EDGAR 10-K Filing

Company CIK: 1409775
Filing Year: 2021
Filename: 1409775_10-K_2021_0001409775-21-000012.json

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ITEM 1. BUSINESS
Item 1. Business
Overview
The Parent is a financial holding company that conducts its business operations primarily through its commercial banking subsidiary, BBVA USA, which is an Alabama banking corporation headquartered in Birmingham, Alabama. The Parent was organized in 2007 as a Texas corporation. In April, BBVA announced that it was moving to unify its brand globally. As part of this re-branding, the Bank will transition away from the use of the BBVA Compass name and be re-branded as BBVA. As part of this re-branding, effective June 10, 2019, the Parent amended its Certificate of Formation to change its legal name from BBVA Compass Bancshares, Inc. to BBVA USA Bancshares, Inc.
The Parent is a wholly owned subsidiary of BBVA (NYSE: BBVA). BBVA is a global financial services group founded in 1857. It has a significant market position in Spain, owns the largest financial institution in Mexico, has franchises in South America, has a banking position in Turkey and operates an extensive global branch network. BBVA acquired the Company in 2007.
The Bank performs banking services customary for full service banks of similar size and character. Such services include receiving demand and time deposits, making personal and commercial loans and furnishing personal and commercial checking accounts. The Bank offers, either directly or through its subsidiaries or affiliates, a variety of services, including: portfolio management and administration and investment services to estates and trusts; term life insurance, variable annuities, property and casualty insurance and other insurance products; investment advisory services; a variety of investment services and products to institutional and individual investors; discount brokerage services, and investment company securities and fixed-rate annuities.
The Parent also owns BSI, a registered broker-dealer that engages in investment banking and institutional sales of fixed income securities.
Through BBVA Transfer Holdings, Inc., the Company engages in money transfer services and related activities, including money transmission and foreign exchange services.
On November 15, 2020, PNC entered into a Stock Purchase Agreement with BBVA for the purchase by PNC of 100% of the issued and outstanding shares of the Company, for $11.6 billion in cash on hand in a fixed price structure. PNC is not acquiring BSI, Propel Venture Partners Fund I, L.P. and BBVA Processing Services, Inc. Immediately following the closing of the stock purchase, PNC intends to merge the Parent with and into PNC, with PNC continuing as the surviving entity. Post-closing, PNC intends to merge BBVA USA with and into PNC Bank, National Association, an indirect wholly owned subsidiary of PNC, with PNC Bank continuing as the surviving entity. The transaction is subject to regulatory approvals and certain other customary closing conditions.
Banking Operations
At December 31, 2020, the Company, through the Bank, operated 637 banking offices in Alabama, Arizona, California, Colorado, Florida, New Mexico, and Texas. The following chart reflects the distribution of branch locations in each of the states in which the Company conducts its banking operations:
Alabama 88
Arizona 63
California 61
Colorado 37
Florida 43
New Mexico 17
Texas 328
Total 637
The banking centers in Alabama are located throughout the state. In Arizona, the banking centers are concentrated in the Tucson and Phoenix metropolitan markets. The banking centers in California are concentrated in the Inland Empire and Central Valley regions. The Colorado banking centers are concentrated in the Denver metropolitan area and the New Mexico banking centers are concentrated in the Albuquerque metropolitan area. In Florida, the banking centers are concentrated in Jacksonville, Gainesville, and the Florida panhandle. The Texas banking centers are primarily located in the state’s four largest metropolitan areas of Houston, Dallas/Ft. Worth, San Antonio, and Austin, as well as cities in south Texas, such as McAllen and Laredo.
The Company also operates loan production offices in Atlanta, Georgia; Miami, Orlando, West Palm Beach, Sarasota, and Tampa, Florida; Chicago, Illinois; New York, New York; Baltimore, Maryland; Fresno, Irvine, Los Angeles, Oakland, Ontario, Sacramento, San Diego and San Jose, California; and Charlotte and Raleigh, North Carolina.
Economic Conditions
The Company's operations and customers are primarily concentrated in the Sunbelt region of the United States, particularly in Alabama, Arizona, California, Colorado, Florida, New Mexico and Texas. In terms of geographic distribution, approximately 52% of the Company’s total deposits and 51% of its branches are located in Texas, while Alabama represents approximately 24% of the Company’s total deposits. While the Company's ability to conduct business and the demand for the Company's products is impacted by the overall health of the United States economy, local economic conditions in the Sunbelt region, and specifically in the states in which the Company conducts business, also significantly affect demand for the Company's products, the ability of borrowers to repay loans and the value of collateral securing loans.
One key indicator of economic health is the unemployment rate. During 2020, the U.S. unemployment rate rose from 3.6% for December 2019 to 6.7% in December 2020 due to the impact of the COVID-19 pandemic. The following table provides a comparison of unemployment rates as of December 2020 and 2019 for the states in which the Company has a retail branch presence.
Unemployment Rate*
State December 2020 December 2019 Change
Alabama 3.9% 2.7% 1.2
Arizona 7.5% 4.5% 3.0
California 9.0% 3.9% 5.1
Colorado 8.4% 2.5% 5.9
Florida 6.1% 2.9% 3.2
New Mexico 8.2% 4.8% 3.4
Texas 7.2% 3.5% 3.7
* Source: United States Department of Labor, Bureau of Labor Statistics as of December 2020
A key driver of the unemployment rate has been the decline in nonfarm payroll which has been negatively impacted by the COVID-19 pandemic. The following table provides a comparison of nonfarm payroll at December 2020 to December 2019.
Nonfarm Payroll*
December 2020 December 2019 Change
State (In Thousands)
Alabama 2,059.0 2,093.2 (34.2)
Arizona 2,945.3 3,025.6 (80.3)
California 16,297.3 17,711.8 (1,414.5)
Colorado 2,682.3 2,832.2 (149.9)
Florida 8,710.1 9,128.3 (418.2)
New Mexico 800.1 865.2 (65.1)
Texas 12,594.9 13,029.8 (434.9)
* Source: United States Department of Labor, Bureau of Labor Statistics as of December 2020
Combined, the seven-state Sunbelt region in which the Company operates accounted for approximately 28% of the total decrease in nonfarm payroll in the U.S. in 2020. The largest year-over-year decrease nationally occurred in California, Florida and Texas, with California accounting for 15% of the total decrease in total nonfarm payroll in 2020.
Another economic indicator of health is the real estate market, and in particular changes in residential home prices. After 2008, the national real estate market experienced a significant decline in value, and the value of real estate in certain Southeastern and Southwestern states in particular declined significantly more than real estate values in the United States as a whole. Recent data suggests that the housing market throughout the United States continues to strengthen and home prices have recaptured most of the value lost during the economic downturn and have not been negatively impacted by the COVID-19 pandemic.
The following table presents changes in home prices since the end of 2007 and changes in home prices during 2020 for the states in which the Company operates. During 2020 home prices increased equal to or higher than the national average in all of the states in which the Company operates a retail branch network except California and Texas. Additionally, home prices were above 2007 levels in all states.
Percentage Change in Percentage Change in
State Home Prices since 2007* Home Prices during 2020*
Alabama 17.6% 4.5%
Arizona 15.0% 6.2%
California 20.0% 2.8%
Colorado 71.2% 3.7%
Florida 14.2% 4.5%
New Mexico 9.8% 4.7%
Texas 61.6% 3.1%
U.S. National Average 24.3% 3.7%
* Source: Home price data from FHFA House price index through the third quarter of 2020
Segment Information
The Company is organized along lines of business. Each line of business is a strategic unit that serves a particular group of customers with certain common characteristics by offering various products and services. The lines of business results include certain overhead allocations and intercompany transactions. At December 31, 2020,
the Company’s operating segments consisted of Commercial Banking and Wealth, Retail Banking, Corporate and Investment Banking, and Treasury.
The Commercial Banking and Wealth segment serves the Company’s commercial customers through its wide array of banking and investment services to businesses in the Company’s markets. The segment also provides private banking and wealth management services to high net worth individuals, including specialized investment portfolio management, traditional credit products, traditional trust and estate services, investment advisory services, financial counseling and customized services to companies and their employees. The Commercial Banking and Wealth segment also supports its commercial customers with capabilities in treasury management, accounts receivable purchasing, asset-based lending, international services, as well as insurance and interest rate protection and investment products. The Commercial Banking and Wealth segment is also responsible for the Company's small business customers and indirect automobile portfolio.
The Retail Banking segment serves the Company’s consumer customers through its full-service banking centers, private client offices throughout the U.S., and alternative delivery channels such as internet, mobile, ATMs and telephone banking. The Retail Banking segment provides individuals with comprehensive products and services including home mortgages, consumer loans, credit and debit cards, and deposit accounts.
The Corporate and Investment Banking segment is responsible for providing a wide array of banking and investment services to corporate and institutional clients. In addition to traditional credit and deposit products, the Corporate and Investment Banking segment also supports its customers with capabilities in treasury management, accounts receivable purchasing, asset-based lending, foreign-exchange and international services, and interest rate protection and investment products.
The Treasury segment’s primary function is to manage the liquidity and funding position of the Company, the interest rate sensitivity of the Company's balance sheet and the investment securities portfolio.
For financial information regarding the Company’s segments, which are presented by line of business, as of and for the years ended December 31, 2020, 2019 and 2018, see Note 21, Segment Information, in the Notes to the Consolidated Financial Statements.
Competition
In most of the markets served by the Company, it encounters intense competition from national, regional and local financial service providers, including banks, thrifts, securities dealers, mortgage bankers and finance companies. Competition is based on a number of factors, including customer service and convenience, the quality and range of products and services offered, innovation, price, reputation and interest rates on loans and deposits. The Company’s ability to compete effectively also depends on its ability to attract, retain and motivate employees while managing employee-related costs.
Many of the Company’s nonfinancial institution competitors have fewer regulatory constraints, broader geographic service areas and, in some cases, lower cost structures. In addition, competition for quality customers has intensified as a result of changes in regulation, advances in technology and product delivery channels, consolidation among financial service providers, bank failures and the conversion of certain former investment banks to bank holding companies. For a discussion of risks related to the competition the Company faces, see Item 1A. - Risk Factors.
The table below shows the Company’s deposit market share ranking by state in which the Company operates based on deposits of FDIC-insured institutions as of June 30, 2020, the last date such information is available from the FDIC:
Table 1
Deposit Market Share Ranking
Deposit Market
State Share Rank*
Alabama 2nd
Arizona 5th
California 30th
Colorado 14th
Florida 21st
New Mexico 11th
Texas 4th
*Source: SNL Financial
Employees
At December 31, 2020, the Company had approximately 10,410 full-time equivalent employees. None of the Company's employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement. The Company believes that the Company's relations with the employees are good.
Supervision, Regulation and Other Factors
The Company and the Bank are regulated extensively under federal and state law. In addition, certain of the Company's non-bank subsidiaries are also subject to regulation under federal and state law. The following discussion sets forth some of the elements of the bank regulatory framework applicable to the Company and certain of its subsidiaries. The bank regulatory framework is intended primarily for the protection of customers, including depositors as well as the DIF, and not for the protection of security holders and creditors. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions.
General
The Parent is registered as a bank holding company with the Federal Reserve Board under the Bank Holding Company Act and based upon the Parent's election to become a financial holding company, has the additional powers of a financial holding company. Bank holding companies are subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act. In addition, the Alabama Banking Department regulates holding companies, like the Parent, that own Alabama-chartered banks, like the Bank, under the bank holding company laws of the State of Alabama. The Company is subject to primary regulation and examination by the Federal Reserve Board, through the Federal Reserve Bank of Atlanta, and by the Alabama Banking Department. The Bank is subject to regulation by the FDIC, which insures the Bank’s deposits as permitted by law. Numerous other federal and state laws, as well as regulations promulgated by the Federal Reserve Board and the Alabama Banking Department, govern almost all aspects of the operations of the Company and the Bank. The Company and the Bank are also subject to supervision and regulation by the CFPB. Various federal and state bodies regulate and supervise the Company's non-bank subsidiaries including its brokerage, investment advisory, insurance agency, money transfer, and processing operations. These include, but are not limited to, the SEC, FINRA, federal and state banking regulators and various state regulators of insurance, money transfer and brokerage activities.
The legislative, regulatory and supervisory framework governing the financial services sector has significantly changed since the financial crisis, as well as in response to other factors, such as technological and market changes. Moreover, the intensity of supervisory and regulatory scrutiny and regulatory enforcement and fines have also increased across the banking and financial services sector. With the change of administration, it is possible that the
focus of legislative, regulatory and supervisory efforts, as well as the intensity of such efforts, may continue to change.
In May 2018 the United States Congress passed, and President Trump signed into law, the EGRRCPA. Among other regulatory changes, the EGRRCPA amends various sections of the Dodd-Frank Act, including section 165, which was revised to raise the asset thresholds for determining the application of enhanced prudential standards for bank holding companies. The EGRRCPA’s increased asset thresholds took effect immediately for bank holding companies with total consolidated assets less than $100 billion, with the exception of risk committee requirements, which now apply to publicly-traded bank holding companies with $50 billion or more of consolidated assets. Bank holding companies with consolidated assets between $100 billion and $250 billion were subject to the enhanced prudential standards that applied to them before enactment of EGRRCPA until December 31, 2019, when the Tailoring Rules became effective, as described in detail below.
In October 2019, the federal banking agencies issued the Tailoring Rules, which adjust the thresholds at which certain enhanced prudential standards and capital and liquidity requirements apply to FBOs, including BBVA, and the U.S. IHCs of FBOs, including the Company, pursuant to the EGRRCPA. These rules establish risk-based categories for FBOs and their U.S. IHCs that determine whether and to what extent enhanced prudential standards and certain capital and liquidity requirements apply to FBOs and their U.S. IHCs. BBVA is classified as a Category IV FBO as it has $100 billion in combined U.S. assets. The Company was not initially classified in any of the categories because it had less than $100 billion in total consolidated assets.
As a result, BBVA and the Company are now generally subject to less restrictive enhanced prudential standards and capital and liquidity requirements than under previously applicable regulations, as described in more detail in the relevant sections below. The Company had an average of $100 billion or more of total consolidated assets over the preceding four calendar quarters as of December 31, 2020, and it became a Category IV U.S. IHC under the Tailoring Rules. As a result, certain enhanced prudential standards and capital and liquidity requirements will again apply to the Company and the Bank following any applicable phase-in or transition periods. The Company is currently evaluating what effect these final rules will have on the Company, its subsidiaries, or these entities’ activities, financial condition and/or results of operations.
Permitted Activities
Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than five percent of the voting shares of, any company engaged in the following activities:
•banking or managing or controlling banks;
•furnishing services to or performing services for its subsidiaries; and
•engaging in activities that the Federal Reserve Board determines to be so closely related to banking as to be a proper incident to the business of banking, including:
•factoring accounts receivable;
•making, acquiring, brokering or servicing loans and usual related activities;
•leasing personal or real property;
•operating a non-bank depository institution, such as a savings association;
•performing trust company functions;
•providing financial and investment advisory activities;
•conducting discount securities brokerage activities;
•underwriting and dealing in government obligations and money market instruments;
•providing specified management consulting and counseling activities;
•performing selected data processing services and support services;
•acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions;
•performing selected insurance underwriting activities;
•providing certain community development activities (such as making investments in projects designed primarily to promote community welfare); and
•issuing and selling money orders and similar consumer-type payment instruments.
As a financial holding company, the Parent is permitted to engage in, and be affiliated with companies engaging in, a broader range of activities than those permitted for bank holding companies that are not financial holding companies. In addition to the activities described above, financial holding companies may also engage in activities that are considered to be financial in nature, as well as those incidental or complementary to financial activities, including underwriting, dealing and making markets in securities and making merchant banking investments in non-financial companies. The Company and the Bank must each remain “well-capitalized” and “well-managed” in order for the Parent to maintain its status as a financial holding company. In addition, the Bank must maintain a CRA rating of at least “Satisfactory” for the Company to engage in the full range of activities permissible for financial holding companies.
The Federal Reserve Board has the authority to order a financial holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the financial holding company's continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.
Actions by Federal and State Regulators
Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, state banking regulators, the Federal Reserve Board, and separately the FDIC as the insurer of bank deposits, have the authority to compel or restrict certain actions on the Company's part if they determine that it has insufficient capital or other resources, or is otherwise operating in a manner that may be deemed to be inconsistent with safe and sound banking practices. Under this authority, the Company's bank regulators can require it to enter into informal or formal supervisory agreements, including board resolutions, memoranda of understanding, written agreements and consents or cease and desist orders, pursuant to which the Company would be required to take identified corrective actions to address cited concerns and to refrain from taking certain actions.
Standards for Safety and Soundness
The Federal Deposit Insurance Act requires the federal bank regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: internal controls; information systems and audit systems; loan documentation; credit underwriting; interest rate risk exposure; and asset quality. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking regulators have adopted regulations and interagency guidelines prescribing standards for safety and soundness to implement these required standards. These guidelines set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if a regulator determines that a bank fails to meet any standards prescribed by the guidelines, the regulator may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.
Dividends
The Parent’s ability to declare and pay dividends is limited by federal banking law and Federal Reserve Board regulations and policy. The Federal Reserve Board has authority to prohibit bank holding companies from making capital distributions if they would be deemed to be an unsafe or unsound practice. The Federal Reserve has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless a bank
holding company’s net income is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition.
The Parent is a legal entity separate and distinct from its subsidiaries, and the primary sources of funds for the Parent's interest and principal payments on its debt are cash on hand and dividends from its bank and non-bank subsidiaries. Various federal and state statutory provisions and regulations limit the amount of dividends that the Bank and its non-banking subsidiaries may pay. Under Alabama law, the Bank may not pay a dividend in excess of 90 percent of its net earnings until its surplus is equal to at least 20 percent of capital. The Bank is also required by Alabama law to seek the approval of the Alabama Superintendent of Banking prior to the payment of dividends if the total of all dividends declared by the Bank in any calendar year will exceed the total of (a) the Bank's net earnings for that year, plus (b) its retained net earnings for the preceding two years, less any required transfers to surplus. The statute defines net earnings as the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets, after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal, state and local taxes. The Bank cannot, without approval from the Federal Reserve Board and the Alabama Superintendent of Banking, declare or pay a dividend to the Parent unless the Bank is able to satisfy the criteria discussed above.
The FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a dividend, or paying any management fee to its holding company if the institution would thereafter be undercapitalized. In addition, federal banking regulations applicable to the Company and its bank subsidiary require minimum levels of capital that limit the amounts available for payment of dividends. In addition, many regulators have a policy, but not a requirement, that a dividend payment should not exceed net income to date in the current year. The ability of banks and bank holding companies to pay dividends and make other capital distribution also depends on their ability to maintain a sufficient capital conservation buffer under the U.S. Basel III capital framework.
The Parent's ability to pay dividends has also been subject to the Federal Reserve Board's review of the Company's periodic capital plan and supervisory stress tests of the Company conducted by the Federal Reserve Board as a part of its periodic CCAR process. As a result of the EGRRCPA and Tailoring Rules, however, the Company is no longer subject to CCAR or the Federal Reserve Board’s stress testing requirements, unless and until the Company becomes a Category IV U.S. IHC.
Enhanced Prudential Standards
Pursuant to Title I of the Dodd-Frank Act, certain bank holding companies are subject to enhanced prudential standards and early remediation requirements. As a result, the Company has been subject to more stringent standards, including liquidity and capital requirements, leverage limits, stress testing, resolution planning, and risk management standards, than those applicable to smaller institutions. Certain larger banking organizations are subject to additional enhanced prudential standards.
As discussed above, under the EGRRCPA and Tailoring Rules, the Company is now exempt from many enhanced prudential standards, with the exception of risk committee requirements and any requirements applicable to BBVA and its combined U.S. operations that affect the Company, including certain liquidity and risk management requirements. Under the Tailoring Rules, however, certain enhanced prudential standards will once again apply to the Company following a transition period since it is a Category IV U.S. IHC under the Tailoring Rules.
Under the enhanced prudential standard applicable to Large FBOs, BBVA designated the Parent as its IHC. BBVA’s combined U.S. operations (including its U.S. branches, agencies and subsidiaries) are also subject to liquidity, risk management, stress testing, asset maintenance and other enhanced prudential standards, as modified by the Tailoring Rules.
Certain requirements of these enhanced prudential standards that are applicable to the Company and the combined U.S. operations of BBVA are discussed under the relevant topic areas below.
Capital
The Company and the Bank are subject to certain risk-based capital and leverage ratio requirements under the U.S. Basel III final rule. These quantitative calculations are minimums, and the Federal Reserve may determine that a banking organization, based on its size, complexity, or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on the Company’s operations or financial condition. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on the Company’s or the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications.
Under the U.S. Basel III final rule, the Company’s and the Bank’s assets, exposures, and certain off-balance sheet items are subject to risk weights used to determine the institutions’ risk-weighted assets. These risk-weighted assets are used to calculate the following minimum capital ratios for the Company and the Bank:
•CET1 Risk-Based Capital Ratio, represents the ratio of CET1 capital to risk-weighted assets. CET1 capital primarily includes common shareholders’ equity subject to certain regulatory adjustments and deductions, including with respect to goodwill, intangible assets, certain deferred tax assets, and accumulated other comprehensive income. Under the U.S. Basel III final rule, the Company made a one-time election to filter certain accumulated other comprehensive income components, with the result that those components are not recognized in the Company’s CET1. In July 2019, the FDIC, the Federal Reserve Board and the OCC issued final rules that simplify the capital treatment of mortgage servicing assets, deferred tax assets arising from temporary differences that an institution could not realize through net operating loss carrybacks, and investments in the capital of unconsolidated financial institutions, as well as simplify the recognition and calculation of minority interests that are includable in regulatory capital, for non-advanced approaches banking organizations, including the Company and the Bank as they have less than $250 billion in total assets. Banking organizations were required to adopt these changes by the quarter beginning on April 1, 2020.
•Tier 1 Risk-Based Capital Ratio, represents the ratio of Tier 1 capital to risk-weighted assets. Tier 1 capital is primarily comprised of CET1 capital, perpetual preferred stock, and certain qualifying capital instruments.
•Total Risk-Based Capital Ratio, represents the ratio of total capital, including CET1 capital, Tier 1 capital, and Tier 2 capital, to risk-weighted assets. Tier 2 capital primarily includes qualifying subordinated debt and qualifying ALLL. Tier 2 capital also includes, among other things, certain trust preferred securities.
•Tier 1 Leverage Ratio, represents the ratio of Tier 1 capital to quarterly average assets (net of goodwill, certain other intangible assets, and certain other deductions).
In August 2020, the U.S. federal banking agencies adopted a 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. In addition, in December 2018, the U.S. federal banking agencies finalized rules that permits bank holding companies and banks to phase-in the day-one retained earnings impact of the current expected credit losses accounting standard over a period of three years for regulatory capital purposes. As part of its response to the impact of COVID-19, the U.S. federal banking agencies issued another final rule that provides the option to temporarily delay certain effects of the current expected credit losses accounting standard on regulatory capital for two years, followed by a three-year transition period. The final rule allows bank holding companies and banks to delay for two years 100% of the day-one impact of adopting the current expected credit losses accounting standard and 25% of the cumulative change in the reported allowance for credit losses since adopting the current expected credit losses accounting standard. The Company and the Bank have elected to adopt this final rule.
The U.S. Basel III final rule also requires banking organizations to maintain a capital conservation buffer to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to
management. The capital conservation buffer requirement is 2.5% and is calculated as a ratio of CET1 capital to risk-weighted assets, and it effectively increases the required minimum risk-based capital ratios. As a result of the Tailoring Rules, the Company had not been subject to the stress buffer requirements, but as a result of becoming a Category IV U.S. IHC, the Company will be required to maintain the applicable stress buffer requirement, instead of the capital conservation buffer. For further discussion of the stress buffer requirements, see Stress Buffer Requirements.
The total minimum regulatory capital ratios and well-capitalized minimum ratios are reflected in the table below. The Federal Reserve Board has not yet revised the well-capitalized standard for bank holding companies to reflect the higher capital requirements imposed under the U.S. Basel III final rule. For purposes of the Federal Reserve Board’s Regulation Y, including determining whether a bank holding company meets the requirements to be a financial holding company, bank holding companies, such as the Company, must maintain a Tier 1 Risk-Based Capital Ratio of 6.0% or greater and a Total Risk-Based Capital Ratio of 8.0% or greater. If the Federal Reserve Board were to apply the same or a very similar well-capitalized standard to bank holding companies as that applicable to the Bank, the Company’s capital ratios as of December 31, 2020, would exceed such revised well-capitalized standard. The Federal Reserve Board may require bank holding companies, including the Company, to maintain capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a bank holding company’s particular condition, risk profile, and growth plans.
Capital Ratios as of December 31, 2020
The table below shows certain regulatory capital ratios for the Company and the Bank as of December 31, 2020 using the Transitional Basel III regulatory capital methodology applicable to the Company during 2020.
Table 2
Capital Ratios
Regulatory Minimum for Company and Bank (1)
Minimum Ratio + Capital Conservation Buffer (2)
Well-Capitalized Minimum for the Bank
The Company
The Bank
CET 1 Risk-Based Capital Ratio 4.5 % 7.0 % 6.5 % 13.28 % 12.24 %
Tier 1 Risk-Based Capital Ratio 6.0 % 8.5 % 8.0 % 13.61 % 12.24 %
Total Risk-Based Capital Ratio 8.0 % 10.5 % 10.0 % 15.79 % 14.42 %
Leverage Ratio 4.0 % N/A 5.0 % 9.07 % 8.32 %
(1) Regulatory minimum requirements do not include the capital conservation buffer, which must be maintained in addition to meeting regulatory minimum requirements in order to avoid automatic restrictions on capital distributions and certain discretionary bonus payments.
(2) Reflects the capital conservation buffer of 2.5%.
See Note 16, Regulatory Capital Requirements and Dividends from Subsidiaries, in the Notes to the Consolidated Financial Statements, for additional information on the calculation of capital ratios for the Company and the Bank.
Prompt Corrective Action for Undercapitalization
The FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized insured depository institutions. Under this system, the federal banking regulators are required to rate insured depository institutions on the basis of five capital categories as described below. The federal banking regulators are also required to take mandatory supervisory actions and are authorized to take other discretionary actions, with respect to insured depository institutions in the three undercapitalized categories, the severity of which will depend upon the capital category to which the insured depository institution is assigned. Generally, subject to a narrow exception, the FDICIA requires the banking regulator to appoint a receiver or conservator for an insured depository institution that is critically undercapitalized. The federal banking regulators have specified by regulation the relevant capital level
for each category. Under the prompt corrective action regulations that are currently in effect under the U.S. Basel III framework, all insured depository institutions are assigned to one of the following capital categories:
Well-capitalized - The insured depository institution exceeds the required minimum level for each relevant capital measure. A well-capitalized insured depository institution is one (1) having a Total Risk-Based Capital Ratio of 10 percent or greater, (2) having a Tier 1 Risk-Based Capital Ratio of 8 percent or greater, (3) having a CET1 Risk-Based Capital Ratio of 6.5 percent or greater (4) having a Leverage Ratio of 5 percent or greater, and (5) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.
Adequately Capitalized - The insured depository institution meets the required minimum level for each relevant capital measure. An adequately capitalized insured depository institution is one (1) having a Total Risk-Based Capital Ratio of 8 percent or greater, (2) having a Tier 1 Risk-Based Capital Ratio of 6 percent or greater, and (3) having a CET1 Risk-Based Capital Ratio of 4.5 percent or greater (4) having a Leverage Ratio of 4 percent or greater, and (5) failing to meet the definition of a well-capitalized bank.
Undercapitalized - The insured depository institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized insured depository institution is one (1) having a Total Risk-Based Capital Ratio of less than 8 percent, (2) having a Tier 1 Risk-Based Capital Ratio of less than 6 percent, (3) having a CET1 Risk-Based Capital Ratio of less than 4.5 percent, or (4) a Leverage Ratio of less than 4 percent.
Significantly Undercapitalized - The insured depository institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized insured depository institution is one (1) having a Total Risk-Based Capital Ratio of less than 6 percent, (2) having a Tier 1 Risk-Based Capital Ratio of less than 4 percent, (3) a CET 1 Risk Based-Capital Ratio of less than 3 percent, or (4) a Leverage Ratio of less than 3 percent.
Critically Undercapitalized - The insured depository institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2 percent.
The regulations permit the appropriate federal banking regulator to downgrade an institution to the next lower category if the regulator determines after notice and opportunity for hearing or response that the institution (1) is in an unsafe or unsound condition or (2) has received and not corrected a less-than-satisfactory rating for any of the categories of asset quality, management, earnings or liquidity in its most recent examination. Supervisory actions by the appropriate federal banking regulator depend upon an institution's classification within the five categories. The Company's management believes that the Company and the Bank have the requisite capital levels to qualify as well-capitalized institutions under the FDICIA. See Note 16, Regulatory Capital Requirements and Dividends from Subsidiaries, in the Notes to the Consolidated Financial Statements.
If an institution fails to remain well-capitalized, it will be subject to a variety of enforcement remedies that increase as the capital condition worsens. For instance, the FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a dividend, or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized as a result. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions may not accept brokered deposits absent a waiver from the FDIC, are subject to growth limitations and are required to submit capital restoration plans for regulatory approval. A depository institution's holding company must guarantee any required capital restoration plan, up to an amount equal to the lesser of 5 percent of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. Federal banking regulators may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator.
Total Loss-Absorbing Capital and Long-Term Debt Requirements
The Federal Reserve Board's final rule on the total loss-absorbing capacity of U.S. G-SIBs and the U.S. intermediate holding companies of non-U.S. G-SIBs does not apply to the Company since neither the Parent nor BBVA are G-SIBs.
Single Counterparty Credit Limits
In June 2018, the Federal Reserve Board issued a final rule implementing single counterparty credit limits applicable to the combined U.S. operations of major FBOs and to certain large U.S. IHCs of FBOs. The rule imposes percentage limitations on a firm’s net credit exposures to individual counterparties (aggregated based on affiliation), generally as a percentage of the firm’s tier 1 capital. As a result of the Tailoring Rules, the Company is not subject to the single counterparty credit limits rule. BBVA became subject to single counterparty credit limits with respect to its combined U.S. operations starting in July 2020. However, under the Tailoring Rules, BBVA may elect to comply with home-country single counterparty credit limits instead of the Federal Reserve Board’s rule. If BBVA were to elect to comply with the Federal Reserve Board’s rule, the Federal Reserve Board’s single counterparty credit limits could adversely affect the Company’s financial position.
Periodic Capital Plans and Stress Testing
The Company has been required to submit periodic capital plans to the Federal Reserve Board and generally could pay dividends and make other capital distributions only in accordance with a capital plan as to which the Federal Reserve Board had not objected as part of the Federal Reserve Board’s annual CCAR process. In addition to capital planning requirements the Company and the Bank have been subject to stress testing requirements under the Federal Reserve Board’s enhanced prudential standards and the Dodd-Frank Act. The Company has been required to conduct periodic company-run stress tests and has been subject to periodic supervisory stress tests conducted by the Federal Reserve Board.
As a result of the Tailoring Rules, the Company and the Bank were not required to participate in the CCAR process in 2020 and were not subject to the Federal Reserve Board’s stress testing requirements. As a result of becoming a Category IV U.S. IHC, the Company will be subject to these requirements after the applicable transition period which will be used to determine its stress capital buffer requirement.
The Company remains subject to the requirement to develop and maintain a capital plan, and the board of directors (or designated subcommittee thereof) remain subject to the requirements to review and approve the capital plan.
Stress Buffer Requirements
In March 2020, the Federal Reserve Board issued a final rule to integrate its capital planning and stress testing requirements with certain ongoing regulatory capital requirements. The final rule applies to the consolidated operations of U.S. IHCs and introduces a stress capital buffer and related changes to the capital planning and stress testing processes.
For risk-based capital requirements, the stress capital buffer replaces the existing Capital Conservation Buffer of 2.5%. Under the final rule, beginning in the 2020 CCAR cycle, a covered bank holding company will be required to calculate a stress capital buffer equal to the greater of (i) the difference between its starting and minimum projected CET1 Risk-Based Capital Ratio under the severely adverse scenario in the supervisory stress test, plus the sum of the dollar amount of the firm’s planned common stock dividends for each of the fourth through seventh quarters of the planning horizon as a percentage of risk-weighted assets, or (ii) 2.5%.
The final rule also makes related changes to the capital planning and stress testing process. Among other changes, the revised capital plan rule eliminates the assumption that a covered bank holding company’s balance sheet assets would increase over the planning horizon. In addition, provided that a covered bank holding company is otherwise in compliance with automatic restrictions on distributions under the Federal Reserve’s capital rules, the covered bank holding company will no longer be required to seek prior approval to make capital distributions in excess of those included in its capital plan.
As a result of the Tailoring Rules, the Company was not subject to the stress buffer requirements in 2020. Because the Company became a Category IV U.S. IHC as of December 31, 2020, it will be subject to the stress buffer requirements going forward.
Deposit Insurance and Assessments
Deposits at the Bank are insured by the DIF as administered by the FDIC, up to the applicable limits established by law. The DIF is funded through assessments on banks, such as the Bank. Changes in the methodology used to calculate these assessments, resulting from the Dodd-Frank Act increased the assessments that the Bank is required to pay to the FDIC. In addition, in March 2016, the FDIC issued a final rule imposing a surcharge on the assessments of insured depository institutions with total consolidated assets of $10 billion or more, such as the Bank, to raise the DIF's reserve ratio. These surcharges are no longer applicable effective October 1, 2018 as a result of the FDIC's reserve ratio exceeding 1.35%. The FDIC also collects Financing Corporation deposit assessments, which are calculated off of the assessment base established by the Dodd-Frank Act. The Bank pays the DIF assessment as well as the Financing Corporation assessments.
As of June 30, 2020, the DIF reserve ratio fell to 1.30%. The FDIC, as required under the Federal Deposit Insurance Act, established a plan on September 15, 2020, to restore the DIF reserve ratio to meet or exceed 1.35% within eight years. The FDIC’s restoration plan projects the reserve ratio to exceed 1.35% without increasing the deposit insurance assessment rate, subject to ongoing monitoring over the next eight years. The FDIC could increase the deposit insurance assessments for certain insured depository institutions, including the Bank, if the DIF reserve ratio is not restored as projected.
With respect to brokered deposits, an insured depository institution must be well-capitalized in order to accept, renew or roll over such deposits without FDIC clearance. An adequately capitalized insured depository institution must obtain a waiver from the FDIC in order to accept, renew or roll over brokered deposits. Undercapitalized insured depository institutions generally may not accept, renew or roll over brokered deposits. See the Deposits section in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.
Volcker Rule
The Volcker Rule prohibits an insured depository institution, such as the Bank, and its affiliates from (1) engaging in “proprietary trading” and (2) investing in or sponsoring certain types of funds (covered funds) subject to certain limited exceptions. The final rules contain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations and also permit certain ownership interests in certain types of funds to be retained. They also permit the offering and sponsoring of funds under certain conditions. The final Volcker Rule regulations impose significant compliance and reporting obligations on banking entities.
As of October 2019, the five regulatory agencies charged with implementing the Volcker Rule finalized amendments to the Volcker Rule. These amendments tailor the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of trading account, clarify certain key provisions in the Volcker Rule, and modify the information companies are required to provide the federal agencies.
In June 2020, the five federal agencies finalized amendments to the Volcker Rule's restrictions on ownership interests in and relationships with covered funds. Among other things, these amendments permit banking entities to have relationships with and offer additional financial services to additional types of funds and investments vehicles. The Company is of the view that the impact of the Volcker Rule, including the recent amendments to the Volcker Rule, is not material to its business operations.
Consumer Protection Regulations
Retail activities of banks are subject to a variety of statutes and regulations designed to protect consumers, and the Company is subject to supervision and regulation by the CFPB with respect to consumer protection laws. Interest and other charges collected or contracted for by banks are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to federal laws applicable to credit transactions, such as:
•the federal Truth-In-Lending Act and Regulation Z issued by the CFPB, governing disclosures of credit terms to consumer borrowers;
•the Home Mortgage Disclosure Act and Regulation C issued by the CFPB, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
•the Equal Credit Opportunity Act and Regulation B issued by the CFPB, prohibiting discrimination on the basis of various prohibited factors in extending credit;
•the Fair Credit Reporting Act and Regulation V issued by the CFPB, governing the use and provision of information to consumer reporting agencies;
•the Fair Debt Collection Practices Act and Regulation F issued by the CFPB, governing the manner in which consumer debts may be collected by collection agencies;
•the Service Members Civil Relief Act, applying to all debts incurred prior to commencement of active military service (including credit card and other open-end debt) and limiting the amount of interest, including service and renewal charges and any other fees or charges (other than bona fide insurance) that is related to the obligation or liability; and
•the guidance of the various federal agencies charged with the responsibility of implementing such federal laws.
Deposit operations also are subject to, among others:
•the Truth in Savings Act and Regulation DD issued by the CFPB, which require disclosure of deposit terms to consumers;
•Regulation CC issued by the Federal Reserve Board, which relates to the availability of deposit funds to consumers;
•the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
•the Electronic Fund Transfer Act and Regulation E issued by the CFPB, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services.
In addition, there are consumer protection standards that apply to functional areas of operation (rather than applying only to loan or deposit products). The Company and the Bank are also subject to certain state laws and regulations designed to protect consumers, and under the Dodd-Frank Act, state attorneys general and other state officials are empowered to enforce certain federal consumer protection laws and regulations.
The CFPB has promulgated, and continues to promulgate, many mortgage-related rules since it was established under the Dodd-Frank Act including rules related to the ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, Home Mortgage Disclosure Act requirements and appraisal and escrow standards for higher priced mortgages.
Changes to consumer protection regulations, including those promulgated by the CFPB could affect the Company's business but the likelihood, timing and scope of any such changes and the impact any such change may have on the Company cannot be determined with any certainty. See Item 1A. Risk Factors. The Company is also subject to legislation and regulation and future legislation or regulation or changes to existing legislation or regulation could affect its business.
Resolution Plans for the Company and the Bank
BBVA is required to prepare and submit a resolution plan to the Federal Reserve Board and the FDIC, also referred to as a living will, which, in the event of material financial distress or failure, provides for the rapid and orderly liquidation of BBVA’s material U.S. operations under the bankruptcy code and in a way that would not pose systemic risk to the financial system of the United States. If the Federal Reserve Board and the FDIC jointly determine that BBVA’s plan is not credible and BBVA fails to cure the deficiencies in a timely manner, then the Federal Reserve Board and the FDIC may jointly impose on BBVA, or on any of its subsidiaries, including the Company, more stringent capital, leverage or liquidity requirements or restrictions on growth, activities, or operations. The Bank must also submit to the FDIC a separate plan whereby the institution can be resolved by the FDIC, in the event of failure, in a manner that ensures depositors will receive access to insured funds within the required timeframes and generally ensures an orderly liquidation of the institution.
BBVA filed its most recent resolution plan on December 20, 2018, and the Bank filed its most recent plan on June 29, 2018. In October 2019, the Federal Reserve Board and the FDIC issued a final rule that reduces or eliminates resolution planning requirements for institutions that fall into certain risk-based categories. As a result, BBVA will be required to submit a more streamlined resolution plan once every three years, with its next submission due in July 2022. In April 2019, the FDIC released an advanced notice of proposed rulemaking with respect to the FDIC’s bank resolution plan requirements that requested comments on how to better tailor bank resolution plans to a firm’s size, complexity, and risk profile. Until the FDIC’s revisions to its bank resolution plan requirement are finalized, no bank resolution plans will be required to be filed.
U.S. Liquidity Standards
The Federal Reserve Board evaluates the Company’s liquidity as part of the supervisory process. As a result of the Tailoring Rules, the Company, as a Category IV U.S. IHC, is exempt from the LCR and the NSFR.
Anti-Money Laundering; USA PATRIOT Act; Office of Foreign Assets Control
A major focus of U.S. governmental policy relating to financial institutions in recent years has been fighting money laundering and terrorist financing. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and reputational consequences for that financial institution.
Under laws applicable to the Company, including the Bank Secrecy Act, as amended by the USA PATRIOT Act, and implementing regulations, U.S. financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; testing of the program by an independent audit function and risk-based procedures for conducting ongoing customer due diligence. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.
The Company is prohibited from entering into specified financial transactions and account relationships. The Company also must take reasonable steps to conduct enhanced scrutiny of account relationships, as appropriate, to guard against money laundering and to report any suspicious transactions. Pursuant to the USA PATRIOT Act, law enforcement authorities have been granted increased access to financial information maintained by banks, and anti-money laundering obligations have been substantially strengthened.
The USA PATRIOT Act amended, in part, the Bank Secrecy Act and provides for, among other things, the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. The statute also provides for: (1) regulations that set minimum requirements for verifying customer identification at account opening; (2) rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism
or money laundering; and (3) enhanced due diligence requirements for financial institutions that administer, maintain or manage private bank accounts or correspondent accounts for non-U.S. persons.
The Anti-Money Laundering Act of 2020, enacted on January 1, 2021 as part of the National Defense Authorization Act, does not directly impose new requirements on banks, but requires the U.S. Treasury Department to issue National Anti-Money Laundering and Countering the Financing of Terrorism Priorities, and conduct studies and issue regulations that may, over the next few years, significantly alter some of the due diligence, recordkeeping and reporting requirements that the Bank Secrecy Act and USA PATRIOT Act impose on banks. The Anti-Money Laundering Act of 2020 also contains provisions that promote increased information-sharing and use of technology, and increases penalties for violations of the Bank Secrecy Act and includes whistleblower incentives, both of which could increase the prospect of regulatory enforcement.
Federal, state, and local law enforcement may, through FinCEN, request that the Bank search its records for any relationships or transactions with persons reasonably suspected to be involved in terrorist activity or money laundering. Upon receiving such a request, the Bank must search its records and timely report to FinCEN any identified relationships or transactions.
Furthermore, OFAC is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and acts of Congress. OFAC publishes, and routinely updates, lists of names, such as the Specially Designated Nationals and Blocked Persons List, of individuals and entities with whom U.S. persons, as defined by OFAC, are generally prohibited from conducting transactions or dealings. Persons on these lists include persons suspected of aiding, financing, or engaging in terrorist acts, narcotics trafficking, or the proliferation of weapons of mass destruction, among other targeted activities. OFAC also administers sanctions programs against certain countries or territories. If the Bank finds a name on any transaction, account or wire transfer instruction that is on an OFAC list or determines that processing a transaction or maintaining or servicing an account would violate a sanctions program administered by OFAC, it must, depending on the regulation, freeze such account, reject such transaction, file a suspicious activity report and/or notify the appropriate authorities.
Commitments to the Bank
Under the Dodd-Frank Act, both BBVA and the Parent are required to serve as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances when BBVA and the Parent might not do so absent the statutory requirement. Under the Bank Holding Company Act, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary, other than a non-bank subsidiary of a bank, upon the Federal Reserve Board's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any depository institution subsidiary. Further, the Federal Reserve Board has discretion to require a bank holding company to divest itself of any bank or non-bank subsidiaries if the agency determines that any such divestiture may aid the depository institution's financial condition. In addition, any loans by the Parent to the Bank would be subordinate in right of payment to depositors and to certain other indebtedness of the Bank.
Transactions with Affiliates and Insiders
A variety of legal limitations restrict the Bank from lending or otherwise supplying funds or in some cases transacting business with the Company or the Company's non-bank subsidiaries. The Bank is subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Board's Regulation W. Section 23A places limits on the amount of “covered transactions,” which include loans or extensions of credit to, investments in or certain other transactions with, affiliates as well as the amount of advances to third parties collateralized by the securities or obligations of affiliates. The aggregate of all covered transactions is limited to 10 percent of a bank's capital and surplus for any one affiliate and 20 percent for all affiliates. Furthermore, within the foregoing limitations as to amount, certain covered transactions must meet specified collateral requirements ranging from 100 to 130 percent. Also, a bank is prohibited from purchasing low quality assets from any of its affiliates. Section 608 of the Dodd-Frank Act broadens the definition of “covered transactions” to include derivative transactions and the borrowing or lending of securities if the transaction will cause a bank to have credit exposure to an affiliate. The revised definition also includes the acceptance of debt obligations of an affiliate as collateral for a loan or extension of credit to a third
party. Furthermore, reverse repurchase transactions are viewed as extensions of credit (instead of asset purchases) and thus become subject to collateral requirements.
Section 23B prohibits an institution from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with nonaffiliated companies. Except for limitations on low quality asset purchases and transactions that are deemed to be unsafe or unsound, Regulation W generally excludes affiliated depository institutions from treatment as affiliates. Transactions between a bank and any of its subsidiaries that are engaged in certain financial activities may be subject to the affiliated transaction limits. The Federal Reserve Board also may designate bank subsidiaries as affiliates.
Banks are also subject to quantitative restrictions on extensions of credit to executive officers, directors, principal shareholders and their related interests. In general, such extensions of credit (1) may not exceed certain dollar limitations, (2) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (3) must not involve more than the normal risk of repayment or present other unfavorable features. Certain extensions of credit also require the approval of a bank's board of directors.
Regulatory Examinations
Federal and state banking agencies require the Company and the Bank to prepare annual reports on financial condition and to conduct an annual audit of financial affairs in compliance with minimum standards and procedures. The Bank, and in some cases the Company and the Company's non-bank affiliates, must undergo regular on-site examinations by the appropriate regulatory agency, which will examine for adherence to a range of legal and regulatory compliance responsibilities. A bank regulator conducting an examination has complete access to the books and records of the examined institution. The results of the examination are confidential. The cost of examinations may be assessed against the examined institution as the agency deems necessary or appropriate.
Community Reinvestment Act
The CRA requires the Federal Reserve Board to evaluate the record of the Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods. These evaluations are considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could result in additional requirements and limitations on the Bank and the Company. In addition, the Bank must maintain a CRA rating of at least "Satisfactory" for the Company to engage in the full range of activities permissible for financial holding companies.
The OCC recently finalized amendments to its CRA rules that do not apply to the Bank, and the Federal Reserve separately proposed different amendments to its CRA rules that would apply to the Bank. It is too early to tell whether and to what extent the Federal Reserve will adopt the amendments to the CRA rules applicable to the Bank. In the past, the banking agencies have aligned their CRA regulations.
Commercial Real Estate Lending
Lending operations that involve concentrations of commercial real estate loans are subject to enhanced scrutiny by federal banking regulators. The regulators have advised financial institutions of the risks posed by commercial real estate lending concentrations. Such loans generally include land development, construction loans and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for examiners to help identify institutions that are potentially exposed to concentration risk and may warrant greater supervisory scrutiny:
•total reported loans for construction, land development and other land represent 100 percent or more of the institution's total capital, or
•total commercial real estate loans represent 300 percent or more of the institution's total capital, and the outstanding balance of the institution's commercial real estate loan portfolio has increased by 50 percent or more during the prior 36 months.
In addition, the Dodd-Frank Act contains provisions that may impact the Company's business by reducing the amount of its commercial real estate lending and increasing the cost of borrowing, including rules relating to risk retention of securitized assets. Section 941 of the Dodd-Frank Act requires, among other things, a loan originator or a securitizer of asset-backed securities to retain a percentage of the credit risk of securitized assets, and the Company is subject to rules issued by the banking agencies to implement these requirements.
Anti-Tying Restrictions
In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for them on the condition that (1) the customer obtain or provide some additional credit, property or services from or to said bank or bank holding company or their subsidiaries, or (2) the customer not obtain some other credit, property or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. A bank may, however, offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products. Also, certain foreign transactions are exempt from the general rule.
Privacy and Credit Reporting
The Federal Reserve Board, FDIC and other bank regulatory agencies have adopted guidelines for safeguarding confidential, personal customer information. These guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. In addition, various U.S. regulators, including the Federal Reserve Board and the SEC, have increased their focus on cybersecurity through guidance, examinations and regulations.
The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, the statute requires disclosures to consumers regarding policies and procedures with respect to the disclosure of such nonpublic personal information and, except as otherwise required by law, prohibits disclosing such information except as provided in the banking subsidiary’s policies and procedures.
States are also increasingly proposing or enacting legislation that relates to data privacy and data protection such as the California Consumer Privacy Act, which went into effect on January 1, 2020. California voters also recently passed the California Privacy Rights Act, which will take effect on January 1, 2023, and significantly modify the CCPA, imposing additional obligations on covered companies and expanding California consumers’ rights with respect to certain sensitive personal information, potentially resulting in further uncertainty and requiring the Company to incur additional costs and expenses in an effort to comply. The Company continues to assess the requirements of such laws and proposed legislation and their applicability to the Company. Moreover, these laws, and proposed legislation, are still subject to revision or formal guidance and they may be interpreted or applied in a manner inconsistent with the Company’s understanding.
The Bank utilizes credit bureau data in underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act and Federal Reserve Regulation V on a uniform, nationwide basis, including credit reporting, prescreening and sharing of information between affiliates and the use of credit data. The Fair and Accurate Credit Transactions Act, which amended the Fair Credit Reporting Act, permits states to enact identity theft laws that are not inconsistent with the conduct required by the provisions of that Act.
Enforcement Powers
The Bank and its “institution-affiliated parties,” including management, employees, agents, independent contractors and consultants, such as attorneys and accountants and others who participate in the conduct of the institution's affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. Violations can include failure to timely file required reports, filing false or misleading information or submitting inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such
violations and criminal penalties for some financial institution crimes may include imprisonment for 20 years. Regulators have flexibility to commence enforcement actions against institutions and institution-affiliated parties, and the FDIC has the authority to terminate deposit insurance. When issued by a banking agency, cease-and-desist and similar orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts or take other actions determined to be appropriate by the ordering agency. The federal banking regulators also may remove a director or officer from an insured depository institution (and bar them from the industry) if a violation is willful or reckless.
Monetary Policy and Economic Controls
The Bank's earnings, and therefore the Company's earnings, are affected by the policies of regulatory authorities, including the monetary policy of the Federal Reserve Board. An important function of the Federal Reserve Board is to promote orderly economic growth by influencing interest rates and the supply of money and credit. Among the methods that have been used to achieve this objective are open market operations in U.S. government securities, changes in the discount rate for bank borrowings, expanded access to funds for non-banks and changes in reserve requirements against bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, interest rates on loans and securities, and rates paid for deposits.
The effects of the various Federal Reserve Board policies on the Company's future business and earnings cannot be predicted. The Company cannot predict the nature or extent of any affects that possible future governmental controls or legislation might have on its business and earnings.
Depositor Preference Statute
Federal law provides that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution are afforded priority over other general unsecured claims against such institution, including federal funds and letters of credit, in the liquidation or other resolution of the institution by any receiver.
FDIC Recordkeeping Requirements
FDIC rules impose recordkeeping requirements for FDIC-insured institutions with 2 million or more deposit accounts, which includes the Bank. The rules generally requires each covered institution to maintain complete and accurate information needed to determine deposit insurance coverage with respect to each deposit account. In addition, each covered institution must ensure that its information technology system is able to calculate the insured amount for most depositors within 24 hours of failure. Compliance was required by April 1, 2020.
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.
During the year ended December 31, 2020, the Company did not knowingly engage 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, 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. During the year ended December 31, 2020, the BBVA Group had the following activities, transactions and dealings requiring disclosure under Section 13(r) of the Exchange Act.
Iranian embassy-related activity. On a continuing basis, 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 year ended December 31, 2020, from embassy-related activity, which include fees and/or commissions, did not exceed $129. The BBVA Group does not allocate direct costs to fees and commissions and, therefore, has not disclosed a separate profit measure.
Additional Information
The Company’s corporate headquarters are located at 2200 Post Oak Blvd., Houston, Texas, 77056, and the Company’s telephone number is (205) 297-3000. The Company maintains an Investor Relations website on the Internet at www.bbvausa.com. This reference to the Company's website is an inactive textual reference only, and is not a hyperlink. The contents of the Company's website shall not be deemed to be incorporated by reference into this Annual Report on Form 10-K.
The Company files annual, quarterly and current reports and other information with the SEC. You may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports and information statements and other information that the Company files electronically with the SEC at www.sec.gov. The Company also makes available free of charge, on or through its website, these reports and other information as soon as reasonably practicable following the time they are electronically filed with or furnished to the SEC.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
This section highlights the material risks that the Company currently faces. Any of the risks described below could materially adversely affect the Company's business, financial condition, or results of operations.
MARKET AND LIQUIDITY RISKS:
The COVID-19 pandemic has adversely impacted the Company's business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted or modelled precisely, 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. Despite the partial lifting of some of these measures in some of the states in our geographic footprint, the recent increase in cases in the United States means that it remains unknown if any of these measures will be reinstated when there will be a return to normal economic activity.
As a result, the demand for the Company's 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 has resulted and 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 or re-close, 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.
Among other relief programs, we are participating in the SBA’s Paycheck Protection Program. Paycheck Protection Program loans are fixed, low interest rate loans that are guaranteed by the SBA and subject to numerous other regulatory requirements, and a borrower may apply to have all or a portion of the loan forgiven. If Paycheck Protection Program borrowers fail to qualify for loan forgiveness, we face a heightened risk of holding these loans at unfavorable interest rates for an extended period of time. While the Paycheck Protection Program loans are guaranteed by the SBA, various regulatory requirements apply to our ability to seek recourse under the guarantees, and related procedures are currently subject to uncertainty. If a borrower defaults on a Paycheck Protection Program loan, these requirements and uncertainties may limit our ability to fully recover against the loan guarantee or to seek full recourse against the borrower.
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 or modelled precisely, 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 this section captioned “Risk Factors,” including those risks related to market, credit, geopolitical and business operations.
Any deterioration in national, regional and local economic conditions, particularly unemployment levels and home prices, could materially affect the Company's business, financial condition or results of operations.
The Company's business is subject to periodic fluctuations based on national, regional and local economic conditions. These fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on its financial condition and operations even if other favorable events occur. The Company's banking operations are locally-oriented and community-based. Accordingly, the Company expects to continue to be dependent upon local business conditions as well as conditions in the local residential and commercial real estate markets it serves, including Alabama, Arizona, California, Colorado, Florida, New Mexico and Texas. These economic conditions could require the Company to charge-off a higher percentage of loans or increase provisions for credit losses, which would reduce its net income.
The Company is part of the financial system and a systemic lack of available credit, a lack of confidence in the financial sector, continued volatility in the financial markets and/or reduced business activity could materially adversely affect its business, financial condition or results of operations.
A return of the volatile economic conditions experienced in the U.S. during 2008-2009, including the adverse conditions in the fixed income debt markets, for an extended period of time, particularly if left unmitigated by policy measures, may materially and adversely affect the Company.
Weakness in the real estate market has adversely affected the Company in the past and may do so in the future.
At December 31, 2020, residential real estate loans totaled $13.3 billion, or 20.3% of the Company’s loan portfolio and commercial real estate loans totaled $13.6 billion, or 20.7% of the Company’s loan portfolio. Declining residential real estate prices have historically caused cyclically higher delinquencies and losses on residential mortgage loans and home equity lines of credit. These conditions have resulted in losses, write-downs and impairment charges in the Company's mortgage and other business units.
Future declines in residential real estate values, low sales volumes, the fluctuating valuation of collateral, financial stress on borrowers as a result of unemployment, interest rate resets on ARMs or other factors could have adverse effects on borrowers that could result in higher delinquencies and greater charge-offs in future periods. Similar trends may be observed in the commercial real estate loan portfolio in times of general or localized economic downturns. Further, decreases in real estate values generally might adversely affect the creditworthiness of state and local governments, and this might result in decreased profitability or credit losses from loans made to such governments. In markets dependent on energy production, falling energy prices may adversely affect real estate values.
A 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. Any of these conditions, should they occur, could adversely affect the Company's financial condition or results of operations.
Ineffective liquidity management could adversely affect the Company’s financial results and condition.
Effective liquidity management is essential for the operation of the Company’s business. The Company requires sufficient liquidity to meet customer loan requests, customer deposit maturities/withdrawals, payments on debt obligations as they come due and other cash commitments under both normal operating conditions and unpredictable circumstances causing industry or general financial market stress. The Company’s access to funding sources in amounts adequate to finance activities on terms that are acceptable to the Company could be impaired by factors that affect the Company specifically or the financial services industry or economy in general. Factors that could detrimentally impact the Company’s access to liquidity sources include a downturn in the geographic markets in which our loans and operations are concentrated or difficult credit markets. The Company’s access to deposits may also be affected by the liquidity needs of the Company’s depositors. In particular, a majority of the Company’s liabilities during 2020 were checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial majority of the Company’s assets were loans, which cannot be called or sold in the same time frame. Although the Company has historically been able to replace maturing deposits and advances as necessary, the Company might not be able to replace such funds in the future, especially if a large number of the Company’s depositors seek to withdraw their accounts, regardless of the reason. A failure to
maintain adequate liquidity could materially and adversely affect our business, results of operations or financial condition.
Changes in interest rates could affect the Company's income and cash flows.
The Company's earnings and financial condition are largely dependent on net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads, meaning the difference between interest rates earned on loans and investments and the interest rates paid on deposits and borrowings, could adversely affect the Company's earnings and financial condition. In addition, changes in interest rates may impact the fair value of our fixed-rate securities and the extent to which customers prepay mortgages and other loans. The Company cannot control or predict with certainty changes in interest rates.
Regional and local economic conditions, competitive pressures and the policies of regulatory authorities, including monetary policies of the Federal Reserve Board, affect interest income and interest expense. The Company has policies and procedures designed to manage the risks associated with changes in market interest rates. Changes in interest rates, however, may still have an adverse effect on the Company's profitability. While the Company actively manages against these risks, if its assumptions regarding borrower behavior are wrong or overall economic conditions are significantly different than planned for, then its risk mitigation techniques may be insufficient to protect against the risk.
In response to the economic consequences of the COVID-19 pandemic, the Federal Reserve lowered its target for the federal funds rate to a range of 0% to 0.25%. Such low rates increase the risk in the U.S. of a negative interest rate environment in which interest rates drop below zero, either broadly or for some types of instruments. For example, yields on one-month and three-month Treasuries briefly dropped below zero in March 2020. Such an occurrence would likely further reduce the interest we earn on loans and other earning assets, while also likely requiring us to pay to maintain our deposits with the Federal Reserve Bank. Our systems may not be able to handle adequately a negative interest rate environment and not all variable rate instruments are designed for such a circumstance. We cannot predict the nature or timing of future changes in monetary policies in response to the outbreak or the precise effects that they may have on our activities and financial results.
Expected Replacement of LIBOR may adversely affect the Company’s business.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional regulatory or other actions or reforms with respect to LIBOR may be enacted in the United Kingdom or elsewhere.
On April 3, 2018, the Federal Reserve Bank of New York commenced publication of three reference rates based on overnight U.S. Treasury repurchase agreement transactions, including SOFR, which has been recommended as an alternative to U.S. dollar LIBOR by the Alternative Reference Rates Committee. The Alternative Reference Rates Committee is a group of private-market participants convened by the Federal Reserve and the Federal Reserve Bank of New York, with the objective of helping to ensure a transition from USD LIBOR to SOFR. Further, the Bank of England is publishing a reformed Sterling Overnight Index Average, comprised of a broader set of overnight Sterling money market transactions, which has been selected by the Working Group on Sterling Risk-Free Reference Rates as the alternative rate to Sterling LIBOR. Central bank-sponsored committees in other jurisdictions, including Europe, Japan and Switzerland, have selected alternative reference rates denominated in other currencies and have plans to replace or reform existing benchmarks with those alternative reference rates.
In particular, any such transition, action or reform could:
•Adversely impact the pricing, liquidity, value of, return on and trading for a broad array of financial products and transactions, including any LIBOR-linked securities such as the Company’s Series A Preferred Stock, Capital Securities, loans and derivatives that are included in our financial assets and liabilities;
•Require extensive changes to documentation that governs or references LIBOR or LIBOR-based products and transactions, including, for example, pursuant to time-consuming renegotiations of existing documentation to modify the terms of outstanding securities, related hedging transactions, loans and derivatives;
•Result in inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with one or more alternative reference rates;
•Result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of provisions in LIBOR based products and transactions such as fallback language or other related provisions, including in the case of fallbacks to the alternative reference rates, regarding any economic, legal, operational or other impact resulting from the fundamental differences between U.S. dollar LIBOR, or other LIBORs or other benchmarks that are being replaced or reformed, on the one hand, and the various alternative reference rates, on the other;
•Require the transition and/or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products and transactions to those based on one or more alternative reference rates in a timely manner, including by quantifying value and risk for various alternative reference rates, which may prove challenging given the limited history of the proposed alternative reference rates; and
•Cause us to incur additional costs in relation to any of the above factors.
In addition, the U.S. federal banking agencies issued a statement in November 2020 encouraging banks to transition away from U.S. dollar LIBOR as soon as practicable and to stop entering into new contracts that use U.S. dollar LIBOR by December 31, 2021.
Depending on several factors including those set forth above, our business, financial condition and results of operations could be materially adversely impacted by the market transition or reform of certain benchmarks, including U.S. dollar LIBOR. Other factors include the pace of the transition to replacement or reformed rates, the specific terms and parameters for and market acceptance of any alternative reference rate, prices of and the liquidity of trading markets for products based on alternative reference rates, and our ability to transition and develop appropriate systems and analytics for one or more alternative reference rates.
Downgrades to the U.S. government's credit rating, or the credit rating of its securities, by one or more of the credit ratings agencies could have a material adverse effect on general economic conditions, as well as the Company's operations, earnings and financial condition.
It is foreseeable that the ratings and perceived creditworthiness of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to the U.S. government could be correspondingly affected by any downgrade to the U.S. government's sovereign credit rating, including the rating of U.S. Treasury securities. Instruments of this nature are key assets on the balance sheets of financial institutions, including the Company, and are widely used as collateral by financial institutions to meet their day-to-day cash flows in the short-term debt market.
A downgrade of the U.S. government's sovereign credit rating, and the perceived creditworthiness of U.S. government-related obligations, could impact the Company's ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments. The Company cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic conditions. Such ratings actions could result in a significant adverse impact on the Company. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instrumentalities would significantly exacerbate the other risks to which the Company is subject and any related adverse effects on its business, financial condition and results of operations.
Volatile or declining oil prices could adversely affect the Company's performance.
As of December 31, 2020, energy-related loan balances represented approximately 3.6 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, 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.
The failure of the European Union to stabilize the fiscal condition of member countries, especially in Spain, could have an adverse impact on global financial markets, the current U.S. economic recovery and the Company.
Certain European Union member countries have fiscal obligations greater than their fiscal revenue, which has caused investor concern over such countries' ability to continue to service their debt and foster economic growth. Fiscal austerity measures such as raising taxes and reducing entitlements have improved the ability of some member countries to service their debt, but have challenged economic growth and efforts to lower unemployment rates in the region. Although the fiscal health and economic outlook of Spain and the European Union, more generally, have improved, there is no guarantee that these trends will continue.
The Company is a wholly owned subsidiary of BBVA, which is based in Spain and serves as a source of strength and capital to the Company. Accordingly, European Union weakness, particularly in Spain, could directly impact BBVA and could have an adverse impact on the Company's business or financial condition.
A weaker European economy may transcend Europe, cause investors to lose confidence in the safety and soundness of European financial institutions and the stability of European member economies, and likewise affect U.S.-based financial institutions, the stability of the global financial markets and the economic recovery underway in the U.S. Should the U.S. economic recovery be adversely impacted by these factors, loan and asset growth at U.S. financial institutions, like the Company, could be affected.
Disruptions in the Company's ability to access capital markets may adversely affect its capital resources and liquidity.
The Company may access capital markets to provide it with sufficient capital resources and liquidity to meet its commitments and business needs, and to accommodate the transaction and cash management needs of its clients. Other sources of contingent funding available to the Company include inter-bank borrowings, brokered deposits, repurchase agreements, FHLB capacity and borrowings from the Federal Reserve discount window. Any occurrence that may limit the Company's access to the capital markets, such as a decline in the confidence of debt investors, its depositors or counterparties participating in the capital markets, or a downgrade of its debt rating, may adversely affect the Company's capital costs and its ability to raise capital and, in turn, its liquidity.
Disruptions in the liquidity of financial markets may directly impact the Company to the extent it needs to access capital markets to raise funds to support its business and overall liquidity position. This situation could adversely affect the cost of such funds or the Company's ability to raise such funds. If the Company were unable to access any of these funding sources when needed, it might be unable to meet customers' needs, which could adversely impact its financial condition, results of operations, cash flows and level of regulatory-qualifying capital.
CREDIT RISKS:
The Company is subject to credit risk.
When the Company loans money, commits to loan money or enters into a letter of credit or other contract with a counterparty, it incurs credit risk, which is the risk of losses if its borrowers do not repay their loans or its counterparties fail to perform according to the terms of their contracts. Many of the Company's products expose it to credit risk, including loans, leases and lending commitments.
The Company may suffer increased losses in its loan portfolio despite enhancement of its underwriting policies and practices, and the Company's allowances for credit losses may not be adequate to cover such eventual losses.
The Company seeks to mitigate risks inherent in its loan portfolio by adhering to specific underwriting policies and practices, which often include analysis of (1) a borrower's credit history, financial statements, tax returns and cash flow projections; (2) valuation of collateral based on reports of independent appraisers; and (3) verification of liquid assets. The Company's underwriting policies, practices and standards are periodically reviewed and, if appropriate, enhanced in response to changing market conditions and/or corporate strategies.
Like other financial institutions, the Company maintains allowances for credit losses to provide for loan defaults and nonperformance. The Company's allowances for credit losses may not be adequate to cover eventual loan losses, and future provisions for credit losses could materially and adversely affect the Company's financial condition and results of operations. In addition, beginning in 2020, the FASB's Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326), substantially changed the accounting for credit losses under current U.S. GAAP standards. Under the prior U.S. GAAP standards, credit losses were not reflected in financial statements until it was probable that the credit loss has been incurred. Under this ASU, an entity is required to reflect in its financial statements its current estimate of credit losses on financial assets over the expected life of each financial asset. This ASU may have a negative impact on the Company’s reported earnings, capital, regulatory capital ratios, as well as on regulatory limits which are based on capital (e.g., loans to affiliates) since it accelerates the recognition of estimated credit losses. As part of its response to the impact of COVID-19, the U.S. federal banking agencies issued a final rule that provides the option to temporarily delay certain effects of this accounting standard on regulatory capital for two years, followed by a three-year transition period. The final rule allows bank holding companies and banks to delay for two years 100% of the day-one impact of adopting the accounting standard and 25% of the cumulative change in the reported allowance for credit losses since adopting the current expected credit losses accounting standard.
A reduction in the Company's own credit rating could have a material adverse effect on the Company's liquidity and increase the cost of its capital markets funding.
Adequate liquidity is essential to the Company's businesses. A reduction to the Company's credit rating could have a material adverse effect on the Company's business, financial condition and results of operations.
The rating agencies regularly evaluate the Company and their ratings are based on a number of factors, including the Company's financial strength as well as factors not entirely within its control, such as conditions affecting the financial services industry generally. Adverse changes in the credit ratings of the Kingdom of Spain, which subsequently could impact BBVA, could also adversely impact the Company's credit rating. There can be no assurance that the Company will maintain its current ratings. The Company's failure to maintain those ratings could increase its borrowing costs, require the Company to replace funding lost due to the downgrade, which may include the loss of customer deposits, and may also limit the Company's access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements.
The Company's ability to access the capital markets is important to its overall funding profile. This access is affected by its credit rating. The interest rates that the Company pays on its securities are also influenced by, among other things, the credit ratings that it receives from recognized rating agencies. A downgrade to the Company's credit rating could affect its ability to access the capital markets, increase its borrowing costs and negatively impact its profitability. A ratings downgrade to the Company's credit rating could also create obligations or liabilities for it under the terms of its outstanding securities that could increase its costs or otherwise have a negative effect on the Company's results of operations or financial condition. Additionally, a downgrade of the credit rating of any
particular security issued by the Company could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.
Changes in accounting standards could impact reported earnings.
The entities that set accounting standards and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes can materially impact how management records and reports the Company’s financial condition and results of operations. In some cases, the Company could be required to apply a new or revised accounting standard retroactively, resulting in a possible restatement of prior period financial statements.
OPERATING RISKS:
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 purchasers as a result of breaches of representations 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.
The Company originates and often sells mortgage loans. When it sells mortgage loans, whether as whole loans or pursuant to a securitization, the Company is required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. The Company's whole loan sale agreements require it to repurchase or substitute mortgage loans in the event that it breaches certain of these representations or warranties. In addition, the Company may be required to repurchase mortgage loans as a result of borrower fraud or in the event of early payment default of the borrower on a mortgage loan. Likewise, the Company is required to repurchase or substitute mortgage loans if it breaches a representation or warranty in connection with its securitizations, whether or not it was the originator of the loan. While in many cases it may have a remedy available against certain parties, often these may not be as broad as the remedies available to a purchaser of mortgage loans against it, and the Company faces the further risk that such parties may not have the financial capacity to satisfy remedies that may be available to it. Therefore, if a purchaser enforces its remedies against it, the Company may not be able to recover its losses from third parties. The Company has received repurchase and indemnity demands from purchasers. These have resulted in an increase in the amount of losses for repurchases. While the Company has taken steps to enhance its underwriting policies and procedures, these steps will not reduce risk associated with loans sold in the past. If repurchase and indemnity demands increase materially, the Company's results of operations may be adversely affected.
The Company is at risk of increased losses from fraud.
Criminals committing fraud increasingly are using more sophisticated techniques and in some cases are part of larger criminal rings, which allow them to be more effective. Fraudulent activity has taken many forms and escalates as more tools for accessing financial services emerge, such as real-time payments. Fraud schemes are broad and continuously evolving and include such things as debit card/credit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of our clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify themselves, yet seek to establish a business relationship for the purpose of perpetrating fraud. An emerging type of fraud involves the creation of synthetic identification in which fraudsters “create” individuals for the purpose of perpetrating fraud. Further, in addition to fraud committed against us, we may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer to commit fraud. Many of these data compromises have been widely reported in the media. Further, as a result of the increased sophistication of fraud activity, we have increased our spending on systems and controls to detect and prevent fraud. This will result in continued ongoing investments in the future.
The Company’s operational or security systems or infrastructure, or those of third parties, could fail or be breached, which could disrupt its business and adversely impact its results of operations, liquidity and financial condition, as well as cause legal or reputational harm.
The potential for operational risk exposure exists throughout the Company’s business and, as a result of its interactions with, and reliance on, third parties, is not limited to the Company’s own internal operational functions. The Company’s operational and security systems and infrastructure, including its computer systems, data management, and internal processes, as well as those of third parties, are integral to its performance. The Company relies on employees and third parties in its day-to-day and ongoing operations, who may, as a result of human error, misconduct, malfeasance or failure, or breach of the Company’s or of third-party systems or infrastructure, expose the Company to risk. For example, the Company’s ability to conduct business may be adversely affected by any significant disruptions to the Company or to third parties with whom it interacts or upon whom it relies. In addition, the Company’s ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to its own systems. The Company’s financial, accounting, data processing, backup or other operating or security systems and infrastructure may fail to operate properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond its control, which could adversely affect its ability to process transactions or provide services. Such events may include sudden increases in customer transaction volume; electrical, telecommunications or other major physical infrastructure outages; natural disasters such as earthquakes, tornadoes, hurricanes and floods; disease pandemics; and events arising from local or larger scale political or social matters, including wars and terrorist acts. In addition, the Company may need to take its systems offline if they become infected with malware or a computer virus or as a result of another form of cyber-attack. The Company's business may be susceptible to infrastructure outages because its data centers are located outside the U.S. In the event that backup systems are utilized, they may not process data as quickly as the Company’s primary systems and some data might not have been saved to backup systems, potentially resulting in a temporary or permanent loss of such data. The Company frequently updates its systems to support its operations and growth and to remain compliant with all applicable laws, rules and regulations. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones, including business interruptions. Implementation and testing of controls related to the Company’s computer systems, security monitoring and retaining and training personnel required to operate its systems also entail significant costs. Operational risk exposures could adversely impact the Company’s results of operations, liquidity and financial condition, as well as cause reputational harm. In addition, the Company may not have adequate insurance coverage to compensate for losses from a major interruption.
The Company faces security risks, including denial of service attacks, hacking, social engineering attacks targeting its colleagues and customers, malware intrusion or data corruption attempts, and identity theft that could result in the disclosure of confidential information, adversely affect its business or reputation, and create significant legal and financial exposure.
The Company’s computer systems and network infrastructure and those of third parties, on which it is highly dependent, are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. The Company’s business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in its computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access the Company’s network, products and services, its customers and other third parties may use personal mobile devices or computing devices that are outside of its network environment and are subject to their own cybersecurity risks.
The Company, its customers, regulators and other third parties, including other financial services institutions and companies engaged in data processing, have been subject to, and are likely to continue to be the target of, cyber-attacks. These cyber-attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information, ransomware, improper access by employees or vendors, attacks on personal email of employees, ransom demands to not expose security vulnerabilities in the Company’s systems or the systems of third parties or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of the Company, its employees, its customers or of third parties, damage its systems or otherwise materially disrupt the Company’s or its customers’ or other third parties’ network access or business operations. As cyber threats continue to evolve, the Company may be required to
expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of the Company’s systems and implement controls, processes, policies and other protective measures, the Company may not be able to anticipate all security breaches, nor may it be able to implement guaranteed preventive measures against such security breaches. Cyber threats are rapidly evolving and the Company may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss.
Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the use of the internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as the Company continues to increase its mobile-payment and other internet-based product offerings and expand its internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime affiliates, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks and "spear phishing" attacks are becoming more sophisticated and are extremely difficult to prevent. In such an attack, an attacker will attempt to fraudulently induce colleagues, customers or other users of the Company’s systems to disclose sensitive information in order to gain access to its data or that of its clients. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently, may not be recognized until launched and may not be recognized until well after a breach has occurred. The risk of a security breach caused by a cyber-attack at a vendor or by unauthorized vendor access has also increased in recent years. Additionally, the existence of cyber-attacks or security breaches at third-party vendors with access to the Company’s data may not be disclosed to it in a timely manner.
The Company also faces indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties with whom it does business or upon whom it relies to facilitate or enable its business activities, including, for example, financial counterparties, regulators and providers of critical infrastructure such as internet access and electrical power. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber-attack or other information or security breach that significantly degrades, deletes or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including the Company. This consolidation, interconnectivity and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber-attack or other information or security breach, termination or constraint could, among other things, adversely affect the Company’s ability to effect transactions, service its clients, manage its exposure to risk or expand its business.
Cyber-attacks or other information or security breaches, whether directed at the Company or third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber-attack on its systems has been successful, whether or not this perception is correct, may damage the Company’s reputation with customers and third parties with whom it does business. Hacking of personal information and identity theft risks, in particular, could cause serious reputational harm. A successful penetration or circumvention of system security could cause the Company serious negative consequences, including loss of customers and business opportunities, significant business disruption to its operations and business, misappropriation or destruction of its confidential information and/or that of its customers, or damage to the Company’s or its customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in the Company’s security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact its results of operations, liquidity and financial condition.
The Company relies on other companies to provide key components of our business infrastructure.
Third parties provide key components of the Company’s business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, Internet connections and network access. While the Company has selected these third-party vendors carefully, performing upfront due diligence and ongoing
monitoring activities, even with a strong oversight in place, the Company does not entirely control their actions. Any problems caused by these third parties, including those resulting from disruptions in services provided by a vendor (including as a result of a cyber-attack, other information security event or a natural disaster), financial or operational difficulties for the vendor, or resulting from issues at third-party vendors to the vendors, failure of a vendor to handle current or higher volumes, failure of a vendor to provide services for any reason, poor performance of services, failure to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of our vendors, could adversely affect the Company’s ability to deliver products and services to the Company’s customers, the Company’s reputation and the Company’s ability to conduct its business. In certain situation, replacing these third-party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable, inherent risk to the Company’s business operations.
The Company depends on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, the Company may rely on information furnished by or on behalf of clients and counterparties, including financial statements and other financial information. The Company also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.
The Company's framework for managing risks may not be effective in mitigating risk and loss to the Company.
The Company's risk management framework is made up of various processes and strategies to manage its risk exposure. The framework to manage risk, including the framework's underlying assumptions, may not be effective under all conditions and circumstances. If the risk management framework proves ineffective, the Company could suffer unexpected losses and could be materially adversely affected.
The Company's financial reporting controls and procedures may not prevent or detect all errors or fraud.
Financial reporting disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Any disclosure controls and procedures over financial reporting or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.
The value of the Company’s goodwill may decline in the future.
A significant decline in the Company’s expected future cash flows, a significant adverse change in the business climate, or slower growth rates, any or all of which could be materially impacted by many of the risk factors discussed herein, may require that the Company take charges in the future related to the impairment of goodwill. Future regulatory actions could also have a material impact on assessments of goodwill for impairment. If the Company were to conclude that a future write-down of its goodwill and other intangible assets is necessary, the Company would record the appropriate charge which could have a material adverse effect on its results of operations.
The Company depends on the expertise of key personnel, and its operations may suffer if it fails to attract and retain skilled personnel.
The Company's success depends, in large part, on its ability to attract and retain key individuals. Competition for qualified candidates in the activities and markets that the Company serves is great and it may not be able to hire these candidates and retain them. If the Company is not able to hire or retain these key individuals, it may be unable
to execute its business strategies and may suffer adverse consequences to its business, operations and financial condition.
The federal banking regulators have issued joint guidance on executive compensation designed to help ensure that a banking organization's incentive compensation policies do not encourage imprudent risk taking and are consistent with the safety and soundness of the organization. In addition, the Dodd-Frank Act requires those agencies, along with the SEC, to adopt rules affecting the structure and reporting of incentive compensation. The federal banking regulators and SEC proposed such rules in 2011 and issued revised proposed rules in 2016. The Company cannot predict if or when these rules will be adopted.
As a wholly owned subsidiary of BBVA, the Company is also required to comply with the European Union’s CRD-IV, which, among other things, impacts the variable compensation of certain risk-takers and highly compensated individuals in the Company or its subsidiaries. In accordance with CRD-IV, the Bank pays variable compensation of certain employees half in stock and half in cash. Additionally, in accordance with CRD-IV, from 40% to 50% (depending on the classification of the employee), of such payment is deferred for three years. The deferred amounts are subject to performance indicators and a malus clause, which could result in the reduction or forfeiture of the deferred amounts. The equity awards are subject to an additional one-year holding period after delivery. Most of the Company’s competitors are not subject to CRD-IV.
If the Company is unable to attract and retain qualified employees, or do so at rates necessary to maintain its competitive position, or if compensation costs required to attract and retain employees become more expensive, the Company's performance, including its competitive position, could be materially adversely affected.
Unpredictable catastrophic events could have a material adverse effect on the Company.
The occurrence of catastrophic events such as hurricanes, tropical storms, tornadoes, terrorist attacks, disease pandemics and other large scale catastrophes could adversely affect the Company's consolidated financial condition or results of operations. The Company has operations and customers in the southern United States, which could be adversely impacted by hurricanes and other severe weather in those regions. Unpredictable natural and other disasters could have an adverse effect on the Company in that such events could materially disrupt its operations or the ability or willingness of its customers to access the financial services it offers. The incidence and severity of catastrophes are inherently unpredictable. Although the Company carries insurance to mitigate its exposure to certain catastrophic events, these events could nevertheless reduce its earnings and cause volatility in its financial results for any fiscal quarter or year and have a material adverse effect on its financial condition and/or results of operations.
REGULATORY AND COMPLIANCE RISKS:
Cybersecurity and data privacy are areas of heightened legislative and regulatory focus.
As cybersecurity and data privacy risks for banking organizations and the broader financial system have significantly increased in recent years, cybersecurity and data privacy issues have become the subject of increasing legislative and regulatory focus. The federal bank regulatory agencies have proposed enhanced cyber risk management standards, which would apply to a wide range of large financial institutions and their third-party service providers, including the Company and the Bank, and would focus on cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience and situational awareness. Several states have also proposed or adopted cybersecurity and data privacy legislation and regulations, which require, among other things, notification to affected individuals when there has been a security breach of their personal data.
The Company receives, maintains and stores non-public personal information of its customers and counterparties, including, but not limited to, personally identifiable information and personal financial information. The sharing, use, disclosure and protection of this information are governed by federal and state law. Both personally identifiable information and personal financial information is increasingly subject to legislation and regulation, the intent of which is to protect the privacy of personal information that is collected and handled.
The Company may become subject to new legislation or regulation concerning cybersecurity or the privacy of personally identifiable information and personal financial information or of any other information it may store or
maintain. The Company could be adversely affected if new legislation or regulations are adopted or if existing legislation or regulations are modified such that it is required to alter its systems or require changes to its business practices or privacy policies. If cybersecurity, data privacy, data protection, data transfer or data retention laws are implemented, interpreted or applied in a manner inconsistent with the Company’s current practices, the Company may be subject to fines, litigation or regulatory enforcement actions or ordered to change its business practices, policies or systems in a manner that adversely impacts its operating results.
The Company is subject to legislation and regulation, and future legislation or regulation or changes to existing legislation or regulation could affect its business.
Government regulation and legislation subject the Company and other financial institutions to restrictions, oversight and/or costs that may have an impact on the Company’s business, financial condition or results of operations.
The Company is subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of its operations and limit the businesses in which the Company may engage. These laws and regulations may change from time to time and are primarily intended for the protection of consumers and depositors and are not designed to protect security-holders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. In addition, actions by regulatory agencies or significant litigation against the Company could cause it to devote significant time and resources to defending itself and may lead to penalties that materially affect the Company and its shareholders. Future changes in the laws or regulations or their interpretations or enforcement may also be materially adverse to the Company and its shareholder or may require the Company to expend significant time and resources to comply with such requirements.
The Company cannot predict whether any pending or future legislation will be adopted or the substance and impact of any such new legislation on the Company. Changes in regulation could affect the Company in a substantial way and could have an adverse effect on its business, financial condition and results of operations. In addition, legislation or regulatory reform could affect the behaviors of third parties that the Company deals with in the course of business, such as rating agencies, insurance companies and investors. The extent to which the Company can adjust its strategies to offset such adverse impacts also is not known at this time.
In addition, as a result of the Tailoring Rules, the Company and the Bank are now subject to less restrictive capital and liquidity requirements and enhanced prudential standards than in past years. However, the Company became a Category IV U.S. IHC under the Tailoring Rules as of December 31, 2020, it will again be subject to certain additional capital and liquidity requirements and enhanced prudential standards applied to the Company in past years following applicable transition periods.
The Company and the Bank are also regulated and supervised by the CFPB. The CFPB has promulgated many mortgage-related rules since it was established under the Dodd-Frank Act, including rules related to the ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, Home Mortgage Disclosure Act requirements and appraisal and escrow standards for higher-priced mortgages. The mortgage-related rules issued by the CFPB have materially restructured the origination, servicing and securitization of residential mortgages in the United States. These rules have impacted, and will continue to impact, the business practices of mortgage lenders, including the Company and the Bank.
In addition, with the change of administration, it is possible that the focus of legislative, regulatory and supervisory efforts, as well as the intensity of such efforts, may change. The new administration's agenda could include a heightened focus on the regulation of loan portfolios and credit concentrations to borrowers impacted by climate change, heightened scrutiny on Bank Secrecy Act and anti-money laundering requirements, topics related to social equity, executive compensation, and increased capital and liquidity, limits on share buybacks and dividends. The Company also expect reform proposals for the short-term wholesale markets. It is too early for us to assess which, if any, of these policies would be implemented and what their impact on the Company's business, financial condition or results of operations would be.
Please refer to Item 1. Business - Supervision, Regulation and Other Factors for more information.
Compliance with anti-money laundering and anti-terrorism financing rules involves significant cost and effort.
The Company is subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules and regulations can put a significant financial burden on banks and other financial institutions and poses significant technical problems. Although the Company has internal policies and procedures designed to ensure compliance with applicable anti-money laundering and anti-terrorism financing rules and regulations, it cannot guarantee that its policies and procedures completely prevent violations of such rules and regulations. Any such violations may have severe consequences, including sanctions, fines and reputational consequences, which could have a material adverse effect on the Company's business, financial condition or results of operations.
The costs and effects of litigation, regulatory investigations, examinations or similar matters, or adverse facts and developments relating thereto, could materially affect the Company's business, operating results and financial condition.
The Company faces legal risks in its business, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high and are escalating. Substantial legal liability or significant regulatory action against the Company may have material adverse financial effects or cause significant reputational harm, which in turn could seriously harm its business prospects.
The Company and its operations are subject to increased regulatory oversight and scrutiny, which may lead to additional regulatory investigations or enforcement actions, thereby increasing the Company’s costs associated with responding to or defending such actions. In particular, inquiries could develop into administrative, civil or criminal proceedings or enforcement actions and may increase the Company's compliance costs, require changes in the Company's business practices, affect the Company's competitiveness, impair the Company's profitability, harm the Company's reputation or otherwise adversely affect the Company's business.
The Company's insurance may not cover all claims that may be asserted against it and indemnification rights to which it is entitled may not be honored. Any claims asserted against the Company, regardless of merit or eventual outcome, may harm its reputation. Should the ultimate judgments or settlements in any litigation or investigation significantly exceed the Company's insurance coverage, they could have a material adverse effect on its business, financial condition and results of operations. In addition, premiums for insurance covering the financial and banking sectors are rising. The Company may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms or at historic rates, if at all.
The Company is exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs.
The Company is required to comply with various anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, and economic sanctions programs, including those administered by the United Nations Security Council and the United States, including OFAC. The anti-corruption laws generally prohibit providing anything of value to government officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of its business, the Company may deal with entities, the employees of which are considered government officials. In addition, as noted above in Part I, Item 1 (“Anti-Money Laundering; USA PATRIOT Act; Office of Foreign Assets Control”), economic sanctions programs restrict the Company from conducting certain transactions or dealings involving certain sanctioned countries or persons.
Although the Company has internal policies and procedures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that the Company’s employees, directors, officers, partners, agents and service providers will not take actions in violation of the Company’s policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which they or the Company may ultimately be held responsible. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties being imposed on the Company, limits being placed on the Company’s activities, authorizations or licenses being revoked, damage to the Company’s reputation and other consequences that could have a material adverse effect on the Company’s business, results of operations and financial condition. Further, litigation or investigations relating to alleged or suspected violations of anti-corruption laws or sanctions regulations could be costly.
The Company is subject to capital adequacy and liquidity standards, and if it fails to meet these standards its financial condition and operations would be adversely affected.
The U.S. Basel III final rule and provisions in the Dodd-Frank Act increased capital requirements for banking organizations such as the Company and the Bank. Consistent with the Basel Committee's Basel III capital framework, the U.S. Basel III final rule includes a minimum ratio of CET1 capital to risk weighted assets of 4.5 percent and a CET1 capital conservation buffer of greater than 2.5 percent of risk-weighted assets that applies to all U.S. banking organizations, including the Bank and the Company. Failure to maintain the capital conservation buffer would result in increasingly stringent restrictions on a banking organization's ability to make dividend payments and other capital distributions and pay discretionary bonuses to executive officers.
The Company has also been required to submit a periodic capital plan to the Federal Reserve Board under the CCAR process, subject to Dodd-Frank Act stress testing requirements and additional liquidity requirements. As a result of the Tailoring Rules, however, the Company and the Bank are no longer subject to CCAR, Dodd-Frank Act stress testing and the LCR. If, however, the Company becomes a Category IV U.S. IHC under the Tailoring Rules, it will again be subject to certain modified forms of these requirements that applied to the Company in past years.
In addition, BBVA designated the Parent as its IHC to comply with the Federal Reserve Board's final rule to enhance its supervision and regulation of the U.S. operations of Large FBOs. The Company is subject to U.S. risk-based and leverage capital, liquidity, risk management, and other enhanced prudential standards on a consolidated basis under this rule, as amended by the Tailoring Rules. BBVA's combined U.S. operations (including its U.S. branches, agencies and subsidiaries) are also subject to certain enhanced prudential standards. These enhanced prudential standards could affect the Company’s operations.
Please refer to Item 1. Business - Supervision, Regulation and Other Factors for more information.
STRATEGIC AND REPUTATIONAL RISKS:
The financial services market is undergoing rapid technological changes, and the Company may be unable to effectively compete or may experience heightened cyber-security and/or fraud risks as a result of these changes.
The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and may enable the Company to reduce costs. The Company's future success may depend, in part, on its ability to use technology to provide products and services that provide convenience to customers and to create additional efficiencies in its operations. Some of the Company's competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. As a result, the Company's ability to effectively compete to retain or acquire new business may be impaired, and its business, financial condition or results of operations may be adversely affected.
The Company is under continuous threat of loss due to cyber-attacks, especially as it continues to expand customer capabilities to utilize internet and other remote channels to transact business. Two of the most significant cyber-attack risks that it faces are e-fraud and breach of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract funds directly from customers' or the Company's accounts. A breach of sensitive customer data, such as account numbers and social security numbers could present significant reputational, legal and/or regulatory costs to the Company.
Over the past few years, there have been a series of distributed denial of service attacks on financial services companies. Distributed denial of service attacks are designed to saturate the targeted online network with excessive amounts of network traffic, resulting in slow response times, or in some cases, causing the site to be temporarily unavailable. Generally, these attacks have not been conducted to steal financial data, but meant to interrupt or suspend a company's internet service. While these events may not result in a breach of client data and account information, the attacks can adversely affect the performance of a company’s website and in some instances have prevented customers from accessing a company’s website. Distributed denial of service attacks, hacking and identity theft risks could cause serious reputational harm. Cyber threats are rapidly evolving and the Company may not be able to anticipate or prevent all such attacks. The Company's risk and exposure to these matters remains heightened
because of the evolving nature and complexity of these threats from cybercriminals and hackers, its plans to continue to provide internet banking and mobile banking channels, and its plans to develop additional remote connectivity solutions to serve its customers. The Company may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss.
Additionally, fraud risk may increase as the Company offers more products online or through mobile channels.
The Company is subject to intense competition in the financial services industry, particularly in its market area, which could result in losing business or margin declines.
The Company operates in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes, as well as continued consolidation. The Company faces aggressive competition from other domestic and foreign lending institutions and from numerous other providers of financial services. The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition. Because non-banking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures. Securities firms and insurance companies that elect to become financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking, and may acquire banks and other financial institutions. This may significantly change the competitive environment in which the Company conducts business. Some of the Company's competitors have greater financial resources and/or face fewer regulatory constraints. As a result of these various sources of competition, the Company could lose business to competitors or be forced to price products and services on less advantageous terms to retain or attract clients, either of which would adversely affect its profitability.
Some of the Company's larger competitors, including certain national banks that have a significant presence in its market area, may have greater capital and resources than the Company, may have higher lending limits and may offer products and services not offered by the Company. Although the Company remains strong, stable and well capitalized, management cannot predict the reaction of customers and other third parties with which it conducts business with respect to the strength of the Company relative to its competitors, including its larger competitors. Any potential adverse reactions to the Company's financial condition or status in the marketplace, as compared to its competitors, could limit its ability to attract and retain customers and to compete for new business opportunities. The inability to attract and retain customers or to effectively compete for new business may have a material and adverse effect on the Company's financial condition and results of operations.
The Company also experiences competition from a variety of institutions outside of its market area. Some of these institutions conduct business primarily over the internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer who can obtain loans, pay bills and transfer funds directly without going through a bank. This “disintermediation” could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. In addition, changes in consumer spending and saving habits could adversely affect the Company's operations, and the Company may be unable to timely develop competitive new products and services in response to these changes.
Customers could pursue alternatives to bank deposits, causing the Company to lose a relatively inexpensive source of funding.
Checking and savings account balances and other forms of client deposits could decrease if customers perceive alternative investments, such as the stock market, provide superior expected returns. When clients move money out of bank deposits in favor of alternative investments, the Company can lose a relatively inexpensive source of funds, thus increasing its funding costs.
Negative public opinion could damage the Company's reputation and adversely impact business and revenues.
As a financial institution, the Company's earnings and capital are subject to risks associated with negative public opinion. The reputation of the financial services industry in general has been damaged as a result of the financial crisis and other matters affecting the financial services industry, including mortgage foreclosure issues. Negative public opinion regarding the Company could result from its actual or alleged conduct in any number of activities, including lending practices, the failure of any product or service sold by it to meet its clients' expectations or
applicable regulatory requirements, breach of sensitive customer information, a cybersecurity incident, corporate governance and acquisitions, or from actions taken by government regulators and community organizations in response to those activities. The Company could also be adversely affected by negative public opinion involving BBVA. Negative public opinion can adversely affect the Company's ability to keep, attract and/or retain clients and personnel, and can expose it to litigation and regulatory action. Actual or alleged conduct by one of the Company's businesses can result in negative public opinion about its other businesses. Negative public opinion could also affect the Company's credit ratings, which are important to accessing unsecured wholesale borrowings. Significant changes in these ratings could change the cost and availability of these sources of funding.
The Company’s ability to attract and retain customers, clients, investors, and highly-skilled management and employees is affected by its reputation. Public perception of the financial services industry in general was damaged as a result of the credit crisis that started in 2008. Significant harm to its reputation can also arise from other sources, including employee misconduct, actual or perceived unethical behavior, conflicts of interest, litigation, GSE or regulatory actions, failing to deliver minimum or required standards of service and quality, failing to address customer and agency complaints, compliance failures, unauthorized release of confidential information due to cyber-attacks or otherwise, and the activities of the Company’s clients, customers and counterparties, including vendors. Actions by the financial service industry generally or by institutions or individuals in the industry can adversely affect the Company’s reputation, indirectly by association. All of these could adversely affect its growth, results of operation and financial condition.
The Company's rebranding strategy may not produce the benefits expected, may involve substantial costs and may not be favorably received by Customers.
Since 2008, the Company has marketed the Company's products and services using the “BBVA Compass” brand name and logo. Effective June 10, 2019, the Parent amended its Certificate of Formation to change its legal name from BBVA Compass Bancshares, Inc. to BBVA USA Bancshares, Inc. During 2019, the Bank began the process of transitioning away from the use of the “BBVA Compass” name and rebranding as “BBVA.”
Developing and maintaining awareness and integrity of the Company and the Company's brand are important to achieving widespread acceptance of our existing and future offerings and are important elements in attracting new customers. The importance of brand recognition will increase as competition in the Company's market further intensifies. Successful promotion of the Company's brand will depend on the effectiveness of the Company's marketing efforts and on the Company's ability to provide reliable and useful banking solutions. The Company plans to continue investing substantial resources to promote the Company's brand, but there is no guarantee that the Company will be able to achieve or maintain brand name recognition or status under the new brand, “BBVA,” that is comparable to the recognition and status previously enjoyed by the “BBVA Compass” brand. Even if the Company's brand recognition and loyalty increases, this may not result in increased use of the Company's products and services or higher revenue.
For these reasons, the Company's rebranding initiative may not produce the benefits expected, could adversely affect the Company's ability to retain and attract customers, and may have a negative impact on the Company's operations, business, financial results and financial condition.
RISKS RELATING TO THE COMPANY'S SECURITIES:
The Company is a subsidiary of BBVA Group, and activities across BBVA Group could adversely affect the Company’s business and results of operations.
The Company is a part of a highly diversified international financial group which offers a wide variety of financial and related products and services including retail banking, asset management, private banking and wholesale banking. The BBVA Group strives to foster a culture in which its employees act with integrity and feel comfortable reporting instances of misconduct. The BBVA Group employees are essential to this culture, and acts of misconduct by any employee, and particularly by senior management, could erode trust and confidence and damage the BBVA Group and the Company’s reputation among existing and potential clients and other stakeholders. Negative public opinion could result from actual or alleged conduct by the BBVA Group entities in any number of activities or circumstances, including operations, employment-related offenses such as sexual harassment and
discrimination, regulatory compliance, the use and protection of data and systems, and the satisfaction of client expectations, and from actions taken by regulators or others in response to such conduct.
Spanish judicial authorities are investigating the activities of Centro Exclusivo de Negocios y Transacciones, S.L. (Cenyt). Such investigation includes the provision of services by Cenyt to BBVA. On 29th July, 2019, BBVA was named as an official suspect (investigado) in a criminal judicial investigation (Preliminary Proceeding No. 96/2017 - Piece No. 9, Central Investigating Court No. 6 of the National High Court) for alleged facts which could be constitutive of bribery, revelation of secrets and corruption. On February 3, 2020, BBVA was notified by the Central Investigating Court No. 6 of the National High Court of the order lifting the secrecy of the proceedings. Certain current and former officers and employees of the BBVA Group, as well as former directors have also been named as investigated parties in connection with this investigation. BBVA has been and continues to be proactively collaborating with the Spanish judicial authorities, including sharing with the courts the relevant information obtained in the internal investigation hired by the entity in 2019 to contribute to the clarification of the facts. As of the date of this Annual Report on Form 10-K, no formal accusation against BBVA has been made. This criminal judicial proceeding is in the pre-trial phase. Therefore, it is not possible at this time to predict the scope or duration of such proceeding or any related proceeding or its or their possible outcomes or implications for the BBVA Group, including any fines, damages or harm to the BBVA´s Group reputation caused thereby.
This matter or any similar matters arising across the BBVA Group could damage the Company’s reputation and adversely affect the confidence of the Company’s clients, rating agencies, regulators, bondholders and other parties and could have an adverse effect on the Company’s business, financial condition and operating results.
The Parent is a holding company and depends on its subsidiaries for liquidity in the form of dividends, distributions and other payments.
The Parent is a legal entity separate and distinct from its subsidiaries, including the Bank. The principal source of cash flow for the Parent is dividends from the Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank. Regulations of both the Federal Reserve Board and the State of Alabama affect the ability of the Bank to pay dividends and other distributions to the Company and to make loans to the Company. Also, the Company’s right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. Limitations on the Parent’s ability to receive dividends and distributions from its subsidiaries could have a material adverse effect on the Company’s liquidity and on its ability to pay dividends on common stock. For additional information regarding these limitations see Item 1. Business - Supervision, Regulation and Other Factors - Dividends.
RISKS RELATING TO THE MERGER:
The Company's ability to complete the Merger with PNC is subject to the receipt of consents and approvals from regulatory agencies which may impose conditions that could adversely affect the Company or cause the Merger to be abandoned.
On November 15, 2020, PNC entered into a Stock Purchase Agreement with BBVA for the purchase by PNC of 100% of the issued and outstanding shares of the Company. PNC is not acquiring BSI, Propel Venture Partners Fund I, L.P. and BBVA Processing Services, Inc. Immediately following the closing of the Stock Purchase, PNC intends to merge the Parent with and into PNC, with PNC continuing as the surviving entity. Post-closing, PNC intends to merge BBVA USA with and into PNC Bank, National Association, an indirect wholly owned subsidiary of PNC, with PNC Bank continuing as the surviving entity (the foregoing transactions, collectively, the “Merger”).
Before the Merger may be completed, various governmental approvals or consents must be obtained, including from the Federal Reserve Board and other bank regulatory agencies. These regulators may impose conditions on the completion of the Merger. Although the Company does not currently expect that any significant conditions would be imposed, there can be no assurance that there will not be, and such conditions could have the effect of delaying completion of the Merger or imposing additional costs on the completion of the Merger. There can be no assurance as to whether the regulatory approvals will be received, the timing of those approvals, or whether any conditions will be imposed.
The Company will be subject to business uncertainties and contractual restrictions while the Merger is pending.
Uncertainty about the effect of the Merger on associates and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. In addition, subject to certain exceptions, the Company has agreed to operate its business in the ordinary course prior to the closing, and the Company is restricted from making certain acquisitions and taking other specified actions without the consent of PNC until the Merger is completed. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the Merger.
Failure to complete the Merger could negatively impact the Company.
If the Merger is not completed for any reason, there may be various adverse consequences and the Company may experience negative reactions from the financial markets and from its customers and associates. For example, the Company’s business may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger.
Additionally, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions required to effect the Merger. If the Merger is not completed, the Company would have to pay these expenses without realizing the expected benefits of the Merger.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
Not Applicable.

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ITEM 2. PROPERTIES
Item 2. Properties
The Company occupies various facilities principally located in Alabama, Arizona, California, Colorado, Florida, New Mexico and Texas and in states where it operates loan production offices that are used in the normal course of the financial services business. The properties consist of both owned and leased properties and include land for future banking center sites. The leased properties include both land and buildings that are generally under long-term leases. The Company leases office space used as the Company's principal executive offices in Houston, Texas. The Bank has significant operations in Birmingham, Alabama. The Company owns the land and building where the Bank is headquartered. See Note 5, Premises and Equipment, in the Notes to the Consolidated Financial Statements, for additional disclosures related to the Company’s properties.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
See under “Legal and Regulatory Proceedings” in Note 15, Commitments, Contingencies and Guarantees, in the Notes to the Consolidated Financial Statements.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not Applicable.
Part II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Parent's common stock is not traded on any exchange or other interdealer electronic trading facility and there is no established public trading market for the Parent's common stock.
Holders
As of the date of this filing, BBVA was the sole holder of the Parent's common stock.
Dividends
The payment of dividends on the Parent's common stock is subject to determination and declaration by the Board of Directors of the Parent and regulatory limitations on the payment of dividends. There is no assurance that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends will continue. The following table sets forth the common dividends the Parent paid to its sole shareholder, BBVA, for each of the last eight quarters.
2020 2019
(In Thousands)
Quarter Ended:
March 31 $ - $ -
June 30 - 170,000
September 30 - -
December 31 - 312,000
Year $ - $ 482,000
A discussion of dividend restrictions is provided in Item 1. Business - Overview - Supervision, Regulation, and Other Factors - Dividends and in Note 16, Regulatory Capital Requirements and Dividends from Subsidiaries, in the Notes to the Consolidated Financial Statements.
Recent Sales of Unregistered Securities
Not Applicable.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
The following table sets forth summarized historical consolidated financial information for each of the periods indicated. This information should be read together with Management's Discussion and Analysis of Financial Condition and Results of Operations below and with the accompanying Consolidated Financial Statements included in this Annual Report on Form 10-K. The historical information indicated as of and for the years ended December 31, 2020 through 2016, has been derived from the Company's audited Consolidated Financial Statements for the years ended December 31, 2020 through 2016. Historical results set forth below and elsewhere in this Annual Report on Form 10-K are not necessarily indicative of future performance.
Years Ended December 31,
2020 2019 2018 2017 2016
(Dollars in Thousands)
Summary of Operations:
Interest income $ 2,981,028 $ 3,558,656 $ 3,265,274 $ 2,766,648 $ 2,530,459
Interest expense 470,504 951,623 658,696 436,481 462,778
Net interest income 2,510,524 2,607,033 2,606,578 2,330,167 2,067,681
Provision for credit losses 966,129 597,444 365,420 287,693 302,589
Net interest income after provision for credit losses 1,544,395 2,009,589 2,241,158 2,042,474 1,765,092
Noninterest income 1,192,672 1,135,944 1,056,909 1,045,975 1,055,974
Noninterest expense, including goodwill impairment (1) 4,561,718 2,866,080 2,349,960 2,311,587 2,303,522
Net (loss) income before income tax expense (1,824,651) 279,453 948,107 776,862 517,544
Income tax expense 37,013 126,046 184,678 316,076 146,021
Net (loss) income (1,861,664) 153,407 763,429 460,786 371,523
Noncontrolling interest 2,047 2,332 1,981 2,005 2,010
Net (loss) income attributable to BBVA USA Bancshares, Inc. $ (1,863,711) $ 151,075 $ 761,448 $ 458,781 $ 369,513
Summary of Balance Sheet:
As of the Period-End:
Debt securities $ 16,297,042 $ 14,032,351 $ 13,866,829 $ 13,265,725 $ 12,448,455
Loans and loans held for sale 65,796,353 64,058,915 65,255,320 61,690,878 60,223,112
Allowance for loan losses (1,679,474) (920,993) (885,242) (842,760) (838,293)
Total assets 102,756,203 93,603,347 90,947,174 87,320,579 87,079,953
Deposits 85,858,381 74,985,283 72,167,987 69,256,313 67,279,533
FHLB and other borrowings 3,548,492 3,690,044 3,987,590 3,959,930 3,001,551
Shareholder's equity 11,691,362 13,386,589 13,512,529 13,013,310 12,750,707
Average Balances:
Loans and loans held for sale $ 67,045,078 $ 64,275,473 $ 63,761,869 $ 60,419,711 $ 61,505,935
Total assets 102,008,134 94,293,422 89,576,037 87,358,298 91,064,360
Deposits 82,426,860 73,007,106 70,149,887 66,627,368 67,904,564
FHLB and other borrowings 3,605,422 3,968,094 4,095,054 3,973,465 4,226,225
Shareholder's equity 12,003,167 13,894,163 13,266,930 13,035,797 12,818,572
Selected Ratios:
Return on average total assets (1.83) % 0.16 % 0.85 % 0.53 % 0.41 %
Return on average total equity (15.51) 1.10 5.75 3.53 2.90
Average equity to average assets 11.77 14.74 14.81 14.92 14.08
(1)Noninterest expense for the years ended December 31, 2020, 2019, and 2016 includes goodwill impairment of $2.2 billion, $470.0 million, and $59.9 million, respectively.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company during the years ended December 31, 2020, 2019 and 2018. The Executive Overview summarizes information management believes is important for an understanding of the financial condition and results of operations of the Company. Topics presented in the Executive Overview are discussed in more detail within, and should be read in conjunction with, this Management’s Discussion and Analysis of Financial Condition and Results of Operations and the accompanying Consolidated Financial Statements included in this Annual Report on Form 10-K. The discussion of the critical accounting policies and analysis set forth below is intended to supplement and highlight information contained in the accompanying Consolidated Financial Statements and the selected financial data presented elsewhere in this Annual Report on Form 10-K.
Executive Overview
Financial Performance
Consolidated net (loss) income attributable to the Company for 2020 was $(1.9) billion compared to $151.1 million earned during 2019. The Company's 2020 results reflected lower net interest income, higher provision for loan losses, higher noninterest expense, which includes $2.2 billion of goodwill impairment, offset by higher noninterest income.
Net interest income totaled $2.5 billion in 2020 and $2.6 billion in 2019. The net interest margin for 2020 was 2.73% compared to 3.17% for 2019. Net interest margin in 2020 was primarily impacted by the timing of the Federal Reserve Board's decrease of benchmark rates in October of 2019 and in March of 2020.
Provision for credit losses was $966.1 million for 2020 compared to $597.4 million for 2019. For 2020, provision for credit losses was comprised of $965.8 million of provision for loan losses and $331 thousand of provision for HTM security losses. The increase in provision for loan losses in 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. During 2020, economic conditions deteriorated due to the impact of the COVID-19 health crisis. As a result, economic projections for gross domestic product declined dramatically and unemployment levels increased significantly with information related to the evolving impact of the COVID-19 health crisis. Additionally, provision for loan losses was impacted by the higher reserves in the energy portfolio due to the decrease in oil prices.
The Company recorded net charge-offs of $392.2 million during 2020 compared to $561.7 million during 2019. The decrease was due to an $54.5 million decrease in commercial, financial, and agricultural net charge-offs as well as a $86.4 million decrease in consumer direct net charge-offs and a $39.8 million decrease in consumer indirect net charge-offs.
Noninterest income was $1.2 billion for 2020 and $1.1 billion for 2019, a slight increase of $56.7 million. The increase in total noninterest income was driven by a $54.4 million increase in investment banking and advisory fees, a $7.4 million increase in money transfer income, a $46.8 million increase mortgage banking income, and a $10.8 million increase in corporate and correspondent investment sales partially offset by a $30.6 million decrease in service charges on deposit accounts and a $21.3 million decrease in other noninterest income.
Noninterest expense increased $1.7 billion to $4.6 billion for 2020 compared to 2019. The increase in noninterest expense was primarily attributable to a $2.2 billion goodwill impairment. Also, contributing to the increase was a $13.9 million increase in professional services, a $6.5 million increase in money transfer expense, and a $7.3 million increase in FDIC insurance. Partially offsetting the increase was a $15.0 million decrease in marketing, and a $17.0 million decrease in other noninterest expense.
Income tax expense was $37.0 million for 2020 compared to $126.0 million for 2019. This resulted in an effective tax rate of (2.0)% for 2020 and a 45.1% effective tax rate for 2019. The effective tax rate for 2020 was primarily driven by the unfavorable permanent difference related to goodwill impairment.
The Company's total assets at December 31, 2020 were $102.8 billion, an increase of $9.2 billion from December 31, 2019 levels. Total loans excluding loans held for sale were $65.6 billion at December 31, 2020, an
increase of $1.6 billion or 2.5% from December 31, 2019 levels. The increase was primarily driven by $3.1 billion of SBA PPP loans that the Company has facilitated to assist its commercial customers during the COVID-19 pandemic.
Deposits increased $10.9 billion or 14.5% compared to December 31, 2019, driven by an increase in transaction accounts which increased 29.0%.
Total shareholder's equity at December 31, 2020 was $11.7 billion, a decrease of $1.7 billion compared to December 31, 2019.
The COVID-19 pandemic has caused and continues to cause significant, unprecedented disruption around the world that has affected daily living and negatively impacted the global economy. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and shelter in place requirements in many states and communities, which has increased unemployment levels and caused extreme volatility in the financial markets. As further discussed in “Analysis of Results of Operations,” during the fiscal year, the Company observed the impact of the pandemic on its business. The reduction in interest rates and economic forecast uncertainty that negatively impacted the provision for credit losses had the most immediate, negative impacts on the Company’s performance. Though the Company is unable to estimate the extent of the impact, the continuing pandemic and related global economic crisis will adversely impact the Company’s future operating results.
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, and has subsequently been amended several times. Among other provisions, the CARES Act includes funding for the SBA 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. Paycheck Protection Program loans are available to a broader range of entities than ordinary Small Business Administration loans, require deferral of principal and interest repayment, and may be forgiven in an amount equal to payroll costs and certain other expenses during either an eight-week or twenty-four-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. Fannie Mae and Freddie Mac have extended their moratorium on foreclosures and evictions for single family federally backed mortgages until at least February 28, 2021.
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.
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 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 provides financial institutions with the option to suspend GAAP requirements for COVID-19-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.
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 stated that it expects to hold interest rates near zero for several years. 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 established 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. Some of these facilities stopped purchasing assets or making loans as of December 31, 2020.
Federal Reserve Board facilities and programs that expired as of December 31, 2020 included:
•three Main Street Loan Facilities to purchase loan participations, under specified conditions, from banks lending to small and medium U.S. businesses;
•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; and
•a Municipal Liquidity Facility to purchased bonds directly from U.S. state, city and county issuers.
The Federal Reserve Board facilities and programs that will expire on March 31, 2021 include:
•a Paycheck Protection Program Liquidity Facility to provide financing to related to Paycheck Protection Program loans made by banks;
•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; 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.
Capital
The Company's Tier 1 and CET1 ratios were 13.61% and 13.28%, respectively at December 31, 2020, compared to 12.83% and 12.49%, respectively at December 31, 2019, under the U.S. Basel III final rule.
For more information, see “Capital” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 1. Business - Supervision, Regulation and Other Factors - Capital, and Note 16, Regulatory Capital Requirements and Dividends from Subsidiaries, in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.
Liquidity
The Company’s sources of liquidity include customers’ interest-bearing and noninterest-bearing deposit accounts, loan principal and interest payments, investment securities, and borrowings. As a holding company, the Parent’s primary source of liquidity is the Bank. Due to the net earnings restrictions on dividend distributions, the Bank was not permitted to pay any dividends at December 31, 2020 and 2019 without regulatory approval.
The Parent paid no common dividends to its sole shareholder, BBVA, during 2020.
As noted in Item 1. Business - Supervision, Regulation and Other Factors, as a result of the Tailoring Rules, the Company was not subject to the LCR requirements as of December 31, 2020 but as the Company became a Category IV U.S. IHC under the Tailoring Rules as of December 31, 2020, it will be subject to the LCR requirements again in the future. At December 31, 2020, the Company's LCR was 144% and was fully compliant with the LCR requirements.
Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth. For more information, see below under “Liquidity Management” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 10, FHLB and Other Borrowings, Note 11, Shareholder's Equity, and Note 15, Commitments, Contingencies and Guarantees, in the Notes to the Consolidated Financial Statements.
Critical Accounting Policies and Estimates
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.
Allowance for Loan Losses: Management’s policy is to maintain the allowance for loan losses at a sufficient level reflecting management's estimate of expected losses over the life of the portfolio. Management performs periodic and systematic detailed reviews of its loan portfolio to identify trends and to assess the overall collectability of the loan portfolio.
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 based on changes in sources of forecast information or management's ability to develop a reasonable and supportable forecast. After the reasonable and supportable forecast period, the Company reverts to long run historical average default probabilities and loss severities using a linear function, with a variable speed determined on a portfolio basis.
While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses and methodology may be necessary if economic or other conditions differ substantially from the assumptions used in making the estimates. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels vary from previous estimates.
A detailed discussion of the methodology used in determining the allowance for loan losses is included in Note 1, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements.
Goodwill Impairment: It is the Company’s policy to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.
Accounting standards require management to estimate the fair value of each reporting unit in assessing impairment at least annually. As such, the Company engages an independent valuation expert to assist in the computation of the fair value estimates of each reporting unit as part of its annual assessment. This assessment utilizes a blend of income and market based valuation methodologies.
The impairment testing process conducted by the Company begins by assigning net assets and goodwill to each reporting unit. The Company then completes the impairment test by comparing the fair value of each reporting unit with the recorded book value of its net assets, with goodwill included in the computation of the carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired. 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 computation of the fair value estimate is 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 calculation could result in differences in the results of the impairment test. None of the Company's reporting units were at risk of failing the goodwill impairment test as of December 31, 2020. See “Goodwill” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and see Note 7, Goodwill, in the Notes to the Consolidated Financial Statements for a detailed discussion of the impairment testing process.
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 adoption of this standard will have an immaterial impact 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.
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 but has not modified any contracts, hedging relationships, or other transactions.
Analysis of Results of Operations
Consolidated net (loss) income attributable to the Company totaled $(1.9) billion, $151.1 million, and $761.4 million for 2020, 2019 and 2018, respectively. The Company's 2020 results reflected lower net interest income, higher provision for loan 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.
2020 compared to 2019
Net interest income totaled $2.5 billion in 2020 and $2.6 billion in 2019. Net interest income on a fully taxable equivalent basis totaled $2.6 billion in 2020 and $2.7 billion in 2019.
Net interest margin was 2.73% in 2020 compared to 3.17% in 2019. The 44 basis point decrease in net interest margin was primarily driven by the timing of the Federal Reserve Board's decrease of benchmark rates in October of 2019 and in March of 2020.
The fully taxable equivalent yield for 2020 for the loan portfolio was 4.02% compared to 4.89% for the prior year. The 87 basis point decrease was primarily driven by the impact of higher interest rates during the first half of 2019 as the Federal Reserve Board did not lower benchmark rates until the second half of 2019 and in March 2020.
The fully taxable equivalent yield on the total investment securities portfolio was 1.76% for 2020, compared to 2.30% for the prior year. The 54 basis point decrease was a result of lower interest rates for 2020 compared to 2019 as well as higher levels of premium amortization as actual and expected prepayments increased.
The average rate paid on interest bearing deposits was 0.62% for 2020 compared to 1.49% for 2019 and reflects the impact of lower funding costs on interest bearing deposit offerings including savings, money market and CD products.
The average rate on FHLB and other borrowings during 2020 was 1.99% compared to 3.43% for the prior year. The 144 basis point decrease was primarily driven by the impact of lower rate FHLB advances as well as the impact of fair value hedges on other borrowings.
2019 compared to 2018
Net interest income totaled $2.6 billion in both 2019 and 2018. Net interest income on a fully taxable equivalent basis totaled $2.7 billion in both 2019 and 2018.
Net interest margin was 3.17% in 2019 compared to 3.30% in 2018. The 13 basis point decrease in net interest margin was primarily driven by higher funding costs.
The fully taxable equivalent yield for 2019 for the loan portfolio was 4.89% compared to 4.64% for the prior year. The 25 basis point increase was primarily driven by the impact of higher interest rates during the first half of 2019 as the Federal Reserve Board did not begin lowering benchmark rates until July 2019.
The fully taxable equivalent yield on the total investment securities portfolio was 2.30% for 2019, compared to 2.12% for the prior year. The 18 basis point increase was a result of higher interest rates partially offset by higher levels of premium amortization as actual and expected prepayments have increased.
The average rate paid on interest bearing deposits was 1.49% for 2019 compared to 1.06% for 2018 and reflects the impact of higher funding costs on interest bearing deposit offerings including savings and money market products.
The average rate on FHLB and other borrowings during 2019 was 3.43% compared to 3.18% for the prior year. The 25 basis point increase was primarily driven by the impact of the $600 million issuance of unsecured senior notes in August 2019 as well as the impact of the $1.2 billion issuance of unsecured senior notes in June 2018.
The following tables set forth the major components of net interest income and the related annualized yields and rates, as well as the variances between the periods caused by changes in interest rates versus changes in volumes.
Table 3
Consolidated Average Balance and Yield/ Rate Analysis
December 31, 2020 December 31, 2019 December 31, 2018
Average Balance Income/Expense Yield/ Rate Average Balance Income/ Expense Yield/Rate Average Balance Income/ Expense Yield/Rate
(Dollars in Thousands)
Assets:
Interest earning assets:
Loans (1) (2) (3) $ 67,045,078 $ 2,698,114 4.02 % $ 64,275,473 $ 3,144,471 4.89 % $ 63,761,869 $ 2,960,170 4.64 %
Total debt securities - AFS 5,825,301 58,876 1.01 8,520,287 168,031 1.97 11,390,313 222,627 1.95
Debt securities - HTM (tax exempt) (3) 500,695 15,953 3.19 624,907 22,594 3.62 787,453 27,550 3.50
Debt securities - HTM (taxable) 8,093,187 179,079 2.21 4,656,678 126,911 2.73 1,511,284 39,797 2.63
Total debt securities - HTM 8,593,882 195,032 2.27 5,281,585 149,505 2.83 2,298,737 67,347 2.93
Trading account securities (3) 203,913 3,964 1.94 110,995 2,953 2.66 122,132 3,212 2.63
Securities purchased under agreements to resell (4) 1,207,097 37,896 3.14 857,171 38,089 4.44 129,000 9,375 7.27
Other (5) 10,719,257 31,811 0.30 4,869,724 107,145 2.20 2,818,283 54,205 1.92
Total earning assets 93,594,528 3,025,693 3.23 83,915,235 3,610,194 4.30 80,520,334 3,316,936 4.12
Noninterest earning assets:
Cash and due from banks 888,146 973,779 691,166
Allowance for credit losses (1,497,922) (950,306) (859,475)
Net unrealized gain (loss) on investment securities available for sale 99,960 (76,200) (282,517)
Other noninterest earning assets 8,923,422 10,430,914 9,506,529
Total assets $ 102,008,134 $ 94,293,422 $ 89,576,037
Liabilities:
Interest bearing liabilities:
Interest bearing demand deposits $ 13,649,238 54,570 0.40 $ 9,048,948 95,709 1.06 $ 7,950,561 48,599 0.61
Savings and money market accounts 36,073,927 168,737 0.47 28,546,260 354,286 1.24 26,247,253 224,009 0.85
Certificates and other time deposits 8,196,738 133,806 1.63 14,780,464 328,161 2.22 14,784,632 244,682 1.65
Total interest bearing deposits 57,919,903 357,113 0.62 52,375,672 778,156 1.49 48,982,446 517,290 1.06
FHLB and other borrowings 3,605,422 71,848 1.99 3,968,094 136,164 3.43 4,095,054 130,372 3.18
Federal funds purchased and securities sold under agreements to repurchase (4) 1,249,629 41,018 3.28 857,922 36,736 4.28 109,852 8,953 8.15
Other short-term borrowings 12,158 525 4.32 14,963 567 3.79 68,423 2,081 3.04
Total interest bearing liabilities 62,787,112 470,504 0.75 57,216,651 951,623 1.66 53,255,775 658,696 1.24
Noninterest bearing deposits 24,506,957 20,631,434 21,167,441
Other noninterest bearing liabilities 2,710,898 2,551,174 1,885,891
Total liabilities 90,004,967 80,399,259 76,309,107
Shareholder’s equity 12,003,167 13,894,163 13,266,930
Total liabilities and shareholder’s equity $ 102,008,134 $ 94,293,422 $ 89,576,037
Net interest income/net interest spread $ 2,555,189 2.48 % $ 2,658,571 2.64 % $ 2,658,240 2.88 %
Net interest margin 2.73 % 3.17 % 3.30 %
Taxable equivalent adjustment 44,665 51,538 51,662
Net interest income $ 2,510,524 $ 2,607,033 $ 2,606,578
(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)Yield/rate reflects impact of balance sheet offsetting. See Note 14, Securities Financing Activities.
(5)Includes federal funds sold, interest bearing deposits, interest bearing deposits with the Federal Reserve and other earning assets.
Table 4
Volume and Yield/ Rate Variances (1)
2020 compared to 2019 2019 compared to 2018
Change due to
Change due to
Volume
Yield/Rate
Total
Volume
Yield/Rate
Total
(Dollars in Thousands, yields on a fully taxable equivalent basis)
Interest income on:
Total loans $ 130,797 $ (577,154) $ (446,357) $ 24,011 $ 160,290 $ 184,301
Total debt securities available for sale (42,953) (66,202) (109,155) (56,584) 1,988 (54,596)
Total debt securities held to maturity 79,636 (34,109) 45,527 84,510 (2,352) 82,158
Trading account securities 1,968 (957) 1,011 (296) 37 (259)
Securities purchased under agreements to resell 12,894 (13,087) (193) 33,681 (4,967) 28,714
Other (2) 63,976 (139,310) (75,334) 44,198 8,742 52,940
Total earning assets $ 246,318 $ (830,819) $ (584,501) $ 129,520 $ 163,738 $ 293,258
Interest expense on:
Interest bearing demand deposits $ 35,045 $ (76,184) $ (41,139) $ 7,494 $ 39,616 $ 47,110
Savings and money market accounts 76,115 (261,664) (185,549) 21,062 109,215 130,277
Certificates and other time deposits (121,902) (72,453) (194,355) (69) 83,548 83,479
Total interest bearing deposits (10,742) (410,301) (421,043) 28,487 232,379 260,866
FHLB and other borrowings (11,511) (52,805) (64,316) (4,132) 9,924 5,792
Federal funds purchased and securities sold under agreements to repurchase
14,182 (9,900) 4,282 33,917 (6,134) 27,783
Other short-term borrowings (115) 73 (42) (1,930) 416 (1,514)
Total interest bearing liabilities (8,186) (472,933) (481,119) 56,342 236,585 292,927
Increase (decrease) in net interest income $ 254,504 $ (357,886) $ (103,382) $ 73,178 $ (72,847) $ 331
(1)The change in interest not solely due to volume or yield/rate is allocated to the volume column and yield/rate column in proportion to their relationship of the absolute dollar amounts of the change in each.
(2)Includes federal funds sold, interest bearing deposits, interest bearing deposits with the Federal Reserve and other earning assets.
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, and recorded a net of tax increase to accumulated deficit of $150.2 million as of January 1, 2020 for the cumulative effect of adoption ASC 326.
2020 compared to 2019
Provision for credit losses was $966.1 million for 2020 compared to $597.4 million for 2019. For 2020, provision for credit losses was comprised of $965.8 million of provision for loan losses and $331 thousand of provision for HTM security losses. The increase in provision for loan losses in 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. During 2020, economic conditions deteriorated due to the impact of the COVID-19 health crisis. As a result, economic projections for gross domestic product declined dramatically and unemployment levels increased significantly with information related to the evolving impacts of the COVID-19 health crisis. Additionally, provision for loan losses was impacted by the higher reserves in the commercial portfolio due to downgrades in this portfolio.
The Company recorded net charge-offs of $392.2 million during 2020 compared to $561.7 million during 2019. The decrease was due to a $54.5 million decrease in commercial, financial, and agricultural net charge-offs as well as an $86.4 million decrease in consumer direct net charge-offs and a $39.8 million decrease in consumer indirect net charge-offs.
Net charge-offs were 0.59% of average loans for 2020 compared to 0.88% of average loans for 2019.
2019 compared to 2018
Provision for loan losses was $597.4 million for 2019 compared to $365.4 million of provision for loan losses for 2018. The increase in provision for loan losses for 2019 was primarily attributable to higher losses within the consumer direct loan portfolio as well as an increase in the allowance on individually evaluated nonperforming loans in the commercial, financial and agricultural loan portfolio.
The Company recorded net charge-offs of $561.7 million during 2019 compared to $322.9 million during 2018. The increase was due to an $86.7 million increase in commercial, financial, and agricultural net charge-offs as well as a $110.6 million increase in consumer direct net charge-offs, a $22.7 million increase in credit card net charge-offs, and a $14.5 million increase in consumer indirect net charge-offs.
Net charge-offs were 0.88% of average loans for 2019 compared to 0.51% of average loans for 2018.
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 Consolidated Financial Statements for additional disclosures.
Noninterest Income
The following table presents the components of noninterest income.
Table 5
Noninterest Income
Years Ended December 31,
2020 2019 2018
(In Thousands)
Service charges on deposit accounts
$ 219,783 $ 250,367 $ 236,673
Card and merchant processing fees
192,096 197,547 174,927
Investment banking and advisory fees
138,096 83,659 77,684
Investment services sales fees
112,243 115,446 112,652
Money transfer income
106,564 99,144 91,681
Mortgage banking income
74,813 28,059 26,833
Corporate and correspondent investment sales
49,318 38,561 51,675
Asset management fees
48,101 45,571 43,811
Bank owned life insurance
20,149 17,479 17,822
Investment securities gains, net
22,616 29,961 -
Other
208,893 230,150 223,151
Total noninterest income
$ 1,192,672 $ 1,135,944 $ 1,056,909
2020 compared to 2019
Noninterest income was $1.2 billion for 2020 and $1.1 billion for 2019, a slight increase of $56.7 million. The increase in total noninterest income was driven by increases in investment banking and advisory fees, money transfer income, mortgage banking income, and corporate and correspondent investment sales partially offset by decreases in service charges on deposit accounts and other noninterest income.
Service charges on deposit accounts represent the Company's largest category of noninterest revenue. Service charges on deposit accounts decreased to $219.8 million in 2020, compared to $250.4 million in 2019 driven by a general decline in consumer spending activity associated with the COVID-19 pandemic as well as the Bank implementing fee waivers to offer relief for those customers impacted by the COVID-19 pandemic.
Card and merchant processing fees represent income related to customers’ utilization of their debit and credit cards, as well as interchange income and merchants’ discounts. Card and merchant processing fees were $192.1 million in 2020, a decrease of $5.5 million compared to 2019.
Investment banking and advisory fees primarily represent income from BSI. Income from investment banking and advisory fees increased to $138.1 million in 2020 compared to $83.7 million in 2019 primarily due to an increase in debt capital markets activity in 2020 compared to 2019.
Investment services sales fees is comprised of mutual fund and annuity sales income and insurance sales fees. Income from investment services sales fees was $112.2 million in 2020, compared to $115.4 million in 2019.
Money transfer income represents income from the Parent's wholly owned subsidiary, BBVA Transfer Holdings, Inc., which engages in money transfer services, including money transmission and foreign exchange services. Income from money transfer services increased to $106.6 million in 2020 compared to $99.1 million in 2019, driven by an increase in transaction volumes during the year.
Mortgage banking income for 2020 was $74.8 million compared to $28.1 million in 2019. Mortgage banking income 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. The increase in mortgage banking income was driven by an increase of $17.6 million in fair value adjustments on mortgage loans held for sale, mortgage related derivatives and MSRs as well as $30.5 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 $49.3 million in 2020 from $38.6 million in 2019 primarily driven by an increase in customer interest rate income due to an increase in interest rate contract sales as well as valuation adjustments on interest rate contracts.
Asset management fees are generated from money management transactions executed with the Company through trusts, higher net worth customers and other long-term clients. Asset management fees increased to $48.1 million in 2020, compared to $45.6 million in 2019.
BOLI represents income generated by the underlying investments maintained within each of the Company’s life insurance policies on certain key executives and employees. BOLI was $20.1 million in 2020 compared to $17.5 million in 2019.
Investment securities gains, net decreased to $22.6 million in 2020 compared to $30.0 million in 2019. See “-Investment Securities” for more information related to the investment securities sales.
Other income is comprised of income recognized that does not typically fit into one of the other noninterest income categories and includes primarily various fees associated with letters of credit, syndication, ATMs, and foreign exchange fees. The gain (loss) associated with the sale of fixed assets is also included in other income. For 2020, other income decreased by $21.3 million due in part to a $10.0 million decrease in syndication fees and by an $11.2 million decrease in service and referral income with BBVA and its affiliates.
2019 compared to 2018
Noninterest income was $1.1 billion for both 2019 and 2018, a slight increase of $79.0 million. The increase in total noninterest income was driven by increases in service charges on deposit accounts, card and merchant processing fees, money transfer income, investment banking and advisory fees, investment securities gains, and other noninterest income which were partially offset by a decrease in corporate and correspondent investment sales.
Service charges on deposit accounts were $250.4 million in 2019, compared to $236.7 million in 2018 due to continued customer account growth in 2019 when compared to 2018.
Card and merchant processing fees were $197.5 million in 2019, an increase of $22.6 million compared to 2018. Growth in the number of accounts as well as an increase in current customers' spending volumes contributed to the increase in interchange income.
Income from investment services sales fees was $115.4 million in 2019, compared to $112.7 million in 2018.
Income from money transfer services increased to $99.1 million in 2019 compared to $91.7 million in 2018 driven by an increase in transaction volumes during the year.
Income from investment banking and advisory fees increased to $83.7 million in 2019 compared to $77.7 million in 2018 primarily driven by an increase in the volume of underwriting activity.
Asset management fees increased to $45.6 million in 2019, compared to $43.8 million in 2018.
Income from corporate and correspondent investment sales decreased to $38.6 million in 2019 from $51.7 million in 2018. The primary drivers of the decrease were a decrease in interest rate contract sales driven by less demand as interest rates have declined in 2019 as well as valuation adjustments on interest rate contracts.
Mortgage banking income for the year ended December 31, 2019 was $28.1 million compared to $26.8 million in 2018.
BOLI was $17.5 million in 2019 compared to $17.8 million in 2018.
Investment securities gains, net increased to $30.0 million in 2019 compared to none in 2018. See “-Investment Securities” for more information related to the investment securities sales.
For 2019, other income increased by $7.0 million due in part to a $17.9 million increase in the value of the SBIC investments, and a $7.9 million increase in syndication fees partially offset by a $21.0 million decrease in service and referral income with BBVA and its affiliates.
Noninterest Expense
The following table presents the components of noninterest expense.
Table 6
Noninterest Expense
Years Ended December 31,
2020 2019 2018
(In Thousands)
Salaries, benefits and commissions
$ 1,159,561 $ 1,181,934 $ 1,154,791
Professional services
306,873 292,926 277,154
Equipment
267,547 256,766 257,565
Net occupancy
163,125 166,600 166,768
Money transfer expense
74,755 68,224 62,138
Marketing
40,130 55,164 48,866
FDIC insurance
34,954 27,703 67,550
Communications
21,759 21,782 30,582
Goodwill impairment
2,185,000 470,000 -
Other
308,014 324,981 284,546
Total noninterest expense
$ 4,561,718 $ 2,866,080 $ 2,349,960
2020 compared to 2019
Noninterest expense was $4.6 billion for 2020, an increase of $1.7 billion compared to $2.9 billion reported in 2019. Noninterest expense increased primarily due to goodwill impairment along with increases in professional services, money transfer expense, and FDIC insurance offset in part by decreases in marketing and other noninterest expense.
Salaries, benefits and commissions expense is comprised of salaries and wages in addition to other employee benefit costs and represents the largest components of noninterest expense. Salaries, benefits and commissions expense was $1.2 billion in both 2020 and 2019.
Professional services expense represents fees incurred for the various support functions, which includes legal, consulting, outsourcing and other professional related fees. Professional services expense increased by $13.9 million in 2020 to $306.9 million compared to 2019 primarily driven by an $8.9 million increase in outsourcing and professional services paid to BBVA and a $3.7 million increase in other professional services.
Money transfer expense represents expense from the Parent's wholly owned subsidiary, BBVA Transfer Holdings, Inc., which engages in money transfer services, including money transmission and foreign exchange services. Money transfer expense increased to $74.8 million in 2020 compared to $68.2 million in 2019 driven by an increase in transaction volumes during the year.
Marketing decreased $15.0 million to $40.1 million in 2020 compared to $55.2 million in 2019. Approximately $2.1 million of the decrease was related to rebranding costs incurred as a result of the global rebranding strategy in 2019. The decrease was also driven by lower costs associated with direct mail investments and broadcast media and production costs.
FDIC insurance was $35.0 million in 2020 compared to $27.7 million in 2019. The primary driver of the increase was due to a decline in credit quality metrics as well as a shift in maturity dates of certain long term debt.
Communications was $21.8 million in both 2020 and 2019.
Goodwill impairment was $2.2 billion in 2020 compared to $470 million in 2019. Refer to "-Goodwill" and Note 7, Goodwill in the Notes to the Consolidated Financial Statements for further details.
Other noninterest expense represents postage, supplies, subscriptions, provision for unfunded commitments and gains and losses on the sales and write-downs of OREO as well as other OREO associated expenses. Other noninterest expense decreased in 2020 to $308.0 million compared to $325.0 million in 2019. The decrease was primarily attributable to a $15.0 million decreased in item processing fees, $14.6 million decrease in travel expenses, $20.6 million decrease in business development and a $17.6 million decrease in legal reserves offset by a $72.0 million increase in provision for unfunded commitments.
2019 compared to 2018
Noninterest expense was $2.9 billion for 2019, an increase of $516.1 million compared to $2.3 billion reported in 2018. The increase in noninterest expense was primarily attributable to increases in salaries, benefits and commissions, professional services, money transfer expense, marketing, goodwill impairment, and other noninterest expense which were partially offset by decreases in FDIC insurance and communications.
Salaries, benefits and commissions expense was $1.2 billion in 2019, an increase of $27.1 million when compared to 2018. The increase was largely attributable to increases in full time salaries due to annual merit increases as well as an increase in incentive expenses.
Professional services expense increased by $15.8 million in 2019 to $292.9 million compared to 2018 due to an $8.0 million increase in outsourcing and professional services paid to BBVA, a $3.4 million increase in bankcard fees, and a $3.3 million increase in services related to credit reporting.
Money transfer expense increased to $68.2 million in 2019 compared to $62.1 million in 2018 driven by an increase in transaction volumes during the year.
Marketing increased $6.3 million to $55.2 million in 2019 compared to $48.9 million in 2018. Approximately $2.1 million of the increase was related to rebranding costs incurred as a result of the global rebranding strategy. The increase was also driven by higher costs associated with digital sales initiatives and performance media channels.
FDIC insurance was $27.7 million in 2019 compared to $67.6 million in 2018. The primary driver of the decrease was the elimination of the Large Bank FDIC surcharge which resulted in approximately $31.3 million less expense in 2019.
Communications decreased to $21.8 million in 2019 compared to $30.6 million in 2018. The primary driver of the decrease was due to a change in telecommunication services providers.
Goodwill impairment related to the Corporate and Investment Banking reporting unit was $470.0 million in 2019 compared to no goodwill impairment in 2018. Refer to "-Goodwill" and Note 7, Goodwill in the Notes to the Consolidated Financial Statements for further details.
Other noninterest expense increased in 2019 to $325.0 million compared to $284.5 million in 2018. The increase was primarily attributable to an $18.6 million increase in provision for unfunded commitments as well as a $16.3 million increase in fraud related charges.
Income Tax Expense
The Company’s income tax expense totaled $37.0 million, $126.0 million and $184.7 million for 2020, 2019, and 2018, respectively. The effective tax rate was (2.0)%, 45.1%, and 19.5% for 2020, 2019 and 2018, respectively.
The effective tax rate for 2020 compared to 2019 was primarily impacted by the unfavorable permanent difference related to goodwill impairment.
The increase in the effective tax rate in 2019 compared to 2018 was primarily driven by lower net income combined with an unfavorable permanent difference related to goodwill impairment.
Refer to Note 18, Income Taxes, in the Notes to the Consolidated Financial Statements for a reconciliation of the effective tax rate to the statutory tax rate and a discussion of uncertain tax positions and other tax matters.
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 $13.4 billion at December 31, 2020, compared to $5.8 billion at December 31, 2019. The increase was primarily driven by a $7.4 billion increase in interest bearing deposits with the Federal Reserve.
Trading Account Assets
The following table details the composition of the Company’s trading account assets.
Table 7
Trading Account Assets
December 31,
2020 2019
(In Thousands)
Trading account assets:
U.S. Treasury and other U.S. government agencies securities
$ 109,142 $ 137,637
Interest rate contracts
616,566 313,573
Foreign exchange contracts
36,741 22,766
Total trading account assets
$ 762,449 $ 473,976
Trading account assets increased $288 million to $762 million at December 31, 2020. The increase in trading account assets primarily related to increases in interest rate derivative contracts.
Debt Securities
The composition of the Company’s debt securities portfolio reflects the Company’s investment strategy of maximizing portfolio yields commensurate with risk and liquidity considerations. The primary objectives of the Company’s investment strategy are to maintain an appropriate level of liquidity and provide a tool to assist in controlling the Company’s interest rate sensitivity position while at the same time producing adequate levels of interest income. The Company’s debt securities are classified into one of three categories based upon management’s intent to hold the debt securities: (i) debt securities available for sale, (ii) debt securities held to maturity or (iii) trading account assets and liabilities.
For additional financial information regarding the Company’s debt securities, see Note 2, Debt Securities Available for Sale and Debt Securities Held to Maturity, in the Notes to the Consolidated Financial Statements.
The following table reflects the carrying amount of the debt securities portfolio at the end of each of the last three years.
Table 8
Composition of Debt Securities Portfolio
December 31,
2020 2019 2018
(In Thousands)
Debt securities available for sale (at fair value):
U.S. Treasury and other U.S. government agencies $ 2,146,904 $ 3,127,525 $ 5,431,467
Agency mortgage-backed securities 865,648 1,325,857 2,129,821
Agency collateralized mortgage obligations 2,731,731 2,781,125 3,418,979
States and political subdivisions 636 798 949
Total debt securities available for sale $ 5,744,919 $ 7,235,305 $ 10,981,216
Debt securities held to maturity (at amortized cost):
U.S. Treasury and other U.S. government agencies $ 1,291,900 $ 1,287,049 $ -
Agency mortgage-backed securities 570,115 - -
Collateralized mortgage obligations:
Agency 8,144,522 4,846,862 2,089,860
Non-agency 29,186 37,705 46,834
Asset-backed securities and other 48,790 52,355 61,304
States and political subdivisions (1) 467,610 573,075 687,615
Total debt securities held to maturity $ 10,552,123 $ 6,797,046 $ 2,885,613
Total debt securities $ 16,297,042 $ 14,032,351 $ 13,866,829
(1)Represents private placement transactions underwritten as loans but meeting the definition of a security within ASC Topic 320, Investments - Debt Securities, at origination. Additionally, the Company recorded an allowance of $2 million, at December 31, 2020, which is not included in the table above.
As of December 31, 2020, the securities portfolio included $5.7 billion in available for sale debt securities and $10.6 billion in held to maturity debt securities. Approximately 97% of the total debt securities portfolio was backed by government agencies or government-sponsored entities.
During 2020 and 2019, the Company received proceeds of $863.7 million and $2.4 billion, respectively, related to the sale of U.S. Treasury securities, agency collateralized mortgage obligations, and agency mortgage-backed securities classified as available for sale which resulted in net gains of $22.6 million and $30.0 million, respectively. There were no sales of debt securities during 2018.
The Company also purchased approximately $5.0 billion, $4.4 billion and $1.2 billion of U.S. Treasury securities, agency mortgage-backed securities, agency collateralized mortgage obligations and states and political subdivision securities classified as held to maturity during 2020, 2019 and 2018, respectively.
The maturities and weighted average yields of the debt securities available for sale and the debt securities held to maturity portfolios at December 31, 2020 are presented in the following table. Maturity data is calculated based on the next re-pricing date for debt securities with variable rates and remaining contractual maturity for securities with fixed rates. For other mortgage-backed securities excluding pass-through securities, the maturity was calculated using weighted average life. Taxable equivalent adjustments, using a 21 percent tax rate, have been made in calculating yields on tax-exempt obligations.
Table 9
Debt Securities Maturity Schedule
Maturing
Within One Year After One But Within Five Years After Five But Within Ten Years After Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in Thousands)
Debt securities available for sale (at fair value):
U.S. Treasury and other U.S. government agencies $ 300,073 0.28 % $ 1,443,242 1.57 % $ 5,783 2.55 % $ 397,806 1.10 %
Agency mortgage-backed securities 7,038 1.86 49,488 2.18 107,145 2.32 701,977 1.28
Agency collateralized mortgage obligations 15 3.71 11,346 1.94 38,097 2.08 2,682,273 1.08
States and political subdivisions - - 636 4.74 - - - -
Total $ 307,126 $ 1,504,712 $ 151,025 $ 3,782,056
Debt securities held to maturity (at amortized cost):
U.S. Treasury and other U.S. government agencies $ - - % $ 1,291,900 2.11 % $ - - % $ - - %
Agency mortgage-backed securities - - - - - - 570,115 0.77
Collateralized mortgage obligations:
Agency - - - - - - 8,144,522 1.60
Non-agency 702 4.52 - - 3,843 0.62 24,641 1.21
Asset-backed and other securities - - - - 75 0.31 48,715 1.19
States and political subdivisions 20,224 1.77 109,864 2.60 272,898 2.69 64,624 4.16
Total
$ 20,926 $ 1,401,764 $ 276,816 $ 8,852,617
Total securities $ 328,052 $ 2,906,476 $ 427,841 $ 12,634,673
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 Loan Portfolio table presents the classifications by major category at December 31, 2020, and for each of the preceding four years.
Table 10
Loan Portfolio
December 31,
2020 2019 2018 2017 2016
(In Thousands)
Commercial loans:
Commercial, financial and agricultural $ 26,605,142 $ 24,432,238 $ 26,562,319 $ 25,749,949 $ 25,122,002
Real estate - construction 2,498,331 2,028,682 1,997,537 2,273,539 2,125,316
Commercial real estate - mortgage 13,565,314 13,861,478 13,016,796 11,724,158 11,210,660
Total commercial loans $ 42,668,787 $ 40,322,398 $ 41,576,652 $ 39,747,646 $ 38,457,978
Consumer loans:
Residential real estate - mortgage $ 13,327,774 $ 13,533,954 $ 13,422,156 $ 13,365,747 $ 13,259,994
Equity lines of credit 2,394,894 2,592,680 2,747,217 2,653,105 2,543,778
Equity loans 179,762 244,968 298,614 363,264 445,709
Credit card 881,702 1,002,365 818,308 639,517 604,881
Consumer direct 1,929,723 2,338,142 2,553,588 1,690,383 1,254,641
Consumer indirect 4,177,125 3,912,350 3,770,019 3,164,106 3,134,948
Total consumer loans $ 22,890,980 $ 23,624,459 $ 23,609,902 $ 21,876,122 $ 21,243,951
Covered loans - - - - 359,334
Total loans $ 65,559,767 $ 63,946,857 $ 65,186,554 $ 61,623,768 $ 60,061,263
Loans held for sale 236,586 112,058 68,766 67,110 161,849
Total loans and loans held for sale $ 65,796,353 $ 64,058,915 $ 65,255,320 $ 61,690,878 $ 60,223,112
Loans and loans held for sale, net of unearned income, totaled $65.8 billion at December 31, 2020, an increase of $1.7 billion from December 31, 2019. The increase was primarily due to the impact of $3.1 billion of SBA Paycheck Protection Program loans, which are primarily categorized in the commercial, financial and agricultural category in the table above, that the Company has facilitated to assist its commercial customers during the COVID-19 pandemic as well as reflecting an increase in line of credit draws as companies responded to liquidity needs during 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 Consolidated Financial Statements for additional discussion.
The Selected Loan Maturity and Interest Rate Sensitivity table presents maturities of certain loan classifications at December 31, 2020, and an analysis of the rate structure for such loans with maturities greater than one year.
Table 11
Selected Loan Maturity and Interest Rate Sensitivity
Maturity Rate Structure For Loans Maturing Over One Year
One Year or Less Over One Year Through Five Years Over Five Years Through 15 Years Over 15 Years Total Fixed Interest Rate Floating or Adjustable Rate
(In Thousands)
Commercial, financial and agricultural
$ 8,152,161 $ 15,191,994 $ 3,015,175 $ 245,812 $ 26,605,142 $ 5,245,533 $ 13,207,448
Real estate - construction 1,225,279 1,054,997 114,543 103,512 2,498,331 81,808 1,191,244
Commercial real estate - mortgage 2,875,297 7,412,114 2,669,118 608,785 13,565,314 1,868,710 8,821,307
Residential real estate - mortgage 3,830,449 6,043,107 2,884,443 569,775 13,327,774 7,172,586 2,324,739
Equity lines of credit 19,868 17,464 2,357,507 55 2,394,894 110,470 2,264,556
Equity loans 12,993 46,837 72,163 47,769 179,762 164,496 2,273
Credit card 157,094 693,559 31,049 - 881,702 - 724,608
Consumer direct 499,672 940,926 489,042 83 1,929,723 991,190 438,861
Consumer indirect 905,846 2,881,556 389,723 - 4,177,125 3,271,279 -
Total loans $ 17,678,659 $ 34,282,554 $ 12,022,763 $ 1,575,791 $ 65,559,767 $ 18,906,072 $ 28,975,036
Scheduled repayments in the preceding table are reported in the maturity category in which the payment is due. Determinations of maturities are based upon contract terms.
Asset Quality
Nonperforming assets, which includes nonaccrual loans and loans held for sale, accruing loans 90 days past due, accruing TDRs 90 days past due, foreclosed real estate and other repossessed assets totaled $1.5 billion at December 31, 2020 compared to $710 million at December 31, 2019. The increase in nonperforming assets was primarily due to a $724 million increase in nonaccrual loans driven by a $272 million increase in commercial, financial and agricultural nonaccrual loans, primarily in the energy, financial services, and leisure and consumer services sectors, as well as a $344 million increase in commercial real estate - mortgage and an $88 million increase in residential real estate - mortgage. As a percentage of total loans and loans held for sale and foreclosed real estate, nonperforming assets were 2.23% at December 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 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 12
Potential Problem Loans
December 31,
2020 2019
(In Thousands)
Commercial, financial and agricultural
$ 566,800 $ 312,125
Real estate - construction
7,298 13,099
Commercial real estate - mortgage
179,316 78,428
$ 753,414 $ 403,652
The following table summarizes asset quality information for the past five years.
Table 13
Asset Quality
December 31,
2020 2019 2018 2017 2016
(In Thousands)
Nonaccrual loans:
Commercial, financial and agricultural $ 540,741 $ 268,288 $ 400,389 $ 310,059 $ 596,454
Real estate - construction 25,316 8,041 2,851 5,381 1,239
Commercial real estate - mortgage 442,137 98,077 110,144 111,982 71,921
Residential real estate - mortgage 235,463 147,337 167,099 173,843 140,303
Equity lines of credit 42,606 38,113 37,702 34,021 33,453
Equity loans 10,167 8,651 10,939 11,559 13,635
Credit card - - - - -
Consumer direct 10,087 6,555 4,528 2,425 789
Consumer indirect 24,713 31,781 17,834 9,595 5,926
Covered - - - - 730
Total nonaccrual loans 1,331,230 606,843 751,486 658,865 864,450
Nonaccrual loans held for sale - - - - 56,592
Total nonaccrual loans and loans held for sale $ 1,331,230 $ 606,843 $ 751,486 $ 658,865 $ 921,042
Accruing TDRs: (1)
Commercial, financial and agricultural $ 17,686 $ 1,456 $ 18,926 $ 1,213 $ 8,726
Real estate - construction 145 72 116 101 2,393
Commercial real estate - mortgage 910 3,414 3,661 4,155 4,860
Residential real estate - mortgage 53,380 57,165 57,446 64,898 59,893
Equity lines of credit - - - 237 -
Equity loans 19,606 23,770 26,768 30,105 34,746
Credit card - - - - -
Consumer direct 23,163 12,438 2,684 534 704
Consumer indirect - - - - -
Covered - - - - -
Total TDRs 114,890 98,315 109,601 101,243 111,322
TDRs classified as loans held for sale - - - - -
Total TDRs (loans and loans held for sale) $ 114,890 $ 98,315 $ 109,601 $ 101,243 $ 111,322
Loans 90 days past due and accruing:
Commercial, financial and agricultural $ 35,472 $ 6,692 $ 8,114 $ 18,136 $ 2,891
Real estate - construction 532 571 544 1,560 2,007
Commercial real estate - mortgage 1,104 6,576 2,420 927 -
Residential real estate - mortgage 45,761 4,641 5,927 8,572 3,356
Equity lines of credit 2,624 1,567 2,226 2,259 2,950
Equity loans 317 195 180 995 467
Credit card 21,953 22,796 17,011 11,929 10,954
Consumer direct 8,741 18,358 13,336 6,712 4,482
Consumer indirect 5,066 9,730 9,791 7,288 7,197
Covered - - - - 27,238
Total loans 90 days past due and accruing 121,570 71,126 59,549 58,378 61,542
Loans held for sale 90 days past due and accruing - - - - -
Total loans and loans held for sale 90 days past due and accruing
$ 121,570 $ 71,126 $ 59,549 $ 58,378 $ 61,542
Foreclosed real estate $ 11,448 $ 20,833 $ 16,869 $ 17,278 $ 21,112
Other repossessed assets
$ 5,846 $ 10,930 $ 12,031 $ 13,473 $ 7,587
(1)TDR totals include accruing loans 90 days past due classified as TDR.
Nonperforming assets, which include loans held for sale, are detailed in the following table.
Table 14
Nonperforming Assets
December 31,
2020 2019 2018 2017 2016
(In Thousands)
Nonaccrual loans $ 1,331,230 $ 606,843 $ 751,486 $ 658,865 $ 921,042
Loans 90 days or more past due and accruing (1) 121,570 71,126 59,549 58,378 61,542
TDRs 90 days or more past due and accruing 556 414 411 751 589
Nonperforming loans 1,453,356 678,383 811,446 717,994 983,173
Foreclosed real estate 11,448 20,833 16,869 17,278 21,112
Other repossessed assets 5,846 10,930 12,031 13,473 7,587
Total nonperforming assets $ 1,470,650 $ 710,146 $ 840,346 $ 748,745 $ 1,011,872
(1)Excludes loans classified as TDRs
Table 15
Asset Quality Ratios
December 31,
2020 2019 2018
(Dollars in Thousands)
Nonperforming loans and loans held for sale to total loans and loans held for sale (1) 2.21 % 1.06 % 1.24 %
Nonperforming assets to total loans and loans held for sale, foreclosed real estate, and other repossessed assets (2) 2.23 1.11 1.29
Allowance for loan losses to nonperforming loans (3) 115.56 135.76 109.09
Allowance for loan losses to total loans 2.56 1.44 1.36
Nonaccrual loans to total loans and loans held for sale (4) 2.02 0.95 1.15
Allowance for loan losses to nonaccrual loans (5) 126.16 151.77 117.80
(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.
(4)Nonaccrual loans include nonaccrual loans and loans held for sale (including nonaccrual loans classified as TDR).
(5)Nonaccrual loans include nonaccrual loans classified as TDR.
The following table provides a rollforward of nonaccrual loans and loans held for sale.
Table 16
Rollforward of Nonaccrual Loans
Years Ended December 31,
2020 2019
(In Thousands)
Balance at beginning of year $ 606,843 $ 751,486
Additions 1,511,747 762,180
Returns to accrual (143,481) (133,484)
Payments and paydowns (502,841) (158,874)
Transfers to other real estate owned (7,713) (30,431)
Charge-offs (133,325) (584,034)
Balance at end of year $ 1,331,230 $ 606,843
Generally, when a loan is placed on nonaccrual status, the Company applies the entire amount of any subsequent payments (including interest) to the outstanding principal balance. Consequently, a substantial portion of the interest received related to nonaccrual loans has been applied to principal. At December 31, 2020, nonaccrual loans and loans held for sale totaled $1.3 billion.
When borrowers are experiencing financial difficulties, the Company may, in order to assist the borrowers in repaying the principal and interest owed to the Company, 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. 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. Refer to Note 1, Summary of Significant Accounting Policies, and Note 3, Loans and Allowance for Loan Losses, in the Notes to the Consolidated Financial Statements for additional information.
The following table provides a rollforward of TDR activity excluding loans held for sale.
Table 17
Rollforward of TDR Activity
Years Ended December 31,
2020 2019
(In Thousands)
Balance at beginning of year
$ 215,481 $ 311,442
New TDRs
243,713 98,179
Payments/Payoffs
(135,357) (146,984)
Charge-offs
(22,227) (45,003)
Transfers to foreclosed real estate
- (2,153)
Balance at end of year
$ 301,610 $ 215,481
The Company’s aggregate recorded investment in loans modified through TDRs increased to $302 million at December 31, 2020 from $215 million at December 31, 2019. Included in these amounts are $115 million at December 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. At December 31, 2020, the Company had outstanding deferrals on approximately seven thousand loans with an amortized cost of $448 million. Since March, the Company has granted deferrals on approximately 77 thousand loans with an amortized cost of $6.8 billion.
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. Refer to Note 1, Summary of Significant Accounting Policies, and Note 3, Loans and Allowance for Loan Losses, in the Notes to the Consolidated Financial Statements for additional disclosures regarding the allowance for loan losses.
The total allowance for loan losses increased to $1.7 billion at December 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 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 December 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 second quarter of 2020 and along with a substantially slower unemployment recovery.
•Stable GDP outlook.
Although management’s overall economic outlook improved somewhat at December 31, 2020 from the prior quarters, risks to the downside increased, driven by accelerating COVID-19 cases in the Company's footprint and increased political unrest. This increased uncertainty drove the consideration of the downside scenario adjustment included in the December 31, 2020 calculation.
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. This qualitative factor adjustment remained in place as of December 31, 2020, due to concerns around continued volatility in oil prices.
The ratio of the allowance for loan losses to total loans was 2.56% at December 31, 2020 compared 1.44% at December 31, 2019. Nonperforming loans increased to $1.5 billion at December 31, 2020 from $678 million at December 31, 2019.
Net charge-offs were 0.59% of average loans for 2020 compared to 0.88% of average loans for 2019. The decrease was due to an $54.5 million decrease in commercial, financial, and agricultural net charge-offs as well as a $86.4 million decrease in consumer direct net charge-offs and a $39.8 million decrease in consumer indirect net charge-offs.
When determining the adequacy of the allowance for loan losses, management considers changes in the size and character of the loan portfolio, changes in nonperforming and past due loans, historical loan loss experience, the existing risk of individual loans, concentrations of loans to specific borrowers or industries and current economic
conditions. 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.
The following table presents an estimated allocation of the allowance for loan losses. This allocation of the allowance for loan losses is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount of the allowance is available to absorb losses occurring in any category of loans.
Table 18
Allocation of Allowance for Loan Losses
December 31,
2020 2019 2018 2017 2016
Amount Percent of Loans to Total Loans
Amount Percent of Loans to Total Loans
Amount Percent of Loans to Total Loans
Amount Percent of Loans to Total Loans
Amount Percent of Loans to Total Loans
(Dollars in Thousands)
Commercial, financial and agricultural
$ 658,228 40.6 % $ 408,197 38.2 % $ 393,315 40.7 % $ 420,635 41.8 % $ 458,580 41.8 %
Real estate - construction 60,768 3.8 32,108 3.2 33,260 3.0 38,126 3.7 38,990 3.5
Commercial real estate - mortgage
250,324 20.7 86,525 21.7 79,177 20.0 80,007 19.0 77,947 18.7
Residential real estate - mortgage
138,419 20.3 52,084 21.1 50,591 20.6 56,151 21.7 60,021 22.1
Equity lines of credit 66,602 3.7 40,697 4.0 42,566 4.2 43,827 4.3 48,389 4.3
Equity loans 9,448 0.3 6,308 0.4 8,772 0.5 9,878 0.6 11,074 0.7
Credit card 124,840 1.3 61,331 1.6 50,453 1.3 40,765 1.0 39,361 1.0
Consumer direct 201,095 2.9 146,281 3.7 140,308 3.9 82,222 2.8 44,745 2.1
Consumer indirect 169,750 6.4 87,462 6.1 86,800 5.8 71,149 5.1 59,186 5.2
Total, excluding covered loans
1,679,474 100.0 920,993 100.0 885,242 100.0 842,760 100.0 838,293 99.4
Covered loans - - - - - - - - - 0.6
Total $ 1,679,474 100.0 % $ 920,993 100.0 % $ 885,242 100.0 % $ 842,760 100.0 % $ 838,293 100.0 %
The following tables sets forth information with respect to the Company’s loans, excluding loans held for sale, and the allowance for loan losses.
Table 19
Summary of Loan Loss Experience
Years Ended December 31,
2020 2019 2018 2017 2016
(Dollars in Thousands)
Average loans outstanding during the year
$ 66,886,403 $ 64,080,469 $ 63,700,464 $ 60,365,691 $ 61,425,876
Allowance for loan losses, beginning of year, prior to adoption of ASC 326
$ 920,993 $ 885,242 $ 842,760 $ 838,293 $ 762,673
Impact of adopting ASC 326 184,931 - - - -
Allowance for loan losses, beginning of year, after adoption of ASC 326
1,105,924 885,242 842,760 838,293 762,673
Charge-offs:
Commercial, financial and agricultural 117,318 171,507 83,017 106,570 84,218
Real estate - construction 250 19 436 82 505
Commercial real estate - mortgage 9,669 2,578 3,431 9,901 4,361
Residential real estate - mortgage 2,613 7,512 9,073 10,433 8,787
Equity lines of credit 2,384 9,374 6,083 7,305 8,625
Equity loans 696 2,714 2,665 3,549 2,534
Credit card 80,034 72,410 47,509 44,073 37,349
Consumer direct 165,091 258,561 132,609 78,846 52,026
Consumer indirect 100,125 135,975 115,881 98,293 91,198
Covered - - - - 1,484
Total charge-offs 478,180 660,650 400,704 359,052 291,087
Recoveries:
Commercial, financial and agricultural 13,458 13,118 11,294 19,097 11,039
Real estate - construction 148 2,091 285 1,080 2,490
Commercial real estate - mortgage 771 579 6,317 3,904 2,747
Residential real estate - mortgage 1,691 3,673 3,798 5,827 5,751
Equity lines of credit 2,886 7,140 6,145 4,294 4,314
Equity loans 664 2,523 3,167 2,412 1,417
Credit card 7,169 7,573 5,419 3,938 2,892
Consumer direct 18,329 25,363 10,048 7,297 5,164
Consumer indirect 40,816 36,897 31,293 27,946 28,303
Covered - - - 31 1
Total recoveries 85,932 98,957 77,766 75,826 64,118
Net charge-offs 392,248 561,693 322,938 283,226 226,969
Total provision for loan losses 965,798 597,444 365,420 287,693 302,589
Allowance for loan losses, end of year $ 1,679,474 $ 920,993 $ 885,242 $ 842,760 $ 838,293
Net charge-offs to average loans 0.59 % 0.88 % 0.51 % 0.47 % 0.37 %
Table 20
Net Charge-off Ratios
As of and for the year ended
December 31,
2020 2019 2018
(Dollars in Thousands)
Commercial, financial and agricultural 0.38 % 0.62 % 0.27 %
Net charge-offs $ 103,860 $ 158,389 $ 71,723
Average total loans 27,395,911 25,417,911 26,875,616
Real estate - construction - % (0.10) % 0.01 %
Net charge-offs $ 102 $ (2,072) $ 151
Average total loans 2,296,160 2,018,362 2,164,904
Commercial real estate - mortgage 0.06 % 0.02 % (0.02) %
Net charge-offs $ 8,898 $ 1,999 $ (2,886)
Average total loans 13,780,127 13,088,044 11,948,850
Residential real estate - mortgage 0.01 % 0.03 % 0.04 %
Net charge-offs $ 922 $ 3,839 $ 5,275
Average total loans 13,512,284 13,422,279 13,347,558
Equity lines of credit (0.02) % 0.08 % - %
Net charge-offs $ (502) $ 2,234 $ (62)
Average total loans 2,512,609 2,668,536 2,684,098
Equity loans 0.02 % 0.07 % (0.15) %
Net charge-offs $ 32 $ 191 $ (502)
Average total loans 211,691 274,836 326,964
Credit Card 7.62 % 7.32 % 5.93 %
Net charge-offs $ 72,865 $ 64,837 $ 42,090
Average total loans 955,666 886,060 709,309
Consumer direct 6.87 % 9.43 % 5.73 %
Net charge-offs $ 146,762 $ 233,198 $ 122,561
Average total loans 2,137,000 2,471,802 2,138,629
Consumer indirect 1.45 % 2.59 % 2.41 %
Net charge-offs $ 59,309 $ 99,078 $ 84,588
Average total loans 4,084,955 3,832,639 3,504,536
Total loans 0.59 % 0.88 % 0.51 %
Net charge-offs $ 392,248 $ 561,693 $ 322,938
Average total loans 66,886,403 64,080,469 63,700,464
Concentrations
The following tables provide further details regarding the Company’s commercial, financial and agricultural, commercial real estate, residential real estate and consumer segments as of December 31, 2020 and 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 adopted an internal exposure based limit which is based on a variety of risk factors, including but not limited to the borrower's industry.
The commercial, financial and agricultural portfolio segment totaled $26.6 billion at December 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 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 segment by various means, including maintaining prudent advance rates, financial covenants, and obtaining personal guarantees from the principals of the company.
The following table provides details related to the commercial, financial, and agricultural segment.
Table 21
Commercial, Financial and Agricultural
December 31,
2020 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 $ 1,856,157 $ 34,560 $ 16,464 $ 3,233 $ 2,139,178 $ 47,261 $ - $ 8
Basic Materials 496,824 903 - 4 526,485 1,342 - -
Capital Goods & Industrial Services 2,215,646 4,643 451 - 1,987,046 23,736 96 4
Construction & Construction Materials 706,978 30,837 - - 653,157 45,243 - -
Consumer 646,965 25,627 - - 641,289 1,540 - -
Healthcare 3,064,991 7,966 285 - 2,747,248 24,989 314 -
Energy 2,388,611 244,001 - - 2,905,791 69,042 - -
Financial Services 958,893 44,824 - 5,345 1,009,533 23,427 - 1,615
General Corporates 2,214,504 24,315 - 24,591 1,726,318 16,883 475 5,065
Institutions 3,442,650 12,755 - - 3,166,048 400 - -
Leisure and Consumer Services 3,709,817 105,688 296 - 2,777,440 6,957 335 -
Real Estate 1,525,687 - - - 1,490,985 - - -
Retail 475,655 2,521 190 - 483,988 1,869 236 -
Telecoms, Technology & Media 1,454,105 2,045 - - 909,476 2,558 - -
Transportation 983,699 56 - 2,299 903,034 3,041 - -
Utilities 463,960 - - - 365,222 - - -
Total Commercial, Financial and Agricultural $ 26,605,142 $ 540,741 $ 17,686 $ 35,472 $ 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 $13.6 billion at December 31, 2020, compared to $13.9 billion at December 31, 2019, and real estate - construction loans totaled $2.5 billion at December 31, 2020 and $2.0 billion at December 31, 2019.
This segment consists primarily of extensions of credit 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 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 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 22
Commercial Real Estate
December 31,
2020 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 $ 416,431 $ 19,215 $ 11 $ 192 $ 419,063 $ 4,377 $ 2,048 $ -
Arizona 1,030,026 77,739 - - 1,074,395 22,549 - -
California 1,958,178 52,730 - 28 1,992,085 - - 28
Colorado 751,921 9,579 - - 694,691 6,463 - -
Florida 1,189,742 6,972 - - 1,299,336 11,047 27 -
New Mexico 98,356 3,104 - 580 100,845 3,952 - -
Texas 3,783,877 101,907 899 304 3,802,306 36,278 495 4,168
Other 4,336,783 170,891 - - 4,478,757 13,411 844 2,380
$ 13,565,314 $ 442,137 $ 910 $ 1,104 $ 13,861,478 $ 98,077 $ 3,414 $ 6,576
Table 23
Real Estate - Construction
December 31,
2020 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 $ 86,622 $ - $ - $ 115 $ 70,800 $ 90 $ - $ 115
Arizona 205,242 - - - 158,027 - - -
California 519,201 6,761 - - 281,690 - - -
Colorado 110,098 - - - 94,260 473 - -
Florida 162,215 - - - 167,346 905 - -
New Mexico 27,734 - 128 - 18,000 242 15 -
Texas 752,453 - 17 417 747,651 5,926 57 456
Other 634,766 18,555 - - 490,908 405 - -
$ 2,498,331 $ 25,316 $ 145 $ 532 $ 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.
Residential real estate - mortgage loans totaled $13.3 billion at December 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 segment is concentrated in the Company's footprint as indicated in the table below.
Table 24
Residential Real Estate - Mortgage
December 31,
2020 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 $ 806,396 $ 24,893 $ 8,670 $ 8,944 $ 913,683 $ 21,891 $ 11,208 $ 1,557
Arizona 1,360,360 14,661 7,555 2,798 1,380,589 12,111 7,645 609
California 3,759,590 40,062 5,627 2,748 3,441,689 17,941 3,383 -
Colorado 1,041,255 6,144 1,948 1,374 1,144,260 4,141 2,327 144
Florida 1,460,075 62,467 8,809 2,749 1,511,146 32,740 10,051 247
New Mexico 189,293 4,246 1,166 1,256 215,835 3,802 1,249 424
Texas 4,347,169 67,827 17,975 23,644 4,534,481 43,048 19,394 1,660
Other 363,636 15,163 1,630 2,248 392,271 11,663 1,908 -
$ 13,327,774 $ 235,463 $ 53,380 $ 45,761 $ 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 25
Residential Real Estate - Mortgage
December 31,
2020 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 $ 661,152 $ 140,306 $ 18,409 $ 24,774 $ 707,778 $ 96,107 $ 22,804 $ 3,736
621-680 994,304 34,633 11,063 10,195 1,074,497 23,950 10,570 114
681 - 720 1,575,523 18,564 7,701 5,591 1,704,801 9,197 7,305 144
Above 720 9,582,346 22,940 15,499 2,364 9,490,067 11,000 15,922 290
Unknown 514,449 19,020 708 2,837 556,811 7,083 564 357
$ 13,327,774 $ 235,463 $ 53,380 $ 45,761 $ 13,533,954 $ 147,337 $ 57,165 $ 4,641
Equity lines of credit and equity loans totaled $2.6 billion at December 31, 2020 and $2.8 billion at 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 segment is concentrated within the Company's footprint as indicated in the table below.
Table 26
Equity Loans and Lines
December 31,
2020 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 $ 402,504 $ 11,756 $ 6,120 $ 556 $ 452,102 $ 10,096 $ 7,437 $ 341
Arizona 255,581 5,822 2,787 217 311,875 5,475 3,674 22
California 359,947 3,615 87 110 399,494 2,528 187 165
Colorado 142,059 2,361 419 216 167,594 2,729 738 176
Florida 263,193 6,588 4,025 239 295,552 7,298 4,827 121
New Mexico 37,045 2,025 459 204 45,440 1,704 505 11
Texas 1,092,234 19,065 5,369 1,399 1,138,289 15,104 6,050 914
Other 22,093 1,541 340 - 27,302 1,830 352 12
$ 2,574,656 $ 52,773 $ 19,606 $ 2,941 $ 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 27
Equity Loans and Lines
December 31,
2020 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 $ 167,038 $ 28,793 $ 4,984 $ 2,161 $ 200,509 $ 27,098 $ 6,262 $ 1,232
621-680 322,064 11,815 6,377 589 355,324 9,207 7,314 290
681 - 720 427,230 6,086 2,857 191 484,077 6,324 3,683 139
Above 720 1,651,714 5,874 5,388 - 1,790,879 4,095 6,511 101
Unknown 6,610 205 - - 6,859 40 - -
$ 2,574,656 $ 52,773 $ 19,606 $ 2,941 $ 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 at December 31, 2020 were $1.9 billion and $2.3 billion at December 31, 2019. Total credit cards at December 31, 2020 were $882 million and at December 31, 2019 were $1.0 billion.
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 $4.2 billion at December 31, 2020 and $3.9 billion at December 31, 2019.
The following tables provide information related to refreshed FICO scores for the Company's consumer direct and consumer indirect loans.
Table 28
Consumer Direct
December 31,
2020 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 $ 169,268 $ 6,246 $ 862 $ 7,884 $ 225,736 $ 4,258 $ 1,433 $ 17,228
621-680 346,342 1,929 2,723 214 450,532 1,259 2,858 359
681 - 720 402,906 996 4,574 117 516,706 693 5,150 123
Above 720 940,380 379 14,704 121 1,076,436 345 2,997 84
Unknown 70,827 537 300 405 68,732 - - 564
$ 1,929,723 $ 10,087 $ 23,163 $ 8,741 $ 2,338,142 $ 6,555 $ 12,438 $ 18,358
Table 29
Consumer Indirect
December 31,
2020 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 $ 620,343 $ 21,202 $ - $ 4,541 $ 817,071 $ 27,600 $ - $ 9,100
621-680 967,892 2,111 - 382 1,006,409 2,969 - 408
681 - 720 798,345 759 - 56 728,580 621 - 157
Above 720 1,787,736 641 - 87 1,358,098 591 - 65
Unknown 2,809 - - - 2,192 - - -
$ 4,177,125 $ 24,713 $ - $ 5,066 $ 3,912,350 $ 31,781 $ - $ 9,730
Foreign Exposure
As of December 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 December 31, 2020 and 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 December 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.
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. Refer to "Critical Accounting Policies" in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further details.
The Company completed its annual goodwill impairment test as of October 31, 2020 by performing a qualitative assessment of goodwill at the reporting unit level to determine whether any indicators of impairment existed. In performing this qualitative assessment, the Company evaluated events and circumstances since the last quantitative impairment test performed as of March 31, 2020, macroeconomic conditions, banking industry and market conditions, and key financial metrics of the Company as well as reporting unit and overall Company performance. After assessing the totality of the events and circumstances, the Company determined it was not more likely than not that the fair values of the Company's three reporting units with goodwill were greater than their respective carrying amounts, and therefore, a quantitative goodwill impairment test was not deemed necessary.
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, which is further discussed in the Market Risk Management section in Management’s Discussion and Analysis of Financial Condition and Results of Operations herein.
At December 31, 2020, the Company's and the Bank's credit ratings were as follows:
Table 30
Credit Ratings
As of December 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 -
BBVA USA
Long-term debt rating
BBB+ Baa2 BBB
Long-term bank deposits (1)
N/A A2 BBB+
Subordinated debt
BBB Baa2 BBB-
Short-term debt rating
A-2 P-2
Short-term deposit rating (1)
N/A P-1
Outlook
Positive Positive Positive
(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.
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.
Following is a brief description of the various sources of funds used by the Company.
Deposits
Total deposits increased by $10.9 billion from $75.0 billion at December 31, 2019 to $85.9 billion at December 31, 2020 due primarily to growth in money market accounts, as well as growth in noninterest and interest bearing demand deposits. At December 31, 2020 and 2019, total deposits included $3.1 billion and $4.7 billion, respectively, of brokered deposits.
The following table presents the Company’s average deposits segregated by major category:
Table 31
Composition of Average Deposits
December 31,
2020 2019 2018
Balance % of Total Balance % of Total Balance % of Total
(Dollars in Thousands)
Noninterest-bearing demand deposits
$ 24,506,957 29.7 % $ 20,631,434 28.3 % $ 21,167,441 30.2 %
Interest-bearing demand deposits 13,649,238 16.6 9,048,948 12.4 7,950,561 11.3
Savings and money market 36,073,927 43.8 28,546,260 39.1 26,247,253 37.4
Time deposits
8,196,738 9.9 14,780,464 20.2 14,784,632 21.1
Total average deposits $ 82,426,860 100.0 % $ 73,007,106 100.0 % $ 70,149,887 100.0 %
For additional information about deposits, see Note 8, Deposits, in the Notes to the Consolidated Financial Statements.
The following table summarizes the remaining maturities of time deposits of $250,000 or more outstanding at December 31, 2020.
Table 32
Maturities of Time Deposits of $250,000 or More
Time Deposits of $250,000 or More
(In Thousands)
Three months or less $ 631,832
Over three through six months 402,696
Over six through twelve months 430,879
Over twelve months 159,139
$ 1,624,546
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. For additional information regarding the Company’s short-term borrowings, see Note 9, Short-Term Borrowings, in the Notes to the Consolidated Financial Statements.
At December 31, 2020 FHLB and other borrowings were $3.5 billion, a decrease of $142 million compared to the ending balance at December 31, 2019.
For the year ended December 31, 2020, proceeds received from the FHLB and other borrowings were approximately $2 million and repayments were approximately $230 million.
For a discussion of interest rates and maturities of FHLB and other borrowings, refer to Note 10, FHLB and Other Borrowings, in the Notes to the Consolidated Financial Statements.
Shareholder’s Equity
Total shareholder's equity at December 31, 2020 was $11.7 billion compared to $13.4 billion at December 31, 2019. Shareholder's equity decreased $1.7 billion due to losses attributable to the Company during the year offset, in part, by increases of $330 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, structural interest rate, market and liquidity risk, operational risk, strategic and business risk, and reputational risk. Each of these risks is managed through the Company’s ERM program. The ERM program provides the structure and framework to identify, measure, control and manage risk across the organization. ERM is the cornerstone for defining risk tolerance, identifying 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.
The ERM program follows fundamental principles in establishing, executing and maintaining a program to manage overall risks. The Company's Board of Directors is responsible for overseeing the strategic and business plans, the ERM program and framework and the risk tolerance of the Company, approving key risk management policies, overseeing their implementation, and holding executive management accountable for the execution of the
ERM program. Under the oversight of the Company's Board of Directors, management is charged with implementing an effective, integrated risk management structure. This incorporates a defined organizational structure, with defined roles and responsibilities for all aspects of risk management and appropriate tools that support the identification, assessment, control and reporting of key risks. Management is also responsible for defining categories of risk pertaining to the operations of the Company and is responsible for defining that the risk management framework adequately covers both measurable as well as non-measurable risk. Management prepares risk policies and procedures that delineate the approach to all aspects of risk management through proper documentation and communication through appropriate channels. These risk management policies and procedures are aligned with the Company’s overall business strategies and support the ongoing improvement of its risk management. Management and employees within each line of business and support units are the first line of defense in the identification, assessment, mitigation, monitoring and reporting of risks taken by the lines of business, consistent with the Company’s risk tolerance, the current regulatory model for these risks and any material failures that may occur. The lines of business and support units also will have additional infrastructure for certain types of risk embedded in the lines. The risk management organization and other control units serve as the second line of defense and the credit quality review and internal audit functions provide the third line of defense.
Some of the more significant processes used to manage and control these and other risks are described in the remainder of this Annual Report on Form 10-K.
Credit Risk
Credit risk is the most significant risk affecting the organization. Credit risk refers to the potential that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. It can arise from items carried on the balance sheet or in off-balance sheet instruments, customers in the Company’s normal lending activities, and other counterparties. The general definition of credit risk also includes transfer risk. That is, the risk that a particular counterparty cannot honor an obligation because it cannot obtain the currency in which the debt is denominated.
The Company has established the following general practices to manage credit risk:
•limiting the amount of credit that may be extended to individual borrowers, or on an aggregate basis to certain industries, products or collateral types;
•providing tools and policies to promote prudent lending practices;
•developing credit risk underwriting standards, metrics and the continuous monitoring of portfolio performance;
•assessing, monitoring, and reporting credit risks; and
•periodically reevaluating the Company’s strategy and overall exposure as economic, market and other relevant conditions change.
The following discussion presents the principal types of lending conducted by the Company and describes the underwriting procedures and overall risk management of the Company’s lending function.
Management Process
The Company assesses and manages credit risk through a series of policies, processes, measurement systems and controls. The lines of business are responsible for credit risk at the operational day-to-day level. Oversight of the lines of business is provided by the Credit Risk Management department and the appropriate credit committees established within the Company.
Credit Risk Management evaluates all loan requests and approves those that meet the Company’s risk tolerance and are in compliance with Company policies and regulatory guidance. Credit Risk Management also provides policy, portfolio, and approval data to management so that there is a common understanding of loan portfolio risk. This is accomplished by developing credit risk underwriting standards, metrics and the ongoing monitoring of portfolio performance and assessing whether risk management practices have been carried out in accordance with
the Company’s credit risk strategy and policies. Key metrics, trends and issues related to credit risk are presented to the Risk Committee of the Board of Directors.
The CQR function provides an independent review of the Company’s credit quality. The CQR function reports to the Risk Committee of the Board of Directors. The CQR function is charged with providing the Company's Board of Directors and executive management with independent, objective, and timely assessments of the Company’s portfolio quality, credit policies, and credit risk management process.
Underwriting Approach
The Company’s underwriting approach is designed to define acceptable combinations of specific risk-mitigating features so that the credit relationships are expected to conform to the Company’s risk tolerances. Provided below is a summary of the most significant underwriting criteria used to evaluate new loans and loan renewals.
•Cashflow and debt service coverage - cash flow adequacy is a condition of creditworthiness, meaning that loans not clearly supported by a borrower’s cash flow should be justified by secondary repayment sources.
•Secondary sources of repayment - alternative repayment sources are a significant risk-mitigating factor as long as they are liquid, can be easily accessed, and provide adequate resources to supplement the primary cash flow source.
•Value of any underlying collateral - loans are often secured by the asset being financed. Because an analysis of the primary and secondary sources of repayment is the most important factor, collateral, unless it is liquid, generally does not justify loans that cannot be serviced by the borrower’s normal cash flows.
•Overall creditworthiness of the customer, taking into account the customer’s relationships, both past and current, with other lenders - the Company’s success depends on building lasting and mutually beneficial relationships with clients, which involves assessing their financial position and background. Consumer underwriting relies heavily on credit bureau scores and other bureau attributes, as well as on other factors such as ability to pay, guarantors or collateral in the case of secured lending.
•Level of equity invested in the transactions - in general, borrowers are required to contribute or invest a portion of their own funds prior to any loan advances.
Structural Interest Rate, Market, and Liquidity Risks
Structural interest rate risk arises from the impact on the Company’s banking assets and liabilities due to changes in the interest rate curves in the market, impacting both economic value and net interest income generation. Market risk arises from the movement of market variables that impact the trading book. These variables can include interest rates, foreign exchange rates, and commodity prices, among others. Liquidity risk refers to the risk that an institution's financial condition or overall safety and soundness is adversely affected by an inability to meet its obligations. See the Market Risk Management and Liquidity sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations herein.
Operational Risk
Operational risk refers to the potential loss resulting from inadequate or failed internal processes, people or systems, or from external events. It includes the current and prospective risk to earnings and capital arising from fraud, error, and the inability to deliver products or services, maintain a competitive position or manage information. Included in operational risk are compliance and legal risk. This refers to the possibility of legal or regulatory sanctions and liabilities, financial loss or damage to reputation the Company may suffer as a result of its failure to comply with all applicable laws, regulations, codes of conduct and good practice standards.
Operational risk is managed by the lines of business and supporting units with oversight by the Operational Risk Committees at the line of business and supporting unit level. The Operational Risk Committees are the key element
to monitor operational risk events and the implementation of action plans and controls. Summary reports of these committees’ activities and decisions are provided to executive management.
Strategic and Business Risk
Strategic and business risk refers to the potential of lower earnings generation due to reduced operating income that cannot be offset quickly through expense management. The origin can be either company specific or systemic. Management of these risks is a shared responsibility throughout the organization using the following management processes. An annual business planning process occurs where market, competitive and economic factors that could have a negative impact on earnings are addressed with action plans developed to deal with these factors. Additionally, monthly reporting and analysis at a line of business and support unit level is performed and reviewed.
Reputational Risk
Reputational risk normally results as a consequence of events related to other risks previously discussed. Therefore, an adequate management of all the different financial and non-financial risk is critical to mitigate and control reputational risk. Management of this risk also involves brand management, community involvement and internal and external communication.
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 December 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 December 31, 2020.
Table 33
Net Interest Income Sensitivity
Estimated % Change in Net Interest Income
December 31, 2020
Rate Change
+ 200 basis points 5.73 %
+ 100 basis points 3.04
- 25 basis points (1.38)
Management modeled only a 25 basis point decline because larger declines would have resulted in a federal funds rate of less than zero.
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 for new business or potential management actions.
Table 34
Economic Value of Equity
Estimated % Change in Economic Value of Equity
December 31, 2020
Rate Change
+ 300 basis points (7.41) %
+ 200 basis points (3.20)
+ 100 basis points (0.18)
- 25 basis points (0.62)
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 December 31, 2020, the Company had derivative financial instruments outstanding with notional amounts of $55.8 billion, including $39.8 billion related to derivatives to facilitate transactions on behalf of its clients. The estimated net fair value of open contracts was in a net asset position of $500 million at December 31, 2020. For additional information about derivatives, refer to Note 13, Derivatives and Hedging, in the Notes to the 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 customers 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, securities purchased under agreements to resell are additional sources of liquidity due to their short-term maturities.
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 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.
The Company's financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. At December 31, 2020, the Company had unused FHLB borrowing capacity of $7.6 billion. Additionally, the Company had Federal Reserve discount window availability of $13.6 billion at December 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, the Bank was not permitted to pay dividends at December 31, 2020 or December 31, 2019 without regulatory approval. Appropriate limits and guidelines are in place so that the Parent has sufficient cash to meet operating expenses and other commitments without relying on subsidiaries or capital markets for funding.
During 2020, the Parent paid no common dividends to its sole shareholder, BBVA.
At December 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 as a result of the Company becoming a Category IV U.S. IHC under the Tailoring Rules. Please refer to Item 1. Business - Supervision, Regulation and Other Factors - U.S. Liquidity Standards for more information concerning the LCR requirements applicable to the Company.
Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth. See Note 10, FHLB and Other Borrowings, Note 11, Shareholder's Equity, and Note 15, Commitments, Contingencies and Guarantees, in the Notes to the Consolidated Financial Statements for additional information regarding outstanding balances of sources of liquidity and contractual commitments and obligations.
The following table presents information about the Company’s contractual obligations.
Table 35
Contractual Obligations (1)
December 31, 2020
Payments Due by Period
Total Less than 1 year 1-3 Years 3-5 Years More than 5 Years Indeterminable Maturity
(In Thousands)
FHLB and other borrowings $ 3,548,492 $ 1,277,419 $ 766,723 $ 1,421,940 $ 82,410 $ -
Short-term borrowings (2) 184,478 184,478 - - - -
Finance lease obligations 12,673 2,143 3,424 2,614 4,492 -
Operating leases 351,969 56,251 100,244 68,102 127,372 -
Deposits (3) 85,858,381 4,193,411 431,479 55,439 4,700 81,173,352
Unrecognized income tax benefits
7,094 1,039 2,337 3,718 - -
Total $ 89,963,087 $ 5,714,741 $ 1,304,207 $ 1,551,813 $ 218,974 $ 81,173,352
(1)Amounts do not include associated interest payments.
(2)For more information, see Note 9, Short-Term Borrowings, in the Notes to the Consolidated Financial Statements.
(3)Deposits with indeterminable maturity include noninterest bearing demand, savings, interest-bearing demand accounts and money market accounts.
Off Balance Sheet Arrangements
The Company's off balance sheet credit risk includes obligations for loans sold with recourse, unfunded commitments, and letters of credit. Additionally, the Company periodically invests in various limited partnerships that sponsor affordable housing projects. See Note 15, Commitments, Contingencies and Guarantees, in the Notes to the Consolidated Financial Statements for further discussion.
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 December 31, 2020 and 2019.
Table 36
Capital Ratios
December 31,
2020 2019
(Dollars in Thousands)
Capital:
CET1 Capital $ 9,086,853 $ 8,615,357
Tier 1 Capital 9,316,853 8,849,557
Total Qualifying Capital 10,804,264 10,332,023
Assets:
Total risk-adjusted assets (regulatory) $ 68,439,633 $ 68,968,967
Ratios:
CET1 Risk-Based Capital Ratio 13.28 % 12.49 %
Tier 1 Risk-Based Capital Ratio 13.61 12.83
Total Risk-Based Capital Ratio 15.79 14.98
Leverage Ratio 9.07 9.70
At December 31, 2020, the regulatory capital ratios of the Bank also remain well above current regulatory requirements for banks based on applicable U.S. regulatory capital requirements. The Company continually monitors these ratios to ensure that the Bank exceeds this standard.
The Company has elected the ‘five-year transition’ for the ASC 326 accounting standard from the banking agencies’ final rule that allows banking organizations to defer certain effects of the ASC 326 accounting standard on their regulatory capital. Specifically, this 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.
Please refer to Item 1. Business - Supervision, Regulation and Other Factors - Capital Requirements and Item 1A. - Risk Factors for more information regarding regulatory capital requirements. Also, see Note 16, Regulatory Capital Requirements and Dividends from Subsidiaries, in the Notes to the Consolidated Financial Statements for further details.
Effects of Inflation
The majority of assets and liabilities of a financial institution are monetary in nature; therefore, a financial institution differs greatly from most commercial and industrial companies, which have significant investments in fixed assets or inventories that are greatly impacted by inflation. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Inflation also affects other expenses that tend to rise during periods of general inflation.
Management believes the most significant potential impact of inflation on financial results is a direct result of the Company’s ability to manage the impact of changes in interest rates. Management attempts to minimize the impact of interest rate fluctuations on net interest income. However, this goal can be difficult to completely achieve in times of rapidly changing interest rates and is one of many factors considered in determining the Company’s interest rate positioning. The Company is asset sensitive as of December 31, 2020. Refer to Table 33, Net Interest Income Sensitivity, for additional details on the Company’s interest rate sensitivity.
Effects of Deflation
A period of deflation would affect all industries, including financial institutions. Potentially, deflation could lead to lower profits, higher unemployment, lower production and deterioration in overall economic conditions. In addition, deflation could depress economic activity and impair earnings through increasing the value of debt while decreasing the value of collateral for loans. If the economy experienced a severe period of deflation, then it could depress loan demand, impair the ability of borrowers to repay loans and sharply reduce earnings.
Management believes the most significant potential impact of deflation on financial results relates to the Company’s ability to maintain a high amount of capital to cushion against future losses. In addition, the Company can utilize certain risk management tools to help it maintain its balance sheet strength even if a deflationary scenario were to develop.
Quarterly Financial Results
The accompanying table presents condensed information relating to quarterly periods.
Table 37
Quarterly Financial Summary
(Unaudited)
December 31,
2020 2019
Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter
(In Thousands)
Summary of Operations:
Interest income
$ 717,674 $ 721,426 $ 743,545 $ 798,383 $ 855,811 $ 893,204 $ 902,629 $ 907,012
Interest expense
50,472 79,576 131,528 208,928 232,657 252,163 242,880 223,923
Net interest income
667,202 641,850 612,017 589,455 623,154 641,041 659,749 683,089
Provision for credit losses
(81,298) 150,977 539,459 356,991 119,505 140,629 155,018 182,292
Net interest income after provision for credit losses
748,500 490,873 72,558 232,464 503,649 500,412 504,731 500,797
Noninterest income
301,416 284,660 272,354 334,242 272,584 321,319 284,281 257,760
Noninterest expense
577,580 595,628 579,450 2,809,060 1,086,906 598,887 598,314 581,973
Income (loss) before income tax expense (benefit) 472,336 179,905 (234,538) (2,242,354) (310,673) 222,844 190,698 176,584
Income tax expense (benefit) 138,519 13,664 (110,101) (5,069) 20,032 39,899 30,512 35,603
Net income (loss)
333,817 166,241 (124,437) (2,237,285) (330,705) 182,945 160,186 140,981
Less: noncontrolling interest
673 401 472 501 663 514 599 556
Net income (loss) attributable to BBVA USA Bancshares, Inc.
333,144 165,840 (124,909) (2,237,786) (331,368) 182,431 159,587 140,425
Less: preferred stock dividends
3,189 3,286 3,965 4,155 4,239 4,561 4,725 4,485
Net income (loss) attributable to common shareholder
$ 329,955 $ 162,554 $ (128,874) $ (2,241,941) $ (335,607) $ 177,870 $ 154,862 $ 135,940
Selected Average Balances:
Loans and loans held for sale
$ 66,212,070 $ 67,837,185 $ 69,256,412 $ 64,875,095 $ 63,956,453 $ 63,629,992 $ 64,056,915 $ 65,482,395
Total assets
104,835,589 104,282,898 104,204,062 96,356,113 95,754,954 94,942,456 93,452,839 92,985,876
Deposits
85,906,838 85,301,231 83,547,718 74,881,825 74,122,266 72,994,321 72,687,054 72,203,842
FHLB and other borrowings
3,552,199 3,567,285 3,567,010 3,736,201 3,701,993 3,860,727 4,026,581 4,290,724
Shareholder’s equity
11,595,287 11,394,928 11,533,007 13,500,615 14,090,315 14,056,939 13,782,011 13,640,655

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
See “Market Risk Management” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated herein by reference.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
BBVA USA Bancshares, Inc. and Subsidiaries Financial Statements
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Shareholder’s Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to the December 31, 2020 Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder and Board of Directors
BBVA USA Bancshares, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of BBVA USA Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholder’s equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments - Credit Losses (ASC 326).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Goodwill
As discussed in Notes 1 and 7 to the consolidated financial statements, the goodwill balance as of December 31, 2020 was $2.3 billion, of which $1.9 billion related to the Commercial Banking and Wealth reporting unit, $136 million related to the Retail Banking reporting unit, and $262 million related to the Corporate and Investment Banking reporting unit. The Company performs goodwill impairment testing on an annual basis and more frequently if events or circumstances indicate a potential impairment may exist. During the three months ended March 31, 2020, the Company determined that a triggering event had occurred due to the impact of COVID-19 pandemic and its impact on the economic environment and the Company’s financial performance. The Company elected to perform a quantitative impairment test which 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. A test of goodwill for impairment consists of comparing 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 the income approach and market approach, inclusive of both the guideline public company method and the guideline transaction method.
We identified the interim evaluation of the goodwill impairment measurement for the Commercial Banking and Wealth, Retail, and Corporate and Investment Banking reporting units as a critical audit matter. The degree of subjectivity associated with the assessment of certain assumptions to estimate the fair value of the reporting units required a high degree of auditor judgment. Specifically, subjective auditor judgment was required to assess the estimated future cash flow assumptions, discount rates, and long-term growth rates used in the income approach and market multiples used in the market approach. Minor changes to those assumptions could have had a significant effect on the Company’s measurement of the fair value of the reporting units and goodwill impairment. Additionally, the audit effort associated with this estimate required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the measurement of goodwill impairment for the reporting units, including controls over the:
•development of future cash flow assumptions by reporting unit
•development of the long term growth rates, discount rates, and market multiple assumptions by reporting unit.
We evaluated the Company’s analysis to assess potential goodwill impairment for compliance with U.S. generally accepted accounting principles. We evaluated the reasonableness of the Company’s future cash flows for the reporting units, by comparing the future cash flow assumptions to historic projections and internal analysis and external data. We compared the Company’s previous cash flow projections to actual results to assess the Company’s ability to accurately forecast. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
•evaluating the discount rates and long term growth rates by comparing the inputs to the development of the assumptions to publicly available data
•evaluating market multiples by comparing the market multiples to publicly available data for comparable entities and assessing the resulting market multiples
•assessing the results of management’s goodwill impairment measurement considering the income and market approach by reviewing and evaluating the work and documentation of the specialist engaged by the Company.
Allowance for Loan Losses Evaluated on a Collective Basis
As discussed in Note 1 to the consolidated financial statements, the Company adopted ASC 326 as of January 1, 2020. The total allowance for loan losses as of January 1, 2020 was $1.1 billion, which included the allowance for loan losses evaluated on a collective basis (the January 1, 2020 collective ALL). As discussed in Note 3 to the consolidated financial statements, the Company’s allowance for loan losses was $1.7 billion, which included the allowance for loan losses evaluated on a collective basis (the December 31, 2020 collective ALL) as of December 31, 2020. The January 1, 2020 collective ALL and the December 31, 2020 collective ALL (together, the collective ALL) includes the measure of expected credit losses on a collective basis for those loans that share similar risk
characteristics. The Company estimated the collective ALL using (1) discounted cash flows, and (2) default probabilities and loss severities, which are based on relevant internal and external available information that relates to past events, current conditions, and reasonable and supportable economic forecasts. The Company disaggregates the portfolio into segments; incorporating obligor risk ratings for commercial loans and credit scores for consumer loans. The Company estimates the present value of cash shortfalls resulting from the sum of the marginal losses occurring in each time period, 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 estimates, and parameters reflecting the severity of losses (LGD) in the case of default that is given by the marginal probability of default (PD) for each period of the portfolio’s lifetime. The Company estimates a point in time PD and LGD utilizing recent historical data per portfolio, which are then transformed via macroeconomic models using correlated macroeconomic variables included in the forecasted scenarios. After the forecast period, the Company reverts to long run historical average default probabilities and loss severities using a linear function, with reversion speeds that differ by portfolio. A portion of the collective ALL is comprised of adjustments, based on qualitative factors, to the loss estimates described above when it is determined that expected credit losses may not have been captured in the loss estimates.
We identified the assessment of the January 1, 2020 collective ALL and the December 31, 2020 collective ALL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ALL due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ALL methodology, including the methods and models used to estimate (1) the PD and LGD, and their significant assumptions, including portfolio segmentation, the economic forecast scenario and macroeconomic variables, the reasonable and supportable forecast periods, and obligor risk ratings for commercial loans, and (2) the qualitative factors, principally the alternative economic forecast scenarios. The assessment also included an evaluation of the conceptual soundness and performance of the PD and LGD models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the measurement of the collective ALL estimates, including controls over the:
•development of the collective ALL methodology
•development of the PD and LGD models and forecasts
• identification and determination of the significant assumptions used in the PD and LGD models
•development of obligor risk ratings for commercial loans
•development of the qualitative factors, including the alternative economic scenarios
• performance monitoring of the PD and LGD models for the December 31, 2020 collective ALL.
We evaluated the Company’s process to develop the collective ALL estimates by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. We involved credit risk professionals with specialized skills and knowledge who assisted in:
•evaluating the Company’s collective ALL methodology for compliance with U.S. generally accepted accounting principles
•assessing the conceptual soundness and performance of the PD and LGD models by inspecting the model documentation to determine whether the models are suitable for their intended use
•evaluating judgments made by the Company relative to the development and performance testing of the PD and LGD models by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
•evaluating the methodology used to develop the economic forecast scenarios and underlying assumptions by comparing it to the Company’s business environment and relevant industry practices
•assessing the economic forecast scenario through comparison to publicly available forecasts
•testing the long run historical average default probabilities and loss severities and reasonable and supportable forecast periods to evaluate the length of each period by comparing them to specific portfolio risk characteristics and trends
•determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business environment and relevant industry practices
•testing individual obligor risk ratings for a selection of commercial loans by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral
•evaluating the methodology used to develop the qualitative factors and the effect of those factors on the collective ALL compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models.
We also assessed the sufficiency of the audit evidence obtained related to January 1, 2020 collective ALL and the December 31, 2020 collective ALL estimates by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimates.
/s/ KPMG LLP
We have served as the Company’s auditor since 2016.
Birmingham, Alabama
February 25, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder and Board of Directors
BBVA USA Bancshares, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited BBVA USA Bancshares, Inc., and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholder’s equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Birmingham, Alabama
February 25, 2021
BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2020 2019
(In Thousands)
Assets:
Cash and due from banks
$ 1,249,954 $ 1,149,734
Federal funds sold, securities purchased under agreements to resell and interest bearing deposits
13,357,954 5,788,964
Cash and cash equivalents
14,607,908 6,938,698
Trading account assets
762,449 473,976
Debt securities available for sale
5,744,919 7,235,305
Debt securities held to maturity, net of allowance for debt securities held to maturity losses of $2,178 at December 31, 2020 (fair value of $10,809,461 and $6,921,158 for 2020 and 2019, respectively)
10,549,945 6,797,046
Loans held for sale, at fair value
236,586 112,058
Loans
65,559,767 63,946,857
Allowance for loan losses
(1,679,474) (920,993)
Net loans
63,880,293 63,025,864
Premises and equipment, net
1,055,525 1,087,698
Bank owned life insurance
757,943 750,224
Goodwill
2,328,296 4,513,296
Other assets
2,832,339 2,669,182
Total assets
$ 102,756,203 $ 93,603,347
Liabilities:
Deposits:
Noninterest bearing
$ 27,791,421 $ 21,850,216
Interest bearing
58,066,960 53,135,067
Total deposits
85,858,381 74,985,283
FHLB and other borrowings
3,548,492 3,690,044
Federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings
184,478 173,028
Accrued expenses and other liabilities
1,473,490 1,368,403
Total liabilities
91,064,841 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
229,475 229,475
Common stock - $0.01 par value:
Authorized - 300,000,000 shares
Issued - 222,963,891 shares at both December 31, 2020 and 2019, respectively
2,230 2,230
Surplus
14,032,205 14,043,727
Accumulated deficit
(2,931,151) (917,227)
Accumulated other comprehensive income (loss) 329,105 (1,072)
Total BBVA USA Bancshares, Inc. shareholder’s equity
11,661,864 13,357,133
Noncontrolling interests
29,498 29,456
Total shareholder’s equity
11,691,362 13,386,589
Total liabilities and shareholder’s equity
$ 102,756,203 $ 93,603,347
See accompanying Notes to Consolidated Financial Statements.
BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2020 2019 2018
(In Thousands)
Interest income:
Interest and fees on loans
$ 2,656,786 $ 3,097,640 $ 2,914,269
Interest on debt securities available for sale
58,876 168,031 222,623
Interest on debt securities held to maturity
191,695 144,798 61,591
Interest on trading account assets
3,964 2,953 3,211
Interest and dividends on other earning assets
69,707 145,234 63,580
Total interest income
2,981,028 3,558,656 3,265,274
Interest expense:
Interest on deposits
357,113 778,156 517,290
Interest on FHLB and other borrowings
71,848 136,164 130,372
Interest on federal funds purchased and securities sold under agreements to repurchase
41,018 36,736 8,953
Interest on other short-term borrowings
525 567 2,081
Total interest expense
470,504 951,623 658,696
Net interest income
2,510,524 2,607,033 2,606,578
Provision for credit losses 966,129 597,444 365,420
Net interest income after provision for credit losses 1,544,395 2,009,589 2,241,158
Noninterest income:
Service charges on deposit accounts
219,783 250,367 236,673
Card and merchant processing fees
192,096 197,547 174,927
Investment banking and advisory fees
138,096
83,659
77,684
Investment services sales fees
112,243 115,446 112,652
Money transfer income
106,564 99,144 91,681
Mortgage banking income
74,813 28,059 26,833
Corporate and correspondent investment sales
49,318 38,561 51,675
Asset management fees
48,101 45,571 43,811
Bank owned life insurance
20,149 17,479 17,822
Investment securities gains, net
22,616 29,961 -
Other
208,893 230,150 223,151
Total noninterest income
1,192,672 1,135,944 1,056,909
Noninterest expense:
Salaries, benefits and commissions
1,159,561 1,181,934 1,154,791
Professional services
306,873 292,926 277,154
Equipment
267,547 256,766 257,565
Net occupancy
163,125 166,600 166,768
Money transfer expense
74,755 68,224 62,138
Marketing
40,130 55,164 48,866
FDIC insurance
34,954 27,703 67,550
Communications
21,759 21,782 30,582
Goodwill impairment
2,185,000 470,000 -
Other
308,014 324,981 284,546
Total noninterest expense
4,561,718 2,866,080 2,349,960
Net (loss) income before income tax expense (1,824,651) 279,453 948,107
Income tax expense
37,013 126,046 184,678
Net (loss) income (1,861,664) 153,407 763,429
Less: net income attributable to noncontrolling interests
2,047 2,332 1,981
Net (loss) income attributable to BBVA USA Bancshares, Inc. (1,863,711) 151,075 761,448
Less: preferred stock dividends
14,595 18,010 17,047
Net (loss) income attributable to common shareholder $ (1,878,306) $ 133,065 $ 744,401
See accompanying Notes to Consolidated Financial Statements.
BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
2020 2019 2018
(In Thousands)
Net (loss) income $ (1,861,664) $ 153,407 $ 763,429
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period from debt securities available for sale
115,403 159,260 (2,128)
Less: reclassification adjustment for net gains on sale of debt securities available for sale in net income
17,220 22,857 -
Net change in unrealized holding gains (losses) on debt securities available for sale
98,183 136,403 (2,128)
Change in unamortized net holding gains on debt securities held to maturity
6,439 7,794 7,016
Unamortized unrealized net holding losses on debt securities available for sale transferred to debt securities held to maturity
- - (30,487)
Less: non-credit related impairment on debt securities held to maturity
- 82 303
Change in unamortized non-credit related impairment on debt securities held to maturity
474 607 799
Net change in unamortized holding gains (losses) on debt securities held to maturity
6,913 8,319 (22,975)
Unrealized holding gains arising during period from cash flow hedge instruments 214,865 86,310 30,940
Change in defined benefit plans
10,216 (9,820) 4,733
Other comprehensive income, net of tax 330,177 221,212 10,570
Comprehensive (loss) income (1,531,487) 374,619 773,999
Less: comprehensive income attributable to noncontrolling interests
2,047 2,332 1,981
Comprehensive (loss) income attributable to BBVA USA Bancshares, Inc. $ (1,533,534) $ 372,287 $ 772,018
See accompanying Notes to Consolidated Financial Statements.
BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Preferred Stock
Common Stock
Surplus
Accumulated Deficit
Accumulated Other Comprehensive Income (Loss)
Non-Controlling Interests
Total Shareholder’s Equity
(In Thousands)
Balance, December 31, 2017 $ 229,475 $ 2,230 $ 14,818,608 $ (1,868,659) $ (197,405) $ 29,061 $ 13,013,310
Cumulative effect from adoption of ASU 2016-01 - - - 13 (13) - -
Balance, January 1, 2018 $ 229,475 $ 2,230 $ 14,818,608 $ (1,868,646) $ (197,418) $ 29,061 $ 13,013,310
Net income
- - - 761,448 - 1,981 763,429
Other comprehensive income, net of tax - - - - 10,570 - 10,570
Preferred stock dividends
- - (17,047) - - (2,093) (19,140)
Common stock dividends
- - (255,000) - - - (255,000)
Capital contribution
- - - - - 72 72
Vesting of restricted stock
- - (712) - - - (712)
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
- - - 151,075 - 2,332 153,407
Other comprehensive income, net of tax
- - - - 221,212 - 221,212
Preferred stock dividends
- - (18,010) - - (2,093) (20,103)
Issuance of common stock
- - 802 - - - 802
Common stock dividends
- - (482,000) - - - (482,000)
Capital contribution
- - - - - 196 196
Vesting of restricted stock
- - (2,914) - - - (2,914)
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 - - - (1,863,711) - 2,047 (1,861,664)
Other comprehensive income, net of tax
- - - - 330,177 - 330,177
Preferred stock dividends
- - (14,595) - - (2,092) (16,687)
Capital contribution
- - 3,073 - - 87 3,160
Balance, December 31, 2020 $ 229,475 $ 2,230 $ 14,032,205 $ (2,931,151) $ 329,105 $ 29,498 $ 11,691,362
(1)Related to the Company's adoption of ASU 2016-02, ASU 2017-12 and ASU 2018-02 on January 1, 2019. See Note 1, Summary of Significant Accounting Policies, for additional information.
See accompanying Notes to Consolidated Financial Statements.
BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2020 2019 2018
(In Thousands)
Operating Activities:
Net (loss) income $ (1,861,664) $ 153,407 $ 763,429
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 330,584 262,491 267,640
Goodwill impairment 2,185,000 470,000 -
Securities impairment - 215 592
Amortization of intangibles - - 5,104
Amortization (accretion) of discount, loan fees and purchase market adjustments, net 23,834 (34,913) (53,687)
Provision for credit losses 966,129 597,444 365,420
Net change in trading account assets (288,473) (236,320) (17,160)
Net change in trading account liabilities 44,870 (29,486) 3,448
Originations and purchases of mortgage loans held for sale (1,447,176) (767,998) (626,747)
Sale of mortgage loans held for sale 1,398,282 754,245 643,954
Deferred tax benefit (150,459) (27,197) (5,418)
Investment securities gains, net (22,616) (29,961) -
Net (gain) loss on sale of premises and equipment (134) (5,218) 1,103
Net gain on sale of loans - (1,179) -
Gain on sale of mortgage loans held for sale (75,634) (29,539) (18,863)
Net (gain) loss on sale of other real estate and other assets (319) 1,691 (90)
Decrease (increase) in other assets 256,709 64,289 (320,369)
Increase (decrease) in other liabilities 107,101 (84,020) 122,538
Net cash provided by operating activities 1,466,034 1,057,951 1,130,894
Investing Activities:
Proceeds from sales of debt securities available for sale 863,712 2,442,176 -
Proceeds from prepayments, maturities and calls of debt securities available for sale 4,423,041 5,005,812 3,831,344
Purchases of debt securities available for sale (3,728,723) (3,555,480) (3,752,847)
Proceeds from sales of equity securities 96,328 184,814 906,430
Purchases of equity securities (13,169) (189,039) (869,469)
Proceeds from prepayments, maturities and calls of debt securities held to maturity 1,235,173 427,237 390,847
Purchases of debt securities held to maturity (5,046,970) (4,351,535) (1,211,424)
Net change in loan portfolio (2,039,516) (695,625) (4,148,848)
Purchase of premises and equipment (151,176) (135,635) (138,997)
Proceeds from sale of premises and equipment 2,190 10,466 5,732
Proceeds from sales of loans 2,155 1,374,809 293,996
Proceeds from settlement of BOLI policies 12,503 4,513 4,321
Cash payments for premiums of BOLI policies - (26) (34)
Proceeds from sales of other real estate owned 17,828 27,922 23,407
Net cash (used in) provided by investing activities (4,326,624) 550,409 (4,665,542)
Financing Activities:
Net increase in total deposits 10,879,372 2,833,454 2,931,466
Net increase in federal funds purchased and securities sold under agreements to repurchase 11,450 70,753 82,684
Net decrease in other short-term borrowings - - (17,996)
Proceeds from FHLB and other borrowings 2,000 4,436,995 23,323,916
Repayment of FHLB and other borrowings (229,999) (4,790,234) (23,280,212)
Vesting of restricted stock - (2,914) (712)
Capital contribution 3,160 196 72
Preferred dividends paid (16,687) (20,103) (19,140)
Issuance of common stock - 802 -
Common dividends paid - (482,000) (255,000)
Net cash provided by financing activities 10,649,296 2,046,949 2,765,078
Net increase (decrease) in cash, cash equivalents and restricted cash 7,788,706 3,655,309 (769,570)
Cash, cash equivalents and restricted cash at beginning of year 7,156,689 3,501,380 4,270,950
Cash, cash equivalents and restricted cash at end of year $ 14,945,395 $ 7,156,689 $ 3,501,380
See accompanying Notes to Consolidated Financial Statements.
BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Nature of Operations
BBVA USA Bancshares, Inc., headquartered in Houston, Texas, is a wholly owned subsidiary of BBVA.
The Bank, the Company's largest subsidiary, headquartered in Birmingham, Alabama, operates banking centers in Alabama, Arizona, California, Colorado, Florida, New Mexico and Texas. The Bank operates under the brand name BBVA USA, which is a trade name and trademark of BBVA USA Bancshares, Inc.
The Bank performs banking services customary for full service banks of similar size and character. Such services include receiving demand and time deposits, making personal and commercial loans and furnishing personal and commercial checking accounts. The Bank offers, either directly or through its subsidiaries and affiliates, a variety of services, including portfolio management and administration and investment services to estates and trusts; term life insurance, variable annuities, property and casualty insurance and other insurance products; investment advisory services; a variety of investment services and products to institutional and individual investors; discount brokerage services, mutual funds and fixed-rate annuities; and lease financing services.
Proposed Acquisition by PNC
On November 15, 2020, PNC entered into a Stock Purchase Agreement with BBVA for the purchase by PNC of 100% of the issued and outstanding shares of the Company for $11.6 billion in cash on hand in a fixed price structure. PNC is not acquiring BSI, Propel Venture Partners Fund I, L.P. and BBVA Processing Services, Inc. Immediately following the closing of the stock purchase, PNC intends to merge the Parent with and into PNC, with PNC continuing as the surviving entity. Post-closing, PNC intends to merge BBVA USA with and into PNC Bank, National Association, an indirect wholly owned subsidiary of PNC, with PNC Bank continuing as the surviving entity. The transaction is subject to regulatory approvals and certain other customary closing conditions.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries for the years ended December 31, 2020, 2019 and 2018. All intercompany accounts and transactions and balances have been eliminated in consolidation.
The Company has evaluated subsequent events through the filing date of this Annual Report on Form 10-K, to determine if either recognition or disclosure of significant events or transactions is required.
The accounting policies followed by the Company and its subsidiaries and the methods of applying these policies conform with U.S. GAAP and with practices generally accepted within the banking industry. Certain policies that significantly affect the determination of financial position, results of operations and cash flows are summarized below.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States 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 loan losses and goodwill impairment. Actual results could differ from those estimates.
Correction of Immaterial Accounting Error
During the year ended December 31, 2018, income tax expense included $11.4 million of income tax expense related to the correction of an error in prior periods that resulted from an incorrect calculation of the proportional amortization of the Company's Low Income Housing Tax Credit investments. This error primarily related to 2017 and was corrected in the second quarter of 2018.
The Company has evaluated the effect of this correction on prior interim and annual periods' consolidated financial statements in accordance with the guidance provided by SEC Staff Accounting Bulletin No. 108, codified as SAB Topic 1.N, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, and concluded that no prior annual period is materially misstated. In addition, the Company has considered the effect of this correction on the Company's December 31, 2018 financial results, and concluded that the impact on these periods was not material.
Cash and cash equivalents
The Company classifies cash on hand, amounts due from banks, federal funds sold, securities purchased under agreements to resell and interest bearing deposits as cash and cash equivalents. These instruments have original maturities of three months or less.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The securities pledged or received as collateral are generally U.S. government and federal agency securities. The Company's policy is to take possession of securities purchased under agreements to resell. The fair value of collateral either received from or provided to a third party is continually monitored and adjusted as deemed appropriate.
Securities
The Company classifies its debt securities into one of three categories based upon management’s intent and ability to hold the debt securities: (i) trading account assets and liabilities, (ii) debt securities held to maturity or (iii) debt securities available for sale. Debt securities held in a trading account are required to be reported at fair value, with unrealized gains and losses included in earnings. The Company classifies purchases, sales, and maturities of trading securities held for investment purposes as cash flows from investing activities. Cash flows related to trading securities held for trading purposes are reported as cash flows from operating activities. Debt securities held to maturity are stated at cost adjusted for amortization of premiums and accretion of discounts. The related amortization and accretion is determined by the interest method and is included as a noncash adjustment in the net cash provided by operating activities in the Company’s Consolidated Statements of Cash Flows. The Company has the ability, and it is management’s intention, to hold such securities to maturity. Debt securities available for sale are recorded at fair value. Increases and decreases in the net unrealized gain or loss on the portfolio of debt securities available for sale are reflected as adjustments to the carrying value of the portfolio and as an adjustment, net of tax, to accumulated other comprehensive income. See Note 19, Fair Value Measurements, for information on the determination of fair value.
Interest earned on trading account assets, debt securities available for sale and debt securities held to maturity is included in interest income in the Company’s Consolidated Statements of Income. Net realized gains and losses on the sale of debt securities available for sale, computed principally on the specific identification method, are shown separately in noninterest income in the Company’s Consolidated Statements of Income. Net gains and losses on the sale of trading account assets and liabilities are recognized as a component of other noninterest income in the Company’s Consolidated Statements of Income.
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.
Loans Held for Sale
Loans held for sale are recorded at either estimated fair value, if the fair value option is elected, or the lower of cost or estimated fair value. The Company applies the fair value option accounting guidance codified under the FASB's ASC Topic 825, Financial Instruments, for single family real estate mortgage loans originated for sale in the secondary market. Under the fair value option, all changes in the applicable loans’ fair value, which includes the value attributable to the servicing of the loan, are recorded in earnings. Loans classified as held for sale that were not originated for resale in the secondary market are accounted for under the lower of cost or fair value method and are evaluated on an individual basis.
Loans
Loans that management has the intent and ability to hold for the foreseeable 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 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 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 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. Management uses discounted cash flows, default probabilities and loss severities to calculate the allowance for loan losses.
Management estimates the allowance balance over the estimated life of the loans 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 based on changes in sources of forecast information or Management's ability to develop a reasonable and supportable economic forecast. After the reasonable and supportable forecast period, the Company reverts to long run historical average default probabilities and loss severities using a linear function, with a reversion speeds that differ by portfolio.
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 period to estimate expected credit losses: 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 will be executed with an individual borrower, or an extension or renewal option is included in the contract at the reporting date that is not unconditionally cancellable by the Company. 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 ratings 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 estimated 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 estimates a point in time Marginal PD and LGD utilizing recent historical data per portfolio, which are then transformed via macroeconomic models using the aforementioned correlated macroeconomic variables included in the forecasted scenario.
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 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 Consolidated Balance Sheets with changes recognized within noninterest expense in the Company’s Consolidated Statements of Income. See Note 15, Commitments, Contingencies and Guarantees for additional information.
The allowance for loan losses for periods before 2020 is established as follows:
•Loans with outstanding balances greater than $1 million that are nonaccrual and all TDRs are evaluated individually consistent with ASC 310, and specific reserves are allocated based on the present value of the loan’s expected future cash flows, discounted at the loan’s original effective interest rate, except where foreclosure or liquidation is probable or when the primary source of repayment is provided by real estate collateral. In these circumstances, impairment is measured based upon the fair value less cost to sell of the collateral.
•Loans in the remainder of the portfolio are collectively evaluated for impairment consistent with ASC 450 using statistical models based on historical performance data, adjusted for qualitative factors.
Premises and Equipment
Premises, furniture, fixtures, equipment, assets under capital leases and leasehold improvements are stated at cost less accumulated depreciation or amortization. Land is stated at cost. In addition, purchased software and costs of computer software developed for internal use are capitalized provided certain criteria are met. Depreciation is computed principally using the straight-line method over the estimated useful lives of the related assets, which ranges between 1 and 40 years. Leasehold improvements are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the improvements.
Leases
The Company leases certain land, office space, and branches. These leases are generally for periods of 10 to 20 years with various renewal options. The Company, by policy, does not include renewal options for facility leases as part of its right-of-use assets and lease liabilities unless they are deemed reasonably certain to be exercised. Variable
lease payments that are dependent on an index or a rate are initially measured using the index or rate at the commencement date and are included in the measurement of lease liability. Variable lease payments that are not dependent on an index or a rate or changes in variable payments based on an index or rate after the commencement date are excluded from the measurement of the lease liability and recognized in profit and loss in accordance with ASC Topic 842, Leases. Variable lease payments are defined as payments made for the right to use an asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.
The Company has made a policy election to not apply the recognition requirements of ASC Topic 842, Leases, to all short-term leases. Instead, the short-term lease payments will be recognized in the income statement on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. As a practical expedient, the Company has also made a policy election to not separate nonlease components from lease components and instead account for each separate lease component and the nonlease components associated with that lease component as a single lease component.
The Company determines whether a contract contains a lease based on whether a contract, or a part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The discount rate is determined as the rate implicit in the lease or when a rate cannot be readily determined, the Company’s incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Bank Owned Life Insurance
The Company maintains life insurance policies on certain of its executives and employees and is the owner and beneficiary of the policies. The Company invests in these policies, known as BOLI, to provide an efficient form of funding for long-term retirement and other employee benefits costs. The Company records these BOLI policies within bank owned life insurance on the Company’s Consolidated Balance Sheets at each policy’s respective cash surrender value, with changes recorded in noninterest income in the Company’s Consolidated Statements of Income.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets associated with acquisition transactions. Goodwill is assigned to each of the Company’s reporting units and tested for impairment annually as of October 31 or on an interim basis if events or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.
If, after considering all relevant events and circumstances, the Company determines it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then performing an impairment test is not necessary. If the Company elects to bypass the qualitative analysis, or concludes via qualitative analysis that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed. 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 Company has defined its reporting unit structure to include: Commercial Banking and Wealth, Retail Banking, and Corporate and Investment Banking. Each of the defined reporting units was tested for impairment as of October 31, 2020. See Note 7, Goodwill, for a further discussion.
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of recorded balance of the loan or fair value less costs to sell of the collateral assets at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, OREO is carried at the lower of carrying amount or fair value less costs to sell and is included in other assets on the Consolidated Balance Sheets. Gains and losses on the sales and write-downs on such properties and operating expenses from these OREO properties are included in other noninterest expense in the Company’s Consolidated Statements of Income.
Accounting for Transfers and Servicing of Financial Assets
The Company accounts for transfers of financial assets as sales when control over the transferred assets is surrendered. Control is generally considered to have been surrendered when (1) the transferred assets are legally isolated from the Company, even in bankruptcy or other receivership, (2) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee and provide more than a trivial benefit to the Company, and (3) the Company does not maintain the obligation or unilateral ability to reclaim or repurchase the assets. If these sale criteria are met, the transferred assets are removed from the Company's balance sheet and a gain or loss on sale is recognized. If not met, the transfer is recorded as a secured borrowing, and the assets remain on the Company's balance sheet, the proceeds from the transaction are recognized as a liability, and gain or loss on sale is deferred until the sale criterion are achieved.
The Company has one primary class of MSR related to residential real estate mortgages. These mortgage servicing rights are recorded in other assets on the Consolidated Balance Sheets at fair value with changes in fair value recorded as a component of mortgage banking income in the Company’s Consolidated Statements of Income. See Note 4, Loan Sales and Servicing, for a further discussion.
Revenue from Contracts with Customers
The following is a discussion of key revenues within the scope of ASC 606, Revenue from Contracts with Customers:
•Service charges on deposit accounts - Revenue from service charges on deposit accounts is earned through cash management, wire transfer, and other deposit-related services; as well as overdraft, non-sufficient funds, account management and other deposit-related fees. Revenue is recognized for these services either over time, corresponding with deposit accounts’ monthly cycle, or at a point in time for transactional related services and fees.
•Card and merchant processing fees - Card and merchant processing fees consists of interchange fees from consumer credit and debit cards processed by card association networks, merchant services, and other card related services. Interchange rates are generally set by the credit card associations and based on purchase volumes and other factors. Interchange fees are recognized as transactions occur. Merchant services income represents account management fees and transaction fees charged to merchants for the processing of card association transactions. Merchant services revenue is recognized as transactions occur, or as services are performed.
•Investment banking and advisory fees - Investment banking and advisory fees primarily represent revenues earned by the Company for various corporate services including advisory, debt placement and underwriting. Revenues for these services are recorded at a point in time or upon completion of a contractually identified transaction. Underwriting costs are presented gross against underwriting revenues.
•Money transfer income - Money transfer income represents income from the Parent’s wholly owned subsidiary, BBVA Transfer Holdings, Inc., which engages in money transfer services, including money transmission and foreign exchange services. Money transfer income is recognized as transactions occur.
•Asset management, retail investment, and commissions fees - Asset management, retail investment, and commissions fees consists of fees generated from money management transactions and treasury management services, along with mutual fund and annuity sales fee income. Revenue from trade execution and brokerage services is earned through commissions from trade execution on behalf of clients. Revenue from these transactions is recognized at the trade date. Any ongoing service fees are recognized on a monthly basis as services are performed. Trust and asset management services include asset custody and investment management services provided to individual and institutional customers. Revenue is recognized monthly based on a minimum annual fee, and the market value of assets in custody. Additional fees are recognized for transactional activity. Insurance revenue is earned through commissions on insurance sales and earned at a point in time. These revenues are recorded in asset management fees and investment services sales fees within non-interest income in the Company's Consolidated Statements of Income.
Advertising Costs
Advertising costs are generally expensed as incurred and recorded as marketing expense, a component of noninterest expense in the Company’s Consolidated Statements of Income.
Income Taxes
The Company and its eligible subsidiaries file a consolidated federal income tax return. The Company files separate tax returns for subsidiaries that are not eligible to be included in the consolidated federal income tax return. Based on the laws of the respective states where it conducts business operations, the Company either files consolidated, combined or separate tax returns.
Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and are measured using the tax rates and laws that are expected to be in effect when the differences are anticipated to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period the change is incurred. In evaluating the Company's ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company must consider all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and the results of recent operations. A valuation allowance is recognized for a deferred tax asset, if based on the available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes income tax benefits associated with uncertain tax positions, when, in its judgment, it is more likely than not of being sustained on the basis of the technical merits. For a tax position that meets the more-likely-than-not recognition threshold, the Company initially and subsequently measures the tax benefit as the largest amount that the Company judges to have a greater than 50% likelihood of being realized upon ultimate settlement with the taxing authority.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of other noninterest expense in the Company’s Consolidated Statements of Income. Accrued interest and penalties are included within accrued expenses and other liabilities on the Company’s Consolidated Balance Sheets.
The Company applies the proportional amortization method in accounting for its qualified Low Income Housing Tax Credit investments. This method recognizes the amortization of the investment as a component of income tax expense. At December 31, 2020 and 2019, net Low Income Housing Tax Credit investments were $585 million and $542 million, respectively, and are included in other assets on the Company's Consolidated Balance Sheets.
Noncontrolling Interests
The Company applies the accounting guidance codified in ASC Topic 810, Consolidation, related to the treatment of noncontrolling interests. This guidance requires the amount of consolidated net income attributable to the parent and to the noncontrolling interests be clearly identified and presented on the face of the consolidated financial statements.
The noncontrolling interests attributable to the Company's REIT preferred securities and mezzanine investment fund (see Note 11, Shareholder's Equity, for a discussion of the preferred securities) are reported within shareholder’s equity, separately from the equity attributable to the Company’s shareholder. The dividends paid to the REIT preferred shareholders and other mezzanine investment fund investors are reported as reductions in shareholder’s equity in the Consolidated Statements of Shareholder’s Equity, separately from changes in the equity attributable to the Company’s shareholder.
Accounting for Derivatives and Hedging Activities
A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. These instruments include interest rate swaps, caps, floors, financial forwards and futures contracts, foreign exchange contracts, options written and purchased. The Company mainly uses derivatives to manage economic risk related to commercial loans, long-term debt and other funding sources. The Company also uses derivatives to facilitate transactions on behalf of its customers.
All derivative instruments are recognized on the Company’s Consolidated Balance Sheets at their fair value. The Company does not offset fair value amounts under master netting agreements. Fair values are estimated using pricing models and current market data. On the date the derivative instrument contract is entered into, the Company designates the derivative as (1) a fair value hedge, (2) a cash flow hedge, or (3) a free-standing derivative. Changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in earnings. Changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash flow hedge are recorded in accumulated other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). Changes in the fair value of a free-standing derivative and settlements on the instruments are reported in earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the Company’s Consolidated Balance Sheets or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
The Company discontinues hedge accounting prospectively when: (1) it is determined that the derivative instrument is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions); (2) the derivative instrument expires or is sold, terminated or exercised; (3) the derivative instrument is de-designated as a hedge instrument because it is unlikely that a forecasted transaction will occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designation of the derivative instrument as a hedge instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the derivative instrument no longer qualifies as an effective fair value or cash flow hedge, the derivative instrument continues to be carried on the Company’s Consolidated Balance Sheets at its fair value, with changes in the fair value included in earnings. Additionally, for fair value hedges, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted as an adjustment to the yield over the remaining life of the asset or liability. For cash flow hedges, when hedge accounting is discontinued, but the hedged cash flows or forecasted transaction are still expected to occur, the unrealized gains and losses that were accumulated in other comprehensive income are recognized in earnings in the same period when the earnings are affected by the hedged cash flows or forecasted transaction. When a cash flow hedge is discontinued, because the hedged cash flows or forecasted transactions are not expected to occur, unrealized gains and losses that were accumulated in other comprehensive income are recognized in earnings immediately.
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, held-to-maturity 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, collectively ASC 326.
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 ASC 326, 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 ASC 326.
The Company adopted this ASC 326 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 ASC 326. 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 ASC 326 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 ASC 326.
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 19, Fair Value Measurements, for the modified disclosure in accordance with this ASU.
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 table presents the adjusted cost and approximate fair value of debt securities available for sale and debt securities held to maturity. As noted in Note 1, Summary of Significant Accounting Policies, 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.
December 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 $ 2,115,915 $ 45,168 $ 14,179 $ 2,146,904
Agency mortgage-backed securities 834,640 32,103 1,095 865,648
Agency collateralized mortgage obligations 2,681,210 50,811 290 2,731,731
States and political subdivisions 617 19 - 636
Total $ 5,632,382 $ 128,101 $ 15,564 $ 5,744,919
Debt securities held to maturity:
U.S. Treasury and other U.S. government agencies $ 1,291,900 $ 112,968 $ - $ 1,404,868
Agency mortgage-backed securities 570,115 2,491 - 572,606
Collateralized mortgage obligations:
Agency 8,144,522 147,176 27,234 8,264,464
Non-agency 29,186 5,972 209 34,949
Asset-backed securities and other 48,790 1,217 2,681 47,326
States and political subdivisions (1) 467,610 21,047 3,409 485,248
Total $ 10,552,123 $ 290,871 $ 33,533 $ 10,809,461
(1)The Company recorded an allowance of $2 million, at December 31, 2020, related to state and political subdivisions, which is not included in the table above.
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 meet the definition of a debt security within ASC Topic 320, Investments - Debt Securities.
At December 31, 2020, approximately $5.4 billion of debt securities were pledged to secure public deposits, securities sold under agreements to repurchase and FHLB advances and for other purposes as required or permitted by law.
At December 31, 2020, approximately 99.99% of the debt securities classified within available for sale are rated “AAA,” the highest possible rating by nationally recognized rating agencies.
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 December 31, 2020 and 2019, for which an allowance for credit losses has not been recorded at December 31, 2020. This information is aggregated by investment category and the length of time the individual securities have been in an unrealized loss position.
December 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
$ 6,041 $ 60 $ 335,296 $ 14,119 $ 341,337 $ 14,179
Agency mortgage-backed securities
25,710 299 35,326 796 61,036 1,095
Agency collateralized mortgage obligations
96,498 114 162,028 176 258,526 290
Total
$ 128,249 $ 473 $ 532,650 $ 15,091 $ 660,899 $ 15,564
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 December 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.
The following table presents the activity in the allowance for debt securities held to maturity losses.
Held to Maturity Debt Securities
(In Thousands)
Year Ended December 31, 2020
Allowance for debt securities held to maturity losses:
Balance at beginning of period, prior to adoption of ASC 326 $ -
Impact of adopting ASC 326 1,847
Beginning balance, after adoption of ASC 326 1,847
Provision for credit loss expense 331
Securities charged off -
Recoveries -
Ending balance $ 2,178
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 December 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 December 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 December 31, 2020, aggregated by credit quality indicator.
December 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 $ 1,291,900 $ - $ - $ - $ - $ - $ 1,291,900
Agency mortgage-backed securities 570,115 - - - - - 570,115
Collateralized mortgage obligations:
Agency 8,144,522 - - - - - 8,144,522
Non-agency 278 6,840 10,517 5,462 2,533 3,556 29,186
Asset-backed securities and other - 48,127 200 463 - - 48,790
States and political subdivisions - 246,210 221,400 - - - 467,610
$ 10,006,815 $ 301,177 $ 232,117 $ 5,925 $ 2,533 $ 3,556 $ 10,552,123
The following table discloses activity related to credit losses for debt securities where a portion of the OTTI was recognized in other comprehensive income.
Years Ended December 31,
2019 2018
(In Thousands)
Balance, at beginning of year $ 23,416 $ 22,824
Reductions for securities paid off during the period (realized)
- -
Additions for the credit component on debt securities in which OTTI was not previously recognized
- -
Additions for the credit component on debt securities in which OTTI was previously recognized
215 592
Balance, at end of year $ 23,631 $ 23,416
During the years ended December 31, 2019 and 2018, OTTI recognized on held to maturity debt securities totaled $215 thousand and $592 thousand, respectively. The debt securities impacted by credit impairment consisted of held to maturity non-agency collateralized mortgage obligations.
The contractual maturities of the securities portfolios are presented in the following table.
Amortized Cost Fair Value
December 31, 2020 (In Thousands)
Debt securities available for sale:
Maturing within one year $ 300,014 $ 300,073
Maturing after one but within five years 1,400,824 1,443,878
Maturing after five but within ten years 5,694 5,783
Maturing after ten years 410,000 397,806
2,116,532 2,147,540
Agency mortgage-backed securities and agency collateralized mortgage obligations 3,515,850 3,597,379
Total $ 5,632,382 $ 5,744,919
Debt securities held to maturity:
Maturing within one year $ 20,224 $ 20,196
Maturing after one but within five years 1,401,764 1,514,760
Maturing after five but within ten years 272,972 289,908
Maturing after ten years 113,340 112,578
1,808,300 1,937,442
Agency mortgage-backed securities and agency and non-agency collateralized mortgage obligations 8,743,823 8,872,019
Total $ 10,552,123 $ 10,809,461
The gross realized gains and losses recognized on sales of debt securities available for sale are shown in the table below.
Years Ended December 31,
2020 2019 2018
(In Thousands)
Gross gains $ 22,616 $ 29,961 $ -
Gross losses - - -
Net realized gains $ 22,616 $ 29,961 $ -
At December 31, 2020 and 2019 there were $21 million and $28 million, respectively, of unrealized losses, net of tax related to debt securities transferred from available for sale to held to maturity in accumulated other comprehensive income, which are being amortized over the remaining life of those securities.
(3) Loans and Allowance for Loan Losses
The following table presents the composition of the loan portfolio.
December 31,
2020 2019
(In Thousands)
Commercial loans:
Commercial, financial and agricultural $ 26,605,142 $ 24,432,238
Real estate - construction 2,498,331 2,028,682
Commercial real estate - mortgage 13,565,314 13,861,478
Total commercial loans 42,668,787 40,322,398
Consumer loans:
Residential real estate - mortgage 13,327,774 13,533,954
Equity lines of credit 2,394,894 2,592,680
Equity loans 179,762 244,968
Credit card 881,702 1,002,365
Consumer direct 1,929,723 2,338,142
Consumer indirect 4,177,125 3,912,350
Total consumer loans 22,890,980 23,624,459
Total loans $ 65,559,767 $ 63,946,857
Total loans includes unearned income totaling $252.1 million and $224.9 million at December 31, 2020 and 2019, respectively; and unamortized deferred costs totaling $377.7 million and $376.6 million at December 31, 2020 and 2019, respectively. Accrued interest receivable totaling $224.3 million and $204.6 million at December 31, 2020 and 2019, respectively, was reported in other assets on the Company's Consolidated Balance Sheets and is excluded from the related footnote disclosures.
The loan portfolio is diversified geographically, by product type and by industry exposure. Geographically, the portfolio is predominantly in the Sunbelt states, including Alabama, Arizona, Colorado, Florida, New Mexico and Texas, as well as growing but modest exposure in northern and southern California. The loan portfolio’s most significant geographic presence is within Texas. The Company monitors its exposure to various industries and adjusts loan production based on current and anticipated changes in the macro-economic environment as well as specific structural, legal and business conditions affecting each broad industry category.
At December 31, 2020, approximately $14.2 billion of loans were pledged to secure deposits and FHLB advances and for other purposes as required or permitted by law.
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 portfolio segments 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 Loans
(In Thousands)
Year Ended December 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
335,502 236,493 68,442 325,361 965,798
Loans charged-off (117,318) (9,919) (5,693) (345,250) (478,180)
Loan recoveries 13,458 919 5,241 66,314 85,932
Net (charge-offs) recoveries (103,860) (9,000) (452) (278,936) (392,248)
Ending balance $ 658,228 $ 311,092 $ 214,469 $ 495,685 $ 1,679,474
Year Ended December 31, 2019
Allowance for loan losses:
Beginning balance $ 393,315 $ 112,437 $ 101,929 $ 277,561 $ 885,242
Provision for loan losses
173,271 6,123 3,424 414,626 597,444
Loans charged off (171,507) (2,597) (19,600) (466,946) (660,650)
Loan recoveries 13,118 2,670 13,336 69,833 98,957
Net (charge-offs) recoveries (158,389) 73 (6,264) (397,113) (561,693)
Ending balance $ 408,197 $ 118,633 $ 99,089 $ 295,074 $ 920,993
Year Ended December 31, 2018
Allowance for loan losses:
Beginning balance $ 420,635 $ 118,133 $ 109,856 $ 194,136 $ 842,760
Provision (credit) for loan losses
44,403 (8,431) (3,216) 332,664 365,420
Loans charged off (83,017) (3,867) (17,821) (295,999) (400,704)
Loan recoveries 11,294 6,602 13,110 46,760 77,766
Net (charge-offs) recoveries (71,723) 2,735 (4,711) (249,239) (322,938)
Ending balance $ 393,315 $ 112,437 $ 101,929 $ 277,561 $ 885,242
(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.
For the year ended December 31, 2020, the increase in the allowance for loan losses was primarily driven by the impact of the COVID-19 pandemic on economic conditions which impacted the Company's economic forecast. During 2020, economic conditions continued to deteriorate due to the impact of the COVID-19 health crisis. As a result, economic projections for gross domestic product declined dramatically and unemployment levels increased significantly with information related to the evolving impacts of the COVID-19 health crisis. Additionally, the allowance for loan losses was impacted by the higher reserves in the commercial portfolio due to downgrades in this portfolio and the impact of declines in oil prices.
The Company has not recorded a provision for credit loss related to its SBA PPP loans because they are guaranteed by the SBA and have been deemed to have zero expected credit loss as of December 31, 2020.
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 Loans
(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
Loans:
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.
(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 December 31, 2020.
December 31, 2020
Nonaccrual Nonaccrual With No Recorded Allowance
(In Thousands)
Commercial, financial and agricultural $ 540,741 $ 93,614
Real estate - construction 25,316 -
Commercial real estate - mortgage 442,137 77,629
Residential real estate - mortgage 235,463 -
Equity lines of credit 42,606 -
Equity loans 10,167 -
Credit card - -
Consumer direct 10,087 -
Consumer indirect 24,713 -
Total loans $ 1,331,230 $ 171,243
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
The following table presents information on individually evaluated impaired loans, by loan class for the years ended December 31, 2019 and 2018.
Years Ended December 31,
2019 2018
Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
(In Thousands)
Commercial, financial and agricultural
$ 344,940 $ 2,160 $ 293,841 $ 1,379
Real estate - construction 854 9 8,600 7
Commercial real estate - mortgage 78,889 807 81,989 870
Residential real estate - mortgage 108,606 2,681 108,094 2,658
Equity lines of credit 15,641 649 17,413 748
Equity loans 30,158 1,079 34,290 1,180
Credit card - - - -
Consumer direct 7,467 458 2,766 59
Consumer indirect 683 1 641 5
Total loans $ 587,238 $ 7,844 $ 547,634 $ 6,906
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 a strong 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.
The following tables, which exclude loans held for sale, illustrate the credit quality indicators associated with the Company’s loans, by loan class.
Commercial
December 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 $ 5,784,167 $ 2,691,532 $ 1,986,737 $ 3,003,653 $ 754,848 $ 3,030,800 $ 6,861,548 $ - $ 24,113,285
Special Mention 78,988 166,896 193,552 107,194 26,025 102,208 685,822 - 1,360,685
Substandard 38,516 66,725 69,752 96,059 82,947 179,285 499,317 - 1,032,601
Doubtful 16,286 12,248 5,476 709 7,395 5,085 51,372 - 98,571
Total commercial, financial and agricultural
$ 5,917,957 $ 2,937,401 $ 2,255,517 $ 3,207,615 $ 871,215 $ 3,317,378 $ 8,098,059 $ - $ 26,605,142
Real estate - construction
Pass $ 429,483 $ 785,835 $ 710,403 $ 271,229 $ 44,565 $ 38,470 $ 125,184 $ - $ 2,405,169
Special Mention - 9,015 8,414 - 24,059 301 18,223 - 60,012
Substandard 3,973 6,210 551 18,152 - 4,264 - - 33,150
Doubtful - - - - - - - - -
Total real estate - construction
$ 433,456 $ 801,060 $ 719,368 $ 289,381 $ 68,624 $ 43,035 $ 143,407 $ - $ 2,498,331
Commercial real estate - mortgage
Pass $ 1,571,217 $ 2,796,409 $ 3,430,264 $ 1,371,053 $ 777,906 $ 2,113,980 $ 222,864 $ - $ 12,283,693
Special Mention 40,501 131,400 190,140 36,834 147,037 110,279 3,996 - 660,187
Substandard 44,201 34,749 106,067 114,290 112,976 195,821 6,630 - 614,734
Doubtful - - - - 2,758 3,942 - - 6,700
Total commercial real estate - mortgage
$ 1,655,919 $ 2,962,558 $ 3,726,471 $ 1,522,177 $ 1,040,677 $ 2,424,022 $ 233,490 $ - $ 13,565,314
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
Consumer
December 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 $ 3,881,274 $ 2,013,356 $ 883,919 $ 956,310 $ 1,109,560 $ 4,201,849 $ - $ - $ 13,046,268
Nonperforming 4,468 21,702 21,424 21,167 24,964 187,781 - - 281,506
Total residential real estate - mortgage
$ 3,885,742 $ 2,035,058 $ 905,343 $ 977,477 $ 1,134,524 $ 4,389,630 $ - $ - $ 13,327,774
Equity lines of credit
Performing
$ - $ - $ - $ - $ - $ - $ 2,338,907 $ 10,757 $ 2,349,664
Nonperforming
- - - - - - 45,079 151 45,230
Total equity lines of credit
$ - $ - $ - $ - $ - $ - $ 2,383,986 $ 10,908 $ 2,394,894
Equity loans
Performing $ 11,894 $ 10,684 $ 8,624 $ 3,960 $ 3,242 $ 130,600 $ - $ - $ 169,004
Nonperforming 789 375 484 134 - 8,976 - - 10,758
Total equity loans
$ 12,683 $ 11,059 $ 9,108 $ 4,094 $ 3,242 $ 139,576 $ - $ - $ 179,762
Credit card
Performing $ - $ - $ - $ - $ - $ - $ 859,749 $ - $ 859,749
Nonperforming - - - - - - 21,953 - 21,953
Total credit card $ - $ - $ - $ - $ - $ - $ 881,702 $ - $ 881,702
Consumer direct
Performing $ 547,417 $ 426,921 $ 349,518 $ 97,085 $ 43,170 $ 14,617 $ 432,167 $ - $ 1,910,895
Nonperforming 1,220 3,878 7,995 2,325 642 189 2,579 - 18,828
Total consumer direct
$ 548,637 $ 430,799 $ 357,513 $ 99,410 $ 43,812 $ 14,806 $ 434,746 $ - $ 1,929,723
Consumer indirect
Performing
$ 1,817,720 $ 1,112,510 $ 745,483 $ 305,658 $ 92,924 $ 73,051 $ - $ - $ 4,147,346
Nonperforming
1,821 6,759 10,116 5,791 3,076 2,216 - - 29,779
Total consumer indirect
$ 1,819,541 $ 1,119,269 $ 755,599 $ 311,449 $ 96,000 $ 75,267 $ - $ - $ 4,177,125
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
The following tables present an aging analysis of the Company’s past due loans, excluding loans classified as held for sale.
December 31, 2020
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
$ 15,862 $ 22,569 $ 35,472 $ 540,741 $ 17,686 $ 632,330 $ 25,972,812 $ 26,605,142
Real estate - construction 3,595 174 532 25,316 145 29,762 2,468,569 2,498,331
Commercial real estate - mortgage
2,113 2,004 1,104 442,137 910 448,268 13,117,046 13,565,314
Residential real estate - mortgage
49,445 20,694 45,761 235,463 53,380 404,743 12,923,031 13,327,774
Equity lines of credit 11,108 4,305 2,624 42,606 - 60,643 2,334,251 2,394,894
Equity loans 1,417 243 317 10,167 19,606 31,750 148,012 179,762
Credit card 12,147 10,191 21,953 - - 44,291 837,411 881,702
Consumer direct 24,076 17,550 8,741 10,087 23,163 83,617 1,846,106 1,929,723
Consumer indirect 47,174 14,951 5,066 24,713 - 91,904 4,085,221 4,177,125
Total loans $ 166,937 $ 92,681 $ 121,570 $ 1,331,230 $ 114,890 $ 1,827,308 $ 63,732,459 $ 65,559,767
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.
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 generally cover periods of three to six months. In most cases as allowed under the CARES Act, these offers are not classified as TDRs and do not result in loans being placed on nonaccrual
status. For loans that receive a payment deferral or forbearance under these hardship relief programs, the Company continues to accrue interest and recognize interest income during the period of the deferral. Depending on the terms of each program, all or a portion of this accrued interest may be paid directly by the borrower (either during the relief period, at the end of the relief period or at maturity of the loan). For certain programs, the maturity date of the loan may also be extended by the number of payments deferred. Interest income will continue to be recognized at the original contractual interest rate unless that rate is concurrently modified upon entering the relief program (in which case, the modified rate would be used to recognize interest). At December 31, 2020, the Company had deferrals on approximately 7 thousand loans with an amortized cost of $448 million.
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. During the year ended December 31, 2020, $24 million of TDR modifications included an interest rate concession and $219 million of TDR modifications resulted from modifications to the loan’s structure. During the year ended December 31, 2019, $25 million of TDR modifications included an interest rate concession and $73 million of TDR modifications resulted from modifications to the loan’s structure. During the year ended December 31, 2018, $28 million of TDR modifications included an interest rate concession and $119 million of TDR modifications resulted from modifications to the loan’s structure.
The following table presents an analysis of the types of loans that were restructured and classified as TDRs, excluding loans classified as held for sale.
December 31, 2020 December 31, 2019 December 31, 2018
Number of Contracts Post-Modification Outstanding Recorded Investment Number of Contracts Post-Modification Outstanding Recorded Investment Number of Contracts Post-Modification Outstanding Recorded Investment
(Dollars in Thousands)
Commercial, financial and agricultural
27 $ 197,671 15 $ 29,293 8 $ 122,182
Real estate - construction 1 116 1 119 2 307
Commercial real estate - mortgage 12 16,702 7 21,419 4 4,072
Residential real estate - mortgage 40 9,817 118 28,269 73 14,851
Equity lines of credit 14 595 9 478 11 289
Equity loans 12 1,965 17 1,141 25 2,687
Credit card - - - - - -
Consumer direct 198 16,847 286 15,583 16 2,158
Consumer indirect - - 154 1,878 - -
The impact to the allowance for loan losses related to modifications classified as TDRs was approximately $(7.0) million, $21.0 million and $11.2 million for the years ended December 31, 2020, 2019 and 2018, 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 table excludes loans classified as held for sale as of period-end and includes loans no longer in default as of year-end.
Years Ended December 31,
2020 2019 2018
Number of Contracts Recorded Investment at Default Number of Contracts Recorded Investment at Default Number of Contracts Recorded Investment at Default
(Dollars in Thousands)
Commercial, financial and agricultural 2 $ 16,912 - $ - - $ -
Real estate - construction - - - - - -
Commercial real estate - mortgage - - 1 599 - -
Residential real estate - mortgage 4 893 2 455 7 834
Equity lines of credit 1 65 - - - -
Equity loans 1 270 2 151 6 358
Credit card - - - - - -
Consumer direct 5 235 6 2,757 1 5
Consumer indirect - - - - - -
At December 31, 2020 and 2019, there were $132.5 million and $43.8 million, respectively, of commitments to lend additional funds to borrowers whose terms have been modified in a TDR.
Foreclosure Proceedings
Other real estate owned, a component of other assets in the Company's Consolidated Balance Sheets, totaled $11 million and $22 million at December 31, 2020 and 2019, respectively. Other real estate owned included $6 million and $14 million of foreclosed residential real estate properties at December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, there were $29 million and $57 million, respectively, of loans secured by residential real estate properties for which formal foreclosure proceedings were in process.
(4) Loan Sales and Servicing
Loans held for sale were $237 million and $112 million at December 31, 2020 and 2019, respectively. Loans held for sale at December 31, 2020 and 2019 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.
2020 2019 2018
(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 2,155 1,113,371 293,996
The following table summarizes the Company's sales of loans originated for sale in the secondary market.
2020 2019 2018
(In Thousands)
Residential real estate loans originated for sale in the secondary market sold (1) $ 1,322,648 $ 724,706 $ 625,091
Net gains recognized on sales of residential real estate loans originated for sale in the secondary market (2)
75,634 29,539 18,863
Servicing fees recognized (2) 10,634 10,896 11,213
(1)The Company has retained servicing responsibilities for all loans sold that were originated for sale in the secondary market.
(2)Recorded in mortgage banking income in the Company's Consolidated Statements of Income.
The following table provides the recorded balance of loans sold with retained servicing and the related MSRs.
December 31, 2020 December 31, 2019
(In Thousands)
Recorded balance of residential real estate mortgage loans sold with retained servicing (1)
$ 4,425,180 $ 4,534,202
MSRs (2) 30,665 42,022
(1)These loans are not included in loans on the Company's Consolidated Balance Sheets.
(2)Recorded under the fair value method and included in other assets on the Company's Consolidated Balance Sheets.
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.
Years Ended December 31,
2020 2019 2018
(In Thousands)
Carrying value, at beginning of year $ 42,022 $ 51,539 $ 49,597
Additions 11,796 6,639 6,874
Increase (decrease) in fair value:
Due to changes in valuation inputs or assumptions (13,465) (7,552) 6,985
Due to other changes in fair value (1) (9,688) (8,604) (11,917)
Carrying value, at end of year $ 30,665 $ 42,022 $ 51,539
(1)Represents the realization of expected net servicing cash flows, expected borrower repayments and the passage of time.
See Note 19, Fair Value Measurements, for additional disclosures related to the assumptions and estimates used in determining fair value of residential MSRs.
At December 31, 2020 and 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:
December 31,
2020 2019
(Dollars in Thousands)
Fair value of MSRs $ 30,665 $ 42,022
Composition of residential loans serviced for others:
Fixed rate mortgage loans 98.5 % 98.1 %
Adjustable rate mortgage loans 1.5 1.9
Total 100.0 % 100.0 %
Weighted average life (in years) 3.6 4.6
Prepayment speed: 30.4 % 16.9 %
Effect on fair value of a 10% increase (1,620) (2,906)
Effect on fair value of a 20% increase (3,585) (5,043)
Weighted average option adjusted spread 6.2 % 6.4 %
Effect on fair value of a 10% increase (656) (1,159)
Effect on fair value of a 20% increase (1,285) (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 and should not be considered to 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 factor may result in changes in another, which may magnify or counteract the effect of the change.
(5) Premises and Equipment
A summary of the Company’s premises and equipment is presented below.
December 31,
2020 2019
(In Thousands)
Land $ 295,915 $ 297,039
Buildings 588,031 580,911
Furniture, fixtures and equipment 460,987 425,794
Software 1,142,740 1,035,892
Leasehold improvements 205,865 203,776
Construction / projects in progress 117,154 128,816
2,810,692 2,672,228
Less: Accumulated depreciation and amortization 1,755,167 1,584,530
Total premises and equipment $ 1,055,525 $ 1,087,698
The Company recognized $184.2 million, $189.0 million and $198.4 million of depreciation expense related to the above premises and equipment for the years ended December 31, 2020, 2019 and 2018, respectively.
(6) Leases
The following table summarizes the Company’s lease portfolio classification and respective right-of-use asset balances and lease liability balances which are included in other assets and accrued expenses and other liabilities, respectively, on the Company’s Consolidated Balance Sheets.
Finance Operating Total
(In Thousands)
December 31, 2020
Right-of-use asset $ 7,243 $ 264,111 $ 271,354
Lease liability balance 10,635 305,802 316,437
December 31, 2019
Right-of-use asset $ 8,566 $ 272,279 $ 280,845
Lease liability balance 12,339 313,398 325,737
The table below presents information about the Company's total lease costs which include amounts recognized on the Company’s Consolidated Statements of Income during the period.
December 31,
2020 2019
(In Thousands)
Interest on lease liabilities $ 529 $ 608
Amortization of right-of-use assets 1,323 1,323
Finance lease cost 1,852 1,931
Operating lease cost 48,418 48,316
Variable lease cost 16,757 16,537
Sublease income (6,764) (6,812)
Total lease cost $ 60,263 59,972
The Company incurred lease expense of $86.8 million for the year ended December 31, 2018. The Company received lease income of $7.7 million for the year December 31, 2018 related to space leased to third parties.
The table below presents supplemental cash flow information arising from lease transactions and noncash information on lease liabilities arising from obtaining right-of-use assets.
December 31,
2020 2019
(In Thousands)
Cash paid for amounts included in measurement of liabilities
Operating cash flows from operating leases $ 56,796 $ 54,020
Operating cash flows from finance leases 529 608
Financing cash flows from finance leases 1,704 1,589
Right-of-use assets obtained in exchange for lease obligations
Operating leases 38,537 35,315
Finance leases - -
The weighted-average remaining lease term and discount rates at December 31, 2020 were as follows:
Finance Operating Total
Weighted-average remaining lease term 8.0 years 9.3 years 9.2 years
Weighted-average discount rate 4.6 % 3.1 % 3.1 %
The following table provides the annual undiscounted future minimum payments under finance and noncancellable operating leases at December 31, 2020:
Finance Operating Total
(In Thousands)
2021 $ 2,143 $ 56,251 $ 58,394
2022 1,923 53,147 55,070
2023 1,501 47,097 48,598
2024 1,410 38,116 39,526
2025 1,204 29,986 31,190
Thereafter 4,492 127,372 131,864
Total $ 12,673 $ 351,969 $ 364,642
At December 31, 2020 the Company had no additional operating or finance leases that had not yet commenced that would create significant rights and obligations for the Company as a lessee.
The table below presents a reconciliation of the undiscounted cash flows to the finance lease liabilities and operating lease liabilities.
December 31, 2020
Finance Operating Total
(In Thousands)
Total undiscounted lease liability $ 12,673 $ 351,969 $ 364,642
Less: imputed interest 2,038 46,167 48,205
Total discounted lease liability $ 10,635 $ 305,802 $ 316,437
(7) 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 December 31, 2020
Goodwill 9,835,400
Accumulated impairment losses (7,507,104)
Goodwill, net at December 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 December 31, 2020 and 2019, the goodwill, net of accumulated impairment losses, attributable to each of the Company’s three identified reporting units is as follows:
Years Ended December 31,
2020 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
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 Company's annual goodwill impairment test is performed as of October 31 each year. The Company elected to perform a qualitative assessment to determine whether it is more likely than not that the fair value of the entity (or the reporting unit) is less than its carrying amount, including goodwill. In performing this qualitative assessment, the Company evaluated events and circumstances since the last quantitative impairment test performed as of March 31, 2020, macroeconomic conditions, banking industry and market conditions, and key financial metrics of the Company as well as reporting unit and overall Company performance. After assessing the totality of the events and circumstances, the Company determined it was not more likely than not that the fair values of the Company's three reporting units with goodwill were greater than their respective carrying amounts, and therefore, a quantitative goodwill impairment test was not deemed necessary.
Additionally, on a quarterly basis, the Company evaluates whether a triggering event has occurred. During the three months ended March 31, 2020, the Company determined that a triggering event had occurred due to the COVID-19 pandemic and its impact on the economic environment and the Company's financial performance. The Company elected to perform a quantitative impairment test. The results of 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 to financial projections that resulted in the fair value of the reporting units being less than the carrying value of the reporting units.
The estimated fair value of the reporting units were determined using a blend of both income and market approaches.
For the income approach, estimated future cash flows and terminal values are discounted. 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.
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 recognized goodwill impairment of $470 million within the Corporate and Investment Banking reporting unit during the year ended December 31, 2019 and no impairment in the year ended December 31, 2018.
Through December 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.
For the quarters ended June 30, 2020 and September 30, 2020, the Company concluded that a trigger event had not occurred as events or circumstances had not changed that indicated that the fair value of the entity (or the reporting unit) may be below its carrying amount since March 31, 2020 based on those contemplated when impairment was recorded. Consideration of events or circumstances are similar to those evaluated in the qualitative assessment described above.
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.
(8) Deposits
Time deposits of $250,000 or less totaled $3.1 billion at December 31, 2020, while time deposits of more than $250,000 totaled $1.6 billion. At December 31, 2020, the scheduled maturities of time deposits were as follows.
(In Thousands)
2021 $ 4,193,411
2022 334,089
2023 97,390
2024 29,570
2025 25,869
Thereafter 4,700
Total $ 4,685,029
At December 31, 2020 and 2019, demand deposit overdrafts reclassified to loans totaled $13 million and $17 million, respectively. In addition to the securities and loans the Company has pledged as collateral to secure public
deposits and FHLB advances at December 31, 2020, the Company also had $6.3 billion of standby letters of credit issued by the FHLB to secure public deposits.
(9) Short-Term Borrowings
The short-term borrowings table below shows the distribution of the Company’s short-term borrowed funds.
Ending Balance Ending Average Interest Rate Average Balance Maximum Outstanding Balance
(Dollars in Thousands)
As of and for the year ended
December 31, 2020
Securities sold under agreements to repurchase $ 184,478 0.24 % $ 1,249,629 $ 1,050,182
Other short-term borrowings - - 12,158 20,031
Total short-term borrowings $ 184,478 $ 1,261,787 $ 1,070,213
As of and for the year ended
December 31, 2019
Federal funds purchased $ - - % $ 746 $ 5,060
Securities sold under agreements to repurchase 173,028 1.70 857,176 1,198,822
Total 173,028 857,922 1,203,882
Other short-term borrowings - - 14,963 69,446
Total short-term borrowings $ 173,028 $ 872,885 $ 1,273,328
(10) FHLB and Other Borrowings
The following table details the Company’s FHLB advances and other borrowings including maturities and interest rates as of December 31, 2020.
December 31,
Maturity Dates 2020 2019
(In Thousands)
FHLB advances:
LIBOR-based floating rate (weighted average rate of 0.85%)
2021 $ 120,000 $ 120,000
Fixed rate (weighted average rate of 3.30%)
2021-2025
59,657 59,892
Total FHLB advances 179,657 179,892
Senior notes and subordinated debentures:
2.88% senior notes
2022 750,000 750,000
3.50% senior notes
2021 700,000 700,000
2.50% senior notes
2024 600,000 600,000
0.95% senior notes
2021 450,000 450,000
3.88% subordinated debentures
2025 700,000 700,000
5.50% subordinated debentures
2020 - 227,764
5.90% subordinated debentures
2026 71,086 71,086
Fair value of hedged senior notes and subordinated debentures
108,191 26,975
Net unamortized discount (10,442) (15,673)
Total senior notes and subordinated debentures
3,368,835 3,510,152
Total FHLB and other borrowings $ 3,548,492 $ 3,690,044
In August 2019, the Bank issued $600 million aggregate principal amount of its 2.50% unsecured senior notes due 2024.
The following table presents maturity information for the Company’s FHLB and other borrowings, including the fair value of hedged senior notes and subordinated debentures as well as unamortized discounts and premiums, as of December 31, 2020.
FHLB Advances Senior Notes and Subordinated Debentures
(In Thousands)
Maturing:
2021 $ 120,000 $ 1,157,419
2022 - 766,723
2023 - -
2024 55,054 620,729
2025 4,603 741,554
Thereafter
- 82,410
Total
$ 179,657 $ 3,368,835
(11) Shareholder's Equity
Series A Preferred Stock
In December 2015, the Company completed the sale of 1,150 shares of its Floating Non-Cumulative Perpetual Preferred Stock, Series A at a per share price of $200,000 to BBVA. As the sole holder of the Series A Preferred Stock, BBVA will be entitled to receive dividend payments only when, and if declared by the Company’s Board of Directors or a duly authorized committee thereof. Any such dividends will be payable from the date of original issue at a floating rate per annum equal to the three-month U.S. dollar LIBOR as determined on the relevant dividend determination date plus 5.24%. Any such dividends will be payable on a non-cumulative basis, quarterly in arrears on March 1, June 1, September 1 and December 1, commencing March 1, 2016. Payment of dividends on the Series A Preferred Stock is subject to certain legal, regulatory and other restrictions. Redemption is solely at the Company's option. The Company may, at its option, redeem the Series A Preferred Stock (i) in whole or in part, from time to time, on any dividend payment date on or after December 1, 2022 or (ii) in whole but not in part at any time within 90 days of certain changes to regulatory capital requirements.
At both December 31, 2020 and 2019, the carrying amount of the Series A Preferred Stock, including related surplus, net of issuance costs was approximately $229 million.
Class B Preferred Stock
In December 2000, a subsidiary of the Bank issued $21 million of Class B Preferred Stock. The Preferred Stock outstanding was approximately $21 million and $22 million at December 31, 2020 and 2019, respectively, and is classified as noncontrolling interests on the Company’s Consolidated Balance Sheets. The Preferred Stock dividends are preferential, non-cumulative and payable semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 2001, at a rate per annum equal to 9.875% of the liquidation preference of $1,000 per share when and if declared by the board of directors of the subsidiary, in its sole discretion, out of funds legally available for such payment.
The Preferred Stock is redeemable for cash, at the option of the subsidiary, in whole or in part, at any time on or after June 15, 2021. Prior to June 15, 2021, the Preferred Stock is not redeemable, except that prior to such date, the Preferred Stock may be redeemed for cash, at the option of the subsidiary, in whole but not in part, only upon the occurrence of certain tax or regulatory events. Any such redemption is subject to the prior approval of the Federal Reserve. The Preferred Stock is not redeemable at the option of the holders thereof at any time.
(12) 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 (loss).
December 31, 2020
Pretax Tax Expense/ (Benefit) After-tax
(In Thousands)
Other comprehensive income:
Unrealized holding gains arising during period from debt securities available for sale
$ 151,371 $ 35,968 $ 115,403
Less: reclassification adjustment for net gains on sale of debt securities in net income
22,616 5,396 17,220
Net change in unrealized gains on debt securities available for sale
128,755 30,572 98,183
Change in unamortized net holding gains on debt securities held to maturity
8,505 2,066 6,439
Less: non-credit related impairment on debt securities held to maturity
- - -
Change in unamortized non-credit related impairment on debt securities held to maturity
636 162 474
Net change in unamortized holding gains on debt securities held to maturity
9,141 2,228 6,913
Unrealized holding gains arising during period from cash flow hedge instruments
281,512 66,647 214,865
Change in defined benefit plans
13,458 3,242 10,216
Other comprehensive income
$ 432,866 $ 102,689 $ 330,177
December 31, 2019
Pretax Tax Expense/ (Benefit) After-tax
(In Thousands)
Other comprehensive income:
Unrealized holding gains arising during period from debt securities available for sale
$ 208,725 $ 49,465 $ 159,260
Less: reclassification adjustment for net gains on sale of debt securities in net income
29,961 7,104 22,857
Net change in unrealized gains on debt securities available for sale
178,764 42,361 136,403
Change in unamortized net holding gains on debt securities held to maturity
10,144 2,350 7,794
Less: non-credit related impairment on debt securities held to maturity
108 26 82
Change in unamortized non-credit related impairment on debt securities held to maturity
781 174 607
Net change in unamortized holding gains on debt securities held to maturity 10,817 2,498 8,319
Unrealized holding gains arising during period from cash flow hedge instruments
113,359 27,049 86,310
Change in defined benefit plans
(12,932) (3,112) (9,820)
Other comprehensive income
$ 290,008 $ 68,796 $ 221,212
December 31, 2018
Pretax Tax Expense/ (Benefit) After-tax
(In Thousands)
Other comprehensive income:
Unrealized holding losses arising during period from debt securities available for sale
$ (2,925) $ (797) $ (2,128)
Less: reclassification adjustment for net gains on sale of debt securities in net income
- - -
Net change in unrealized losses on debt securities available for sale
(2,925) (797) (2,128)
Change in unamortized net holding gains on debt securities held to maturity
9,120 2,104 7,016
Unamortized unrealized net holding losses on debt securities available for sale transferred to debt securities held to maturity
(39,904) (9,417) (30,487)
Less: non-credit related impairment on debt securities held to maturity
397 94 303
Change in unamortized non-credit related impairment on debt securities held to maturity
1,036 237 799
Net change in unamortized holding losses on debt securities held to maturity
(30,145) (7,170) (22,975)
Unrealized holding gains arising during period from cash flow hedge instruments 46,406 15,466 30,940
Change in defined benefit plans
6,142 1,409 4,733
Other comprehensive income
$ 19,478 $ 8,908 $ 10,570
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 (loss) before reclassifications 159,260 83,903 - (82) 243,081
Amounts reclassified from accumulated other comprehensive (loss) income (15,063) 2,407 (9,820) 607 (21,869)
Net current period other comprehensive income (loss)
144,197 86,310 (9,820) 525 221,212
Balance, December 31, 2019 $ (40,080) $ 91,445 $ (46,666) $ (5,771) $ (1,072)
Balance, December 31, 2019 $ (40,080) $ 91,445 $ (46,666) $ (5,771) $ (1,072)
Other comprehensive income before reclassifications 115,403 310,170 - - 425,573
Amounts reclassified from accumulated other comprehensive income (loss)
(10,781) (95,305) 10,216 474 (95,396)
Net current period other comprehensive income 104,622 214,865 10,216 474 330,177
Balance, December 31, 2020 $ 64,542 $ 306,310 $ (36,450) $ (5,297) $ 329,105
(1)Related to the Company's adoption of ASU 2017-12 and ASU 2018-02 on January 1, 2019. See Note 1, Summary of Significant Accounting Policies, for additional information.
The following table presents information on reclassifications out of accumulated other comprehensive income.
Details About Accumulated Other Comprehensive Income Components Amounts Reclassified From Accumulated Other Comprehensive Income (1)
Consolidated Statement of Income Caption
December 31, 2020 December 31, 2019 December 31, 2018
(In Thousands)
Unrealized Gains (Losses) on Debt Securities Available for Sale and Transferred to Held to Maturity
$ 22,616 $ 29,961 $ - Investment securities gains, net
(8,505) (10,144) (9,120) Interest on debt securities held to maturity
14,111 19,817 (9,120)
(3,330) (4,754) 2,104 Income tax (expense) benefit
$ 10,781 $ 15,063 $ (7,016) Net of tax
Accumulated Gains (Losses) on Cash Flow Hedging Instruments
$ 127,716 $ (2,214) $ (45,027) Interest and fees on loans
(2,758) (948) (1,288) Interest on FHLB and other borrowings
124,958 (3,162) (46,315)
(29,653) 755 10,981 Income tax (expense) benefit
$ 95,305 $ (2,407) $ (35,334) Net of tax
Defined Benefit Plan Adjustment
$ (13,458) $ 12,932 $ (6,142) (2)
3,242 (3,112) 1,409 Income tax benefit (expense)
$ (10,216) $ 9,820 $ (4,733) Net of tax
Unamortized Impairment Losses on Debt Securities Held to Maturity
$ (636) $ (781) $ (1,036) Interest on debt securities held to maturity
162 174 237 Income tax benefit
$ (474) $ (607) $ (799) Net of tax
(1)Amounts in parentheses indicate debits to the 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, for additional details).
(13) Derivatives and Hedging
The Company is a party to derivative instruments in the normal course of business to meet financing needs of its customers and reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. The Company has made an accounting policy decision to not offset derivative fair value amounts under master netting agreements. See Note 1, Summary of Significant Accounting Policies, 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 Consolidated Balance Sheets on a gross basis.
December 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 $ 3,496,086 $ 11,635 $ 748 $ 3,623,950 $ 10,633 $ 354
Total fair value hedges 11,635 748 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 - 2,108 120,000 - 2,864
Foreign currency contracts:
Forwards related to currency fluctuations 4,102 - 19 2,597 102 -
Total cash flow hedges - 2,127 102 2,864
Total derivatives designated as hedging instruments $ 11,635 $ 2,875 $ 10,735 $ 3,218
Free-standing derivatives not designated as hedging instruments:
Interest rate contracts:
Forward contracts related to held for sale mortgages $ 861,061 $ 1,184 $ 5,193 $ 289,990 $ 148 $ 514
Option contracts related to mortgage servicing rights - - - 60,000 38 -
Interest rate lock commitments 520,481 17,897 - 146,941 3,088 -
Equity contracts:
Purchased equity option related to equity-linked CDs 40,253 574 - 152,130 4,460 -
Written equity option related to equity-linked CDs 32,507 - 468 128,620 - 3,765
Foreign exchange contracts:
Forwards related to commercial loans 578,484 1,635 7,424 443,493 167 3,872
Spots related to commercial loans 47,564 124 38 48,626 7 68
Swap associated with sale of Visa, Inc. Class B shares 189,352 - 6,517 161,904 - 5,904
Futures contracts (3) 200,000 - - 2,110,000 - -
Trading account assets and liabilities:
Interest rate contracts for customers 38,305,700 616,566 128,831 35,503,973 313,573 97,881
Foreign exchange contracts for customers 1,448,123 36,741 34,598 1,039,507 22,766 20,678
Total trading account assets and liabilities 653,307 163,429 336,339 118,559
Total free-standing derivative instruments not designated as hedging instruments
$ 674,721 $ 183,069 $ 344,247 $ 132,682
(1)Derivative assets, except for trading account assets that are recorded as a component of trading account assets on the Consolidated Balance Sheets, are recorded in other assets on the Company’s Consolidated Balance Sheets.
(2)Derivative liabilities are recorded in accrued expenses and other liabilities on the Company’s Consolidated Balance Sheets.
(3)Changes in fair value are cash settled daily; therefore, there is no ending balance at any given reporting period.
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 the change in fair value of the derivative instrument. See Note 1, Summary of Significant Accounting Policies, for additional information on the Company’s accounting policies related to derivative instruments and hedging activities.
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 generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date.
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 years ended December 31, 2020, 2019 and 2018 related to hedged firm commitments no longer qualifying as a fair value hedge. At December 31, 2020, the fair value hedges had a weighted average expected remaining term of 2.5 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 the 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 (loss) because of the discontinuance of cash flow hedges related to certain forecasted transactions that are probable of not occurring for the years ended December 31, 2020, 2019 and 2018.
At December 31, 2020, cash flow hedges not terminated had a net fair value of $(2) million and a weighted average life of 2.2 years. Net gains of $174.5 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 4.4 years.
The following table presents the effect of hedging derivative instruments on the Company’s Consolidated Statements of Income.
Interest Income Interest Expense
Interest and fees on loans Interest on FHLB and other borrowings
(In Thousands)
Year Ended December 31, 2020
Total amounts presented in the consolidated statements of income
$ 2,656,786 $ 71,848
Gains (losses) on fair value hedging relationships:
Interest rate contracts:
Amounts related to interest settlements and amortization on derivatives
$ - $ 35,086
Recognized on derivatives
- 86,244
Recognized on hedged items
- (81,995)
Net income (expense) recognized on fair value hedges
$ - $ 39,335
Gain (losses) on cash flow hedging relationships: (1)
Interest rate contracts:
Realized gain (losses) reclassified from AOCI into net income (2) $ 127,716 $ (2,758)
Net income (expense) recognized on cash flow hedges
$ 127,716 $ (2,758)
Year Ended December 31, 2019
Total amounts presented in the consolidated statements of income
$ 3,097,640 $ 136,164
Gains (losses) on fair value hedging relationships:
Interest rate contracts:
Amounts related to interest settlements and amortization on derivatives
$ - $ (2,659)
Recognized on derivatives
- 54,504
Recognized on hedged items
- (51,682)
Net income (expense) recognized on fair value hedges
$ - $ 163
Gain (losses) on cash flow hedging relationships: (1)
Interest rate contracts:
Realized losses reclassified from AOCI into net income (2)
$ (2,214) $ (948)
Net income (expense) recognized on cash flow hedges
$ (2,214) $ (948)
Year Ended December 31, 2018
Total amounts presented in the consolidated statements of income
$ 2,914,269 $ 130,372
Gains (losses) on fair value hedging relationships:
Interest rate contracts:
Amounts related to interest settlements and amortization on derivatives
$ - $ 3,510
Recognized on derivatives
- (19,952)
Recognized on hedged items
- 19,124
Net income (expense) recognized on fair value hedges
- 2,682
Gain (losses) on cash flow hedging relationships: (1)
Interest rate contracts:
Realized gains (losses) reclassified from AOCI into net income (2)
$ (45,027) $ (1,288)
Net income (expense) recognized on cash flow hedges
$ (45,027) $ (1,288)
(1)See Note 12, Comprehensive Income, for gain or loss recognized for cash flow hedges in accumulated other comprehensive income.
(2)Pre-tax
The following table presents 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 Consolidated Balance Sheets in fair value hedging relationships.
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)
December 31, 2020
FHLB and other borrowings $ 3,260,644 $ 107,023 $ 1,168
December 31, 2019
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 as part of the Company’s overall risk management strategy or to facilitate client needs. Economic hedges are those that are not designated 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 also enters into a variety of interest rate contracts and foreign exchange contracts in its trading activities. The primary purpose for using these derivative instruments in the trading account is to facilitate customer transactions. The trading interest rate contract portfolio is actively managed and hedged with similar products to limit market value risk of the portfolio. Changes in the estimated fair value of contracts in the trading account along with the related interest settlements on the contracts are recorded in noninterest income as corporate and correspondent investment sales in the Company’s Consolidated Statements of Income.
The Company enters into forward and option contracts to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. Revaluation gains and losses from free-standing derivatives related to mortgage banking activity are recorded as a component of mortgage banking income in the Company’s Consolidated Statements of Income.
Interest rate lock commitments issued on residential mortgage loan commitments that will be held for resale are also considered free-standing derivative instruments, and the interest rate exposure on these commitments is economically hedged primarily with forward contracts. Revaluation gains and losses from free-standing derivatives related to mortgage banking activity are recorded as a component of mortgage banking income in the Company’s Consolidated Statements of Income.
In conjunction with the sale of its Visa, Inc. Class B shares in 2009, the Company entered into a total return swap in which the Company will make or receive payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares. This total return swap is accounted for as a free-standing derivative.
The Company offers its customers equity-linked CDs that have a return linked to individual equities and equity indices. Under appropriate accounting guidance, a CD that pays interest based on changes in an equity index is a hybrid instrument that requires separation into a host contract (the CD) and an embedded derivative contract (written equity call option). The Company has entered into an offsetting derivative contract in order to economically hedge the exposure related to the issuance of equity-linked CDs. Both the embedded derivative and derivative contract entered into by the Company are classified as free-standing derivative instruments.
The Company also enters into foreign currency contracts to hedge its exposure to fluctuations in foreign currency exchange rates due to its funding of commercial loans in foreign currencies.
The net gains and losses recorded in the Company’s Consolidated Statements of Income from free-standing derivative instruments not designated as hedging instruments are summarized in the following table.
Gain (Loss) for the Years Ended
December 31,
Consolidated Statements of Income Caption 2020 2019 2018
(In Thousands)
Futures contracts Mortgage banking income and corporate and correspondent investment sales
$ (779) $ (1,288) $ (194)
Interest rate contracts:
Interest rate lock commitments Mortgage banking income 14,809 1,076 (404)
Option contracts related to mortgage servicing rights Mortgage banking income 1,528 929 (38)
Forward contracts related to residential mortgage loans held for sale Mortgage banking income (3,643) 469 (790)
Interest rate contracts for customers Corporate and correspondent investment sales
30,347 24,128 35,326
Equity contracts:
Purchased equity option related to equity-linked CDs
Other expense (3,886) (9,725) (27,144)
Written equity option related to equity-linked CDs
Other expense 3,296 8,669 24,524
Foreign currency contracts:
Forward and swap contracts related to commercial loans Other income (25,561) (275) 36,353
Spot contracts related to commercial loans
Other income 6,439 1,542 (3,898)
Foreign currency exchange contracts for customers
Corporate and correspondent investment sales
16,642 15,404 16,232
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 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 and foreign currency 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 December 31, 2020, interest rate swap agreements and options classified as trading were substantially matched. The Company had credit risk of $653 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 material net credit losses associated with derivative instruments classified as trading for the years ended December 31, 2020,
2019 and 2018. At December 31, 2020 and 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 have credit risk of $12 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 years ended December 31, 2020, 2019 and 2018. At December 31, 2020 and 2019, there were no nonperforming derivative positions classified as nontrading.
As of December 31, 2020 and 2019, the Company had recorded the right to reclaim cash collateral of $199 million and $150 million, respectively, within other assets on the Company’s Consolidated Balance Sheets and had recorded the obligation to return cash collateral of $14 million and $12 million, respectively, within deposits on the Company’s Consolidated Balance Sheets.
Contingent Features
Certain of the Company’s derivative instruments contain provisions that require the Company’s debt to 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 December 31, 2020 was $66 million for which the Company has collateral requirements of $64 million in the normal course of business. If the credit-risk-related contingent features underlying these agreements had been triggered on December 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.
The following 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 Consolidated Balance Sheets Net Amount Presented in the Consolidated Balance Sheets Financial Instruments Collateral Received/ Pledged (1) Cash Collateral Received/ Pledged (1) Net Amount
(In Thousands)
December 31, 2020
Derivative financial assets:
Subject to a master netting arrangement
$ 38,554 $ - $ 38,554 $ - $ 3,771 $ 34,783
Not subject to a master netting arrangement
647,802 - 647,802 - - 647,802
Total derivative financial assets
$ 686,356 $ - $ 686,356 $ - $ 3,771 $ 682,585
Derivative financial liabilities:
Subject to a master netting arrangement
$ 153,524 $ - $ 153,524 $ - $ 153,524 $ -
Not subject to a master netting arrangement
32,420 - 32,420 - - 32,420
Total derivative financial liabilities
$ 185,944 $ - $ 185,944 $ - $ 153,524 $ 32,420
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.
(14) Securities Financing Activities
Netting of Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
The Company has various financial asset 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 13, 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, 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 Consolidated Balance Sheets Net Amount Presented in the Consolidated Balance Sheets Financial Instruments Collateral Received/ Pledged (1) Cash Collateral Received/ Pledged (1) Net Amount
(In Thousands)
December 31, 2020
Securities purchased under agreement to resell:
Subject to a master netting arrangement
$ 986,290 $ 798,097 $ 188,193 $ 188,193 $ - $ -
Securities sold under agreements to repurchase:
Subject to a master netting arrangement
$ 982,575 $ 798,097 $ 184,478 $ 184,478 $ - $ -
December 31, 2019
Securities purchased under agreement 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)
December 31, 2020
Securities sold under agreements to repurchase:
U.S. Treasury and other U.S. government agencies securities
$ 880,200 $ - $ 102,375 $ - $ 982,575
Mortgage-backed securities
- - - - -
Total
$ 880,200 $ - $ 102,375 $ - $ 982,575
December 31, 2019
Securities sold under agreements to repurchase:
U.S. Treasury and other U.S. government agencies securities $ 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 mitigates the risk by monitoring the liquidity and credit quality of the collateral, as well as the maturity profile of the transactions.
At December 31, 2020, the fair value of collateral received related to securities purchased under agreements to resell was $966 million and the fair value of collateral pledged for securities sold under agreements to repurchase was $960 million. 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.
(15) 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.
December 31,
2020 2019
(In Thousands)
Commitments to extend credit $ 28,251,150 $ 27,725,965
Standby and commercial letters of credit 853,450 996,830
Commitments to extend credit are agreements to lend to customers on certain terms and conditions as long as all conditions are satisfied and 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 both December 31, 2020 and 2019, the recorded amount of these deferred fees was $7 million. The Company holds various assets as collateral supporting those commitments for which collateral is deemed necessary. At December 31, 2020, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit was $853 million. At December 31, 2020 and 2019, the Company had reserves related to letters of credit and unfunded commitments recorded in accrued expenses and other liabilities on the Company’s Consolidated Balance Sheet of $150 million and $67 million, respectively. See Note 1, Summary of Significant Accounting Policies, 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 FNMA securitizations. At both December 31, 2020 and 2019, the amount of potential recourse was $18 million of which the Company had reserved $693 thousand which is recorded in accrued expenses and other liabilities on its Consolidated Balance Sheets for the respective years.
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 warranties would materially change the financial condition or results of operations of the Company. At December 31, 2020 and 2019, the Company recorded $2.7 million and $1.2 million, respectively, of reserves in accrued expenses and other liabilities on the Company’s Consolidated Balance Sheets related to potential losses from loans sold.
Low Income Housing Tax Credit Partnerships
The Company has committed to make certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments will be to facilitate the sale of additional affordable housing product offerings and to assist in achieving goals associated with the Community Reinvestment Act, and to achieve a satisfactory return on capital. The total unfunded commitment associated with these investments at December 31, 2020 and 2019 were $190 million and $171 million, respectively, and were recorded in accrued expenses and other liabilities on the Company’s Consolidated Balance Sheets.
Forward Starting Reverse Repurchase Agreements and Forward Starting Repurchase Agreements.
The Company enters into securities purchased under agreements to resell and securities sold under agreements to repurchase that settle at a future date, generally within three business days. At December 31, 2020 the Company had no forward starting reverse repurchase agreements or forward starting repurchase agreements. The Company had no forward starting reverse repurchase agreements and forwarding starting repurchase agreements of $450 million at December 31, 2019.
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. 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 appealed and on December 14, 2020, the appellate court issued an opinion reversing the jury verdict and entering a plaintiffs take nothing judgment in the Company’s favor on all claims. Plaintiffs are seeking further review of the appellate court’s decision. 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 later amended the complaint to also take issue with BBVA USA’s practice of directing non-citizen applicants to complete the online account origination processes in a physical branch location. Plaintiff alleges that these practices constitute alienage discrimination and violations of California's Unruh Act. BBVA USA’s motion to dismiss was granted on November 2, 2020 and the plaintiffs are pursuing an appeal of that ruling. 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.
In April 2020, BBVA USA was named as a defendant in a lawsuit filed in the United States District Court for the Eastern District of Texas, Marshall Division originally styled Estech Systems, Inc. v. BBVA USA Bancshares, Inc., alleging that BBVA USA has violated intellectual property rights owned by the plaintiff in connection with various patents regarding voice-over-internet protocols (VoIP). The plaintiff alleges that BBVA USA’s use of certain phone systems and technologies violate its claimed patent rights.
The plaintiff seeks unspecified monetary relief. The Company believes there are substantial defenses to these claims and intends to defend them vigorously.
In June 2020, BBVA USA was named as a defendant in a putative class action lawsuit filed in the United States District Court for the Southern District of California styled Sarah Hill v. BBVA USA, challenging BBVA USA’s assessment of certain overdraft fees. The plaintiffs seek unspecified monetary relief. The Company believes there are substantial defenses to these claims and intends to defend them vigorously.
In July 2020, BSI was named as a defendant in a putative class action lawsuit filed in the Supreme Court of the State of New York, County of New York, City of Miami Fire Fighters’ and Police Officers’ Retirement Trust, individually and on behalf of all others similarly situated v. Occidental Petroleum Corporation, et al., wherein the plaintiffs allege that Occidental Petroleum Corporation, 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.
In October 2020, BBVA USA was joined in a Delaware state court action styled Yatra Online v. Ebix, et al., alleging breach of contract and tortious interference with a prospective transaction between Yatra Online and Ebix. The plaintiff seeks unspecified monetary relief. The Company believes there are substantial defenses to these claims and intends to defend them vigorously.
In December 2020, BBVA USA was named as a defendant in a putative class action lawsuit filed in the United States District Court for the Southern District of California styled Eisenberg v. BBVA USA, challenging BBVA USA’s assessment of certain overdraft fees. The plaintiffs seek unspecified monetary relief. The Company believes there are substantial defenses to these claims and intends to defend them vigorously.
In December 2020, 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, Drake v. BBVA USA Bancshares, Inc., et al., wherein the plaintiff alleges 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.
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, 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 December 31, 2020 and 2019 , the Company had accrued legal reserves in the amount of $5 million and $23 million, respectively. 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, if any. 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.” Based on information available at December 31, 2020, management estimates no reasonably possible losses in excess of related reserves. The matters underlying this estimate 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 estimate; therefore, this estimate 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 the IRS for the tax year 2018 and 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. Refer to Note 18, Income Taxes, for additional information on various tax audits.
(16) Regulatory Capital Requirements and Dividends from Subsidiaries
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s Consolidated Financial Statements. Under capital adequacy guidelines, the regulatory framework for prompt corrective action and the Gramm-Leach-Bliley Act, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of each entity's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are also subject to qualitative judgments by the regulators about capital components, risk weightings and other factors.
At December 31, 2020, the Company and the Bank, remain above the applicable U.S. regulatory capital requirements. Under the U.S. Basel III capital rule, the current minimum required regulatory capital ratios are as follows:
CET1 Risk-Based Capital Ratio (1) 7.000 %
Tier 1 Risk-Based Capital Ratio (1) 8.500
Total Risk-Based Capital Ratio (1) 10.500
Tier 1 Leverage Ratio 4.000
(1) The CET1, tier 1 and total capital minimum ratio requirements include a capital conservation buffer of 2.500%.
.
The following table presents the Basel III regulatory capital ratios at December 31, 2020 and 2019 for the Company and the Bank.
Amount Ratios
2020 2019 2020 2019
(Dollars in Thousands)
Risk-based capital
CET1:
BBVA USA Bancshares, Inc. $ 9,086,853 $ 8,615,357 13.28 % 12.49 %
BBVA USA 8,314,129 7,916,278 12.24 11.56
Tier 1:
BBVA USA Bancshares, Inc. 9,316,853 8,849,557 13.61 12.83
BBVA USA 8,314,129 7,920,478 12.24 11.56
Total:
BBVA USA Bancshares, Inc. 10,804,264 10,332,023 15.79 14.98
BBVA USA 9,796,153 9,549,373 14.42 13.94
Leverage:
BBVA USA Bancshares, Inc. 9,316,853 8,849,557 9.07 9.70
BBVA USA 8,314,129 7,920,478 8.32 8.98
Dividends paid by the Bank are the primary source of funds available to the Parent for payment of dividends to its shareholder and other needs. Applicable federal and state statutes and regulations impose restrictions on the amount of dividends that may be declared by the Bank. In addition to the formal statutes and regulations, regulatory authorities also consider the adequacy of each bank’s total capital in relation to its assets, deposits and other such items. Capital adequacy considerations could further limit the availability of dividends from the Bank. The Bank could have paid additional dividends to the Parent in the amount of $2.5 billion while continuing to meet the capital requirements for “well-capitalized” banks at December 31, 2020; however, due to the net earnings restrictions on dividend distributions, the Bank did not have the ability to pay any dividends at December 31, 2020 without regulatory approval.
The Bank is required to maintain cash balances with the Federal Reserve. The average amount of these balances approximated $10.2 billion and $4.5 billion for the years ended December 31, 2020 and 2019, respectively.
(17) Benefit Plans
Defined Benefit Plan
The Company sponsors a defined benefit pension plan that is intended to qualify under the Internal Revenue Code. At the beginning of 2003, the pension plan was closed to new participants, with existing participants being offered the option to remain in the pension plan or move to an employer funded defined contribution plan. Benefits under the pension plan are based on years of service and the employee's highest consecutive five years of compensation during employment.
During 2014, the Company announced to all active participants the sunsetting of the pension plan on December 31, 2017. Beginning on this date, active participants will no longer be credited with future service but rather will be transitioned into the employer funded portion of the Company's defined contribution plan.
The following tables summarize the Company’s defined benefit pension plan.
Obligations and Funded Status
Years Ended December 31,
2020 2019
(In Thousands)
Change in benefit obligation:
Benefit obligation, at beginning of year $ 379,026 $ 334,290
Service cost 600 550
Interest cost 10,497 12,862
Actuarial (gain) loss 36,477 46,375
Benefits paid (16,261) (15,051)
Benefit obligation, at end of year 410,339 379,026
Change in plan assets:
Fair value of plan assets, at beginning of year 361,920 328,795
Actual return on plan assets 54,958 45,176
Employer contribution - 3,000
Benefits paid (16,261) (15,051)
Fair value of plan assets, at end of year 400,617 361,920
Funded status (9,722) (17,106)
Net actuarial loss 33,570 43,125
Net amount recognized $ 23,848 $ 26,019
Amounts recognized on the Company’s Consolidated Balance Sheets consist of:
December 31,
2020 2019
(In Thousands)
Accrued expenses and other liabilities $ (9,722) $ (17,106)
Deferred tax - other assets 7,963 10,264
Accumulated other comprehensive loss 25,607 32,861
Net amount recognized $ 23,848 $ 26,019
The accumulated benefit obligation for the Company’s defined benefit pension plan was $410 million and $379 million at December 31, 2020 and 2019, respectively. The Company anticipates amortizing none of the actuarial loss from accumulated other comprehensive income over the next twelve months.
The components of net periodic benefit cost recognized in the Company’s Consolidated Statements of Income are as follows.
Years Ended December 31,
2020 2019 2018
(In Thousands)
Service cost $ 600 $ 550 $ 509
Interest cost 10,497 12,862 11,565
Expected return on plan assets (9,065) (10,733) (9,529)
Recognized actuarial loss 139 - 259
Net periodic benefit cost $ 2,171 $ 2,679 $ 2,804
The following table provides additional information related to the Company’s defined benefit pension plan.
Years Ended December 31,
2020 2019
(Dollars in Thousands)
Change in defined benefit plan included in other comprehensive income $ (7,254) $9,070
Weighted average assumption used to determine benefit obligation at December 31:
Discount rate 2.45 % 3.24 %
Weighted average assumptions used to determine net pension income for year ended December 31:
Discount rate - benefit obligations 3.24 % 4.23 %
Discount rate - interest cost 2.85 % 3.94 %
Expected return on plan assets 2.55 % 3.33 %
To establish the discount rate utilized, the Company performs an analysis of matching anticipated cash flows for the duration of the plan liabilities to third party forward discount curves. To develop the expected return on plan assets, the Company considers the current level of expected returns on risk free investments (primarily government bonds), the historical level of risk premium associated with other asset classes in which plan assets are invested, and the expectations for future returns of each asset class. The expected return for each asset class is then weighted based on the target asset allocation, and a range of expected return on plan assets is developed. Based on this information, the plan’s Retirement Committee sets the discount rate and expected rate of return assumption.
Future Benefit Payments
The following table summarizes the estimated benefits to be paid in the following periods.
(In Thousands)
2021 $ 17,010
2022 18,366
2023 19,319
2024 20,040
2025 20,707
2026-2030 108,967
The expected benefits above were estimated based on the same assumptions used to measure the Company’s benefit obligation at December 31, 2020 and include benefits attributable to estimated future employee service.
Plan Assets
The Company’s Retirement Committee sets the investment policy for the defined benefit pension plan and reviews investment performance and asset allocation on a quarterly basis. The current asset allocation for the plan is entirely allocated to fixed income securities, including U.S. Treasury and other U.S. government securities, corporate debt securities and municipal debt securities, as well as cash and cash equivalent securities.
The following table presents the fair value of the Company’s defined benefit pension plan assets.
Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs
Fair Value (Level 1) (Level 2) (Level 3)
(In Thousands)
December 31, 2020
Assets:
Cash and cash equivalents $ 11,846 $ 11,846 $ - $ -
Fixed income securities:
U.S. Treasury and other U.S. government agencies 252,954 223,013 29,941 -
Corporate bonds 135,817 - 135,817 -
Total fixed income securities 388,771 223,013 165,758 -
Fair value of plan assets $ 400,617 $ 234,859 $ 165,758 $ -
December 31, 2019
Assets:
Cash and cash equivalents $ 19,137 $ 19,137 $ - $ -
Fixed income securities:
U.S. Treasury and other U.S. government agencies 219,667 194,079 25,588 -
States and political subdivisions - - - -
Corporate bonds 123,116 - 123,116 -
Total fixed income securities 342,783 194,079 148,704 -
Fair value of plan assets $ 361,920 $ 213,216 $ 148,704 $ -
In general, the fair value applied to the Company’s defined benefit pension plan assets is based upon quoted market prices or Level 1 measurements, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use observable market based parameters as inputs, or Level 2 measurements. Level 3 measurements include discounted cash flow analyses based on assumptions that are not readily observable in the market place, such as projections of future cash flows, loss assumptions and discount rates. See Note 19, Fair Value Measurements, for a further discussion of the fair value hierarchy.
Supplemental Retirement Plans
The Company maintains unfunded defined benefit plans for certain key executives that are intended to meet the requirements of Section 409A of the Internal Revenue Code and provide additional retirement benefits not otherwise provided through the Company’s basic retirement benefit plans. These plans had unfunded projected benefit obligations and net plan liabilities of $34 million and $33 million at December 31, 2020 and 2019, respectively, which are reflected on the Company’s Consolidated Balance Sheets as accrued expenses and other liabilities. Net periodic expenses of these plans was $1.8 million for each of the years ended December 31, 2020, 2019, and 2018. At December 31, 2020 and 2019, the Company had $13.5 million and $12.2 million, respectively, recognized in accumulated other comprehensive income, net of tax, related to these plans.
Defined Contribution Plan
The Company sponsors a defined contribution plan comprised of a traditional employee defined contribution component with matching employer contributions and an employer funded defined contribution component. Under the traditional employee portion of the defined contribution plan, employees may contribute up to 75% of their compensation on a pretax basis subject to statutory limits. The Company makes matching contributions equal to 100% of the first 3% of compensation deferred plus 50% of the next 2% of compensation deferred. The Company may also make voluntary non-matching contributions to the plan.
Under the employer funded portion of the defined contribution plan, the Company makes contributions on behalf of certain employees based on pay and years of service. The Company's contributions range from 2% to 4% of the employee's base pay based on the employee's years of service. Participation in this portion of the defined contribution plan was limited to employees hired after January 1, 2002 and those participants in the defined benefit pension plan who, in 2002, chose to forgo future accumulation of benefit service.
In aggregate, the Company recognized $44.3 million, $43.0 million, and $41.3 million of expense recorded in salaries, benefits and commissions in the Company's Consolidated Statements of Income related to this defined contribution plan for the years ended December 31, 2020, 2019, and 2018, respectively.
(18) Income Taxes
Income tax expense consisted of the following:
Years Ended December 31,
2020 2019 2018
(In Thousands)
Current income tax expense:
Federal $ 164,698 $ 131,390 $ 161,375
State 22,774 21,853 28,721
Total 187,472 153,243 190,096
Deferred income tax benefit:
Federal (136,355) (23,335) (1,925)
State (14,104) (3,862) (3,493)
Total (150,459) (27,197) (5,418)
Total income tax expense $ 37,013 $ 126,046 $ 184,678
Income tax expense differed from the amount computed by applying the federal statutory income tax rate to pretax (loss) earnings for the following reasons:
Years Ended December 31,
2020 2019 2018
Amount Percent of Pretax Earnings Amount Percent of Pretax Earnings Amount Percent of Pretax Earnings
(Dollars in Thousands)
Income tax expense at federal statutory rate $ (383,177) 21.0 % $ 58,685 21.0 % $ 199,103 21.0 %
Increase (decrease) resulting from:
Tax-exempt interest income (35,621) 2.0 (41,289) (14.8) (41,272) (4.4)
FDIC insurance 7,340 (0.4) 5,818 2.1 13,782 1.5
Bank owned life insurance (4,231) 0.2 (3,663) (1.3) (3,743) (0.4)
Goodwill impairment 455,827 (25.0) 98,700 35.3 - -
State income tax, net of federal income taxes
4,187 (0.2) 15,217 5.4 18,170 1.9
Revaluation of net deferred tax assets (1) - - - - (8,577) (0.9)
Income tax credits (2) (10,780) 0.6 (10,168) (3.6) 8,133 0.9
Change in valuation allowance 3,622 (0.2) (913) (0.3) 1,017 0.1
Other (154) - 3,659 1.3 (1,935) (0.2)
Income tax expense $ 37,013 (2.0) % $ 126,046 45.1 % $ 184,678 19.5 %
(1) Includes $(5.0) million of benefit related to items in accumulated other comprehensive income in which the related tax effects were originally recognized in other comprehensive income for December 31, 2018.
(2) Includes $11.4 million of expense for December 31, 2018 related to the correction of an error in prior periods that resulted from an incorrect calculation of the proportional amortization of the Company's Low Income Housing Tax Credit investments. See Note 1, Summary of Significant Accounting Policies, for additional details.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below.
December 31,
2020 2019
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 396,342 $ 216,449
Lease ROU liability 72,041 73,958
Accrued expenses 92,179 85,212
Net unrealized losses on investment securities available for sale, hedging instruments and defined benefit plan adjustment
- 289
Other real estate owned 532 941
Nonaccrual interest 27,845 22,737
Federal net operating loss carryforwards 3,956 3,956
Other 30,008 30,689
Gross deferred taxes 622,903 434,231
Valuation allowance (12,210) (8,852)
Total deferred tax assets 610,693 425,379
Deferred tax liabilities:
Premises and equipment 125,095 127,649
Net unrealized gains on securities available for sale, hedging instruments and defined benefit plan adjustment 102,400 -
Lease ROU asset 62,232 64,252
Core deposit and other acquired intangibles 4,633 8,077
Capitalized loan costs 36,959 34,907
Loan valuation 3,973 5,729
Other 13,346 17,038
Total deferred tax liabilities 348,638 257,652
Net deferred tax asset $ 262,055 $ 167,727
A real estate investment subsidiary of the Company has net operating loss carryforwards of approximately $18.8 million at both December 31, 2020 and 2019. These losses begin to expire in 2030. The Company has determined that it is more likely than not the benefit from this deferred tax asset will not be realized in the carryforward period and has recorded a full valuation allowance of approximately $4.0 million against the assets at both December 31, 2020 and 2019.
Additionally, the Company has state net operating loss carryforwards of approximately $175.0 million and $182.0 million at December 31, 2020 and 2019, respectively. These state net operating losses expire in years 2021 through 2039. The Company believes it is more likely than not the benefit from certain state net operating loss carryforwards will not be realized, and, accordingly, has established a valuation allowance associated with these net operating loss carryforwards. The Company had recorded a valuation allowance of approximately $8.3 million and $4.9 million at December 31, 2020 and 2019, respectively, related to these state net operating loss carryforwards.
The following is a tabular reconciliation of the total amounts of the gross unrecognized tax benefits.
Years Ended December 31,
2020 2019 2018
(In Thousands)
Unrecognized income tax benefits, at beginning of year $ 7,269 $ 7,191 $ 14,916
Increases for tax positions related to:
Prior years - - 215
Current year 2,614 2,871 2,887
Decreases for tax positions related to:
Prior years (792) (348) (111)
Current year - - -
Settlement with taxing authorities - - (8,617)
Expiration of applicable statutes of limitation (1,997) (2,445) (2,099)
Unrecognized income tax benefits, at end of year $ 7,094 $ 7,269 $ 7,191
During the years ended December 31, 2020, 2019 and 2018, the Company recognized benefits of $1 thousand, $19 thousand and $772 thousand, respectively, for interest and penalties related to the unrecognized tax benefits noted above. At December 31, 2020 and 2019, the Company had approximately $506 thousand and $507 thousand, respectively, of accrued interest and penalties recognized related to unrecognized tax benefits within accrued expenses and other liabilities. Included in the balance of unrecognized tax benefits at December 31, 2020, 2019 and 2018 were $7.1 million, $7.3 million, and $7.2 million, respectively, of tax benefits that, if recognized after the balance sheet date, would affect the effective tax rate.
The Company and its subsidiaries are routinely examined by various taxing authorities. The following table summarizes the tax years that are either currently under examination or remain open under the statute of limitations and subject to examination by the major tax jurisdictions in which the Company operates:
Jurisdictions Open Tax Years
Federal 2017-2020
Various states (1) 2016-2020
(1)Major state tax jurisdictions include Alabama, California, Texas and New York.
The Company believes that it has adequately reserved on federal and state issues and any variance on final resolution, whether over or under the reserve amount, would be immaterial to the financial statements.
It is reasonably possible that the above unrecognized tax benefits could be reduced by approximately $1 million in 2021 due to statute expiration and audit settlement.
(19) Fair Value Measurements
The Company applies the fair value accounting guidance required under ASC Topic 820 which establishes a framework for measuring fair value. This guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within this fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows.
•Level 1 - Fair value is based on quoted prices in an active market for identical assets or liabilities.
•Level 2 - Fair value is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
•Level 3 - Fair value is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities would include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar pricing techniques based on the Company’s own assumptions about what market participants would use to price the asset or liability.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments under the fair value hierarchy, is set forth below. These valuation methodologies were applied to the Company’s financial assets and financial liabilities carried at fair value. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use observable market based parameters as inputs. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as other unobservable parameters. Any such valuation adjustments are applied consistently over time. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and, therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.
Financial Instruments Measured at Fair Value on a Recurring Basis
Trading account assets and liabilities, securities available for sale, certain mortgage loans held for sale, derivative assets and liabilities, and mortgage servicing rights are recorded at fair value on a recurring basis. The following is a description of the valuation methodologies for these assets and liabilities.
Trading account assets and liabilities and debt securities available for sale - Trading account assets and liabilities and debt securities available for sale consist of U.S. Treasury securities and other U.S. government agency securities, mortgage-backed securities, collateralized mortgage obligations, debt obligations of state and political subdivisions, other debt securities, and derivative contracts.
•U.S. Treasury securities and other U.S. government agency securities are valued based on quoted market prices of identical assets on active exchanges (Level 1 measurements) or are valued based on a market approach using observable inputs such as benchmark yields, reported trades, broker/dealer quotes, benchmark securities, and bids/offers of government-sponsored enterprise securities (Level 2 measurements).
•Mortgage-backed securities are primarily valued using market-based pricing matrices that are based on observable inputs including benchmark To Be Announced security prices, U.S. Treasury yields, U.S. dollar swap yields, and benchmark floating-rate indices. Mortgage-backed securities pricing may also give consideration to pool-specific data such as prepayment history and collateral characteristics. Valuations for mortgage-backed securities are therefore classified as Level 2 measurements.
•Collateralized mortgage obligations are valued using market-based pricing matrices that are based on observable inputs including reported trades, bids, offers, dealer quotes, U.S. Treasury yields, U.S. dollar swap yields, market convention prepayment speeds, tranche-specific characteristics, prepayment history, and collateral characteristics. Fair value measurements for collateralized mortgage obligations are classified as Level 2 measurements.
•Debt obligations of states and political subdivisions are primarily valued using market-based pricing matrices that are based on observable inputs including Municipal Securities Rulemaking Board reported trades, issuer spreads, material event notices, and benchmark yield curves. These valuations are Level 2 measurements.
•Other debt securities consist of foreign and corporate debt. Foreign and corporate debt valuations are based on information and assumptions that are observable in the market place. The valuations for these securities are therefore classified as Level 2 measurements.
•Other derivative assets and liabilities consist primarily of interest rate contracts. The Company’s interest rate contracts are valued utilizing Level 2 observable inputs (yield curves and volatilities) to determine a current market price for each interest rate contract. These valuations are classified as Level 2 measurements.
Loans held for sale - 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.
The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for sale. Both the mortgage loans held for sale and the related forward contracts are classified as Level 2 measurements.
At both December 31, 2020 and 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 Consolidated Statements of Income. Net gains (losses) of $8.9 million, $999 thousand and $596 thousand resulting from changes in fair value of these loans were recorded in noninterest income during the years ended December 31, 2020, 2019, and 2018, respectively.
The Company also had fair value changes on forward contracts related to residential mortgage loans held for sale of approximately $(3.6) million, $469 thousand and $(790) thousand for the years ended December 31, 2020, 2019, and 2018, respectively. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.
The following tables summarize 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)
December 31, 2020
Residential mortgage loans held for sale $ 236,586 $ 223,929 $ 12,657
December 31, 2019
Residential mortgage loans held for sale $ 112,058 $ 108,345 $ 3,713
Derivative assets and liabilities - Derivative assets and liabilities are measured using models that primarily use market observable inputs, such as quoted security prices, and are accordingly classified as Level 2. The derivative assets and liabilities classified within Level 3 of the fair value hierarchy were comprised of interest rate lock commitments that are valued using third-party software that calculates fair market value considering current quoted TBA and other market based prices and then applies closing ratio assumptions based on software-produced pull through ratios that are generated using the Company’s historical fallout activity. Based upon this process, the fair value measurement obtained for these financial instruments is deemed a Level 3 classification. The Company's Secondary Marketing Committee is responsible for the appropriate application of the valuation policies and procedures surrounding the Company’s interest rate lock commitments. Policies established to govern mortgage pipeline risk management activities must be approved by the Company’s Asset Liability Committee on an annual basis.
Other assets - equity securities - A component of other assets measured at fair value on a recurring basis are mutual funds and U.S. government agency equity securities. Mutual funds are valued based on quoted market prices of identical assets trading on active exchanges. These valuations are Level 1 measurements. U.S. government agency equity securities are valued based on quoted market prices of identical assets trading on active exchanges. These valuations thus qualify as Level 1 measurements.
Other assets - MSR - A component of other assets measured at fair value on a recurring basis and classified within Level 3 of the fair value hierarchy are MSRs that are valued through a discounted cash flow analysis using a third-party commercial valuation system. The MSR valuation takes into consideration the objective characteristics of the MSR portfolio, such as loan amount, note rate, service fee, loan term, and common industry assumptions, such as servicing costs, ancillary income, prepayment estimates, earning rates, cost of fund rates, option-adjusted spreads, etc. The Company’s portfolio-specific factors are also considered in calculating the fair value of MSRs to the extent one can reasonably assume a buyer would also incorporate these factors. Examples of such factors are geographical concentrations of the portfolio, liquidity consideration, or additional views of risk not inherently accounted for in prepayment assumptions. Product liquidity and these other risks are generally incorporated through adjustment of discount factors applied to forecasted cash flows. Based on this method of pricing MSRs, the fair value measurement obtained for these financial instruments is deemed a Level 3 classification. The value of the MSR is calculated by a third-party firm that specializes in the MSR market and valuation services. Additionally, the Company obtains a valuation from an independent party to compare for reasonableness. The Company’s Secondary Marketing Committee is responsible for ensuring the appropriate application of valuation, capitalization, and fair value decay policies for the MSR portfolio. The Committee meets at least monthly to review the MSR portfolio.
Other assets - SBIC - A component of other assets measured at fair value on a recurring basis and classified within Level 3 of the fair value hierarchy are SBIC investments. The SBIC investments are valued initially based upon transaction price. 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, and changes in economic conditions affecting the issuer, are used in the determination of estimated fair value.
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
December 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 securities $ 109,142 $ 109,142 $ - $ -
Interest rate contracts 616,566 - 616,566 -
Foreign exchange contracts 36,741 - 36,741 -
Total trading account assets 762,449 109,142 653,307 -
Debt securities available for sale:
U.S. Treasury and other U.S. government agencies 2,146,904 1,694,160 452,744 -
Agency mortgage-backed securities 865,648 - 865,648 -
Agency collateralized mortgage obligations 2,731,731 - 2,731,731 -
States and political subdivisions 636 - 636 -
Total debt securities available for sale 5,744,919 1,694,160 4,050,759 -
Loans held for sale 236,586 - 236,586 -
Derivative assets:
Interest rate contracts 30,716 - 12,819 17,897
Equity contracts 574 - 574 -
Foreign exchange contracts 1,759 - 1,759 -
Total derivative assets 33,049 - 15,152 17,897
Other assets:
Equity securities 14,032 14,032 - -
MSR 30,665 - - 30,665
SBIC 162,578 - - 162,578
Liabilities:
Trading account liabilities:
Interest rate contracts $ 128,831 $ - $ 128,831 $ -
Foreign exchange contracts 34,598 - 34,598 -
Total trading account liabilities 163,429 - 163,429 -
Derivative liabilities:
Interest rate contracts 8,049 - 8,049 -
Equity contracts 468 - 468 -
Foreign exchange contracts 7,481 - 7,481 -
Total derivative liabilities 15,998 - 15,998 -
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 securities $ 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 -
Agency mortgage-backed securities 1,325,857 - 1,325,857 -
Agency 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 -
The following table reconciles 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)
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) 1,076 (16,156) 21,936
Included in other comprehensive income - - -
Purchases, issuances, sales and settlements:
Purchases - - 17,465
Issuances - 6,639 -
Sales - - -
Settlements - - -
Balance, December 31, 2019 $ 3,088 $ 42,022 $ 119,475
Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at December 31, 2019 $ 1,076 $ (16,156) $ 21,936
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) 14,809 (23,153) 27,602
Included in other comprehensive income - - -
Purchases, issuances, sales and settlements:
Purchases - - 15,501
Issuances - 11,796 -
Sales - - -
Settlements - - -
Balance, December 31, 2020 $ 17,897 $ 30,665 $ 162,578
Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at December 31, 2020 $ 14,809 $ (23,153) $ 27,602
(1)Included in noninterest income in the Consolidated Statements of Income.
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 table represents those assets that were subject to fair value adjustments during the years ended December 31, 2020 and 2019 and still held as of the end of the year, and the related losses from fair value adjustments on assets sold during the year as well as assets still held as of the end of the year.
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)
December 31, 2020 (Level 1) (Level 2) (Level 3) December 31, 2020
(In Thousands)
Nonrecurring fair value measurements
Assets:
OREO $ 11,448 $ - $ - $ 11,448 $ (1,139)
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)
December 31, 2019 (Level 1) (Level 2) (Level 3) December 31, 2019
(In Thousands)
Nonrecurring fair value measurements
Assets:
Debt securities held to maturity $ 2,177 $ - $ - $ 2,177 $ (215)
Impaired loans (1) 484 - - 484 (143,024)
OREO 21,583 - - 21,583 (5,614)
(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 measurements.
The tables below present quantitative 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
December 31, 2020 Valuation Technique Unobservable Input(s) (Weighted Average)
(In Thousands)
Recurring fair value measurements:
Interest rate contracts $ 17,897 Discounted cash flow Closing ratios (pull-through) 18.2% - 100.0% (62.5%)
Cap grids 0.3% - 2.6% (1.0%)
Other assets - MSRs 30,665 Discounted cash flow Option adjusted spread 6.0% - 8.3% (6.2%)
Constant prepayment rate or life speed 3.5% - 90.3% (19.9%)
Cost to service $65 - $4,000 ($100)
Other assets - SBIC investments 162,578 Transaction price Transaction price N/A
Nonrecurring fair value measurements:
OREO $ 11,448 Appraised value Appraised value 8.0% (1)
(1)Represents discounts 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 $ 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 discounts 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.
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 are as follows:
December 31, 2020
Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3
(In Thousands)
Financial Instruments:
Assets:
Cash and cash equivalents
$ 14,607,908 $ 14,607,908 $ 14,607,908 $ - $ -
Debt securities held to maturity 10,552,123 10,809,461 1,404,868 8,837,070 567,523
Loans 65,559,767 64,459,914 - - 64,459,914
Liabilities:
Deposits
$ 85,858,381 $ 85,872,252 $ - $ 85,872,252 $ -
FHLB and other borrowings
3,548,492 3,489,951 - 3,489,951 -
Federal funds purchased and securities sold under agreements to repurchase
184,478 184,478 - 184,478 -
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 -
(20) Supplemental Disclosure for Statement of Cash Flows
The following table presents the Company’s noncash investing and financing activities.
Years Ended December 31,
2020 2019 2018
(In Thousands)
Supplemental disclosures of cash flow information:
Interest paid $ 546,802 $ 955,655 $ 592,747
Net income taxes paid 120,584 111,688 146,016
Supplemental schedule of noncash activities:
Transfer of loans and loans held for sale to OREO $ 7,623 $ 34,327 $ 22,908
Transfer of loans to loans held for sale - 1,196,883 -
Transfer of available for sale debt securities to held to maturity debt securities
- - 1,017,275
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company’s Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Company's Consolidated Statements of Cash Flows.
Years Ended December 31,
2020 2019 2018
(In Thousands)
Cash and cash equivalents $ 14,607,908 $ 6,938,698 $ 3,332,626
Restricted cash in other assets 337,487 217,991 168,754
Total cash, cash equivalents and restricted cash shown in the statement of cash flows $ 14,945,395 $ 7,156,689 $ 3,501,380
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 Consolidated Balance Sheets.
(21) Segment Information
The Company's operating segments are based on the Company's lines of business. Each line of business is a strategic unit that serves a particular group of customers with certain common characteristics by offering various products and services. The 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, the geographic distribution of revenue and assets is not significant. There are no individual customers whose revenues exceeded 10% of consolidated revenue.
At December 31, 2020, the Company’s operating segments consisted of Commercial Banking and Wealth, Retail Banking, Corporate and Investment Banking, and Treasury.
The Commercial Banking and Wealth segment serves the Company’s commercial customers through its wide array of banking and investment services to businesses in the Company’s markets. The segment also provides private banking and wealth management services to high net worth individuals, including specialized investment portfolio management, traditional credit products, traditional trust and estate services, investment advisory services, financial counseling and customized services to companies and their employees. The Commercial Banking and Wealth segment also supports its commercial customers with capabilities in treasury management, accounts receivable purchasing, asset-based lending, international services, as well as insurance and interest rate protection and investment products. The Commercial Banking and Wealth segment is also responsible for the Company's small business customers and indirect automobile portfolio.
The Retail Banking segment serves the Company’s consumer customers through its full-service banking centers, private client offices throughout the U.S., and alternative delivery channels such as internet, mobile, ATMs and
telephone banking. The Retail Banking segment provides individuals with comprehensive products and services including home mortgages, consumer loans, credit and debit cards, and deposit accounts.
The Corporate and Investment Banking segment is responsible for providing a wide array of banking and investment services to corporate and institutional clients. In addition to traditional credit and deposit products, the Corporate and Investment Banking segment also supports its customers with capabilities in treasury management, accounts receivable purchasing, asset-based lending, foreign-exchange and international services, and interest rate protection and investment products.
The Treasury segment's primary function is to manage the liquidity and funding positions of the Company, the interest rate sensitivity of the Company's balance sheet and the investment securities portfolio.
Corporate Support and Other includes activities that are not directly attributable to the operating segments, such as, the activities of the Parent and corporate support functions that are not directly attributable to a strategic business segment, as well as the elimination of intercompany transactions. Goodwill impairment is also presented within Corporate Support and Other as the Company does not allocate goodwill impairment to the related segments in the Company's internal profitability reporting system. Corporate Support and Other also includes the activities associated with Simple.
The following table presents the segment information for the Company’s segments.
December 31, 2020
Commercial Banking and Wealth Retail Banking Corporate and Investment Banking Treasury Corporate Support and Other Consolidated
(In Thousands)
Net interest income (expense)
$ 989,897 $ 1,028,976 $ 115,484 $ 146,031 $ 230,136 $ 2,510,524
Allocated provision (credit) for loan losses
362,195 251,679 136,741 1,909 213,605 966,129
Noninterest income
255,322 491,789 212,752 39,897 192,912 1,192,672
Noninterest expense
662,293 1,207,219 184,535 18,837 2,488,834 4,561,718
Net income (loss) before income tax expense (benefit)
220,731 61,867 6,960 165,182 (2,279,391) (1,824,651)
Income tax expense (benefit)
46,353 12,992 1,462 34,688 (58,482) 37,013
Net income (loss)
174,378 48,875 5,498 130,494 (2,220,909) (1,861,664)
Less: net income attributable to noncontrolling interests
328 - - 1,589 130 2,047
Net income (loss) attributable to BBVA USA Bancshares, Inc.
$ 174,050 $ 48,875 $ 5,498 $ 128,905 $ (2,221,039) $ (1,863,711)
Average total assets
$ 43,427,195 $ 18,414,003 $ 8,056,713 $ 25,868,006 $ 6,242,217 $ 102,008,134
December 31, 2019
Commercial Banking and Wealth Retail Banking Corporate and Investment Banking Treasury Corporate Support and Other Consolidated
(In Thousands)
Net interest income (expense)
$ 1,144,144 $ 1,275,436 $ 124,992 $ (112,085) $ 174,546 $ 2,607,033
Allocated provision (credit) for loan losses
212,038 305,788 39,753 (693) 40,558 597,444
Noninterest income
243,517 485,052 160,302 45,107 201,966 1,135,944
Noninterest expense
650,622 1,224,665 156,328 20,487 813,978 2,866,080
Net income (loss) before income tax expense (benefit)
525,001 230,035 89,213 (86,772) (478,024) 279,453
Income tax expense (benefit)
110,250 48,307 18,735 (18,222) (33,024) 126,046
Net income (loss)
414,751 181,728 70,478 (68,550) (445,000) 153,407
Less: net income (loss) attributable to noncontrolling interests
547 - - 1,624 161 2,332
Net income (loss) attributable to BBVA USA Bancshares, Inc.
$ 414,204 $ 181,728 $ 70,478 $ (70,174) $ (445,161) $ 151,075
Average total assets
$ 40,127,445 $ 18,858,148 $ 7,773,995 $ 19,156,849 $ 8,376,985 $ 94,293,422
December 31, 2018
Commercial Banking and Wealth Retail Banking Corporate and Investment Banking Treasury Corporate Support and Other Consolidated
(In Thousands)
Net interest income (expense)
$ 1,367,512 $ 1,460,880 $ 189,074 $ (71,823) $ (339,065) $ 2,606,578
Allocated provision for loan losses
71,136 220,296 (57,700) (1,177) 132,865 365,420
Noninterest income
236,877 451,614 159,991 20,123 188,304 1,056,909
Noninterest expense
657,146 1,171,189 155,404 22,809 343,412 2,349,960
Net income (loss) before income tax expense (benefit)
876,107 521,009 251,361 (73,332) (627,038) 948,107
Income tax expense (benefit)
183,982 109,412 52,786 (15,400) (146,102) 184,678
Net income (loss)
692,125 411,597 198,575 (57,932) (480,936) 763,429
Less: net income attributable to noncontrolling interests
358 - - 1,655 (32) 1,981
Net income (loss) attributable to BBVA USA Bancshares, Inc.
$ 691,767 $ 411,597 $ 198,575 $ (59,587) $ (480,904) $ 761,448
Average total assets
$ 38,841,832 $ 18,448,639 $ 8,295,416 $ 16,173,962 $ 7,816,188 $ 89,576,037
Results of the Company’s business segments are based on the Company’s lines of business and internal management accounting policies that have been developed to reflect the underlying economics of the business.
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 loan losses and the segments' provision for loan losses is reflected in Corporate Support and Other. 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. Unless noted otherwise, the 2019 and 2018 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.
(22) Revenue from Contracts with Customers
The following tables depict the disaggregation of revenue according to revenue type and segment.
Year Ended December 31, 2020
Commercial Banking and Wealth Retail Banking Corporate and Investment Banking Treasury, Corporate Support and Other Total
(In Thousands)
Service charges on deposit accounts $ 54,126 $ 158,350 $ 7,307 $ - $ 219,783
Card and merchant processing fees 34,412 117,948 - 39,736 192,096
Investment services sales fees 112,243 - - - 112,243
Money transfer income - - - 106,564 106,564
Investment banking and advisory fees - - 138,096 - 138,096
Asset management fees 48,101 - - - 48,101
248,882 276,298 145,403 146,300 816,883
Other revenues (1) 6,440 215,491 67,349 86,509 375,789
Total noninterest income $ 255,322 $ 491,789 $ 212,752 $ 232,809 $ 1,192,672
(1) Other revenues primarily relate to revenues not derived from contracts with customers.
Year Ended December 31, 2019
Commercial Banking and Wealth Retail Banking Corporate and Investment Banking Treasury, Corporate Support and Other Total
(In Thousands)
Service charges on deposit accounts $ 50,600 $ 192,888 $ 6,879 $ - $ 250,367
Card and merchant processing fees 36,666 122,316 - 38,565 197,547
Investment services sales fees 115,446 - - - 115,446
Money transfer income - - - 99,144 99,144
Investment banking and advisory fees - - 83,659 - 83,659
Asset management fees 45,571 - - - 45,571
248,283 315,204 90,538 137,709 791,734
Other revenues (1) (4,766) 169,848 69,764 109,364 344,210
Total noninterest income $ 243,517 $ 485,052 $ 160,302 $ 247,073 $ 1,135,944
(1) Other revenues primarily relate to revenues not derived from contracts with customers.
Year Ended December 31, 2018
Commercial Banking and Wealth Retail Banking Corporate and Investment Banking Treasury, Corporate Support and Other Total
(In Thousands)
Service charges on deposit accounts $ 46,497 $ 183,336 $ 6,840 $ - $ 236,673
Card and merchant processing fees 29,433 110,010 - 35,484 174,927
Investment services sales fees 112,652 - - - 112,652
Money transfer income - - - 91,681 91,681
Investment banking and advisory fees - - 77,684 - 77,684
Asset management fees 43,811 - - - 43,811
232,393 293,346 84,524 127,165 737,428
Other revenues (1) 4,484 158,268 75,467 81,262 319,481
Total noninterest income $ 236,877 $ 451,614 $ 159,991 $ 208,427 $ 1,056,909
(1) Other revenues primarily relate to revenues not derived from contracts with customers.
(23) Parent Company Financial Statements
The condensed financial information for BBVA USA Bancshares, Inc. (Parent company only) is presented as follows:
Parent Company
Balance Sheets
December 31,
2020 2019
(In Thousands)
Assets:
Cash and cash equivalents $ 180,863 $ 217,765
Debt securities available for sale 250,000 250,000
Investments in subsidiaries:
Banks 10,659,689 12,428,503
Non-banks 579,401 460,264
Other assets 75,731 73,663
Total assets $ 11,745,684 $ 13,430,195
Liabilities and Shareholder’s Equity:
Accrued expenses and other liabilities $ 83,820 $ 73,062
Shareholder’s equity 11,661,864 13,357,133
Total liabilities and shareholder’s equity $ 11,745,684 $ 13,430,195
Parent Company
Statements of Income
Years Ended December 31,
2020 2019 2018
(In Thousands)
Income:
Dividends from banking subsidiaries $ - $ 445,000 $ 305,000
Dividends from non-bank subsidiaries - 13,356 -
Other 16,443 5,320 7,731
Total income 16,443 463,676 312,731
Expense:
Salaries and employee benefits 5,380 994 3,980
Other 8,312 12,840 8,781
Total expense 13,692 13,834 12,761
Income before income tax benefit and equity in undistributed earnings of subsidiaries
2,751 449,842 299,970
Income tax expense (benefit) 5,946 2,215 (1,255)
(Loss) income before equity in undistributed earnings of subsidiaries (3,195) 447,627 301,225
Equity in undistributed (losses) earnings of subsidiaries (1,860,516) (296,552) 460,223
Net (loss) income $ (1,863,711) $ 151,075 $ 761,448
Other comprehensive income (1) 330,177 221,212 10,570
Comprehensive (loss) income $ (1,533,534) $ 372,287 $ 772,018
(1)See Consolidated Statement of Comprehensive Income detail.
Parent Company
Statements of Cash Flows
Years Ended December 31,
2020 2019 2018
(In Thousands)
Operating Activities:
Net (loss) income $ (1,863,711) $ 151,075 $ 761,448
Adjustments to reconcile net income to cash provided by operations:
Depreciation 1,272 1,229 1,257
Equity in undistributed losses (earnings) of subsidiaries 1,860,516 296,552 (460,223)
Increase in other assets (3,470) (6,050) (878)
Increase in accrued expenses and other liabilities 10,758 8,960 4,085
Net cash provided by operating activities 5,365 451,766 305,689
Investing Activities:
Purchases of debt securities available for sale (2,999,875) (3,493,942) (2,194,278)
Sales and maturities of debt securities available for sale 3,000,000 3,495,000 2,155,000
Purchase of premises and equipment - (377) (3)
Contributions to subsidiaries (30,870) 28,677 (31,109)
Net cash (used in) provided by investing activities (30,745) 29,358 (70,390)
Financing Activities:
Capital contribution from parent 3,073 - -
Vesting of restricted stock - (2,914) (712)
Issuance of common stock - 802 -
Dividends paid (14,595) (500,010) (272,047)
Net cash used in financing activities (11,522) (502,122) (272,759)
Net decrease in cash, cash equivalents and restricted cash (36,902) (20,998) (37,460)
Cash, cash equivalents and restricted cash at beginning of year 217,765 238,763 276,223
Cash, cash equivalents and restricted cash at end of year $ 180,863 $ 217,765 $ 238,763
(24) Related Party Transactions
The Company enters into various contracts with BBVA that affect the Company’s business and operations. The following discloses the significant transactions between the Company and BBVA during 2020, 2019 and 2018.
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.
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 $3.2 billion and $3.4 billion as of December 31, 2020 and 2019, respectively. The net fair value of outstanding derivative contracts between the Company and BBVA are detailed below.
December 31,
2020 2019
(In Thousands)
Derivative contracts:
Fair value hedges $ (748) $ (354)
Cash flow hedges (19) 102
Free-standing derivative instruments not designated as hedging instruments (44,958) (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 agreements to resell and securities sold under agreements to repurchase where BBVA is the counterparty.
December 31,
2020 2019
(In Thousands)
Securities purchased under agreements to resell $ 186,568 $ 178,914
Securities sold under agreements to repurchase 6,426 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 2020. At both December 31, 2020 and December 31, 2019 there was no amount outstanding under the revolving note and cash subordination agreement. Interest expense related to these agreements was $99 thousand, $50 thousand, and $309 thousand for the years ended December 31, 2020, 2019 and 2018, respectively, and are included in interest on other short term borrowings within the Company's 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 $17.7 million, $30.1 million, and $49.7 million for the years ended December 31, 2020, 2019 and 2018, respectively, and is recorded as a component of noninterest income within the Company's Consolidated Statements of Income. Expenses associated with these agreements were $48.9 million, $38.6 million, and $31.5 million for the years ended December 31, 2020, 2019 and 2018, respectively, and are recorded as a component of noninterest expense within the Company's 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 December 31, 2020 and 2019, the carrying amount of the Series A Preferred Stock was approximately $229 million. During the years ended December 31, 2020 and 2019, the Company paid $14.6 million and $18.0 million, respectively, of preferred stock dividends to BBVA.
Loan Sales to Related Parties
During the year ended December 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.
During the year ended December 31, 2018, the Company sold, without recourse, loans of approximately $165 million to BBVA, S.A. New York Branch. The sale resulted in no gain or loss.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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 Annual Report on Form 10-K, 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.
Management’s Report on Internal Control Over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f).
The Company’s internal control over financial reporting is a process affected by those charged with governance, management, and other personnel designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of inherent limitations in any internal control, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting is effective based on the criteria established in Internal Control - Integrated Framework (2013).
KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and has issued a report on the effectiveness of our internal control over financial reporting, which report is included in "Part II - Item 8. Financial Statements and Supplementary Data" of this Report.
Changes In Internal Control Over Financial Reporting.
There have been no changes in the Company’s internal controls 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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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
Not Applicable.
Part III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Information for this item is not required as the Company is filing this Annual Report on Form 10-K with a reduced disclosure format. See "Explanatory Note."

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Information for this item is not required as the Company is filing this Annual Report on Form 10-K with a reduced disclosure format. See "Explanatory Note."

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information for this item is not required as the Company is filing this Annual Report on Form 10-K with a reduced disclosure format. See "Explanatory Note."

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information for this item is not required as the Company is filing this Annual Report on Form 10-K with a reduced disclosure format. See "Explanatory Note."

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
For the years ended December 31, 2020 and 2019, professional services were performed by KPMG, LLP. The following table sets forth the aggregate fees paid to KPMG LLP by the Company.
Years Ended December 31,
2020 2019
Audit fees (1)
$ 4,619,785 $ 5,299,765
Audit related fees (2)
185,778 270,015
Tax fees (3)
- -
All other fees - -
Total fees $ 4,805,563 $ 5,569,780
(1)Audit fees are fees for professional services rendered for audits of the Company's financial statements, SEC regulatory filings, and services that are normally provided by KPMG LLP in connection with statutory and regulatory filings or engagements.
(2)Audit related fees generally include fees associated with reports pursuant to service organization examinations, employee benefit plan audits, and other compliance reports.
(3)Tax fees include fees associated with tax compliance services, tax advice and tax planning.
Pre-approval of Services by the Independent Registered Public Accounting Firm
Under the terms of its charter, the Audit and Compliance Committee of the Board of Directors (the “Audit Committee”) must approve all audit services and permitted non-audit services to be provided by the independent registered public accounting firm for the Company, either before the firm is engaged to render such services or pursuant to pre-approval policies and procedures established by the Audit Committee, subject to a de minimis exception for non-audit services that are approved by the Audit Committee prior to the completion of the audit and otherwise in accordance with the terms of applicable SEC rules. The de minimis exception waives the pre-approval requirements for non-audit services provided that such services: (1) do not aggregate to more than five percent of total revenues paid by the Corporation to its independent registered public accountant in the fiscal year when services are provided, (2) were not recognized as non-audit services at the time of the engagement, and (3) are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee or one or more designated representatives. Between meetings of the Audit Committee, the authority to pre-approve such services is delegated to the Chairperson of the Audit Committee. The Audit Committee may also delegate to one or more of its members the authority to grant pre-approvals of such services. The decisions of the Chairperson or any designee to pre-approve any audit or permitted non-audit service must be presented to the Audit Committee at its next scheduled meeting.
Part IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
(1)Financial Statements
See Item 8.
(2)Financial Statement Schedules
None
(3)Exhibits
See the Exhibit Index below.
Exhibit Number Description of Documents
3.1
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).
3.2
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).
4.1
Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934.
23.1
Consent of KPMG LLP, Independent Registered Public Accounting Firm.
31.1
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
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.
32.2
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.