UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| |
(Mark One) | |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20172018
OR
|
| |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-2989
|
| | |
| COMMERCE BANCSHARES, INC. | |
(Exact name of registrant as specified in its charter) |
|
| | |
Missouri | | 43-0889454 |
(State of Incorporation) | | (IRS Employer Identification No.) |
| | |
1000 Walnut, Kansas City, MO | | 64106 |
(Address of principal executive offices) | | (Zip Code) |
| | |
(816) 234-2000 | | |
(Registrant’s telephone number, including area code) | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | |
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company £ | Emerging growth company £ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of August 1, 2017,2018, the registrant had outstanding 101,625,940106,616,850 shares of its $5 par value common stock, registrant’s only class of common stock.
Commerce Bancshares, Inc. and Subsidiaries
Form 10-Q
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
| | | June 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| (Unaudited) | | | (Unaudited) | | |
| (In thousands) | (In thousands) |
ASSETS | | | | | | |
Loans | $ | 13,626,592 |
| | $ | 13,412,736 |
| $ | 13,954,111 |
| | $ | 13,983,674 |
|
Allowance for loan losses | (157,832 | ) | | (155,932 | ) | (159,532 | ) | | (159,532 | ) |
Net loans | 13,468,760 |
| | 13,256,804 |
| 13,794,579 |
| | 13,824,142 |
|
Loans held for sale (including $14,118,000 and $9,263,000 of residential mortgage loans carried at fair value at June 30, 2017 and December 31, 2016, respectively) | 22,002 |
| | 14,456 |
| |
Loans held for sale (including $10,750,000 and $15,327,000 of residential mortgage loans carried at fair value at June 30, 2018 and December 31, 2017, respectively) | | 20,352 |
| | 21,398 |
|
Investment securities: | | | |
| | | |
|
Available for sale ($719,820,000 and $568,553,000 pledged at June 30, 2017 and | | | | |
December 31, 2016, respectively, to secure swap and repurchase agreements) | 9,439,701 |
| | 9,649,203 |
| |
Trading | 22,291 |
| | 22,225 |
| |
Non-marketable | 102,388 |
| | 99,558 |
| |
Available for sale debt ($557,698,000 and $662,515,000 pledged at June 30, 2018 and | | | | |
December 31, 2017, respectively, to secure swap and repurchase agreements) | | 8,412,376 |
| | 8,725,442 |
|
Trading debt | | 31,156 |
| | 18,269 |
|
Equity | | 4,444 |
| | 50,591 |
|
Other | | 112,309 |
| | 99,005 |
|
Total investment securities | 9,564,380 |
| | 9,770,986 |
| 8,560,285 |
| | 8,893,307 |
|
Federal funds sold and short-term securities purchased under agreements to resell | 16,520 |
| | 15,470 |
| 31,500 |
| | 42,775 |
|
Long-term securities purchased under agreements to resell | 625,000 |
| | 725,000 |
| 700,000 |
| | 700,000 |
|
Interest earning deposits with banks | 80,860 |
| | 272,275 |
| 114,947 |
| | 30,631 |
|
Cash and due from banks | 433,747 |
| | 494,690 |
| 386,339 |
| | 438,439 |
|
Land, buildings and equipment, net | 334,586 |
| | 337,705 |
| 331,782 |
| | 335,110 |
|
Goodwill | 138,921 |
| | 138,921 |
| 138,921 |
| | 138,921 |
|
Other intangible assets, net | 7,002 |
| | 6,709 |
| 8,083 |
| | 7,618 |
|
Other assets | 387,065 |
| | 608,408 |
| 437,954 |
| | 401,074 |
|
Total assets | $ | 25,078,843 |
| | $ | 25,641,424 |
| $ | 24,524,742 |
| | $ | 24,833,415 |
|
LIABILITIES AND EQUITY | | | | | | |
Deposits: | | | |
| | | |
|
Non-interest bearing | $ | 7,314,506 |
| | $ | 7,429,398 |
| $ | 6,876,756 |
| | $ | 7,158,962 |
|
Savings, interest checking and money market | 11,427,615 |
| | 11,430,789 |
| 11,761,832 |
| | 11,499,620 |
|
Time open and C.D.'s of less than $100,000 | 679,668 |
| | 713,075 |
| 603,629 |
| | 634,646 |
|
Time open and C.D.'s of $100,000 and over | 1,403,873 |
| | 1,527,833 |
| 1,079,340 |
| | 1,132,218 |
|
Total deposits | 20,825,662 |
| | 21,101,095 |
| 20,321,557 |
| | 20,425,446 |
|
Federal funds purchased and securities sold under agreements to repurchase | 1,256,444 |
| | 1,723,905 |
| 1,166,759 |
| | 1,507,138 |
|
Other borrowings | 101,903 |
| | 102,049 |
| 9,291 |
| | 1,758 |
|
Other liabilities | 266,627 |
| | 213,243 |
| 255,752 |
| | 180,889 |
|
Total liabilities | 22,450,636 |
| | 23,140,292 |
| 21,753,359 |
| | 22,115,231 |
|
Commerce Bancshares, Inc. stockholders’ equity: | | | |
| | | |
|
Preferred stock, $1 par value | | | | | | |
Authorized 2,000,000 shares; issued 6,000 shares | 144,784 |
| | 144,784 |
| 144,784 |
| | 144,784 |
|
Common stock, $5 par value | | | |
| | | |
|
Authorized 120,000,000 shares; | | | | | | |
issued 102,003,046 shares | 510,015 |
| | 510,015 |
| |
issued 107,081,397 shares | | 535,407 |
| | 535,407 |
|
Capital surplus | 1,546,534 |
| | 1,552,454 |
| 1,804,057 |
| | 1,815,360 |
|
Retained earnings | 390,853 |
| | 292,849 |
| 408,374 |
| | 221,374 |
|
Treasury stock of 207,294 shares at June 30, 2017 | | | | |
and 364,711 shares at December 31, 2016, at cost | (10,373 | ) | | (15,294 | ) | |
Accumulated other comprehensive income | 42,070 |
| | 10,975 |
| |
Treasury stock of 275,577 shares at June 30, 2018 | | | | |
and 276,968 shares at December 31, 2017, at cost | | (15,854 | ) | | (14,473 | ) |
Accumulated other comprehensive income (loss) | | (108,781 | ) | | 14,108 |
|
Total Commerce Bancshares, Inc. stockholders' equity | 2,623,883 |
| | 2,495,783 |
| 2,767,987 |
| | 2,716,560 |
|
Non-controlling interest | 4,324 |
| | 5,349 |
| 3,396 |
| | 1,624 |
|
Total equity | 2,628,207 |
| | 2,501,132 |
| 2,771,383 |
| | 2,718,184 |
|
Total liabilities and equity | $ | 25,078,843 |
| | $ | 25,641,424 |
| $ | 24,524,742 |
| | $ | 24,833,415 |
|
See accompanying notes to consolidated financial statements.
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
| | | For the Three Months Ended June 30 | | For the Six Months Ended June 30 | For the Three Months Ended June 30 | | For the Six Months Ended June 30 |
(In thousands, except per share data) | 2017 | 2016 | | 2017 | 2016 | 2018 | 2017 | | 2018 | 2017 |
| (Unaudited) | (Unaudited) |
INTEREST INCOME | | | | | | |
Interest and fees on loans | $ | 134,273 |
| $ | 121,151 |
| | $ | 262,596 |
| $ | 240,484 |
| $ | 154,135 |
| $ | 134,273 |
| | $ | 301,150 |
| $ | 262,596 |
|
Interest and fees on loans held for sale | 263 |
| 692 |
| | 459 |
| 827 |
| 372 |
| 263 |
| | 676 |
| 459 |
|
Interest on investment securities | 54,975 |
| 54,698 |
| | 110,240 |
| 103,589 |
| 65,564 |
| 54,975 |
| | 118,806 |
| 110,240 |
|
Interest on federal funds sold and short-term securities purchased under | | | | | | |
agreements to resell | 37 |
| 19 |
| | 60 |
| 43 |
| 177 |
| 37 |
| | 357 |
| 60 |
|
Interest on long-term securities purchased under agreements to resell | 3,684 |
| 3,354 |
| | 7,477 |
| 6,829 |
| 3,785 |
| 3,684 |
| | 7,899 |
| 7,477 |
|
Interest on deposits with banks | 362 |
| 151 |
| | 759 |
| 421 |
| 1,590 |
| 362 |
| | 2,730 |
| 759 |
|
Total interest income | 193,594 |
| 180,065 |
| | 381,591 |
| 352,193 |
| 225,623 |
| 193,594 |
| | 431,618 |
| 381,591 |
|
INTEREST EXPENSE | | | | | | |
Interest on deposits: | | | | | | |
Savings, interest checking and money market | 4,342 |
| 3,548 |
| | 8,232 |
| 7,032 |
| 6,519 |
| 4,342 |
| | 12,108 |
| 8,232 |
|
Time open and C.D.'s of less than $100,000 | 674 |
| 709 |
| | 1,318 |
| 1,451 |
| 694 |
| 674 |
| | 1,356 |
| 1,318 |
|
Time open and C.D.'s of $100,000 and over | 2,822 |
| 2,347 |
| | 5,585 |
| 4,333 |
| 3,483 |
| 2,822 |
| | 6,322 |
| 5,585 |
|
Interest on federal funds purchased and securities sold under | | | | | | |
agreements to repurchase | 2,038 |
| 725 |
| | 3,577 |
| 1,613 |
| 3,956 |
| 2,038 |
| | 7,957 |
| 3,577 |
|
Interest on other borrowings | 911 |
| 907 |
| | 1,799 |
| 2,160 |
| 12 |
| 911 |
| | 24 |
| 1,799 |
|
Total interest expense | 10,787 |
| 8,236 |
| | 20,511 |
| 16,589 |
| 14,664 |
| 10,787 |
| | 27,767 |
| 20,511 |
|
Net interest income | 182,807 |
| 171,829 |
| | 361,080 |
| 335,604 |
| 210,959 |
| 182,807 |
| | 403,851 |
| 361,080 |
|
Provision for loan losses | 10,758 |
| 9,216 |
| | 21,886 |
| 18,655 |
| 10,043 |
| 10,758 |
| | 20,439 |
| 21,886 |
|
Net interest income after provision for loan losses | 172,049 |
| 162,613 |
| | 339,194 |
| 316,949 |
| 200,916 |
| 172,049 |
| | 383,412 |
| 339,194 |
|
NON-INTEREST INCOME | | | | | | |
Bank card transaction fees | 44,999 |
| 45,065 |
| | 88,203 |
| 89,535 |
| 43,215 |
| 37,295 |
| | 84,668 |
| 73,046 |
|
Trust fees | 33,120 |
| 30,241 |
| | 65,134 |
| 59,484 |
| 37,036 |
| 33,120 |
| | 73,098 |
| 65,134 |
|
Deposit account charges and other fees | 22,861 |
| 21,328 |
| | 44,803 |
| 42,019 |
| 23,893 |
| 22,861 |
| | 46,875 |
| 44,803 |
|
Capital market fees | 2,156 |
| 2,500 |
| | 4,498 |
| 5,225 |
| 1,992 |
| 2,156 |
| | 4,283 |
| 4,498 |
|
Consumer brokerage services | 3,726 |
| 3,491 |
| | 7,375 |
| 7,000 |
| 3,971 |
| 3,726 |
| | 7,739 |
| 7,375 |
|
Loan fees and sales | 4,091 |
| 3,196 |
| | 7,259 |
| 5,706 |
| 3,229 |
| 4,091 |
| | 6,091 |
| 7,259 |
|
Other | 12,131 |
| 10,749 |
| | 22,878 |
| 26,625 |
| 11,514 |
| 12,131 |
| | 21,786 |
| 22,878 |
|
Total non-interest income | 123,084 |
| 116,570 |
| | 240,150 |
| 235,594 |
| 124,850 |
| 115,380 |
| | 244,540 |
| 224,993 |
|
INVESTMENT SECURITIES GAINS (LOSSES), NET | 1,651 |
| (744 | ) | | 879 |
| (1,739 | ) | (3,075 | ) | 1,651 |
| | 2,335 |
| 879 |
|
NON-INTEREST EXPENSE | | | | | | |
Salaries and employee benefits | 108,829 |
| 104,808 |
| | 221,198 |
| 211,667 |
| 115,589 |
| 108,829 |
| | 231,483 |
| 221,198 |
|
Net occupancy | 11,430 |
| 11,092 |
| | 22,873 |
| 22,395 |
| 11,118 |
| 11,430 |
| | 22,702 |
| 22,873 |
|
Equipment | 4,776 |
| 4,781 |
| | 9,385 |
| 9,415 |
| 4,594 |
| 4,776 |
| | 9,025 |
| 9,385 |
|
Supplies and communication | 5,446 |
| 5,693 |
| | 11,155 |
| 12,522 |
| 5,126 |
| 5,446 |
| | 10,439 |
| 11,155 |
|
Data processing and software | 23,356 |
| 22,770 |
| | 46,453 |
| 45,669 |
| 21,016 |
| 20,035 |
| | 41,706 |
| 39,940 |
|
Marketing | 4,488 |
| 4,389 |
| | 7,712 |
| 8,202 |
| 5,142 |
| 4,488 |
| | 9,947 |
| 7,712 |
|
Deposit insurance | 3,592 |
| 3,143 |
| | 7,063 |
| 6,308 |
| 3,126 |
| 3,592 |
| | 6,583 |
| 7,063 |
|
Community service | | 656 |
| 2,916 |
| | 1,385 |
| 5,860 |
|
Other | 22,677 |
| 20,413 |
| | 45,585 |
| 38,384 |
| 15,493 |
| 15,378 |
| | 30,867 |
| 31,081 |
|
Total non-interest expense | 184,594 |
| 177,089 |
| | 371,424 |
| 354,562 |
| 181,860 |
| 176,890 |
| | 364,137 |
| 356,267 |
|
Income before income taxes | 112,190 |
| 101,350 |
| | 208,799 |
| 196,242 |
| 140,831 |
| 112,190 |
| | 266,150 |
| 208,799 |
|
Less income taxes | 33,201 |
| 31,542 |
| | 58,108 |
| 60,912 |
| 29,507 |
| 33,201 |
| | 52,765 |
| 58,108 |
|
Net income | 78,989 |
| 69,808 |
| | 150,691 |
| 135,330 |
| 111,324 |
| 78,989 |
| | 213,385 |
| 150,691 |
|
Less non-controlling interest expense (income) | 29 |
| (85 | ) | | 227 |
| 63 |
| |
Less non-controlling interest expense | | 994 |
| 29 |
| | 2,071 |
| 227 |
|
Net income attributable to Commerce Bancshares, Inc. | 78,960 |
| 69,893 |
| | 150,464 |
| 135,267 |
| 110,330 |
| 78,960 |
| | 211,314 |
| 150,464 |
|
Less preferred stock dividends | 2,250 |
| 2,250 |
| | 4,500 |
| 4,500 |
| 2,250 |
| 2,250 |
| | 4,500 |
| 4,500 |
|
Net income available to common shareholders | $ | 76,710 |
| $ | 67,643 |
| | $ | 145,964 |
| $ | 130,767 |
| $ | 108,080 |
| $ | 76,710 |
| | $ | 206,814 |
| $ | 145,964 |
|
Net income per common share — basic | $ | .75 |
| $ | .67 |
| | $ | 1.43 |
| $ | 1.29 |
| $ | 1.02 |
| $ | .71 |
| | $ | 1.94 |
| $ | 1.36 |
|
Net income per common share — diluted | $ | .75 |
| $ | .66 |
| | $ | 1.43 |
| $ | 1.28 |
| $ | 1.01 |
| $ | .71 |
| | $ | 1.93 |
| $ | 1.36 |
|
See accompanying notes to consolidated financial statements.
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | For the Three Months Ended June 30 | | For the Six Months Ended June 30 | | For the Three Months Ended June 30 | | For the Six Months Ended June 30 |
(In thousands) | | 2017 | 2016 | | 2017 | 2016 | | 2018 | 2017 | | 2018 | 2017 |
| | (Unaudited) | | (Unaudited) |
Net income | | $ | 78,989 |
| $ | 69,808 |
| | $ | 150,691 |
| $ | 135,330 |
| | $ | 111,324 |
| $ | 78,989 |
| | $ | 213,385 |
| $ | 150,691 |
|
Other comprehensive income (loss): | | | | | | | | |
Net unrealized gains (losses) on securities for which a portion of an other-than-temporary impairment has been recorded in earnings | | 76 |
| — |
| | 171 |
| (398 | ) | | (123 | ) | 76 |
| | (78 | ) | 171 |
|
Net unrealized gains on other securities | | 11,241 |
| 31,139 |
| | 30,243 |
| 101,634 |
| |
Net unrealized gains (losses) on other securities | | | (19,489 | ) | 11,241 |
| | (93,210 | ) | 30,243 |
|
Pension loss amortization | | 341 |
| 356 |
| | 681 |
| 718 |
| | 394 |
| 341 |
| | 787 |
| 681 |
|
Other comprehensive income | | 11,658 |
| 31,495 |
| | 31,095 |
| 101,954 |
| |
Other comprehensive income (loss) | | | (19,218 | ) | 11,658 |
| | (92,501 | ) | 31,095 |
|
Comprehensive income | | 90,647 |
| 101,303 |
| | 181,786 |
| 237,284 |
| | 92,106 |
| 90,647 |
| | 120,884 |
| 181,786 |
|
Less non-controlling interest expense (income) | | 29 |
| (85 | ) | | 227 |
| 63 |
| |
Less non-controlling interest expense | | | 994 |
| 29 |
| | 2,071 |
| 227 |
|
Comprehensive income attributable to Commerce Bancshares, Inc. | Comprehensive income attributable to Commerce Bancshares, Inc. | $ | 90,618 |
| $ | 101,388 |
| | $ | 181,559 |
| $ | 237,221 |
| Comprehensive income attributable to Commerce Bancshares, Inc. | $ | 91,112 |
| $ | 90,618 |
| | $ | 118,813 |
| $ | 181,559 |
|
See accompanying notes to consolidated financial statements.
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| | | | Commerce Bancshares, Inc. Shareholders | | | Commerce Bancshares, Inc. Shareholders | |
(In thousands, except per share data) | Preferred Stock | Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Non-Controlling Interest | Total | Preferred Stock | Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Non-Controlling Interest | Total |
| (Unaudited) | (Unaudited) |
Balance December 31, 2017 | | $ | 144,784 |
| $ | 535,407 |
| $ | 1,815,360 |
| $ | 221,374 |
| $ | (14,473 | ) | $ | 14,108 |
| $ | 1,624 |
| $ | 2,718,184 |
|
Adoption of ASU 2018-02 | | |
|
| (2,932 | ) | | 2,932 |
| | — |
|
Adoption of ASU 2016-01 | | |
|
|
|
| 33,320 |
|
|
| (33,320 | ) |
|
| — |
|
Net income | | |
|
|
|
| 211,314 |
|
|
|
|
| 2,071 |
| 213,385 |
|
Other comprehensive income (loss) | | |
|
|
|
|
|
|
|
| (92,501 | ) |
|
| (92,501 | ) |
Distributions to non-controlling interest | | |
|
|
|
|
|
|
|
|
|
| (299 | ) | (299 | ) |
Purchases of treasury stock | | |
|
|
|
|
|
| (19,069 | ) |
|
|
|
| (19,069 | ) |
Issuance of stock under purchase and equity compensation plans | | |
|
| (17,697 | ) |
|
| 17,688 |
|
|
|
|
| (9 | ) |
Stock-based compensation | | |
|
| 6,394 |
|
|
|
|
|
|
|
|
| 6,394 |
|
Cash dividends on common stock ($.470 per share) | | |
|
|
|
| (50,202 | ) |
|
|
|
|
|
| (50,202 | ) |
Cash dividends on preferred stock ($.750 per depositary share) | | |
|
|
|
| (4,500 | ) |
|
|
|
|
|
| (4,500 | ) |
Balance June 30, 2018 | | $ | 144,784 |
| $ | 535,407 |
| $ | 1,804,057 |
| $ | 408,374 |
| $ | (15,854 | ) | $ | (108,781 | ) | $ | 3,396 |
| $ | 2,771,383 |
|
Balance December 31, 2016 | $ | 144,784 |
| $ | 510,015 |
| $ | 1,552,454 |
| $ | 292,849 |
| $ | (15,294 | ) | $ | 10,975 |
| $ | 5,349 |
| $ | 2,501,132 |
| $ | 144,784 |
| $ | 510,015 |
| $ | 1,552,454 |
| $ | 292,849 |
| $ | (15,294 | ) | $ | 10,975 |
| $ | 5,349 |
| $ | 2,501,132 |
|
Adoption of ASU 2016-09 | | | 3,441 |
| (2,144 | ) | | 1,297 |
|
|
|
|
| 3,441 |
| (2,144 | ) |
|
|
|
|
|
| 1,297 |
|
Net income | |
|
|
|
| 150,464 |
|
|
|
|
| 227 |
| 150,691 |
| |
|
|
|
| 150,464 |
|
|
|
|
| 227 |
| 150,691 |
|
Other comprehensive income | |
|
|
|
|
|
|
|
| 31,095 |
|
|
| 31,095 |
| |
|
|
|
|
|
|
|
| 31,095 |
|
|
| 31,095 |
|
Distributions to non-controlling interest | |
|
|
|
|
|
|
|
|
|
| (1,252 | ) | (1,252 | ) | |
|
|
|
|
|
|
|
|
|
| (1,252 | ) | (1,252 | ) |
Purchases of treasury stock | |
|
|
|
|
|
| (10,628 | ) |
|
|
|
| (10,628 | ) | |
|
|
|
|
|
| (10,628 | ) |
|
|
|
| (10,628 | ) |
Issuance of stock under purchase and equity compensation plans | |
|
| (15,556 | ) |
|
| 15,549 |
|
|
|
|
| (7 | ) | |
|
| (15,556 | ) |
|
| 15,549 |
|
|
|
|
| (7 | ) |
Stock-based compensation | |
|
| 6,195 |
|
|
|
|
|
|
|
|
| 6,195 |
| |
|
| 6,195 |
|
|
|
|
|
|
|
|
| 6,195 |
|
Cash dividends on common stock ($.450 per share) | |
|
|
|
| (45,816 | ) |
|
|
|
|
|
| (45,816 | ) | |
Cash dividends on common stock ($.429 per share) | | |
|
|
|
| (45,816 | ) |
|
|
|
|
|
| (45,816 | ) |
Cash dividends on preferred stock ($.750 per depositary share) | |
|
|
|
| (4,500 | ) |
|
|
|
|
|
| (4,500 | ) | | (4,500 | ) | | (4,500 | ) |
Balance June 30, 2017 | $ | 144,784 |
| $ | 510,015 |
| $ | 1,546,534 |
| $ | 390,853 |
| $ | (10,373 | ) | $ | 42,070 |
| $ | 4,324 |
| $ | 2,628,207 |
| $ | 144,784 |
| $ | 510,015 |
| $ | 1,546,534 |
| $ | 390,853 |
| $ | (10,373 | ) | $ | 42,070 |
| $ | 4,324 |
| $ | 2,628,207 |
|
Balance December 31, 2015 | $ | 144,784 |
| $ | 489,862 |
| $ | 1,337,677 |
| $ | 383,313 |
| $ | (26,116 | ) | $ | 32,470 |
| $ | 5,428 |
| $ | 2,367,418 |
| |
Net income | |
|
|
|
| 135,267 |
|
|
|
|
| 63 |
| 135,330 |
| |
Other comprehensive income | |
|
|
|
|
|
|
|
| 101,954 |
|
|
| 101,954 |
| |
Distributions to non-controlling interest | |
|
|
|
|
|
|
|
|
|
| (586 | ) | (586 | ) | |
Purchases of treasury stock | |
|
|
|
|
|
| (37,462 | ) |
|
|
|
| (37,462 | ) | |
Issuance of stock under purchase and equity compensation plans | |
|
| (11,873 | ) |
|
| 11,871 |
|
|
|
|
| (2 | ) | |
Excess tax benefit related to equity compensation plans | |
|
| 1,904 |
|
|
|
|
|
|
|
|
| 1,904 |
| |
Stock-based compensation | |
|
| 6,287 |
|
|
|
|
|
|
|
|
| 6,287 |
| |
Cash dividends on common stock ($.429 per share) | |
|
|
|
| (43,522 | ) |
|
|
|
|
|
| (43,522 | ) | |
Cash dividends on preferred stock ($.750 per depositary share) | | (4,500 | ) | | (4,500 | ) | |
Balance June 30, 2016 | $ | 144,784 |
| $ | 489,862 |
| $ | 1,333,995 |
| $ | 470,558 |
| $ | (51,707 | ) | $ | 134,424 |
| $ | 4,905 |
| $ | 2,526,821 |
| |
See accompanying notes to consolidated financial statements.
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | For the Six Months Ended June 30 | For the Six Months Ended June 30 |
(In thousands) | 2017 | | 2016 | 2018 | | 2017 |
| (Unaudited) | (Unaudited) |
OPERATING ACTIVITIES: | | | | | | |
Net income | $ | 150,691 |
| | $ | 135,330 |
| $ | 213,385 |
| | $ | 150,691 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Provision for loan losses | 21,886 |
| | 18,655 |
| 20,439 |
| | 21,886 |
|
Provision for depreciation and amortization | 19,890 |
| | 20,689 |
| 19,180 |
| | 19,890 |
|
Amortization of investment security premiums, net | 17,827 |
| | 16,014 |
| 11,679 |
| | 17,827 |
|
Investment securities (gains) losses, net (A) | (879 | ) | | 1,739 |
| |
Investment securities gains, net (A) | | (2,335 | ) | | (879 | ) |
Net gains on sales of loans held for sale | (3,547 | ) | | (2,880 | ) | (2,671 | ) | | (3,547 | ) |
Originations of loans held for sale | (96,943 | ) | | (70,880 | ) | (89,183 | ) | | (96,943 | ) |
Proceeds from sales of loans held for sale | 92,423 |
| | 68,486 |
| 91,671 |
| | 92,423 |
|
Net decrease in trading securities, excluding unsettled transactions | 6,097 |
| | 81,184 |
| |
Net (increase) decrease in trading debt securities | | (23,843 | ) | | 6,097 |
|
Stock-based compensation | 6,195 |
| | 6,287 |
| 6,394 |
| | 6,195 |
|
(Increase) decrease in interest receivable | (428 | ) | | 60 |
| |
Increase (decrease) in interest payable | (692 | ) | | 57 |
| |
Increase in interest receivable | | (1,717 | ) | | (428 | ) |
Decrease in interest payable | | (601 | ) | | (692 | ) |
Increase in income taxes payable | 1,483 |
| | 73 |
| 25,721 |
| | 1,483 |
|
Other changes, net | (1,985 | ) | | (9,785 | ) | 19,958 |
| | (6,939 | ) |
Net cash provided by operating activities | 212,018 |
| | 265,029 |
| 288,077 |
| | 207,064 |
|
INVESTING ACTIVITIES: | | | | | | |
Proceeds from sales of investment securities (A) | 6,552 |
| | 2,071 |
| 192,522 |
| | 6,552 |
|
Proceeds from maturities/pay downs of investment securities (A) | 910,411 |
| | 1,109,707 |
| 812,970 |
| | 910,411 |
|
Purchases of investment securities (A) | (625,931 | ) | | (414,154 | ) | (748,707 | ) | | (625,931 | ) |
Net increase in loans | (234,405 | ) | | (693,522 | ) | |
Net (increase) decrease in loans | | 7,978 |
| | (234,405 | ) |
Repayments of long-term securities purchased under agreements to resell | 100,000 |
| | 50,000 |
| — |
| | 100,000 |
|
Purchases of land, buildings and equipment | (14,117 | ) | | (13,649 | ) | (13,525 | ) | | (14,117 | ) |
Sales of land, buildings and equipment | 2,527 |
| | 5,399 |
| 1,667 |
| | 2,527 |
|
Net cash provided by investing activities | 145,037 |
| | 45,852 |
| 252,905 |
| | 145,037 |
|
FINANCING ACTIVITIES: | | | | | | |
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits | 77,562 |
| | (38,985 | ) | (27,222 | ) | | 77,562 |
|
Net increase (decrease) in time open and C.D.'s | (157,367 | ) | | 267,339 |
| |
Net decrease in federal funds purchased and short-term securities sold under agreements to repurchase | (467,461 | ) | | (331,280 | ) | |
Net decrease in time open and C.D.'s | | (83,895 | ) | | (157,367 | ) |
Net decrease in federal funds purchased and securities sold under agreements to repurchase | | (340,379 | ) | | (467,461 | ) |
Repayment of long-term borrowings | (146 | ) | | (840 | ) | (149 | ) | | (146 | ) |
Additional long-term borrowings | — |
| — |
| 900 |
| |
Net increase in short-term borrowings | | 7,682 |
| | — |
|
Purchases of treasury stock | (10,628 | ) | | (37,462 | ) | (19,069 | ) | | (10,628 | ) |
Issuance of stock under equity compensation plans | (7 | ) | | (2 | ) | (9 | ) | | (7 | ) |
Cash dividends paid on common stock | (45,816 | ) | | (43,522 | ) | (50,202 | ) | | (45,816 | ) |
Cash dividends paid on preferred stock | (4,500 | ) | | (4,500 | ) | (4,500 | ) | | (4,500 | ) |
Net cash used in financing activities | (608,363 | ) | | (188,352 | ) | (517,743 | ) | | (608,363 | ) |
Increase (decrease) in cash and cash equivalents | (251,308 | ) | | 122,529 |
| |
Cash and cash equivalents at beginning of year | 782,435 |
| | 502,719 |
| |
Cash and cash equivalents at June 30 | $ | 531,127 |
| | $ | 625,248 |
| |
(A) Available for sale and non-marketable securities | | | | |
Increase (decrease) in cash, cash equivalents and restricted cash | | 23,239 |
| | (256,262 | ) |
Cash, cash equivalents and restricted cash at beginning of year | | 524,352 |
| | 801,641 |
|
Cash, cash equivalents and restricted cash at June 30 | | $ | 547,591 |
| | $ | 545,379 |
|
(A) Available for sale debt securities, equity securities and other securities | | | | |
Income tax payments, net | $ | 54,621 |
| | $ | 59,886 |
| $ | 24,969 |
| | $ | 54,621 |
|
Interest paid on deposits and borrowings | $ | 21,203 |
| | $ | 16,532 |
| $ | 28,368 |
| | $ | 21,203 |
|
Loans transferred to foreclosed real estate | $ | 461 |
| | $ | 861 |
| $ | 1,044 |
| | $ | 461 |
|
Loans transferred from held for investment to held for sale | $ | — |
| | $ | 50,360 |
| |
See accompanying notes to consolidated financial statements.
Restricted cash is comprised of cash collateral posted by the Company to secure interest rate swap agreements. This balance is included in other assets in the consolidated balance sheets and totaled $14.8 million and $14.3 million at June 30, 2018 and 2017, respectively.
Commerce Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 20172018 (Unaudited)
1. Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 20162017 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three and six month periods ended June 30, 20172018 are not necessarily indicative of results to be attained for the full year or any other interim period.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company's most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto.
These financial statements reflect the adoption of several FASB Accounting Standards Updates (ASUs) on January 1, 2018. In some cases, the adoption of these ASUs resulted in changes to former accounting policies as described in Note 1 to the financial statements in the 2017 Annual Report on Form 10-K. The ASUs which affected the Company's 2018 financial statements include:
ASU 2014-09, Revenue from Contracts with Customers, which is discussed further in Note 13.
ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which is discussed further in Note 3 - Investment Securities, Note 8 - Accumulated Other Comprehensive Income, and Note 15 - Fair Value of Financial Instruments.
ASU 2016-18, Restricted Cash, which requires that the beginning and end of period amounts shown on the statement of cash flows include not only cash and cash equivalents, but also restricted cash and restricted cash equivalents, as considered such by the reporting entity.
ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which is discussed further in Note 6 - Pension.
ASU 2018-02, Reclassification for Certain Tax Effects from Accumulated Other Comprehensive Income, which is discussed further in Note 8 - Accumulated Other Comprehensive Income.
2. Loans and Allowance for Loan Losses
Major classifications within the Company’s held for investment loan portfolio at June 30, 20172018 and December 31, 20162017 are as follows:
| |
(In thousands) | | June 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
Commercial: | | | | | | | | |
Business | | $ | 4,852,408 |
| | $ | 4,776,365 |
| | $ | 4,990,298 |
| | $ | 4,958,554 |
|
Real estate – construction and land | | 848,152 |
| | 791,236 |
| | 967,151 |
| | 968,820 |
|
Real estate – business | | 2,727,349 |
| | 2,643,374 |
| | 2,727,580 |
| | 2,697,452 |
|
Personal Banking: | | | | | | | | |
Real estate – personal | | 2,009,203 |
| | 2,010,397 |
| | 2,102,586 |
| | 2,062,787 |
|
Consumer | | 2,038,514 |
| | 1,990,801 |
| | 2,012,644 |
| | 2,104,487 |
|
Revolving home equity | | 403,387 |
| | 413,634 |
| | 374,557 |
| | 400,587 |
|
Consumer credit card | | 740,865 |
| | 776,465 |
| | 775,214 |
| | 783,864 |
|
Overdrafts | | 6,714 |
| | 10,464 |
| | 4,081 |
| | 7,123 |
|
Total loans | | $ | 13,626,592 |
| | $ | 13,412,736 |
| | $ | 13,954,111 |
| | $ | 13,983,674 |
|
At June 30, 2017,2018, loans of $3.9$3.7 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.6$1.7 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.
Allowance for loan losses
A summary of the activity in the allowance for loan losses during the three and six months ended June 30, 20172018 and 2016,2017, respectively, follows:
| | | | For the Three Months Ended June 30 | | For the Six Months Ended June 30 | | For the Three Months Ended June 30 | | For the Six Months Ended June 30 |
(In thousands) | | Commercial | Personal Banking |
Total | | Commercial | Personal Banking |
Total | | Commercial | Personal Banking |
Total | | Commercial | Personal Banking |
Total |
Balance at beginning of period | Balance at beginning of period | $ | 92,951 |
| $ | 64,881 |
| $ | 157,832 |
| | $ | 91,361 |
| $ | 64,571 |
| $ | 155,932 |
| Balance at beginning of period | $ | 93,065 |
| $ | 66,467 |
| $ | 159,532 |
| | $ | 93,704 |
| $ | 65,828 |
| $ | 159,532 |
|
Provision | Provision | (111 | ) | 10,869 |
| 10,758 |
| | 1,002 |
| 20,884 |
| 21,886 |
| Provision | 485 |
| 9,558 |
| 10,043 |
| | (409 | ) | 20,848 |
| 20,439 |
|
Deductions: | Deductions: | | | | Deductions: | | | |
Loans charged off | Loans charged off | 531 |
| 13,415 |
| 13,946 |
| | 1,077 |
| 25,745 |
| 26,822 |
| Loans charged off | 362 |
| 13,323 |
| 13,685 |
| | 728 |
| 26,688 |
| 27,416 |
|
Less recoveries on loans | Less recoveries on loans | 430 |
| 2,758 |
| 3,188 |
| | 1,453 |
| 5,383 |
| 6,836 |
| Less recoveries on loans | 663 |
| 2,979 |
| 3,642 |
| | 1,284 |
| 5,693 |
| 6,977 |
|
Net loan charge-offs (recoveries) | Net loan charge-offs (recoveries) | 101 |
| 10,657 |
| 10,758 |
| | (376 | ) | 20,362 |
| 19,986 |
| Net loan charge-offs (recoveries) | (301 | ) | 10,344 |
| 10,043 |
| | (556 | ) | 20,995 |
| 20,439 |
|
Balance June 30, 2017 | $ | 92,739 |
| $ | 65,093 |
| $ | 157,832 |
| | $ | 92,739 |
| $ | 65,093 |
| $ | 157,832 |
| |
Balance June 30, 2018 | | Balance June 30, 2018 | $ | 93,851 |
| $ | 65,681 |
| $ | 159,532 |
| | $ | 93,851 |
| $ | 65,681 |
| $ | 159,532 |
|
Balance at beginning of period | Balance at beginning of period | $ | 86,027 |
| $ | 66,105 |
| $ | 152,132 |
| | $ | 82,086 |
| $ | 69,446 |
| $ | 151,532 |
| Balance at beginning of period | $ | 92,951 |
| $ | 64,881 |
| $ | 157,832 |
| | $ | 91,361 |
| $ | 64,571 |
| $ | 155,932 |
|
Provision | Provision | 1,569 |
| 7,647 |
| 9,216 |
| | 5,720 |
| 12,935 |
| 18,655 |
| Provision | (111 | ) | 10,869 |
| 10,758 |
| | 1,002 |
| 20,884 |
| 21,886 |
|
Deductions: | Deductions: | | | | Deductions: | | | |
Loans charged off | Loans charged off | 661 |
| 11,984 |
| 12,645 |
| | 2,174 |
| 23,761 |
| 25,935 |
| Loans charged off | 531 |
| 13,415 |
| 13,946 |
| | 1,077 |
| 25,745 |
| 26,822 |
|
Less recoveries on loans | Less recoveries on loans | 2,263 |
| 2,866 |
| 5,129 |
| | 3,566 |
| 6,014 |
| 9,580 |
| Less recoveries on loans | 430 |
| 2,758 |
| 3,188 |
| | 1,453 |
| 5,383 |
| 6,836 |
|
Net loan charge-offs (recoveries) | Net loan charge-offs (recoveries) | (1,602 | ) | 9,118 |
| 7,516 |
| | (1,392 | ) | 17,747 |
| 16,355 |
| Net loan charge-offs (recoveries) | 101 |
| 10,657 |
| 10,758 |
| | (376 | ) | 20,362 |
| 19,986 |
|
Balance June 30, 2016 | $ | 89,198 |
| $ | 64,634 |
| $ | 153,832 |
| | $ | 89,198 |
| $ | 64,634 |
| $ | 153,832 |
| |
Balance June 30, 2017 | | Balance June 30, 2017 | $ | 92,739 |
| $ | 65,093 |
| $ | 157,832 |
| | $ | 92,739 |
| $ | 65,093 |
| $ | 157,832 |
|
The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, 20172018 and December 31, 2016,2017, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASCAccounting Standards Codification (ASC) 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below, which are deemed to have similar risk characteristics and are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.
| | | Impaired Loans | | All Other Loans | Impaired Loans | | All Other Loans |
(In thousands) | Allowance for Loan Losses | Loans Outstanding | | Allowance for Loan Losses | Loans Outstanding | Allowance for Loan Losses | Loans Outstanding | | Allowance for Loan Losses | Loans Outstanding |
June 30, 2017 | | | | |
June 30, 2018 | | | | |
Commercial | $ | 1,454 |
| $ | 44,937 |
| | $ | 91,285 |
| $ | 8,382,972 |
| $ | 2,631 |
| $ | 90,724 |
| | $ | 91,220 |
| $ | 8,594,305 |
|
Personal Banking | 1,433 |
| 20,221 |
| | 63,660 |
| 5,178,462 |
| 919 |
| 18,172 |
| | 64,762 |
| 5,250,910 |
|
Total | $ | 2,887 |
| $ | 65,158 |
| | $ | 154,945 |
| $ | 13,561,434 |
| $ | 3,550 |
| $ | 108,896 |
| | $ | 155,982 |
| $ | 13,845,215 |
|
December 31, 2016 | | | | |
December 31, 2017 | | | | |
Commercial | $ | 1,817 |
| $ | 44,795 |
| | $ | 89,544 |
| $ | 8,166,180 |
| $ | 3,067 |
| $ | 92,613 |
| | $ | 90,637 |
| $ | 8,532,213 |
|
Personal Banking | 1,292 |
| 19,737 |
| | 63,279 |
| 5,182,024 |
| 1,176 |
| 22,182 |
| | 64,652 |
| 5,336,666 |
|
Total | $ | 3,109 |
| $ | 64,532 |
| | $ | 152,823 |
| $ | 13,348,204 |
| $ | 4,243 |
| $ | 114,795 |
| | $ | 155,289 |
| $ | 13,868,879 |
|
Impaired loans
The table below shows the Company’s investment in impaired loans at June 30, 20172018 and December 31, 2016.2017. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 14.15.
| | (In thousands) | | June 30, 2017 | | Dec. 31, 2016 | | June 30, 2018 | | Dec. 31, 2017 |
Non-accrual loans | | $ | 13,362 |
| | $ | 14,283 |
| | $ | 9,472 |
| | $ | 11,983 |
|
Restructured loans (accruing) | | 51,796 |
| | 50,249 |
| | 99,424 |
| | 102,812 |
|
Total impaired loans | | $ | 65,158 |
| | $ | 64,532 |
| | $ | 108,896 |
| | $ | 114,795 |
|
The following table provides additional information about impaired loans held by the Company at June 30, 20172018 and December 31, 2016,2017, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.
| |
(In thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance |
June 30, 2017 | | |
June 30, 2018 | | |
With no related allowance recorded: | | |
Business | $ | 5,566 |
| $ | 9,000 |
| $ | — |
| $ | 4,946 |
| $ | 8,936 |
| $ | — |
|
Real estate – construction and land | 537 |
| 752 |
| — |
| |
Real estate – business | | 1,210 |
| 1,300 |
| — |
|
| $ | 6,103 |
| $ | 9,752 |
| $ | — |
| $ | 6,156 |
| $ | 10,236 |
| $ | — |
|
With an allowance recorded: | | |
Business | $ | 29,226 |
| $ | 29,821 |
| $ | 914 |
| $ | 70,871 |
| $ | 71,157 |
| $ | 2,090 |
|
Real estate – construction and land | 65 |
| 68 |
| 3 |
| 1,342 |
| 1,346 |
| 39 |
|
Real estate – business | 9,543 |
| 10,961 |
| 537 |
| 12,355 |
| 12,928 |
| 502 |
|
Real estate – personal | 6,286 |
| 9,258 |
| 570 |
| 5,707 |
| 8,134 |
| 295 |
|
Consumer | 6,242 |
| 6,280 |
| 259 |
| 5,464 |
| 5,464 |
| 52 |
|
Revolving home equity | 582 |
| 582 |
| 10 |
| 114 |
| 114 |
| 11 |
|
Consumer credit card | 7,111 |
| 7,111 |
| 594 |
| 6,887 |
| 6,887 |
| 561 |
|
| $ | 59,055 |
| $ | 64,081 |
| $ | 2,887 |
| $ | 102,740 |
| $ | 106,030 |
| $ | 3,550 |
|
Total | $ | 65,158 |
| $ | 73,833 |
| $ | 2,887 |
| $ | 108,896 |
| $ | 116,266 |
| $ | 3,550 |
|
December 31, 2016 | | |
December 31, 2017 | | |
With no related allowance recorded: | | |
Business | $ | 7,375 |
| $ | 10,470 |
| $ | — |
| $ | 5,356 |
| $ | 9,000 |
| $ | — |
|
Real estate – construction and land | 557 |
| 752 |
| — |
| |
Real estate – business | | 1,299 |
| 1,303 |
| — |
|
Consumer | | 779 |
| 817 |
| — |
|
| $ | 7,932 |
| $ | 11,222 |
| $ | — |
| $ | 7,434 |
| $ | 11,120 |
| $ | — |
|
With an allowance recorded: | | |
Business | $ | 29,924 |
| $ | 31,795 |
| $ | 1,318 |
| $ | 72,589 |
| $ | 73,168 |
| $ | 2,455 |
|
Real estate – construction and land | 69 |
| 72 |
| 3 |
| 837 |
| 841 |
| 27 |
|
Real estate – business | 6,870 |
| 8,072 |
| 496 |
| 12,532 |
| 13,071 |
| 585 |
|
Real estate – personal | 6,394 |
| 9,199 |
| 642 |
| 9,126 |
| 11,914 |
| 532 |
|
Consumer | 5,281 |
| 5,281 |
| 57 |
| 5,388 |
| 5,426 |
| 67 |
|
Revolving home equity | 584 |
| 584 |
| 1 |
| 204 |
| 204 |
| 11 |
|
Consumer credit card | 7,478 |
| 7,478 |
| 592 |
| 6,685 |
| 6,685 |
| 566 |
|
| $ | 56,600 |
| $ | 62,481 |
| $ | 3,109 |
| $ | 107,361 |
| $ | 111,309 |
| $ | 4,243 |
|
Total | $ | 64,532 |
| $ | 73,703 |
| $ | 3,109 |
| $ | 114,795 |
| $ | 122,429 |
| $ | 4,243 |
|
Total average impaired loans for the three and six month periods ended June 30, 20172018 and 2016,2017, respectively, are shown in the table below.
| |
(In thousands) | Commercial | Personal Banking | Total | Commercial | Personal Banking | Total |
Average Impaired Loans: | | |
For the three months ended June 30, 2018 | | |
Non-accrual loans | | $ | 7,676 |
| $ | 2,005 |
| $ | 9,681 |
|
Restructured loans (accruing) | | 81,832 |
| 17,122 |
| 98,954 |
|
Total | | $ | 89,508 |
| $ | 19,127 |
| $ | 108,635 |
|
For the six months ended June 30, 2018 | | |
Non-accrual loans | | $ | 8,097 |
| $ | 2,464 |
| $ | 10,561 |
|
Restructured loans (accruing) | | 80,552 |
| 17,943 |
| 98,495 |
|
Total | | $ | 88,649 |
| $ | 20,407 |
| $ | 109,056 |
|
For the three months ended June 30, 2017 | | |
Non-accrual loans | $ | 9,867 |
| $ | 4,539 |
| $ | 14,406 |
| $ | 9,867 |
| $ | 4,539 |
| $ | 14,406 |
|
Restructured loans (accruing) | 34,765 |
| 15,780 |
| 50,545 |
| 34,765 |
| 15,780 |
| 50,545 |
|
Total | $ | 44,632 |
| $ | 20,319 |
| $ | 64,951 |
| $ | 44,632 |
| $ | 20,319 |
| $ | 64,951 |
|
For the six months ended June 30, 2017 | | |
Non-accrual loans | $ | 10,238 |
| $ | 4,027 |
| $ | 14,265 |
| $ | 10,238 |
| $ | 4,027 |
| $ | 14,265 |
|
Restructured loans (accruing) | 33,333 |
| 15,991 |
| 49,324 |
| 33,333 |
| 15,991 |
| 49,324 |
|
Total | $ | 43,571 |
| $ | 20,018 |
| $ | 63,589 |
| $ | 43,571 |
| $ | 20,018 |
| $ | 63,589 |
|
For the three months ended June 30, 2016 | | |
Non-accrual loans | $ | 22,098 |
| $ | 4,461 |
| $ | 26,559 |
| |
Restructured loans (accruing) | 28,775 |
| 17,297 |
| 46,072 |
| |
Total | $ | 50,873 |
| $ | 21,758 |
| $ | 72,631 |
| |
For the six months ended June 30, 2016 | | |
Non-accrual loans | $ | 21,551 |
| $ | 4,542 |
| $ | 26,093 |
| |
Restructured loans (accruing) | 27,977 |
| 17,499 |
| 45,476 |
| |
Total | $ | 49,528 |
| $ | 22,041 |
| $ | 71,569 |
| |
The table below shows interest income recognized during the three and six month periods ended June 30, 20172018 and 2016,2017, respectively, for impaired loans held at the end of each period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 14.15.
| | | For the Three Months Ended June 30 | | For the Six Months Ended June 30 | For the Three Months Ended June 30 | | For the Six Months Ended June 30 |
(In thousands) | 2017 | 2016 | | 2017 | 2016 | 2018 | 2017 | | 2018 | 2017 |
Interest income recognized on impaired loans: | | | | | | |
Business | $ | 319 |
| $ | 236 |
| | $ | 637 |
| $ | 472 |
| $ | 821 |
| $ | 319 |
| | $ | 1,641 |
| $ | 637 |
|
Real estate – construction and land | 1 |
| 3 |
| | 2 |
| 5 |
| 22 |
| 1 |
| | 44 |
| 2 |
|
Real estate – business | 88 |
| 56 |
| | 175 |
| 112 |
| 147 |
| 88 |
| | 294 |
| 175 |
|
Real estate – personal | 36 |
| 42 |
| | 71 |
| 84 |
| 52 |
| 36 |
| | 103 |
| 71 |
|
Consumer | 80 |
| 89 |
| | 159 |
| 177 |
| 82 |
| 80 |
| | 164 |
| 159 |
|
Revolving home equity | 6 |
| 4 |
| | 12 |
| 7 |
| 1 |
| 6 |
| | 2 |
| 12 |
|
Consumer credit card | 145 |
| 159 |
| | 289 |
| 318 |
| 159 |
| 145 |
| | 317 |
| 289 |
|
Total | $ | 675 |
| $ | 589 |
| | $ | 1,345 |
| $ | 1,175 |
| $ | 1,284 |
| $ | 675 |
| | $ | 2,565 |
| $ | 1,345 |
|
Delinquent and non-accrual loans
The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at June 30, 20172018 and December 31, 2016.2017.
| |
(In thousands) | Current or Less Than 30 Days Past Due |
30 – 89 Days Past Due | 90 Days Past Due and Still Accruing | Non-accrual |
Total | Current or Less Than 30 Days Past Due |
30 – 89 Days Past Due | 90 Days Past Due and Still Accruing | Non-accrual |
Total |
June 30, 2017 | | |
June 30, 2018 | | |
Commercial: | | |
Business | $ | 4,842,945 |
| $ | 2,761 |
| $ | 372 |
| $ | 6,330 |
| $ | 4,852,408 |
| $ | 4,983,337 |
| $ | 1,404 |
| $ | 443 |
| $ | 5,114 |
| $ | 4,990,298 |
|
Real estate – construction and land | 843,289 |
| 4,319 |
| — |
| 544 |
| 848,152 |
| 963,654 |
| 3,492 |
| — |
| 5 |
| 967,151 |
|
Real estate – business | 2,721,612 |
| 3,904 |
| — |
| 1,833 |
| 2,727,349 |
| 2,718,888 |
| 6,227 |
| — |
| 2,465 |
| 2,727,580 |
|
Personal Banking: | | |
Real estate – personal | 1,997,661 |
| 6,060 |
| 1,978 |
| 3,504 |
| 2,009,203 |
| 2,092,350 |
| 7,155 |
| 1,193 |
| 1,888 |
| 2,102,586 |
|
Consumer | 2,012,634 |
| 22,526 |
| 2,203 |
| 1,151 |
| 2,038,514 |
| 1,985,195 |
| 25,096 |
| 2,353 |
| — |
| 2,012,644 |
|
Revolving home equity | 400,306 |
| 2,154 |
| 927 |
| — |
| 403,387 |
| 372,865 |
| 708 |
| 984 |
| — |
| 374,557 |
|
Consumer credit card | 722,604 |
| 9,111 |
| 9,150 |
| — |
| 740,865 |
| 758,230 |
| 8,504 |
| 8,480 |
| — |
| 775,214 |
|
Overdrafts | 6,414 |
| 300 |
| — |
| — |
| 6,714 |
| 3,731 |
| 350 |
| — |
| — |
| 4,081 |
|
Total | $ | 13,547,465 |
| $ | 51,135 |
| $ | 14,630 |
| $ | 13,362 |
| $ | 13,626,592 |
| $ | 13,878,250 |
| $ | 52,936 |
| $ | 13,453 |
| $ | 9,472 |
| $ | 13,954,111 |
|
December 31, 2016 | | |
December 31, 2017 | | |
Commercial: | | |
Business | $ | 4,763,274 |
| $ | 3,735 |
| $ | 674 |
| $ | 8,682 |
| $ | 4,776,365 |
| $ | 4,949,148 |
| $ | 3,085 |
| $ | 374 |
| $ | 5,947 |
| $ | 4,958,554 |
|
Real estate – construction and land | 789,633 |
| 1,039 |
| — |
| 564 |
| 791,236 |
| 967,321 |
| 1,473 |
| 21 |
| 5 |
| 968,820 |
|
Real estate – business | 2,639,586 |
| 2,154 |
| — |
| 1,634 |
| 2,643,374 |
| 2,694,234 |
| 482 |
| — |
| 2,736 |
| 2,697,452 |
|
Personal Banking: | | |
Real estate – personal | 1,995,724 |
| 9,162 |
| 2,108 |
| 3,403 |
| 2,010,397 |
| 2,050,787 |
| 6,218 |
| 3,321 |
| 2,461 |
| 2,062,787 |
|
Consumer | 1,957,358 |
| 29,783 |
| 3,660 |
| — |
| 1,990,801 |
| 2,067,025 |
| 32,674 |
| 3,954 |
| 834 |
| 2,104,487 |
|
Revolving home equity | 411,483 |
| 1,032 |
| 1,119 |
| — |
| 413,634 |
| 397,349 |
| 1,962 |
| 1,276 |
| — |
| 400,587 |
|
Consumer credit card | 757,443 |
| 10,187 |
| 8,835 |
| — |
| 776,465 |
| 764,568 |
| 10,115 |
| 9,181 |
| — |
| 783,864 |
|
Overdrafts | 10,014 |
| 450 |
| — |
| — |
| 10,464 |
| 6,840 |
| 283 |
| — |
| — |
| 7,123 |
|
Total | $ | 13,324,515 |
| $ | 57,542 |
| $ | 16,396 |
| $ | 14,283 |
| $ | 13,412,736 |
| $ | 13,897,272 |
| $ | 56,292 |
| $ | 18,127 |
| $ | 11,983 |
| $ | 13,983,674 |
|
Credit quality
The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.
| | Commercial Loans |
(In thousands) |
Business | Real Estate-Construction | Real Estate- Business |
Total |
Business | Real Estate-Construction | Real Estate- Business |
Total |
June 30, 2017 | | |
June 30, 2018 | | |
Pass | $ | 4,617,838 |
| $ | 843,151 |
| $ | 2,629,544 |
| $ | 8,090,533 |
| $ | 4,771,613 |
| $ | 954,492 |
| $ | 2,648,144 |
| $ | 8,374,249 |
|
Special mention | 180,380 |
| 1,754 |
| 44,279 |
| 226,413 |
| 58,771 |
| 10,501 |
| 33,791 |
| 103,063 |
|
Substandard | 47,860 |
| 2,703 |
| 51,693 |
| 102,256 |
| 154,800 |
| 2,153 |
| 43,180 |
| 200,133 |
|
Non-accrual | 6,330 |
| 544 |
| 1,833 |
| 8,707 |
| 5,114 |
| 5 |
| 2,465 |
| 7,584 |
|
Total | $ | 4,852,408 |
| $ | 848,152 |
| $ | 2,727,349 |
| $ | 8,427,909 |
| $ | 4,990,298 |
| $ | 967,151 |
| $ | 2,727,580 |
| $ | 8,685,029 |
|
December 31, 2016 | | |
December 31, 2017 | | |
Pass | $ | 4,607,553 |
| $ | 788,778 |
| $ | 2,543,348 |
| $ | 7,939,679 |
| $ | 4,740,013 |
| $ | 955,499 |
| $ | 2,593,005 |
| $ | 8,288,517 |
|
Special mention | 116,642 |
| 722 |
| 45,479 |
| 162,843 |
| 59,177 |
| 10,614 |
| 50,577 |
| 120,368 |
|
Substandard | 43,488 |
| 1,172 |
| 52,913 |
| 97,573 |
| 153,417 |
| 2,702 |
| 51,134 |
| 207,253 |
|
Non-accrual | 8,682 |
| 564 |
| 1,634 |
| 10,880 |
| 5,947 |
| 5 |
| 2,736 |
| 8,688 |
|
Total | $ | 4,776,365 |
| $ | 791,236 |
| $ | 2,643,374 |
| $ | 8,210,975 |
| $ | 4,958,554 |
| $ | 968,820 |
| $ | 2,697,452 |
| $ | 8,624,826 |
|
The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain Personal Bankingpersonal real estate loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. AtThese loans totaled $211.1 million at June 30, 2017, these were comprised of $227.42018 and $219.2 million inat December 31, 2017. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $161.8 million at June 30, 2018 and $145.0 million at December 31, 2017. As the healthcare loans are guaranteed by the hospital, FICO scores are not considered relevant for this program. The personal real estate loans or 4.4%and consumer loans excluded below totaled less than 8% of the Personal Banking portfolio, compared to $237.2 million at December 31, 2016.portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at June 30, 20172018 and December 31, 20162017 by FICO score.
| | Personal Banking Loans | | % of Loan Category | % of Loan Category |
| Real Estate - Personal | Consumer | Revolving Home Equity | Consumer Credit Card | Real Estate - Personal | Consumer | Revolving Home Equity | Consumer Credit Card |
June 30, 2017 | | |
June 30, 2018 | | |
FICO score: | | |
Under 600 | 1.2 | % | 3.2 | % | 1.0 | % | 4.9 | % | 1.1 | % | 3.2 | % | .8 | % | 4.6 | % |
600 - 659 | 2.7 |
| 5.7 |
| 1.8 |
| 14.8 |
| 2.0 |
| 5.1 |
| 1.6 |
| 14.1 |
|
660 - 719 | 10.6 |
| 18.5 |
| 9.5 |
| 34.8 |
| 10.0 |
| 18.0 |
| 9.2 |
| 35.3 |
|
720 - 779 | 26.1 |
| 26.9 |
| 21.8 |
| 25.8 |
| 23.6 |
| 23.6 |
| 22.1 |
| 26.4 |
|
780 and over | 59.4 |
| 45.7 |
| 65.9 |
| 19.7 |
| 63.3 |
| 50.1 |
| 66.3 |
| 19.6 |
|
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
December 31, 2016 | | |
December 31, 2017 | | |
FICO score: | | |
Under 600 | 1.3 | % | 3.4 | % | 1.0 | % | 4.9 | % | 1.3 | % | 3.3 | % | 1.1 | % | 4.7 | % |
600 - 659 | 2.6 |
| 6.4 |
| 1.8 |
| 15.5 |
| 2.1 |
| 5.5 |
| 1.7 |
| 14.4 |
|
660 - 719 | 10.4 |
| 19.7 |
| 9.7 |
| 34.9 |
| 10.5 |
| 17.3 |
| 9.5 |
| 34.4 |
|
720 - 779 | 25.4 |
| 26.3 |
| 21.1 |
| 25.1 |
| 25.6 |
| 26.8 |
| 21.4 |
| 26.0 |
|
780 and over | 60.3 |
| 44.2 |
| 66.4 |
| 19.6 |
| 60.5 |
| 47.1 |
| 66.3 |
| 20.5 |
|
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Troubled debt restructurings
As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $59.2 million at June 30, 2017.restructurings, as shown in the table below. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected, and those non-accrual loans totaled $7.4 million at June 30, 2017.collected. Other performing restructured loans totaled $51.8 million at June 30, 2017. These includeare comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result the loans were classified as troubled debt restructurings. These commercial loans totaled $36.8 million at June 30, 2017. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $7.1 million at June 30, 2017.programs. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company hasalso classified additionalcertain loans as troubled debt restructuringsrestructings because they were not reaffirmed by the borrower in bankruptcy proceedings. At June 30, 2017, theseThese loans totaled $7.6 million inare comprised of personal real estate, revolving home equity and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.payments.
|
| | | | | | | |
(In thousands) | June 30, 2018 | December 31, 2017 |
Accruing loans: | | |
| Non-market interest rates | $ | 86,906 |
| $ | 88,588 |
|
| Assistance programs | 6,887 |
| 6,685 |
|
| Bankruptcy non-affirmation | 5,335 |
| 7,283 |
|
| Other | 296 |
| 256 |
|
Non-accrual loans | 7,156 |
| 7,796 |
|
Total troubled debt restructurings | $ | 106,580 |
| $ | 110,608 |
|
The following table below shows the outstanding balancesbalance of loans classified as troubled debt restructurings by loan classification at June 30, 2017,2018, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.
| | (In thousands) | June 30, 2017 | Balance 90 days past due at any time during previous 12 months | June 30, 2018 | Balance 90 days past due at any time during previous 12 months |
Commercial: | | |
Business | $ | 34,088 |
| $ | — |
| $ | 75,680 |
| $ | 32 |
|
Real estate - construction and land | 537 |
| — |
| 1,337 |
| — |
|
Real estate - business | 7,710 |
| — |
| 12,311 |
| — |
|
Personal Banking: | | |
Real estate - personal | 3,995 |
| 353 |
| 4,787 |
| 303 |
|
Consumer | 5,149 |
| 50 |
| 5,464 |
| 115 |
|
Revolving home equity | 582 |
| 47 |
| 114 |
| 42 |
|
Consumer credit card | 7,111 |
| 649 |
| 6,887 |
| 577 |
|
Total restructured loans | $ | 59,172 |
| $ | 1,099 |
| |
Total troubled debt restructurings | | $ | 106,580 |
| $ | 1,069 |
|
For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. No financial impact resulted from those performing loans where the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. The effects of modifications to consumer credit card loans were estimated to decrease interest income by approximately $862$925 thousand on an annual, pre-tax basis, compared to amounts contractually owed.
The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to
collect under contractual terms. Performing commercial loans have had no other concessions granted other than being renewed at an interest rate judged not to be market. As such, they have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.
If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for loan losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing troubled debt
restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for loan losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begun.
The Company had commitments of $3.6$6.1 million at June 30, 20172018 to lend additional funds to borrowers with restructured loans.
Loans held for sale
The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 10. The loans are primarily sold to FNMA, FHLMC, and GNMA. At June 30, 2017,2018, the fair value of these loans was $14.1$10.8 million, and the unpaid principal balance was $13.6$10.4 million.
The Company also designates student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which at June 30, 20172018 totaled $7.9$9.6 million.
At June 30, 2017,2018, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing.
Foreclosed real estate/repossessed assets
The Company’s holdings of foreclosed real estate totaled $515 thousand$1.0 million and $366$681 thousand at June 30, 20172018 and December 31, 2016,2017, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.4$2.3 million and $2.2$2.7 million at June 30, 20172018 and December 31, 2016,2017, respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.
3. Investment Securities
Investment securities as shown in this report reflect revised categories as required by the Company’s adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, on January 1, 2018. That new guidance refined the definition of equity securities and required their segregation from available for sale debt securities. For comparability purposes, prior period disclosures in this report have been revised to show the new categorization.
|
| | | | | | |
(In thousands) | June 30, 2018 | December 31, 2017 |
Available for sale debt securities | $ | 8,412,376 |
| $ | 8,725,442 |
|
Trading debt securities | 31,156 |
| 18,269 |
|
Equity securities: | | |
Readily determinable fair value | 2,741 |
| 48,838 |
|
No readily determinable fair value | 1,703 |
| 1,753 |
|
Other: |
|
| |
Federal Reserve Bank stock | 33,369 |
| 33,253 |
|
Federal Home Loan Bank stock | 10,000 |
| 10,000 |
|
Private equity investments | 68,940 |
| 55,752 |
|
Total investment securities | $ | 8,560,285 |
| $ | 8,893,307 |
|
InvestmentWhile changes in the fair value of available for sale debt securities continue to be recorded in the equity category of accumulated other comprehensive income, the new guidance requires changes in the fair value of equity securities to be recorded in current earnings. As required by the new guidance, the unrealized gain in fair value on equity securities (recorded in accumulated other
comprehensive income at December 31, 2017) was reclassified to retained earnings on January 1, 2018. The amount of the reclassification was $33.3 million, net of tax.
Equity securities include common and preferred stock with readily determinable fair values that totaled $2.5 million at cost and $2.7 million at fair value consisted of the following at June 30, 2017 and December 31, 2016.2018. The decline in these balances from prior periods was due to a third party merger transaction in June 2018, in which the majority of these securities were redeemed for cash of $39.9 million. During the first six months of 2018, unrealized net losses of $176 thousand were recognized in current earnings on equity securities still held at June 30, 2018.
|
| | | | | | |
(In thousands) | June 30, 2017 | December 31, 2016 |
Available for sale | $ | 9,439,701 |
| $ | 9,649,203 |
|
Trading | 22,291 |
| 22,225 |
|
Non-marketable | 102,388 |
| 99,558 |
|
Total investment securities | $ | 9,564,380 |
| $ | 9,770,986 |
|
MostEquity securities also include securities with a carrying value of $1.7 million that do not have readily determinable fair values. The Company has elected, under the ASU, to measure these at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the Company’ssame issuer. The Company did not record any impairment or other adjustments to the carrying amount of these investments during the period.
Other investment securities are classified as available for sale, and this portfoliowhose accounting is discussednot addressed in more detail below. The available for sale and the trading portfolios are carried at fair value. Securities which are classified as non-marketableASU include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, and Federal Reserve Bankinvestments in portfolio concerns held by the Company's private equity subsidiaries. FRB stock and FHLB stock are held for debt and regulatory purposes, which totaled $47.1 million at June 30, 2017 and $46.9 million at December 31, 2016.purposes. Investment in Federal Reserve BankFRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. These holdings are carried at cost. Non-marketable securities also includeThe private equity investments, which amounted to $55.0 million at June 30, 2017 and $52.3 million at December 31, 2016. Inin the absence of readily ascertainable market values, these securities are carried at estimated fair value.
The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in accumulated other comprehensive income (AOCI). A summary of the available for sale investmentdebt securities by maturity groupings as of June 30, 20172018 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.
|
| | | | | | |
(In thousands) | Amortized Cost | Fair Value |
U.S. government and federal agency obligations: | | |
Within 1 year | $ | 58,665 |
| $ | 58,829 |
|
After 1 but within 5 years | 499,601 |
| 502,990 |
|
After 5 but within 10 years | 318,318 |
| 318,212 |
|
After 10 years | 35,444 |
| 32,524 |
|
Total U.S. government and federal agency obligations | 912,028 |
| 912,555 |
|
Government-sponsored enterprise obligations: | | |
Within 1 year | 98,069 |
| 98,206 |
|
After 1 but within 5 years | 336,302 |
| 335,723 |
|
After 10 years | 12,493 |
| 12,356 |
|
Total government-sponsored enterprise obligations | 446,864 |
| 446,285 |
|
State and municipal obligations: | | |
Within 1 year | 171,936 |
| 172,890 |
|
After 1 but within 5 years | 643,200 |
| 654,145 |
|
After 5 but within 10 years | 879,036 |
| 900,292 |
|
After 10 years | 50,896 |
| 50,470 |
|
Total state and municipal obligations | 1,745,068 |
| 1,777,797 |
|
Mortgage and asset-backed securities: | | |
Agency mortgage-backed securities | 2,604,217 |
| 2,620,198 |
|
Non-agency mortgage-backed securities | 1,063,236 |
| 1,066,889 |
|
Asset-backed securities | 2,249,399 |
| 2,250,426 |
|
Total mortgage and asset-backed securities | 5,916,852 |
| 5,937,513 |
|
Other debt securities: | | |
Within 1 year | 13,387 |
| 13,389 |
|
After 1 but within 5 years | 176,199 |
| 177,812 |
|
After 5 but within 10 years | 125,910 |
| 126,503 |
|
Total other debt securities | 315,496 |
| 317,704 |
|
Equity securities | 5,463 |
| 47,847 |
|
Total available for sale investment securities | $ | 9,341,771 |
| $ | 9,439,701 |
|
|
| | | | | | |
(In thousands) | Amortized Cost | Fair Value |
U.S. government and federal agency obligations: | | |
Within 1 year | $ | 52,660 |
| $ | 52,603 |
|
After 1 but within 5 years | 645,431 |
| 634,819 |
|
After 5 but within 10 years | 157,967 |
| 155,108 |
|
After 10 years | 69,202 |
| 68,562 |
|
Total U.S. government and federal agency obligations | 925,260 |
| 911,092 |
|
Government-sponsored enterprise obligations: | | |
Within 1 year | 117,562 |
| 117,444 |
|
After 1 but within 5 years | 121,584 |
| 119,743 |
|
After 5 but within 10 years | 34,984 |
| 33,946 |
|
After 10 years | 42,852 |
| 40,228 |
|
Total government-sponsored enterprise obligations | 316,982 |
| 311,361 |
|
State and municipal obligations: | | |
Within 1 year | 147,325 |
| 147,668 |
|
After 1 but within 5 years | 598,663 |
| 600,688 |
|
After 5 but within 10 years | 591,819 |
| 590,950 |
|
After 10 years | 40,963 |
| 39,858 |
|
Total state and municipal obligations | 1,378,770 |
| 1,379,164 |
|
Mortgage and asset-backed securities: | | |
Agency mortgage-backed securities | 3,194,764 |
| 3,131,025 |
|
Non-agency mortgage-backed securities | 1,019,545 |
| 1,010,331 |
|
Asset-backed securities | 1,351,461 |
| 1,338,542 |
|
Total mortgage and asset-backed securities | 5,565,770 |
| 5,479,898 |
|
Other debt securities: | | |
Within 1 year | 9,003 |
| 8,971 |
|
After 1 but within 5 years | 257,704 |
| 252,151 |
|
After 5 but within 10 years | 73,283 |
| 69,739 |
|
Total other debt securities | 339,990 |
| 330,861 |
|
Total available for sale debt securities | $ | 8,526,772 |
| $ | 8,412,376 |
|
Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $432.0$443.8 million, at fair value, at June 30, 2017.2018. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $16.8$15.1 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Interest on these bonds is currently being paid at the maximum failed auction rates. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value
For debt securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income,AOCI, by security type.
| | (In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
June 30, 2017 | | |
June 30, 2018 | | |
U.S. government and federal agency obligations | $ | 912,028 |
| $ | 5,575 |
| $ | (5,048 | ) | $ | 912,555 |
| $ | 925,260 |
| $ | 503 |
| $ | (14,671 | ) | $ | 911,092 |
|
Government-sponsored enterprise obligations | 446,864 |
| 892 |
| (1,471 | ) | 446,285 |
| 316,982 |
| — |
| (5,621 | ) | 311,361 |
|
State and municipal obligations | 1,745,068 |
| 34,717 |
| (1,988 | ) | 1,777,797 |
| 1,378,770 |
| 8,105 |
| (7,711 | ) | 1,379,164 |
|
Mortgage and asset-backed securities: | | |
Agency mortgage-backed securities | 2,604,217 |
| 29,780 |
| (13,799 | ) | 2,620,198 |
| 3,194,764 |
| 5,995 |
| (69,734 | ) | 3,131,025 |
|
Non-agency mortgage-backed securities | 1,063,236 |
| 8,063 |
| (4,410 | ) | 1,066,889 |
| 1,019,545 |
| 6,232 |
| (15,446 | ) | 1,010,331 |
|
Asset-backed securities | 2,249,399 |
| 5,725 |
| (4,698 | ) | 2,250,426 |
| 1,351,461 |
| 2,343 |
| (15,262 | ) | 1,338,542 |
|
Total mortgage and asset-backed securities | 5,916,852 |
| 43,568 |
| (22,907 | ) | 5,937,513 |
| 5,565,770 |
| 14,570 |
| (100,442 | ) | 5,479,898 |
|
Other debt securities | 315,496 |
| 2,745 |
| (537 | ) | 317,704 |
| 339,990 |
| — |
| (9,129 | ) | 330,861 |
|
Equity securities | 5,463 |
| 42,384 |
| — |
| 47,847 |
| |
Total | $ | 9,341,771 |
| $ | 129,881 |
| $ | (31,951 | ) | $ | 9,439,701 |
| $ | 8,526,772 |
| $ | 23,178 |
| $ | (137,574 | ) | $ | 8,412,376 |
|
December 31, 2016 | | |
December 31, 2017 | | |
U.S. government and federal agency obligations | $ | 919,904 |
| $ | 7,312 |
| $ | (6,312 | ) | $ | 920,904 |
| $ | 917,494 |
| $ | 4,096 |
| $ | (4,443 | ) | $ | 917,147 |
|
Government-sponsored enterprise obligations | 450,448 |
| 1,126 |
| (1,576 | ) | 449,998 |
| 408,266 |
| 26 |
| (1,929 | ) | 406,363 |
|
State and municipal obligations | 1,778,684 |
| 12,223 |
| (12,693 | ) | 1,778,214 |
| 1,592,707 |
| 21,413 |
| (2,754 | ) | 1,611,366 |
|
Mortgage and asset-backed securities: | | |
Agency mortgage-backed securities | 2,674,964 |
| 31,610 |
| (20,643 | ) | 2,685,931 |
| 3,046,701 |
| 17,956 |
| (23,744 | ) | 3,040,913 |
|
Non-agency mortgage-backed securities | 1,054,446 |
| 7,686 |
| (6,493 | ) | 1,055,639 |
| 903,920 |
| 6,710 |
| (4,837 | ) | 905,793 |
|
Asset-backed securities | 2,389,176 |
| 3,338 |
| (11,213 | ) | 2,381,301 |
| 1,495,380 |
| 2,657 |
| (5,237 | ) | 1,492,800 |
|
Total mortgage and asset-backed securities | 6,118,586 |
| 42,634 |
| (38,349 | ) | 6,122,871 |
| 5,446,001 |
| 27,323 |
| (33,818 | ) | 5,439,506 |
|
Other debt securities | 327,030 |
| 935 |
| (2,012 | ) | 325,953 |
| 350,988 |
| 1,250 |
| (1,178 | ) | 351,060 |
|
Equity securities | 5,678 |
| 45,585 |
| — |
| 51,263 |
| |
Total | $ | 9,600,330 |
| $ | 109,815 |
| $ | (60,942 | ) | $ | 9,649,203 |
| $ | 8,715,456 |
| $ | 54,108 |
| $ | (44,122 | ) | $ | 8,725,442 |
|
The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or who have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, cash flow analyses are prepared. For more complex analyses, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At June 30, 2017,2018, the fair value of securities on this watch list was $68.9$57.3 million compared to $79.6$68.0 million at December 31, 2016.2017.
As of June 30, 2017,2018, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $30.3$22.4 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.3$14.2 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.
The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at June 30, 20172018 included the following:
| | Significant Inputs | Range | Range |
Prepayment CPR | 4% | - | 25% | 0% | - | 25% |
Projected cumulative default | 14% | - | 51% | 13% | - | 52% |
Credit support | 0% | - | 38% | 0% | - | 20% |
Loss severity | 16% | - | 63% | 14% | - | 63% |
The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities.
| | | For the Six Months Ended June 30 | For the Six Months Ended June 30 |
(In thousands) | 2017 | 2016 | 2018 | 2017 |
Cumulative OTTI credit losses at January 1 | $ | 14,080 |
| $ | 14,129 |
| $ | 14,199 |
| $ | 14,080 |
|
Credit losses on debt securities for which impairment was not previously recognized | 46 |
| — |
| 58 |
| 46 |
|
Credit losses on debt securities for which impairment was previously recognized | 274 |
| 270 |
| 10 |
| 274 |
|
Increase in expected cash flows that are recognized over remaining life of security | (146 | ) | (37 | ) | (104 | ) | (146 | ) |
Cumulative OTTI credit losses at June 30 | $ | 14,254 |
| $ | 14,362 |
| $ | 14,163 |
| $ | 14,254 |
|
SecuritiesDebt securities with unrealized losses recorded in accumulated other comprehensive incomeAOCI are shown in the table below, along with the length of the impairment period.
| | | Less than 12 months | | 12 months or longer | | Total | Less than 12 months | | 12 months or longer | | Total |
(In thousands) | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses |
June 30, 2017 | | | | | | |
June 30, 2018 | | | | | | |
U.S. government and federal agency obligations | $ | 145,884 |
| $ | 5,048 |
| | $ | — |
| $ | — |
| | $ | 145,884 |
| $ | 5,048 |
| $ | 707,018 |
| $ | 12,156 |
| | $ | 90,340 |
| $ | 2,515 |
| | $ | 797,358 |
| $ | 14,671 |
|
Government-sponsored enterprise obligations | 181,682 |
| 1,471 |
| | — |
| — |
| | 181,682 |
| 1,471 |
| 261,378 |
| 5,605 |
| | 49,983 |
| 16 |
| | 311,361 |
| 5,621 |
|
State and municipal obligations | 168,613 |
| 1,365 |
| | 13,761 |
| 623 |
| | 182,374 |
| 1,988 |
| 458,880 |
| 5,700 |
| | 51,863 |
| 2,011 |
| | 510,743 |
| 7,711 |
|
Mortgage and asset-backed securities: | | | | | | | | | | |
Agency mortgage-backed securities | 959,777 |
| 13,795 |
| | 1,720 |
| 4 |
| | 961,497 |
| 13,799 |
| 2,029,957 |
| 45,267 |
| | 566,986 |
| 24,467 |
| | 2,596,943 |
| 69,734 |
|
Non-agency mortgage-backed securities | 503,709 |
| 4,165 |
| | 47,189 |
| 245 |
| | 550,898 |
| 4,410 |
| 773,890 |
| 12,076 |
| | 134,679 |
| 3,370 |
| | 908,569 |
| 15,446 |
|
Asset-backed securities | 795,526 |
| 2,606 |
| | 234,619 |
| 2,092 |
| | 1,030,145 |
| 4,698 |
| 862,416 |
| 13,296 |
| | 173,895 |
| 1,966 |
| | 1,036,311 |
| 15,262 |
|
Total mortgage and asset-backed securities | 2,259,012 |
| 20,566 |
| | 283,528 |
| 2,341 |
| | 2,542,540 |
| 22,907 |
| 3,666,263 |
| 70,639 |
| | 875,560 |
| 29,803 |
| | 4,541,823 |
| 100,442 |
|
Other debt securities | 65,547 |
| 500 |
| | 1,463 |
| 37 |
| | 67,010 |
| 537 |
| 311,714 |
| 8,033 |
| | 19,147 |
| 1,096 |
| | 330,861 |
| 9,129 |
|
Total | $ | 2,820,738 |
| $ | 28,950 |
| | $ | 298,752 |
| $ | 3,001 |
| | $ | 3,119,490 |
| $ | 31,951 |
| $ | 5,405,253 |
| $ | 102,133 |
| | $ | 1,086,893 |
| $ | 35,441 |
| | $ | 6,492,146 |
| $ | 137,574 |
|
December 31, 2016 | | | | | | |
December 31, 2017 | | | | | | |
U.S. government and federal agency obligations | $ | 349,538 |
| $ | 2,823 |
| | $ | 32,208 |
| $ | 3,489 |
| | $ | 381,746 |
| $ | 6,312 |
| $ | 618,617 |
| $ | 4,443 |
| | $ | — |
| $ | — |
| | $ | 618,617 |
| $ | 4,443 |
|
Government-sponsored enterprise obligations | 190,441 |
| 1,576 |
| | — |
| — |
| | 190,441 |
| 1,576 |
| 286,393 |
| 1,712 |
| | 49,766 |
| 217 |
| | 336,159 |
| 1,929 |
|
State and municipal obligations | 700,779 |
| 12,164 |
| | 15,195 |
| 529 |
| | 715,974 |
| 12,693 |
| 282,843 |
| 1,752 |
| | 49,339 |
| 1,002 |
| | 332,182 |
| 2,754 |
|
Mortgage and asset-backed securities: | | | | | | | | | | |
Agency mortgage-backed securities | 1,147,416 |
| 20,638 |
| | 2,150 |
| 5 |
| | 1,149,566 |
| 20,643 |
| 1,320,689 |
| 9,433 |
| | 619,300 |
| 14,311 |
| | 1,939,989 |
| 23,744 |
|
Non-agency mortgage-backed securities | 688,131 |
| 6,373 |
| | 34,946 |
| 120 |
| | 723,077 |
| 6,493 |
| 577,017 |
| 2,966 |
| | 153,813 |
| 1,871 |
| | 730,830 |
| 4,837 |
|
Asset-backed securities | 780,209 |
| 5,277 |
| | 358,778 |
| 5,936 |
| | 1,138,987 |
| 11,213 |
| 786,048 |
| 3,168 |
| | 264,295 |
| 2,069 |
| | 1,050,343 |
| 5,237 |
|
Total mortgage and asset-backed securities | 2,615,756 |
| 32,288 |
| | 395,874 |
| 6,061 |
| | 3,011,630 |
| 38,349 |
| 2,683,754 |
| 15,567 |
| | 1,037,408 |
| 18,251 |
| | 3,721,162 |
| 33,818 |
|
Other debt securities | 179,639 |
| 1,986 |
| | 975 |
| 26 |
| | 180,614 |
| 2,012 |
| 144,090 |
| 727 |
| | 20,202 |
| 451 |
| | 164,292 |
| 1,178 |
|
Total | $ | 4,036,153 |
| $ | 50,837 |
| | $ | 444,252 |
| $ | 10,105 |
| | $ | 4,480,405 |
| $ | 60,942 |
| $ | 4,015,697 |
| $ | 24,201 |
| | $ | 1,156,715 |
| $ | 19,921 |
| | $ | 5,172,412 |
| $ | 44,122 |
|
Theavailable for sale debt portfolio included $6.5 billion of securities that were in a loss position at June 30, 2018, compared to $5.2 billion at December 31, 2017. The Company’s holdingstotal amount of state and municipal obligations included gross unrealized losses of $2.0loss on these securities was $137.6 million at June 30, 2017,2018, an increase of which $230 thousand related$93.5 million compared to auctionthe loss at December 31, 2017. This increase in losses was mainly due to a rising rate securities. This portfolio totaled $1.8 billion at fair value, or 18.8% of total available for sale securities. The average credit quality of the portfolio, excluding auction rate securities, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and the Company has processes and procedures in place to monitor its holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner.environment.
The following tables present proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.
| | | For the Six Months Ended June 30 | For the Six Months Ended June 30 |
(In thousands) | 2017 | 2016 | 2018 | 2017 |
Proceeds from sales of securities: | | |
Available for sale | $ | 4,972 |
| $ | — |
| |
Non-marketable | 1,580 |
| 2,071 |
| |
Available for sale debt securities | | $ | 152,541 |
| $ | 4,972 |
|
Equity securities | | 39,981 |
| 584 |
|
Other | | — |
| 996 |
|
Total proceeds | $ | 6,552 |
| $ | 2,071 |
| $ | 192,522 |
| $ | 6,552 |
|
| | |
Investment securities gains (losses), net: | | |
Available for sale: | | |
Available for sale debt securities: | | |
Losses realized on called bonds | $ | (254 | ) | $ | — |
| $ | — |
| $ | (254 | ) |
Gains realized on sales | | 423 |
| — |
|
Losses realized on sales | (22 | ) | — |
| — |
| (22 | ) |
Gains realized on donations | 4,315 |
| — |
| |
Other-than-temporary impairment recognized on debt securities | (320 | ) | (270 | ) | (68 | ) | (320 | ) |
Non-marketable: | | |
Equity securities: | | |
Gains realized on donations of securities | | — |
| 4,315 |
|
Gains realized on sales | 642 |
| 2,260 |
| 102 |
| 584 |
|
Losses realized on sales | (652 | ) | — |
| (8,917 | ) | — |
|
Fair value adjustments, net | (2,830 | ) | (3,729 | ) | 2,699 |
| — |
|
Total gains (losses), net | $ | 879 |
| $ | (1,739 | ) | |
Other: | | |
Gains realized on sales | | — |
| 58 |
|
Losses realized on sales | | — |
| (652 | ) |
Fair value adjustments, net | | 8,096 |
| (2,830 | ) |
Total investment securities gains, net | | $ | 2,335 |
| $ | 879 |
|
Securities gains for the six months ended June 30, 2018 included gains in fair value of $8.1 million on private equity investments and $2.7 million on equity securities. These were offset by an $8.9 million adjustment to recognize dividend income on a equity security liquidated during the second quarter of 2018.
At June 30, 2017,2018, securities totaling $3.9$3.8 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the Federal Reserve BankFRB and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $719.8$557.7 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.
4. Goodwill and Other Intangible Assets
The following table presents information about the Company's intangible assets which have estimable useful lives.
| | | June 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
(In thousands) | Gross Carrying Amount | Accumulated Amortization | Valuation Allowance | Net Amount | | Gross Carrying Amount | Accumulated Amortization | Valuation Allowance | Net Amount | Gross Carrying Amount | Accumulated Amortization | Valuation Allowance | Net Amount | | Gross Carrying Amount | Accumulated Amortization | Valuation Allowance | Net Amount |
Amortizable intangible assets: | | | | | | |
Core deposit premium | $ | 31,270 |
| $ | (27,914 | ) | $ | — |
| $ | 3,356 |
| | $ | 31,270 |
| $ | (27,429 | ) | $ | — |
| $ | 3,841 |
| $ | 31,270 |
| $ | (28,650 | ) | $ | — |
| $ | 2,620 |
| | $ | 31,270 |
| $ | (28,305 | ) | $ | — |
| $ | 2,965 |
|
Mortgage servicing rights | 6,637 |
| (2,975 | ) | (16 | ) | 3,646 |
| | 5,672 |
| (2,782 | ) | (22 | ) | 2,868 |
| 8,996 |
| (3,533 | ) | — |
| 5,463 |
| | 7,906 |
| (3,244 | ) | (9 | ) | 4,653 |
|
Total | $ | 37,907 |
| $ | (30,889 | ) | $ | (16 | ) | $ | 7,002 |
| | $ | 36,942 |
| $ | (30,211 | ) | $ | (22 | ) | $ | 6,709 |
| $ | 40,266 |
| $ | (32,183 | ) | $ | — |
| $ | 8,083 |
| | $ | 39,176 |
| $ | (31,549 | ) | $ | (9 | ) | $ | 7,618 |
|
Aggregate amortization expense on intangible assets was $330$313 thousand and $399$330 thousand for the three month periods ended June 30, 20172018 and 2016,2017, respectively, and $678$634 thousand and $794$678 thousand for the six month periods ended June 30, 20172018 and 2016,2017, respectively. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of June 30, 2017.2018. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.
| | (In thousands) | | |
2017 | $ | 1,141 |
| |
2018 | 1,091 |
| $ | 1,232 |
|
2019 | 917 |
| 1,094 |
|
2020 | 765 |
| 937 |
|
2021 | 651 |
| 816 |
|
2022 | | 720 |
|
Changes in the carrying amount of goodwill and net other intangible assets for the six month period ended June 30, 2017 is2018 are as follows:
| | (In thousands) | Goodwill | Core Deposit Premium | Mortgage Servicing Rights | Goodwill | Core Deposit Premium | Mortgage Servicing Rights |
Balance January 1, 2017 | $ | 138,921 |
| $ | 3,841 |
| $ | 2,868 |
| |
Balance January 1, 2018 | | $ | 138,921 |
| $ | 2,965 |
| $ | 4,653 |
|
Originations | — |
| — |
| 965 |
| — |
| — |
| 1,090 |
|
Amortization | — |
| (485 | ) | (193 | ) | — |
| (345 | ) | (289 | ) |
Impairment reversal | — |
| — |
| 6 |
| — |
| — |
| 9 |
|
Balance June 30, 2017 | $ | 138,921 |
| $ | 3,356 |
| $ | 3,646 |
| |
Balance June 30, 2018 | | $ | 138,921 |
| $ | 2,620 |
| $ | 5,463 |
|
Goodwill allocated to the Company’s operating segments at June 30, 20172018 and December 31, 20162017 is shown below.
|
| | | |
(In thousands) | |
Consumer segment | $ | 70,721 |
|
Commercial segment | 67,454 |
|
Wealth segment | 746 |
|
Total goodwill | $ | 138,921 |
|
5. Guarantees
The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured, and in the event of nonperformance by customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.
Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At June 30, 2017,2018, that net liability was $2.1$2.2 million, which will be accreted into income over the remaining life of the respective commitments.
The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $338.8$377.5 million at June 30, 2017.2018.
The Company periodically enters into credit risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral and at June 30, 2017,2018, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 32 to 11 years. At June 30, 2017,2018, the fair value of the Company's guarantee liabilities for RPAs was $139$67 thousand, and the notional amount of the underlying swaps was $75.3$103.2 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default.
6. Pension
The amount of net pension cost is shown in the table below:
| | | For the Three Months Ended June 30 | | For the Six Months Ended June 30 | For the Three Months Ended June 30 | | For the Six Months Ended June 30 |
(In thousands) | 2017 | 2016 | | 2017 | 2016 | 2018 | 2017 | | 2018 | 2017 |
Service cost - benefits earned during the period | $ | 128 |
| $ | 138 |
| | $ | 257 |
| $ | 271 |
| $ | 152 |
| $ | 128 |
| | $ | 305 |
| $ | 257 |
|
Interest cost on projected benefit obligation | 973 |
| 1,005 |
| | 1,946 |
| 1,972 |
| 951 |
| 973 |
| | 1,901 |
| 1,946 |
|
Expected return on plan assets | (1,438 | ) | (1,439 | ) | | (2,876 | ) | (2,876 | ) | (1,438 | ) | (1,438 | ) | | (2,875 | ) | (2,876 | ) |
Amortization of prior service cost | (68 | ) | (67 | ) | | (136 | ) | (135 | ) | (67 | ) | (68 | ) | | (135 | ) | (136 | ) |
Amortization of unrecognized net loss | 617 |
| 642 |
| | 1,234 |
| 1,293 |
| 592 |
| 617 |
| | 1,184 |
| 1,234 |
|
Net periodic pension cost | $ | 212 |
| $ | 279 |
| | $ | 425 |
| $ | 525 |
| $ | 190 |
| $ | 212 |
| | $ | 380 |
| $ | 425 |
|
Substantially all benefits accrued under the Company’s defined benefit pension plan were frozen effective January 1, 2005, and the remaining benefits were frozen effective January 1, 2011. During the first six months of 2017,2018, the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets. The Company has no plans to make any further contributions, other than those related to the CERP, during the remainder of 2017.
The Company adopted ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, on January 1, 2018. This guidance requires that the service cost component of net periodic pension cost be reported in the same income statement line item as other compensation costs, while other components of net periodic pension cost be reported separately from the service cost component. Historically, the Company has reported all components of pension cost in salaries and employee benefits. Beginning in 2018, only the service cost component has been included in this category, and the other components have been recorded in other non-interest expense. Prior period financial statements have not been revised because the amount of the reclassification was not significant.
7. Common Stock *
Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 12.
| | | For the Three Months Ended June 30 | | For the Six Months Ended June 30 | For the Three Months Ended June 30 | | For the Six Months Ended June 30 |
(In thousands, except per share data) | 2017 | 2016 | | 2017 | 2016 | 2018 | 2017 | | 2018 | 2017 |
Basic income per common share: | | | | | | |
Net income attributable to Commerce Bancshares, Inc. | $ | 78,960 |
| $ | 69,893 |
| | $ | 150,464 |
| $ | 135,267 |
| $ | 110,330 |
| $ | 78,960 |
| | $ | 211,314 |
| $ | 150,464 |
|
Less preferred stock dividends | 2,250 |
| 2,250 |
| | 4,500 |
| 4,500 |
| 2,250 |
| 2,250 |
| | 4,500 |
| 4,500 |
|
Net income available to common shareholders | $ | 76,710 |
| $ | 67,643 |
| | 145,964 |
| 130,767 |
| 108,080 |
| 76,710 |
| | 206,814 |
| 145,964 |
|
Less income allocated to nonvested restricted stock | 943 |
| 940 |
| | 1,888 |
| 1,834 |
| 1,139 |
| 943 |
| | 2,260 |
| 1,888 |
|
Net income allocated to common stock | $ | 75,767 |
| $ | 66,703 |
| | $ | 144,076 |
| $ | 128,933 |
| $ | 106,941 |
| $ | 75,767 |
| | $ | 204,554 |
| $ | 144,076 |
|
Weighted average common shares outstanding | 100,555 |
| 100,151 |
| | 100,463 |
| 100,247 |
| 105,686 |
| 105,583 |
| | 105,660 |
| 105,486 |
|
Basic income per common share | $ | .75 |
| $ | .67 |
| | $ | 1.43 |
| $ | 1.29 |
| $ | 1.02 |
| $ | .71 |
| | $ | 1.94 |
| $ | 1.36 |
|
Diluted income per common share: | | | | | | |
Net income available to common shareholders | $ | 76,710 |
| $ | 67,643 |
| | $ | 145,964 |
| $ | 130,767 |
| $ | 108,080 |
| $ | 76,710 |
| | $ | 206,814 |
| $ | 145,964 |
|
Less income allocated to nonvested restricted stock | 941 |
| 938 |
| | 1,883 |
| 1,831 |
| 1,136 |
| 941 |
| | 2,254 |
| 1,883 |
|
Net income allocated to common stock | $ | 75,769 |
| $ | 66,705 |
| | $ | 144,081 |
| $ | 128,936 |
| $ | 106,944 |
| $ | 75,769 |
| | $ | 204,560 |
| $ | 144,081 |
|
Weighted average common shares outstanding | 100,555 |
| 100,151 |
| | 100,463 |
| 100,247 |
| 105,686 |
| 105,583 |
| | 105,660 |
| 105,486 |
|
Net effect of the assumed exercise of stock-based awards - based on | | | | | | |
the treasury stock method using the average market price for the respective periods | 344 |
| 261 |
| | 370 |
| 245 |
| 343 |
| 360 |
| | 338 |
| 389 |
|
Weighted average diluted common shares outstanding | 100,899 |
| 100,412 |
| | 100,833 |
| 100,492 |
| 106,029 |
| 105,943 |
| | 105,998 |
| 105,875 |
|
Diluted income per common share | $ | .75 |
| $ | .66 |
| | $ | 1.43 |
| $ | 1.28 |
| $ | 1.01 |
| $ | .71 |
| | $ | 1.93 |
| $ | 1.36 |
|
Unexercised stock appreciation rights of 126295 thousand and 208132 thousand were excluded in the computation of diluted income per common share for the six month periods ended June 30, 20172018 and 2016,2017, respectively, because their inclusion would have been anti-dilutive.
* All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December 2016.2017.
8. Accumulated Other Comprehensive Income
The table below shows the activity and accumulated balances for components of other comprehensive income. The largest component is the unrealized holding gains and losses on available for sale debt securities. Unrealized gains and losses on debt securities for which an other-than-temporary impairment (OTTI) has been recorded in current earnings are shown separately below. The other component is the amortization from other comprehensive income of losses associated with pension benefits, which occurs as the losses are included in current net periodic pension cost.
| | | Unrealized Gains (Losses) on Securities (1) | Pension Loss (2) | Total Accumulated Other Comprehensive Income | Unrealized Gains (Losses) on Securities (1) | Pension Loss | Total Accumulated Other Comprehensive Income (Loss) |
(In thousands) | OTTI | Other | OTTI | Other |
Balance January 1, 2018 | | $ | 3,411 |
| $ | 30,326 |
| $ | (19,629 | ) | $ | 14,108 |
|
ASU 2018-02 Reclassification of tax rate change | | 715 |
| 6,359 |
| (4,142 | ) | 2,932 |
|
ASU 2016-01 Reclassification of unrealized gain on equity securities | | — |
| (33,320 | ) | — |
| (33,320 | ) |
Other comprehensive loss before reclassifications to current earnings | | (173 | ) | (123,854 | ) | — |
| (124,027 | ) |
Amounts reclassified to current earnings from accumulated other comprehensive income | | 68 |
| (424 | ) | 1,049 |
| 693 |
|
Current period other comprehensive income (loss), before tax | | (105 | ) | (124,278 | ) | 1,049 |
| (123,334 | ) |
Income tax (expense) benefit | | 27 |
| 31,068 |
| (262 | ) | 30,833 |
|
Current period other comprehensive income (loss), net of tax | | (78 | ) | (93,210 | ) | 787 |
| (92,501 | ) |
Transfer of unrealized gain on securities for which impairment was not previously recognized | | 12 |
| (12 | ) | — |
| — |
|
Balance June 30, 2018 | | $ | 4,060 |
| $ | (89,857 | ) | $ | (22,984 | ) | $ | (108,781 | ) |
Balance January 1, 2017 | $ | 2,975 |
| $ | 27,328 |
| $ | (19,328 | ) | $ | 10,975 |
| $ | 2,975 |
| $ | 27,328 |
| $ | (19,328 | ) | $ | 10,975 |
|
Other comprehensive income (loss) before reclassifications | (44 | ) | 53,072 |
| — |
| 53,028 |
| |
Amounts reclassified from accumulated other comprehensive income | 320 |
| (4,293 | ) | 1,098 |
| (2,875 | ) | |
Other comprehensive income (loss) before reclassifications to current earnings | | (44 | ) | 53,072 |
| — |
| 53,028 |
|
Amounts reclassified to current earnings from accumulated other comprehensive income | | 320 |
| (4,293 | ) | 1,098 |
| (2,875 | ) |
Current period other comprehensive income, before tax | 276 |
| 48,779 |
| 1,098 |
| 50,153 |
| 276 |
| 48,779 |
| 1,098 |
| 50,153 |
|
Income tax expense | (105 | ) | (18,536 | ) | (417 | ) | (19,058 | ) | (105 | ) | (18,536 | ) | (417 | ) | (19,058 | ) |
Current period other comprehensive income, net of tax | 171 |
| 30,243 |
| 681 |
| 31,095 |
| 171 |
| 30,243 |
| 681 |
| 31,095 |
|
Transfer of unrealized gain on securities for which impairment was not previously recognized | 24 |
| (24 | ) | — |
| — |
| 24 |
| (24 | ) | — |
| — |
|
Balance June 30, 2017 | $ | 3,170 |
| $ | 57,547 |
| $ | (18,647 | ) | $ | 42,070 |
| $ | 3,170 |
| $ | 57,547 |
| $ | (18,647 | ) | $ | 42,070 |
|
Balance January 1, 2016 | $ | 3,316 |
| $ | 49,750 |
| $ | (20,596 | ) | $ | 32,470 |
| |
Other comprehensive income (loss) before reclassifications | (911 | ) | 163,925 |
| — |
| 163,014 |
| |
Amounts reclassified from accumulated other comprehensive income | 270 |
| — |
| 1,158 |
| 1,428 |
| |
Current period other comprehensive income (loss), before tax | (641 | ) | 163,925 |
| 1,158 |
| 164,442 |
| |
Income tax (expense) benefit | 243 |
| (62,291 | ) | (440 | ) | (62,488 | ) | |
Current period other comprehensive income (loss), net of tax | (398 | ) | 101,634 |
| 718 |
| 101,954 |
| |
Balance June 30, 2016 | $ | 2,918 |
| $ | 151,384 |
| $ | (19,878 | ) | $ | 134,424 |
| |
(1) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "investment securities gains (losses), net" in the consolidated statements of income.
(2)
The pre-tax amounts reclassifiedrequirement to revalue deferred tax assets and liabilities in the period of enactment stranded the effects of the tax rate change, mandated by the Tax Cuts and Jobs Act, in accumulated other comprehensive income. In response, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which the Company adopted on January 1, 2018. This ASU allowed the reclassification of the stranded tax effects from accumulated other comprehensive income are included(as shown in the computationtable above) to retained earnings.
As mentioned in Note 3, additional new accounting guidance, which was effective January 1, 2018, required the reclassification of net periodic pension cost as "amortization of prior service cost" and "amortization of unrecognized net loss" (see Note 6), for inclusion in the consolidated statements of income.
unrealized gains on equity securities from accumulated other comprehensive income to retained earnings (also shown above).
9. Segments
The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial and Wealth. The Consumer segment consists of various consumer loan and deposit products offered through its retail branch network of approximately 180 locations. This segment also includes indirect and other consumer loan financing businesses, along with debit and credit card loan and fee businesses. Residential mortgage origination, sales and servicing functions are included in this consumerConsumer segment, but residential mortgage loans retained by the Company are not considered part of this segment. The Commercial segment provides corporate lending, leasing, and international services, along with business and governmental deposit products and commercial cash management services. This segment includes both merchant and commercial bank card products. It also includes the Capital Markets Group which sells fixed income securities and provides safekeeping and accounting services to its business and correspondent bank customers. The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management, and brokerage services. This segment also provides various loan and deposit related services to its private banking customers.
The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues among the three segments. Management periodically makes changes to methods of assigning costs and income to its business segments to better reflect operating results. If appropriate, these changechanges are reflected in prior year information presented below.
| |
(In thousands) | Consumer | Commercial | Wealth | Segment Totals | Other/Elimination | Consolidated Totals | Consumer | Commercial | Wealth | Segment Totals | Other/Elimination | Consolidated Totals |
Three Months Ended June 30, 2018 | | |
Net interest income | | $ | 73,471 |
| $ | 85,721 |
| $ | 11,857 |
| $ | 171,049 |
| $ | 39,910 |
| $ | 210,959 |
|
Provision for loan losses | | (10,409 | ) | 308 |
| 16 |
| (10,085 | ) | 42 |
| (10,043 | ) |
Non-interest income | | 32,116 |
| 51,651 |
| 42,896 |
| 126,663 |
| (1,813 | ) | 124,850 |
|
Investment securities losses, net | | — |
| — |
| — |
| — |
| (3,075 | ) | (3,075 | ) |
Non-interest expense | | (72,095 | ) | (75,360 | ) | (30,254 | ) | (177,709 | ) | (4,151 | ) | (181,860 | ) |
Income before income taxes | | $ | 23,083 |
| $ | 62,320 |
| $ | 24,515 |
| $ | 109,918 |
| $ | 30,913 |
| $ | 140,831 |
|
Six Months Ended June 30, 2018 | | |
Net interest income | | $ | 144,908 |
| $ | 167,816 |
| $ | 23,302 |
| $ | 336,026 |
| $ | 67,825 |
| $ | 403,851 |
|
Provision for loan losses | | (20,924 | ) | 488 |
| (48 | ) | (20,484 | ) | 45 |
| (20,439 | ) |
Non-interest income | | 62,332 |
| 100,862 |
| 84,997 |
| 248,191 |
| (3,651 | ) | 244,540 |
|
Investment securities gains, net | | — |
| — |
| — |
| — |
| 2,335 |
| 2,335 |
|
Non-interest expense | | (142,266 | ) | (148,158 | ) | (62,113 | ) | (352,537 | ) | (11,600 | ) | (364,137 | ) |
Income before income taxes | | $ | 44,050 |
| $ | 121,008 |
| $ | 46,138 |
| $ | 211,196 |
| $ | 54,954 |
| $ | 266,150 |
|
Three Months Ended June 30, 2017 | | |
Net interest income | $ | 69,274 |
| $ | 81,718 |
| $ | 11,933 |
| $ | 162,925 |
| $ | 19,882 |
| $ | 182,807 |
| $ | 69,274 |
| $ | 82,137 |
| $ | 11,934 |
| $ | 163,345 |
| $ | 19,462 |
| $ | 182,807 |
|
Provision for loan losses | (10,802 | ) | 111 |
| 24 |
| (10,667 | ) | (91 | ) | (10,758 | ) | (10,802 | ) | 111 |
| 24 |
| (10,667 | ) | (91 | ) | (10,758 | ) |
Non-interest income | 34,459 |
| 49,746 |
| 38,851 |
| 123,056 |
| 28 |
| 123,084 |
| 29,617 |
| 46,088 |
| 38,852 |
| 114,557 |
| 823 |
| 115,380 |
|
Investment securities gains, net | — |
| — |
| — |
| — |
| 1,651 |
| 1,651 |
| — |
| — |
| — |
| — |
| 1,651 |
| 1,651 |
|
Non-interest expense | (73,603 | ) | (74,054 | ) | (29,446 | ) | (177,103 | ) | (7,491 | ) | (184,594 | ) | (68,374 | ) | (72,134 | ) | (29,494 | ) | (170,002 | ) | (6,888 | ) | (176,890 | ) |
Income before income taxes | $ | 19,328 |
| $ | 57,521 |
| $ | 21,362 |
| $ | 98,211 |
| $ | 13,979 |
| $ | 112,190 |
| $ | 19,715 |
| $ | 56,202 |
| $ | 21,316 |
| $ | 97,233 |
| $ | 14,957 |
| $ | 112,190 |
|
Six Months Ended June 30, 2017 | | |
Net interest income | $ | 136,628 |
| $ | 161,505 |
| $ | 23,771 |
| $ | 321,904 |
| $ | 39,176 |
| $ | 361,080 |
| $ | 136,628 |
| $ | 162,007 |
| $ | 23,778 |
| $ | 322,413 |
| $ | 38,667 |
| $ | 361,080 |
|
Provision for loan losses | (20,464 | ) | 624 |
| 1 |
| (19,839 | ) | (2,047 | ) | (21,886 | ) | (20,464 | ) | 624 |
| 1 |
| (19,839 | ) | (2,047 | ) | (21,886 | ) |
Non-interest income | 66,017 |
| 96,879 |
| 76,557 |
| 239,453 |
| 697 |
| 240,150 |
| 56,780 |
| 90,998 |
| 76,558 |
| 224,336 |
| 657 |
| 224,993 |
|
Investment securities gains, net | — |
| — |
| — |
| — |
| 879 |
| 879 |
| — |
| — |
| — |
| — |
| 879 |
| 879 |
|
Non-interest expense | (145,126 | ) | (147,839 | ) | (59,795 | ) | (352,760 | ) | (18,664 | ) | (371,424 | ) | (135,791 | ) | (142,499 | ) | (59,813 | ) | (338,103 | ) | (18,164 | ) | (356,267 | ) |
Income before income taxes | $ | 37,055 |
| $ | 111,169 |
| $ | 40,534 |
| $ | 188,758 |
| $ | 20,041 |
| $ | 208,799 |
| $ | 37,153 |
| $ | 111,130 |
| $ | 40,524 |
| $ | 188,807 |
| $ | 19,992 |
| $ | 208,799 |
|
Three Months Ended June 30, 2016 | | |
Net interest income | $ | 67,227 |
| $ | 77,249 |
| $ | 10,947 |
| $ | 155,423 |
| $ | 16,406 |
| $ | 171,829 |
| |
Provision for loan losses | (8,775 | ) | 1,468 |
| (9 | ) | (7,316 | ) | (1,900 | ) | (9,216 | ) | |
Non-interest income | 33,038 |
| 48,289 |
| 36,618 |
| 117,945 |
| (1,375 | ) | 116,570 |
| |
Investment securities losses, net | — |
| — |
| — |
| — |
| (744 | ) | (744 | ) | |
Non-interest expense | (70,522 | ) | (70,637 | ) | (28,356 | ) | (169,515 | ) | (7,574 | ) | (177,089 | ) | |
Income before income taxes | $ | 20,968 |
| $ | 56,369 |
| $ | 19,200 |
| $ | 96,537 |
| $ | 4,813 |
| $ | 101,350 |
| |
Six Months Ended June 30, 2016 | | |
Net interest income | $ | 133,791 |
| $ | 153,266 |
| $ | 21,822 |
| $ | 308,879 |
| $ | 26,725 |
| $ | 335,604 |
| |
Provision for loan losses | (17,500 | ) | 1,487 |
| (115 | ) | (16,128 | ) | (2,527 | ) | (18,655 | ) | |
Non-interest income | 62,935 |
| 99,408 |
| 71,020 |
| 233,363 |
| 2,231 |
| 235,594 |
| |
Investment securities losses, net | — |
| — |
| — |
| — |
| (1,739 | ) | (1,739 | ) | |
Non-interest expense | (139,526 | ) | (140,250 | ) | (56,944 | ) | (336,720 | ) | (17,842 | ) | (354,562 | ) | |
Income before income taxes | $ | 39,700 |
| $ | 113,911 |
| $ | 35,783 |
| $ | 189,394 |
| $ | 6,848 |
| $ | 196,242 |
| |
The information presented above 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 procedures and methods, which have been developed to reflect the underlying economics of the businesses. The methodologies are applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided) by assets and liabilities based on their maturity, prepayment and/or repricing characteristics.
The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column include activity not related to the segments, such as that relating to administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. The provision for loan losses in this category contains the difference between net loan charge-offs assigned directly to the segments and the recorded provision for loan loss expense. Included in this category’s net interest income are earnings of the investment portfolio, which are not allocated to a segment.
The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities.
10. Derivative Instruments
The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. TheAt June 30, 2018, the Company’s derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings.
| |
(In thousands) | June 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 |
Interest rate swaps | $ | 1,693,637 |
| $ | 1,685,099 |
| $ | 1,891,877 |
| $ | 1,741,412 |
|
Interest rate caps | 32,890 |
| 59,379 |
| 31,483 |
| 31,776 |
|
Credit risk participation agreements | 118,081 |
| 121,514 |
| 152,402 |
| 133,488 |
|
Foreign exchange contracts | 5,556 |
| 4,046 |
| 8,737 |
| 11,826 |
|
Mortgage loan commitments | 29,429 |
| 12,429 |
| 21,653 |
| 17,110 |
|
Mortgage loan forward sale contracts | 1,026 |
| 6,626 |
| 2,848 |
| 2,566 |
|
Forward TBA contracts | 43,000 |
| 15,000 |
| 25,000 |
| 25,000 |
|
Total notional amount | $ | 1,923,619 |
| $ | 1,904,093 |
| $ | 2,134,000 |
| $ | 1,963,178 |
|
The largest group of notional amounts relate to interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by matching contracts purchased by the Company from other financial dealer institutions. Contracts with dealers that require central clearing are novated to a regulated clearing organizationclearinghouse who becomes the Company's legal counterparty. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings.
Many of the Company’s interest rate swap contracts with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions or instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.
The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further discussed in Note 5 on Guarantees. In addition, the Company enters into foreign exchange contracts, which are mainly comprised of contracts to purchase or deliver foreign currencies for customers at specific future dates.
Under its program to sell residential mortgage loans in the secondary market, the Company designates certain newly-originated residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments and forward loan sale commitments. Changes in the fair values of the loan commitments and funded loans prior to sale that are due to changes in interest rates are economically hedged with forward contracts to sell residential mortgage-backed securities in the to-be-announced (TBA) market. These forward TBA contracts are also considered to be derivatives and are settled in cash at the security settlement date.
The fair values of the Company's derivative instruments, whose notional amounts are listed above, are shown in the table below. Derivative instruments with a positive fair value (asset derivatives) are reported in other assets in the consolidated balance sheets, while derivative instruments with a negative fair value (liability derivatives) are reported in other liabilities in the consolidated balance sheets. Information about the valuation methods used to determine fair value is provided in Note 1315 on Fair Value Measurements.
|
| | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| June 30, 2017 | Dec. 31, 2016 | | June 30, 2017 | Dec. 31, 2016 |
(In thousands) | Fair Value | | Fair Value |
Derivative instruments: | | | | | |
Interest rate swaps | $ | 10,887 |
| $ | 12,987 |
| | $ | (5,987 | ) | $ | (12,987 | ) |
Interest rate caps | 34 |
| 78 |
| | (34 | ) | (78 | ) |
Credit risk participation agreements | 58 |
| 65 |
| | (139 | ) | (156 | ) |
Foreign exchange contracts | 39 |
| 66 |
| | (53 | ) | (4 | ) |
Mortgage loan commitments | 872 |
| 355 |
| | — |
| (6 | ) |
Mortgage loan forward sale contracts | — |
| — |
| | — |
| (63 | ) |
Forward TBA contracts | 137 |
| 15 |
| | (34 | ) | (45 | ) |
Total | $ | 12,027 |
| $ | 13,566 |
| | $ | (6,247 | ) | $ | (13,339 | ) |
Measurements in the 2017 Annual Report on Form 10-K.
DueThe Company's policy is to rule changes by the Company's clearing counterparty effectivepresent its derivative assets and derivative liabilities on a gross basis in its consolidated balance sheets, and these are reported in other assets and other liabilities. However, in January 2017, a clearinghouse rule change required that variation margin on centrally cleared derivatives, formerly treated as collateral, previously recorded in "other assets" has been reclassified and offset againstbe treated as settlements of derivative exposure. As a result, the fair values of cleared swaps, such thatthe respective derivative contracts must be reduced by variation margin payments and reported as a single, net amount. Accordingly, at June 30, 2017,2018 in the table below, the positive fair values of cleared swaps were reduced by $2.4$15.9 million and the negative fair values of cleared swaps were reduced by $7.3$1.5 million. At December 31, 2017, the positive fair values of cleared swaps were reduced by $4.5 million as reflected inand the table above.negative fair values of cleared swaps were reduced by $4.3 million.
|
| | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| June 30, 2018 | Dec. 31, 2017 | | June 30, 2018 | Dec. 31, 2017 |
(In thousands) | Fair Value | | Fair Value |
Derivative instruments: | | | | | |
Interest rate swaps | $ | 5,265 |
| $ | 7,674 |
| | $ | (19,616 | ) | $ | (7,857 | ) |
Interest rate caps | 20 |
| 16 |
| | (20 | ) | (16 | ) |
Credit risk participation agreements | 21 |
| 46 |
| | (67 | ) | (123 | ) |
Foreign exchange contracts | 194 |
| 21 |
| | (31 | ) | (40 | ) |
Mortgage loan commitments | 730 |
| 580 |
| | — |
| — |
|
Mortgage loan forward sale contracts | 8 |
| 8 |
| | (1 | ) | (7 | ) |
Forward TBA contracts | 1 |
| 4 |
| | (111 | ) | (31 | ) |
Total | $ | 6,239 |
| $ | 8,349 |
| | $ | (19,846 | ) | $ | (8,074 | ) |
The effects of derivative instruments on the consolidated statements of income are shown in the table below.
| |
| Location of Gain or (Loss) Recognized in Income on Derivatives | Amount of Gain or (Loss) Recognized in Income on Derivatives | Location of Gain or (Loss) Recognized in Income on Derivatives | Amount of Gain or (Loss) Recognized in Income on Derivatives |
| | For the Three Months Ended June 30 | | For the Six Months Ended June 30 | | For the Three Months Ended June 30 | | For the Six Months Ended June 30 |
(In thousands) | | 2017 | 2016 | | 2017 | 2016 | | 2018 | 2017 | | 2018 | 2017 |
Derivative instruments: | | | | | | | | |
Interest rate swaps | Other non-interest income | $ | 456 |
| $ | 769 |
| | $ | 599 |
| $ | 2,995 |
| Other non-interest income | $ | 1,727 |
| $ | 456 |
| | $ | 2,232 |
| $ | 599 |
|
Credit risk participation agreements | Other non-interest income | 1 |
| (23 | ) | | 11 |
| (58 | ) | Other non-interest income | 16 |
| 1 |
| | 180 |
| 11 |
|
Foreign exchange contracts | Other non-interest income | (55 | ) | 57 |
| | (75 | ) | 8 |
| Other non-interest income | 173 |
| (55 | ) | | 182 |
| (75 | ) |
Mortgage loan commitments | Loan fees and sales | (32 | ) | 19 |
| | 522 |
| 527 |
| Loan fees and sales | 148 |
| (32 | ) | | 149 |
| 522 |
|
Mortgage loan forward sale contracts | Loan fees and sales | (4 | ) | 1 |
| | 62 |
| — |
| Loan fees and sales | 6 |
| (4 | ) | | 6 |
| 62 |
|
Forward TBA contracts | Loan fees and sales | (160 | ) | (397 | ) | | (258 | ) | (726 | ) | Loan fees and sales | (9 | ) | (160 | ) | | 533 |
| (258 | ) |
Total | | $ | 206 |
| $ | 426 |
| | $ | 861 |
| $ | 2,746 |
| | $ | 2,061 |
| $ | 206 |
| | $ | 3,282 |
| $ | 861 |
|
The following table shows the extent to which assets and liabilities relating to derivative instruments have been offset in the consolidated balance sheets. It also provides information about these instruments which are subject to an enforceable master netting arrangement, irrespective of whether they are offset, and the extent to which the instruments could potentially be offset. Also shown is collateral received or pledged in the form of other financial instruments, which is generally cash or marketable securities. The collateral amounts in this table are limited to the outstanding balances of the related asset or liability (after netting is applied); thus amounts of excess collateral are not shown. Most of the derivatives in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.
The Company is party to master netting arrangements with most of its swap derivative counterparties; however, the Company does not offset derivative assets and liabilities under these arrangements on its consolidated balance sheet. Collateral usually in the form of marketable securities, is exchanged between the Company and dealer bank counterparties and is generally subject to thresholds and transfer minimums.minimums, and usually consists of marketable securities. By contract, itthese may be sold or re-pledged by the secured party until recalled at a subsequent valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash andor securities to its clearing agent. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below.
| | | | Gross Amounts Not Offset in the Balance Sheet | | | Gross Amounts Not Offset in the Balance Sheet | |
(In thousands) | Gross Amount Recognized | Gross Amounts Offset in the Balance Sheet | Net Amounts Presented in the Balance Sheet | Financial Instruments Available for Offset | Collateral Received/Pledged | Net Amount | Gross Amount Recognized | Gross Amounts Offset in the Balance Sheet | Net Amounts Presented in the Balance Sheet | Financial Instruments Available for Offset | Collateral Received/Pledged | Net Amount |
June 30, 2017 | | |
June 30, 2018 | | |
Assets: | | |
Derivatives subject to master netting agreements | $ | 11,088 |
| $ | — |
| $ | 11,088 |
| $ | (514 | ) | $ | — |
| $ | 10,574 |
| $ | 5,338 |
| $ | — |
| $ | 5,338 |
| $ | (491 | ) | $ | (2,114 | ) | $ | 2,733 |
|
Derivatives not subject to master netting agreements | 939 |
| — |
| 939 |
| | 901 |
| — |
| 901 |
| |
Total derivatives | 12,027 |
| — |
| 12,027 |
| | 6,239 |
| — |
| 6,239 |
| |
Liabilities: | | |
Derivatives subject to master netting agreements | $ | 6,066 |
| $ | — |
| $ | 6,066 |
| $ | (514 | ) | $ | (1,710 | ) | $ | 3,842 |
| $ | 19,777 |
| $ | — |
| $ | 19,777 |
| $ | (491 | ) | $ | (354 | ) | $ | 18,932 |
|
Derivatives not subject to master netting agreements | 181 |
| — |
| 181 |
| | 69 |
| — |
| 69 |
| |
Total derivatives | 6,247 |
| — |
| 6,247 |
| | 19,846 |
| — |
| 19,846 |
| |
December 31, 2016 | | |
December 31, 2017 | | |
Assets: | | |
Derivatives subject to master netting agreements | $ | 13,111 |
| $ | — |
| $ | 13,111 |
| $ | (3,391 | ) | $ | — |
| $ | 9,720 |
| $ | 7,726 |
| $ | — |
| $ | 7,726 |
| $ | (233 | ) | $ | (824 | ) | $ | 6,669 |
|
Derivatives not subject to master netting agreements | 455 |
| — |
| 455 |
| | 623 |
| — |
| 623 |
| |
Total derivatives | 13,566 |
| — |
| 13,566 |
| | 8,349 |
| — |
| 8,349 |
| |
Liabilities: | | |
Derivatives subject to master netting agreements | $ | 13,124 |
| $ | — |
| $ | 13,124 |
| $ | (3,391 | ) | $ | (5,292 | ) | $ | 4,441 |
| $ | 7,935 |
| $ | — |
| $ | 7,935 |
| $ | (233 | ) | $ | (1,570 | ) | $ | 6,132 |
|
Derivatives not subject to master netting agreements | 215 |
| — |
| 215 |
| | 139 |
| — |
| 139 |
| |
Total derivatives | 13,339 |
| — |
| 13,339 |
| | 8,074 |
| — |
| 8,074 |
| |
11. Resale and Repurchase Agreements
The following table shows the extent to which assets and liabilities relating to securities purchased under agreements to resell (resale agreements) and securities sold under agreements to repurchase (repurchase agreements) have been offset in the consolidated balance sheets, in addition to the extent to which they could potentially be offset. Also shown is collateral received or pledged, which consists of marketable securities. The collateral amounts in the table are limited to the outstanding balances of the related asset or liability (after netting is applied); thus amounts of excess collateral are not shown. The agreements in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.
Resale and repurchase agreements are agreements to purchase/sell securities subject to an obligation to resell/repurchase the same or similar securities. They are accounted for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral accepted or pledged in resale and repurchase agreements with other financial institutions also may be sold or re-pledged by the secured party, but is usually delivered to and held by third party trustees. The Company generally retains custody of securities pledged for repurchase agreements with customers.
The Company is party to several agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase and resale agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the consolidated balance sheets, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $700.0$550.0 million at June 30, 20172018 and $550.0$650.0 million at December 31, 2016.2017. At June 30, 2017,2018, the Company had posted collateral of $718.1$557.0 million in marketable securities, consisting of agency mortgage-backed bonds and treasuries, and had accepted $724.4$556.0 million in investment grade asset-backed, commercial mortgage-backed, and corporate bonds.
| | | | Gross Amounts Not Offset in the Balance Sheet | | | Gross Amounts Not Offset in the Balance Sheet | |
(In thousands) | Gross Amount Recognized | Gross Amounts Offset in the Balance Sheet | Net Amounts Presented in the Balance Sheet | Financial Instruments Available for Offset | Securities Collateral Received/Pledged | Net Amount | Gross Amount Recognized | Gross Amounts Offset in the Balance Sheet | Net Amounts Presented in the Balance Sheet | Financial Instruments Available for Offset | Securities Collateral Received/Pledged | Net Amount |
June 30, 2017 | | |
June 30, 2018 | | |
Total resale agreements, subject to master netting arrangements | $ | 1,325,000 |
| $ | (700,000 | ) | $ | 625,000 |
| $ | — |
| $ | (625,000 | ) | $ | — |
| $ | 1,250,000 |
| $ | (550,000 | ) | $ | 700,000 |
| $ | — |
| $ | (698,414 | ) | $ | 1,586 |
|
Total repurchase agreements, subject to master netting arrangements | 1,702,934 |
| (700,000 | ) | 1,002,934 |
| — |
| (1,002,934 | ) | — |
| 1,585,074 |
| (550,000 | ) | 1,035,074 |
| — |
| (1,035,074 | ) | — |
|
December 31, 2016 | | |
December 31, 2017 | | |
Total resale agreements, subject to master netting arrangements | $ | 1,275,000 |
| $ | (550,000 | ) | $ | 725,000 |
| $ | — |
| $ | (725,000 | ) | $ | — |
| $ | 1,350,000 |
| $ | (650,000 | ) | $ | 700,000 |
| $ | — |
| $ | (700,000 | ) | $ | — |
|
Total repurchase agreements, subject to master netting arrangements | 2,221,065 |
| (550,000 | ) | 1,671,065 |
| — |
| (1,671,065 | ) | — |
| 1,954,768 |
| (650,000 | ) | 1,304,768 |
| — |
| (1,304,768 | ) | — |
|
The table below shows the remaining contractual maturities of repurchase agreements outstanding at June 30, 20172018 and December 31, 2016,2017, in addition to the various types of marketable securities that have been pledged as collateral for these borrowings.
| | | Remaining Contractual Maturity of the Agreements | | Remaining Contractual Maturity of the Agreements | |
(In thousands) | Overnight and continuous | Up to 90 days | Greater than 90 days | Total | Overnight and continuous | Up to 90 days | Greater than 90 days | Total |
June 30, 2017 | | |
June 30, 2018 | | |
Repurchase agreements, secured by: | | |
U.S. government and federal agency obligations | | $ | 253,662 |
| $ | — |
| $ | 350,000 |
| $ | 603,662 |
|
Government-sponsored enterprise obligations | | 63,916 |
| — |
| — |
| 63,916 |
|
Agency mortgage-backed securities | | 518,375 |
| 22,850 |
| 202,750 |
| 743,975 |
|
Non-agency mortgage-backed securities | | 10,591 |
| — |
| — |
| 10,591 |
|
Asset-backed securities | | 56,335 |
| 75,000 |
| — |
| 131,335 |
|
Other debt securities | | 31,595 |
| — |
| — |
| 31,595 |
|
Total repurchase agreements, gross amount recognized | | $ | 934,474 |
| $ | 97,850 |
| $ | 552,750 |
| $ | 1,585,074 |
|
December 31, 2017 | | |
Repurchase agreements, secured by: | | |
U.S. government and federal agency obligations | $ | 330,173 |
| $ | 1,728 |
| $ | 450,000 |
| $ | 781,901 |
| $ | 271,820 |
| $ | 1,731 |
| $ | 450,000 |
| $ | 723,551 |
|
Government-sponsored enterprise obligations | 180,496 |
| — |
| — |
| 180,496 |
| 149,111 |
| — |
| — |
| 149,111 |
|
Agency mortgage-backed securities | 379,441 |
| 70,325 |
| 200,000 |
| 649,766 |
| 737,975 |
| 9,750 |
| 200,000 |
| 947,725 |
|
Asset-backed securities | 10,771 |
| 80,000 |
| — |
| 90,771 |
| 89,601 |
| 30,000 |
| — |
| 119,601 |
|
Other debt securities | | 14,780 |
| — |
| — |
| 14,780 |
|
Total repurchase agreements, gross amount recognized | $ | 900,881 |
| $ | 152,053 |
| $ | 650,000 |
| $ | 1,702,934 |
| $ | 1,263,287 |
| $ | 41,481 |
| $ | 650,000 |
| $ | 1,954,768 |
|
December 31, 2016 | | |
Repurchase agreements, secured by: | | |
U.S. government and federal agency obligations | $ | 294,600 |
| $ | — |
| $ | 300,000 |
| $ | 594,600 |
| |
Government-sponsored enterprise obligations | 147,694 |
| — |
| 3,237 |
| 150,931 |
| |
Agency mortgage-backed securities | 693,851 |
| 24,380 |
| 252,473 |
| 970,704 |
| |
Asset-backed securities | 474,830 |
| 30,000 |
| — |
| 504,830 |
| |
Total repurchase agreements, gross amount recognized | $ | 1,610,975 |
| $ | 54,380 |
| $ | 555,710 |
| $ | 2,221,065 |
| |
12. Stock-Based Compensation
The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights (SARs). Most of the awards are issued during the first quarter of each year. The stock-based compensation expense that has been charged against income was $3.1 million and $2.9 million in both the three months ended June 30, 2018 and 2017, and 2016, respectively,$6.4 million and $6.2 million and $6.3 million in the six months ended June 30, 2018 and 2017, and 2016, respectively.
The Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," on January 1, 2017. The Company elected to change its method of accounting for forfeitures, as allowed by this guidance. In 2016 and prior years, accruals of compensation cost were reduced by an estimate of awards not expected to vest and further adjusted when actual forfeitures occurred. In 2017 and subsequent years, forfeitures will be accounted for when they occur and recognized in
compensation cost at that time. The effect of this change, which was recognized as a cumulative-effect adjustment on January 1, 2017, increased equity and increased deferred tax assets by approximately $1.3 million. ASU 2016-09 also changed the classification of excess tax benefits and deficiencies arising from stock-based payment transactions, resulting in reductions in income tax expense of $4.5 million in the first quarter of 2017 and $1.6 million in the second quarter of 2017.
Nonvested stock awards generally vest in 4 to 7 years and contain restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant. A summary of the status of the Company’s nonvested share awards as of June 30, 2017,2018, and changes during the six month period then ended, is presented below.
| |
| Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value |
Nonvested at January 1, 2017 | 1,392,451 |
| $34.67 | |
Nonvested at January 1, 2018 | | 1,254,518 |
| $38.67 |
Granted | 233,520 |
| 57.32 | 225,764 |
| 59.23 |
Vested | (394,130 | ) | 30.79 | (344,830 | ) | 32.27 |
Forfeited | (9,388 | ) | 38.78 | (15,049 | ) | 45.88 |
Nonvested at June 30, 2017 | 1,222,453 |
| $40.22 | |
Nonvested at June 30, 2018 | | 1,120,403 |
| $44.69 |
SARs are granted with exercise prices equal to the market price of the Company’s stock at the date of grant. SARs vest ratably over 4 years of continuous service and have 10-year contractual terms. All SARs must be settled in stock under provisions of the plan. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs on date of grant. The current year per share average fair value and the model assumptions are shown in the table below.
|
| | | |
Weighted per share average fair value at grant date |
| $12.5412.44 |
|
Assumptions: | |
Dividend yield | 1.6 | % |
Volatility | 21.120.6 | % |
Risk-free interest rate | 2.42.7 | % |
Expected term | 7.06.6 years |
|
A summary of SAR activity during the first six months of 20172018 is presented below.
| | (Dollars in thousands, except per share data) | Rights | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | Rights | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value |
Outstanding at January 1, 2017 | 1,324,954 |
| $34.53 | | | |
Outstanding at January 1, 2018 | | 1,179,286 |
| $37.13 | | |
Granted | 165,592 |
| 57.53 | | | 168,716 |
| 58.42 | | |
Forfeited | (4,182 | ) | 42.82 |
| | | (8,856 | ) | 46.86 |
| | |
Expired | (797 | ) | 36.22 |
| | | (276 | ) | 43.52 |
| | |
Exercised | (263,503 | ) | 30.58 | | | (226,488 | ) | 29.82 | | |
Outstanding at June 30, 2017 | 1,222,064 |
| $38.47 | 6.5 years | $ | 22,583 |
| |
Outstanding at June 30, 2018 | | 1,112,382 |
| $41.77 | 7.1 years | $ | 25,584 |
|
13. Revenue from Contracts with Customers
The Company adopted ASU 2014-09, "Revenue from Contracts with Customers", and its related amendments on January 1, 2018. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For the six months ended June 30, 2018, approximately 62% of the Company’s total revenue was comprised of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services.
The Company has concluded that the new guidance did not require any significant change to its revenue recognition processes. However, application of the new guidance resulted in a reclassification of certain bank card related network and rewards costs, previously classified as non-interest expense, to a reduction to non-interest income in the Company’s consolidated statements of
income. The reclassification had no effect on prior period net income or net income per share. The Company adopted ASU 2014-09 on a full retrospective basis, in which each prior reporting period has been presented in accordance with the new guidance.
The table below shows the effect of this reclassification on bank card fee income and non-interest expense for the three and six months ended June 30, 2017.
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2017 | | Six Months Ended June 30, 2017 |
(In thousands) | | As Previously Reported | Adoption of ASU 2014-09 | As Adjusted | | As Previously Reported | Adoption of ASU 2014-09 | As Adjusted |
Non-interest income: | | | | | | | | |
Bank card transaction fees | | $ | 44,999 |
| $ | (7,704 | ) | $ | 37,295 |
| | $ | 88,203 |
| $ | (15,157 | ) | $ | 73,046 |
|
Total non-interest income | | 123,084 |
| (7,704 | ) | 115,380 |
| | 240,150 |
| (15,157 | ) | 224,993 |
|
Non-interest expense: | | | | | | | | |
Data processing and software | | $ | 23,356 |
| $ | (3,321 | ) | $ | 20,035 |
| | $ | 46,453 |
| $ | (6,513 | ) | $ | 39,940 |
|
Other | | 19,761 |
| (4,383 | ) | 15,378 |
| | 39,725 |
| (8,644 | ) | 31,081 |
|
Total non-interest expense | | 184,594 |
| (7,704 | ) | 176,890 |
| | 371,424 |
| (15,157 | ) | 356,267 |
|
The following table disaggregates non-interest income subject to ASU 2014-09 by major product line.
|
| | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
(In thousands) | 2018 | 2017 | | 2018 | 2017 |
Bank card transaction fees | $ | 43,215 |
| $ | 37,295 |
| | $ | 84,668 |
| $ | 73,046 |
|
Trust fees | 37,036 |
| 33,120 |
| | 73,098 |
| 65,134 |
|
Deposit account charges and other fees | 23,893 |
| 22,861 |
| | 46,875 |
| 44,803 |
|
Consumer brokerage services | 3,971 |
| 3,726 |
| | 7,739 |
| 7,375 |
|
Other non-interest income | 6,852 |
| 8,570 |
| | 14,163 |
| 16,167 |
|
Total non-interest income from contracts with customers | 114,967 |
| 105,572 |
| | 226,543 |
| 206,525 |
|
Other non-interest income (a) | 9,883 |
| 9,808 |
| | 17,997 |
| 18,468 |
|
Total non-interest income | $ | 124,850 |
| $ | 115,380 |
| | $ | 244,540 |
| $ | 224,993 |
|
(a) This revenue is not within the scope of ASU 2014-09, and includes fees relating to capital market activities, loan fees and sales, derivative instruments, standby letters of credit and various other transactions.
The following table presents the opening and closing receivable balances for the six month periods ended June 30, 2018 and 2017 for the Company’s significant revenue categories subject to ASU 2014-09.
|
| | | | | | | | | | | | | |
(In thousands) | June 30, 2018 | December 31, 2017 | | June 30, 2017 | December 31, 2016 |
Bank card transaction fees | $ | 11,104 |
| $ | 13,315 |
| | $ | 10,878 |
| $ | 14,686 |
|
Trust fees | 2,893 |
| 2,802 |
| | 3,227 |
| 2,681 |
|
Deposit account charges and other fees | 5,773 |
| 5,597 |
| | 5,471 |
| 5,735 |
|
Consumer brokerage services | 924 |
| 380 |
| | 345 |
| 309 |
|
For these revenue categories, none of the transaction price has been allocated to performance obligations that are unsatisfied as of the end of a reporting period.
A description of these revenue categories follows.
Bank Card Transaction Fees
The following table presents the components of bank card fee income.
|
| | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
(In thousands) | 2018 | 2017 | | 2018 | 2017 |
Debit card: | | | | | |
Fee income | $ | 10,582 |
| $ | 10,325 |
| | $ | 20,344 |
| $ | 19,966 |
|
Expense for network charges | (375 | ) | (1,921 | ) | | (746 | ) | (3,571 | ) |
Net debit card fees | 10,207 |
| 8,404 |
| | 19,598 |
| 16,395 |
|
| | | | | |
Credit card: | | | | | |
Fee income | 6,800 |
| 6,483 |
| | 12,845 |
| 12,223 |
|
Expense for network charges and rewards | (3,304 | ) | (2,923 | ) | | (6,248 | ) | (5,669 | ) |
Net credit card fees | 3,496 |
| 3,560 |
| | 6,597 |
| 6,554 |
|
| | | | | |
Corporate card: | | | | | |
Fee income | 49,141 |
| 43,261 |
| | 97,017 |
| 85,680 |
|
Expense for network charges and rewards | (24,521 | ) | (23,365 | ) | | (48,229 | ) | (45,820 | ) |
Net corporate card fees | 24,620 |
| 19,896 |
| | 48,788 |
| 39,860 |
|
| | | | | |
Merchant: | | | | | |
Fee income | 7,606 |
| 8,350 |
| | 14,907 |
| 16,289 |
|
Fees to cardholder banks | (1,878 | ) | (2,080 | ) | | (3,603 | ) | (4,169 | ) |
Expense for network charges | (836 | ) | (835 | ) | | (1,619 | ) | (1,883 | ) |
Net merchant fees | 4,892 |
| 5,435 |
| | 9,685 |
| 10,237 |
|
Total bank card transaction fees | $ | 43,215 |
| $ | 37,295 |
| | $ | 84,668 |
| $ | 73,046 |
|
The majority of debit and credit card fees are reported in the Consumer segment, while corporate card and merchant fees are reported in the Commercial segment.
Debit and Credit Card Fees
The Company issues debit and credit cards to its retail and commercial banking customers who use the cards to purchase goods and services from merchants through an electronic payment system. As a card issuer, the Company earns fees, including interchange income, for processing the cardholder’s purchase transaction with a merchant through a settlement network. Purchases are charged directly to a customer’s checking account (in the case of a debit card), or are posted to a customer’s credit card account. The fees earned are established by the settlement network and are dependent on the type of transaction processed but are typically based on a per unit charge. Interchange income, the largest component of debit and credit card fees, is settled daily through the networks. The services provided to the cardholders include issuing and maintaining cards, settling purchases with merchants, and maintaining memberships in various card networks to facilitate processing. These services are considered one performance obligation as one of the services would not be performed without the others. The performance obligation is satisfied as services are rendered for each purchase transaction, and income is immediately recognized.
In order to participate in the settlement network process, the Company must pay various transaction-related costs, established by the networks, including membership fees and a per unit charge for each transaction. These expenses are recorded net of the card fees earned.
Consumer credit card products offer cardholders rewards that can be later redeemed for cash or goods or services to encourage card usage. Reward programs must meet network requirements based on the type of card issued. The expense associated with the rewards granted are recorded net of the credit card fees earned.
Commercial card products offer cash rewards to corporate cardholders to encourage card usage in facilitating corporate payments. The Company pays cash rewards based on contractually agreed upon amounts, normally as a percent of each sales transaction. The expense associated with the cash rewards program is recorded net of the corporate card fees earned.
Merchant Fees
The Company offers merchant processing services to its business customers to enable them to accept credit and debit card payments. Merchant processing activities include gathering merchant sales information, authorizing sales transactions and collecting the funds from card issuers using the networks. The merchant is charged a merchant discount fee for the services based on agreed upon pricing between the merchant and the Company. Merchant fees are recorded net of outgoing interchange costs paid to the card issuing banks and net of other network costs as show in the table above.
Merchant services provided are considered one performance obligation as one of the services would not be performed without the others. The performance obligation is satisfied as services are rendered for each settlement transaction and income is immediately recognized. Income earned from merchant fees settles with the customer according to terms negotiated in individual customer contracts. The majority of customers settle with the Company at least monthly.
Trust Fees
The following table shows the components of revenue within trust fees.
|
| | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
(In thousands) | 2018 | 2017 | | 2018 | 2017 |
Private client | $ | 27,987 |
| $ | 24,701 |
| | $ | 54,855 |
| $ | 48,463 |
|
Institutional | 7,271 |
| 6,751 |
| | 14,682 |
| 13,245 |
|
Other | 1,778 |
| 1,668 |
| | 3,561 |
| 3,426 |
|
Total trust fees | $ | 37,036 |
| $ | 33,120 |
| | $ | 73,098 |
| $ | 65,134 |
|
This revenue is reported in the Wealth segment.
The Company provides trust and asset management services to both private client and institutional trust customers including asset custody, investment advice, and reporting and administrative services. Other specialized services such as tax preparation, financial planning, representation and other related services are provided as needed. Trust fees are generally earned monthly and billed based on a rate multiplied by the fair value of the customer trust assets. The majority of customer trust accounts are billed monthly. However, some accounts are billed quarterly, and a small number of accounts are billed semi-annually or annually, in accordance with agreements in place with the customer. The Company accrues trust fees monthly based on an estimate of fees due and either directly charges the customer’s account the following month or invoices the customer for fees due.
The Company maintains written product pricing information which is used to bill each trust customer based on the services provided. Providing trust services is considered to be a single performance obligation that is satisfied on a monthly basis, involving the monthly custody of customer assets, statement rendering, periodic investment advice where applicable, and other specialized services as needed. As such, performance obligations are considered to be satisfied at the conclusion of each month while trust fee income is also recorded monthly.
Deposit Account Charges and Other Fees
The following table shows the components of revenue within deposit account charges and other fees.
|
| | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
(In thousands) | 2018 | 2017 | | 2018 | 2017 |
Corporate cash management fees | $ | 10,095 |
| $ | 9,477 |
| | $ | 19,492 |
| $ | 18,388 |
|
Overdraft and return item fees | 7,656 |
| 7,448 |
| | 15,168 |
| 14,628 |
|
Other service charges on deposit accounts | 6,142 |
| 5,936 |
| | 12,215 |
| 11,787 |
|
Total deposit account charges and other fees | $ | 23,893 |
| $ | 22,861 |
| | $ | 46,875 |
| $ | 44,803 |
|
Approximately half of this revenue is reported in the Consumer segment, while the remainder is reported in the Commercial segment.
The Company provides corporate cash management services to its business and non-profit customers to meet their various transaction processing needs. Such services include deposit and check processing, lockbox, remote deposit, reconciliation, on-line banking and other similar transaction processing services. The Company maintains unit prices for each type of service, and the customer is billed based on transaction volumes processed monthly. The customer is usually billed either monthly or quarterly,
however, some customers may be billed semi-annually or annually. The customer may pay for the cash management services provided either by paying in cash or using the value of deposit balances (formula provided to the customer) held at the Company. The Company’s performance obligation for corporate cash management services is the processing of items over a monthly term, and the obligations are satisfied at the conclusion of each month.
Overdraft fees are charged to customers when daily checks and other withdrawals to customers’ accounts exceed balances on hand. Fees are based on a unit price multiplied by the number of items processed whose total amounts exceed the available account balance. The daily overdraft charge is calculated and the fee is posted to the customer’s account each day. The Company’s performance obligations for overdraft transactions is based on the daily transaction processed and the obligation is satisfied as each day’s transaction processing is concluded.
Other deposit fees include numerous smaller fees such as monthly statement fees, foreign ATM processing fees, identification restoration fees, and stop payment fees. Such fees are mostly billed to customers directly on their monthly deposit account statements, or in the case of ATM fees, the fee is charged to the customer on the day that transactions are processed. Performance obligations for all of these various services are satisfied at the time that the service is rendered.
Consumer Brokerage Services
The following shows the components of revenue within consumer brokerage services.
|
| | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
(In thousands) | 2018 | 2017 | | 2018 | 2017 |
Commission income | $ | 2,269 |
| $ | 2,193 |
| | $ | 4,361 |
| $ | 4,423 |
|
Managed account services | 1,702 |
| 1,533 |
| | 3,378 |
| 2,952 |
|
Total consumer brokerage services | $ | 3,971 |
| $ | 3,726 |
| | $ | 7,739 |
| $ | 7,375 |
|
Nearly all of this revenue is reported in the Company's Wealth segment.
Consumer brokerage services revenue is comprised of commissions received upon the execution of purchases and sales of mutual fund shares and equity securities, in addition to sales of annuities and certain limited insurance products in an agency capacity. Also, fees are earned on professionally managed advisory programs through arrangements with sub-advisors. Payment from the customer is due upon settlement date for purchases and sales of securities, at the purchase date for annuities and insurance products, and upon inception of the service period for advisory programs.
Most of the contracts (except advisory contracts) encompass two types of performance obligations. The first is an obligation to provide account maintenance, record keeping and custodial services throughout the contract term. The second is the obligation to provide trade execution services for the customers' purchases and sales of products mentioned above. The first obligation is satisfied over time as the service period elapses, while the second type of obligation is satisfied upon the execution of each purchase/sale transaction. Contracts for advisory services contain a single performance obligation comprised of providing the management services and related reporting/administrative services over the contract term.
The transaction price of the contracts (except advisory contracts) is a commission charged at the time of trade execution. The commission varies across different security types, insurance products and mutual funds. It is generally determined by standardized price lists published by the Company and its mutual fund and insurance vendors. Because the transaction price relates specifically to the trade execution, it has been allocated to that performance obligation and is recorded at the time of execution. The fee for advisory services is charged to the customer in advance of the quarterly service period, based on the account balance at the beginning of the period. Revenue is recognized ratably over the service period.
Other Non-Interest Income from Contracts with Customers
Other non-interest income consists mainly of various customer deposit related fees such as ATM fees and gains on sales of tax credits, foreclosed assets, and bank premises and equipment. Performance obligations for these services consist mainly of the execution of transactions for sales of various properties or providing specific deposit related transactions. Fees from these revenue sources are recognized when the performance obligation is completed, at which time cash is received by the Company.
13.
14. Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale anddebt securities, equity securities, trading debt securities, certain non-marketable securitiesinvestments relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or fair value accounting or write-downs of individual assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.
The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value Measurements note in the Company's 20162017 Annual Report on Form 10-K. There have been no significant changes in these methodologies since then, except for a change in the valuationthen.
Instruments Measured at Fair Value on a Recurring Basis
The table below presents the June 30, 20172018 and December 31, 20162017 carrying values of assets and liabilities measured at fair value on a recurring basis. There were no transfers among levels during the first six months of 20172018 or the year ended December 31, 2016.2017.
| | | | Fair Value Measurements Using | | Fair Value Measurements Using |
(In thousands) | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
June 30, 2017 | | |
June 30, 2018 | | |
Assets: | | |
Residential mortgage loans held for sale | $ | 14,118 |
| $ | — |
| $ | 14,118 |
| $ | — |
| $ | 10,750 |
| $ | — |
| $ | 10,750 |
| $ | — |
|
Available for sale securities: | | |
Available for sale debt securities: | | |
U.S. government and federal agency obligations | 912,555 |
| 912,555 |
| — |
| — |
| 911,092 |
| 911,092 |
| — |
| — |
|
Government-sponsored enterprise obligations | 446,285 |
| — |
| 446,285 |
| — |
| 311,361 |
| — |
| 311,361 |
| — |
|
State and municipal obligations | 1,777,797 |
| — |
| 1,760,972 |
| 16,825 |
| 1,379,164 |
| — |
| 1,364,091 |
| 15,073 |
|
Agency mortgage-backed securities | 2,620,198 |
| — |
| 2,620,198 |
| — |
| 3,131,025 |
| — |
| 3,131,025 |
| — |
|
Non-agency mortgage-backed securities | 1,066,889 |
| — |
| 1,066,889 |
| — |
| 1,010,331 |
| — |
| 1,010,331 |
| — |
|
Asset-backed securities | 2,250,426 |
| — |
| 2,250,426 |
| — |
| 1,338,542 |
| — |
| 1,338,542 |
| — |
|
Other debt securities | 317,704 |
| — |
| 317,704 |
| — |
| 330,861 |
| — |
| 330,861 |
| — |
|
Trading debt securities | | 31,156 |
| — |
| 31,156 |
| — |
|
Equity securities | 47,847 |
| 21,156 |
| 26,691 |
| — |
| 2,741 |
| 2,741 |
| — |
| — |
|
Trading securities | 22,291 |
| — |
| 22,291 |
| — |
| |
Private equity investments | 53,557 |
| — |
| — |
| 53,557 |
| 68,940 |
| — |
| — |
| 68,940 |
|
Derivatives * | 12,027 |
| — |
| 11,097 |
| 930 |
| 6,239 |
| — |
| 5,488 |
| 751 |
|
Assets held in trust for deferred compensation plan | 11,893 |
| 11,893 |
| — |
| — |
| 13,790 |
| 13,790 |
| — |
| — |
|
Total assets | 9,553,587 |
| 945,604 |
| 8,536,671 |
| 71,312 |
| 8,545,992 |
| 927,623 |
| 7,533,605 |
| 84,764 |
|
Liabilities: | | |
Derivatives * | 6,247 |
| — |
| 6,108 |
| 139 |
| 19,846 |
| — |
| 19,779 |
| 67 |
|
Liabilities held in trust for deferred compensation plan | 11,893 |
| 11,893 |
| — |
| — |
| 13,790 |
| 13,790 |
| — |
| — |
|
Total liabilities | $ | 18,140 |
| $ | 11,893 |
| $ | 6,108 |
| $ | 139 |
| $ | 33,636 |
| $ | 13,790 |
| $ | 19,779 |
| $ | 67 |
|
December 31, 2016 | | |
December 31, 2017 | | |
Assets: | | |
Residential mortgage loans held for sale | $ | 9,263 |
| $ | — |
| $ | 9,263 |
| $ | — |
| $ | 15,327 |
| $ | — |
| $ | 15,327 |
| $ | — |
|
Available for sale securities: | | |
Available for sale debt securities: | | |
U.S. government and federal agency obligations | 920,904 |
| 920,904 |
| — |
| — |
| 917,147 |
| 917,147 |
| — |
| — |
|
Government-sponsored enterprise obligations | 449,998 |
| — |
| 449,998 |
| — |
| 406,363 |
| — |
| 406,363 |
| — |
|
State and municipal obligations | 1,778,214 |
| — |
| 1,761,532 |
| 16,682 |
| 1,611,366 |
| — |
| 1,594,350 |
| 17,016 |
|
Agency mortgage-backed securities | 2,685,931 |
| — |
| 2,685,931 |
| — |
| 3,040,913 |
| — |
| 3,040,913 |
| — |
|
Non-agency mortgage-backed securities | 1,055,639 |
| — |
| 1,055,639 |
| — |
| 905,793 |
| — |
| 905,793 |
| — |
|
Asset-backed securities | 2,381,301 |
| — |
| 2,381,301 |
| — |
| 1,492,800 |
| — |
| 1,492,800 |
| — |
|
Other debt securities | 325,953 |
| — |
| 325,953 |
| — |
| 351,060 |
| — |
| 351,060 |
| — |
|
Trading debt securities | | 18,269 |
| — |
| 18,269 |
| — |
|
Equity securities | 51,263 |
| 24,967 |
| 26,296 |
| — |
| 48,838 |
| 19,864 |
| 28,974 |
| — |
|
Trading securities | 22,225 |
| — |
| 22,225 |
| — |
| |
Private equity investments | 50,820 |
| — |
| — |
| 50,820 |
| 55,752 |
| — |
| — |
| 55,752 |
|
Derivatives * | 13,566 |
| — |
| 13,146 |
| 420 |
| 8,349 |
| — |
| 7,723 |
| 626 |
|
Assets held in trust for deferred compensation plan | 10,261 |
| 10,261 |
| — |
| — |
| 12,843 |
| 12,843 |
| — |
| — |
|
Total assets | 9,755,338 |
| 956,132 |
| 8,731,284 |
| 67,922 |
| 8,884,820 |
| 949,854 |
| 7,861,572 |
| 73,394 |
|
Liabilities: | | |
Derivatives * | 13,339 |
| — |
| 13,177 |
| 162 |
| 8,074 |
| — |
| 7,951 |
| 123 |
|
Liabilities held in trust for deferred compensation plan | 10,261 |
| 10,261 |
| — |
| — |
| 12,843 |
| 12,843 |
| — |
| — |
|
Total liabilities | $ | 23,600 |
| $ | 10,261 |
| $ | 13,177 |
| $ | 162 |
| $ | 20,917 |
| $ | 12,843 |
| $ | 7,951 |
| $ | 123 |
|
* The fair value of each class of derivative is shown in Note 10.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
| | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
(In thousands) | State and Municipal Obligations | Private Equity Investments | Derivatives | Total | State and Municipal Obligations | Private Equity Investments | Derivatives | Total |
For the three months ended June 30, 2018 | | |
Balance March 31, 2018 | | $ | 17,158 |
| $ | 64,951 |
| $ | 520 |
| $ | 82,629 |
|
Total gains or losses (realized/unrealized): | | |
Included in earnings | | — |
| 3,791 |
| 164 |
| 3,955 |
|
Included in other comprehensive income * | | (379 | ) | — |
| — |
| (379 | ) |
Investment securities sold | | (1,715 | ) | — |
| — |
| (1,715 | ) |
Discount accretion | | 9 |
| — |
| — |
| 9 |
|
Purchases of private equity investments | | — |
| 364 |
| — |
| 364 |
|
Sale/pay down of private equity investments | | — |
| (166 | ) | — |
| (166 | ) |
Balance June 30, 2018 | | $ | 15,073 |
| $ | 68,940 |
| $ | 684 |
| $ | 84,697 |
|
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2018 | | $ | — |
| $ | 3,791 |
| $ | 747 |
| $ | 4,538 |
|
For the six months ended June 30, 2018 | | |
Balance January 1, 2018 | | $ | 17,016 |
| $ | 55,752 |
| $ | 503 |
| $ | 73,271 |
|
Total gains or losses (realized/unrealized): | | |
Included in earnings | | — |
| 8,096 |
| 329 |
| 8,425 |
|
Included in other comprehensive income * | | (246 | ) | — |
| — |
| (246 | ) |
Investment securities sold | | (1,715 | ) | — |
| — |
| (1,715 | ) |
Discount accretion | | 18 |
| — |
| — |
| 18 |
|
Purchases of private equity investments | | — |
| 5,243 |
| — |
| 5,243 |
|
Sale/pay down of private equity investments | | — |
| (186 | ) | — |
| (186 | ) |
Capitalized interest/dividends | | — |
| 35 |
| — |
| 35 |
|
Sale of risk participation agreement | | — |
| — |
| (148 | ) | (148 | ) |
Balance June 30, 2018 | | $ | 15,073 |
| $ | 68,940 |
| $ | 684 |
| $ | 84,697 |
|
Total gains or losses for the six months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2018 | | $ | — |
| $ | 8,096 |
| $ | 910 |
| $ | 9,006 |
|
For the three months ended June 30, 2017 | | |
Balance March 31, 2017 | $ | 17,083 |
| $ | 52,800 |
| $ | 822 |
| $ | 70,705 |
| $ | 17,083 |
| $ | 52,800 |
| $ | 822 |
| $ | 70,705 |
|
Total gains or losses (realized/unrealized): | | |
Included in earnings | — |
| 48 |
| (31 | ) | 17 |
| — |
| 48 |
| (31 | ) | 17 |
|
Included in other comprehensive income * | 319 |
| — |
| — |
| 319 |
| 319 |
| — |
| — |
| 319 |
|
Investment securities called | (600 | ) | — |
| — |
| (600 | ) | (600 | ) | — |
| — |
| (600 | ) |
Discount accretion | 23 |
| — |
| — |
| 23 |
| 23 |
| — |
| — |
| 23 |
|
Purchases of private equity investments | — |
| 2,259 |
| — |
| 2,259 |
| — |
| 2,259 |
| — |
| 2,259 |
|
Sale/pay down of private equity investments | — |
| (1,550 | ) | — |
| (1,550 | ) | — |
| (1,550 | ) | — |
| (1,550 | ) |
Balance June 30, 2017 | $ | 16,825 |
| $ | 53,557 |
| $ | 791 |
| $ | 71,173 |
| $ | 16,825 |
| $ | 53,557 |
| $ | 791 |
| $ | 71,173 |
|
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2017 | $ | — |
| $ | 48 |
| $ | 872 |
| $ | 920 |
| $ | — |
| $ | 48 |
| $ | 872 |
| $ | 920 |
|
For the six months ended June 30, 2017 | | |
Balance January 1, 2017 | $ | 16,682 |
| $ | 50,820 |
| $ | 258 |
| $ | 67,760 |
| $ | 16,682 |
| $ | 50,820 |
| $ | 258 |
| $ | 67,760 |
|
Total gains or losses (realized/unrealized): | | |
Included in earnings | — |
| (2,830 | ) | 533 |
| (2,297 | ) | — |
| (2,830 | ) | 533 |
| (2,297 | ) |
Included in other comprehensive income * | 710 |
| — |
| — |
| 710 |
| 710 |
| — |
| — |
| 710 |
|
Investment securities called | (600 | ) | — |
| — |
| (600 | ) | (600 | ) | — |
| — |
| (600 | ) |
Discount accretion | 33 |
| — |
| — |
| 33 |
| 33 |
| — |
| — |
| 33 |
|
Purchases of private equity investments | — |
| 7,084 |
| — |
| 7,084 |
| — |
| 7,084 |
| — |
| 7,084 |
|
Sale/pay down of private equity investments | — |
| (1,550 | ) | — |
| (1,550 | ) | — |
| (1,550 | ) | — |
| (1,550 | ) |
Capitalized interest/dividends | — |
| 33 |
| — |
| 33 |
| — |
| 33 |
| — |
| 33 |
|
Balance June 30, 2017 | $ | 16,825 |
| $ | 53,557 |
| $ | 791 |
| $ | 71,173 |
| $ | 16,825 |
| $ | 53,557 |
| $ | 791 |
| $ | 71,173 |
|
Total gains or losses for the six months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2017 | $ | — |
| $ | (2,655 | ) | $ | 882 |
| $ | (1,773 | ) | $ | — |
| $ | (2,655 | ) | $ | 882 |
| $ | (1,773 | ) |
For the three months ended June 30, 2016 | | |
Balance March 31, 2016 | $ | 17,209 |
| $ | 67,432 |
| $ | 506 |
| $ | 85,147 |
| |
Total gains or losses (realized/unrealized): | | |
Included in earnings | — |
| (2,810 | ) | (4 | ) | (2,814 | ) | |
Included in other comprehensive income * | 401 |
| — |
| — |
| 401 |
| |
Discount accretion | 69 |
| — |
| — |
| 69 |
| |
Purchases of private equity investments | — |
| 575 |
| — |
| 575 |
| |
Sale/pay down of private equity investments | — |
| (2,398 | ) | — |
| (2,398 | ) | |
Capitalized interest/dividends | — |
| 14 |
| — |
| 14 |
| |
Balance June 30, 2016 | $ | 17,679 |
| $ | 62,813 |
| $ | 502 |
| $ | 80,994 |
| |
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2016 | $ | — |
| $ | (2,810 | ) | $ | 767 |
| $ | (2,043 | ) | |
For the six months ended June 30, 2016 | | |
Balance January 1, 2016 | $ | 17,195 |
| $ | 63,032 |
| $ | 69 |
| $ | 80,296 |
| |
Total gains or losses (realized/unrealized): | | |
Included in earnings | — |
| (3,724 | ) | 469 |
| (3,255 | ) | |
Included in other comprehensive income * | 502 |
| — |
| — |
| 502 |
| |
Investment securities called | (100 | ) | — |
| — |
| (100 | ) | |
Discount accretion | 82 |
| — |
| — |
| 82 |
| |
Purchases of private equity investments | — |
| 5,841 |
| — |
| 5,841 |
| |
Sale/pay down of private equity investments | — |
| (2,398 | ) | — |
| (2,398 | ) | |
Capitalized interest/dividends | — |
| 62 |
| — |
| 62 |
| |
Sale of risk participation agreement | — |
| — |
| (36 | ) | (36 | ) | |
Balance June 30, 2016 | $ | 17,679 |
| $ | 62,813 |
| $ | 502 |
| $ | 80,994 |
| |
Total gains or losses for the six months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2016 | $ | — |
| $ | (3,724 | ) | $ | 732 |
| $ | (2,992 | ) | |
* Included in "net unrealized gains (losses) on other securities" in the consolidated statements of comprehensive income.
Gains and losses included in earnings for the Level 3 assets and liabilities in the previous table are reported in the following line items in the consolidated statements of income:
| | (In thousands) | Loan Fees and Sales | Other Non-Interest Income | Investment Securities Gains (Losses), Net | Total | Loan Fees and Sales | Other Non-Interest Income | Investment Securities Gains (Losses), Net | Total |
For the three months ended June 30, 2018 | | |
Total gains or losses included in earnings | | $ | 147 |
| $ | 17 |
| $ | 3,791 |
| $ | 3,955 |
|
Change in unrealized gains or losses relating to assets still held at June 30, 2018 | | $ | 730 |
| $ | 17 |
| $ | 3,791 |
| $ | 4,538 |
|
For the six months ended June 30, 2018 | | |
Total gains or losses included in earnings | | $ | 149 |
| $ | 180 |
| $ | 8,096 |
| $ | 8,425 |
|
Change in unrealized gains or losses relating to assets still held at June 30, 2018 | | $ | 730 |
| $ | 180 |
| $ | 8,096 |
| $ | 9,006 |
|
For the three months ended June 30, 2017 | | |
Total gains or losses included in earnings | $ | (32 | ) | $ | 1 |
| $ | 48 |
| $ | 17 |
| $ | (32 | ) | $ | 1 |
| $ | 48 |
| $ | 17 |
|
Change in unrealized gains or losses relating to assets still held at June 30, 2017 | $ | 871 |
| $ | 1 |
| $ | 48 |
| $ | 920 |
| $ | 871 |
| $ | 1 |
| $ | 48 |
| $ | 920 |
|
For the six months ended June 30, 2017 | | |
Total gains or losses included in earnings | $ | 522 |
| $ | 11 |
| $ | (2,830 | ) | $ | (2,297 | ) | $ | 522 |
| $ | 11 |
| $ | (2,830 | ) | $ | (2,297 | ) |
Change in unrealized gains or losses relating to assets still held at June 30, 2017 | $ | 871 |
| $ | 11 |
| $ | (2,655 | ) | $ | (1,773 | ) | $ | 871 |
| $ | 11 |
| $ | (2,655 | ) | $ | (1,773 | ) |
For the three months ended June 30, 2016 | | |
Total gains or losses included in earnings | $ | 19 |
| $ | (23 | ) | $ | (2,810 | ) | $ | (2,814 | ) | |
Change in unrealized gains or losses relating to assets still held at June 30, 2016 | $ | 790 |
| $ | (23 | ) | $ | (2,810 | ) | $ | (2,043 | ) | |
For the six months ended June 30, 2016 | | |
Total gains or losses included in earnings | $ | 527 |
| $ | (58 | ) | $ | (3,724 | ) | $ | (3,255 | ) | |
Change in unrealized gains or losses relating to assets still held at June 30, 2016 | $ | 790 |
| $ | (58 | ) | $ | (3,724 | ) | $ | (2,992 | ) | |
Level 3 Inputs
The Company's significant Level 3 measurements which employ unobservable inputs that are readily quantifiable pertain to auction rate securities (ARS) held by the Bank, investments in portfolio concerns held by the Company's private equity subsidiaries, and held for sale residential mortgage loan commitments. ARS are included in state and municipal securities and totaled $16.8$15.1 million at June 30, 2017,2018, while private equity investments, included in non-marketableother securities, totaled $53.6$68.9 million.
Information about these inputs is presented in the table and discussions below.
| | Quantitative Information about Level 3 Fair Value Measurements | Quantitative Information about Level 3 Fair Value Measurements | | Weighted | Quantitative Information about Level 3 Fair Value Measurements | | Weighted |
| Valuation Technique | Unobservable Input | Range | | Average | Valuation Technique | Unobservable Input | Range | | Average |
Auction rate securities | Discounted cash flow | Estimated market recovery period |
|
| 5 years | | Discounted cash flow | Estimated market recovery period |
|
| 5 years | |
| | Estimated market rate | 2.8% | - | 3.1% | | | Estimated market rate | 3.7% | - | 5.9% | |
Private equity investments | Market comparable companies | EBITDA multiple | 4.0 | - | 5.8 | | Market comparable companies | EBITDA multiple | 4.0 | - | 6.0 | |
Mortgage loan commitments | Discounted cash flow | Probability of funding | 53.0% | - | 99.3% | | 80.2% | Discounted cash flow | Probability of funding | 50.5% | - | 98.8% | | 80.4% |
| | Embedded servicing value | (.2)% | - | 2.2% | | 1.0% | | Embedded servicing value | .5% | - | 2.4% | | 1.3% |
Instruments Measured at Fair Value on a Nonrecurring Basis
For assets measured at fair value on a nonrecurring basis during the first six months of 20172018 and 2016,2017, and still held as of June 30, 20172018 and 2016,2017, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation inputs used to determine each adjustment, and the carrying value of the related individual assets or portfolios at June 30, 20172018 and 2016.2017.
| | | | Fair Value Measurements Using | | | Fair Value Measurements Using | |
(In thousands) |
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Gains (Losses) Recognized During the Six Months Ended June 30 |
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Gains (Losses) Recognized During the Six Months Ended June 30 |
June 30, 2018 | | |
Collateral dependent impaired loans | | $ | 175 |
| $ | — |
| $ | — |
| $ | 175 |
| $ | (118 | ) |
Mortgage servicing rights | | 5,463 |
| — |
| — |
| 5,463 |
| 9 |
|
Foreclosed assets | | 47 |
| — |
| — |
| 47 |
| (47 | ) |
Long-lived assets | | 914 |
| — |
| — |
| 914 |
| (552 | ) |
| | |
June 30, 2017 | | |
Collateral dependent impaired loans | $ | 2,044 |
| $ | — |
| $ | — |
| $ | 2,044 |
| $ | (550 | ) | $ | 2,044 |
| $ | — |
| $ | — |
| $ | 2,044 |
| $ | (550 | ) |
Mortgage servicing rights | 3,646 |
| — |
| — |
| 3,646 |
| 6 |
| 3,646 |
| — |
| — |
| 3,646 |
| 6 |
|
Foreclosed assets | 75 |
| — |
| — |
| 75 |
| (58 | ) | 75 |
| — |
| — |
| 75 |
| (58 | ) |
Long-lived assets | 1,834 |
| — |
| — |
| 1,834 |
| (343 | ) | 1,834 |
| — |
| — |
| 1,834 |
| (343 | ) |
| | |
June 30, 2016 | | |
Collateral dependent impaired loans | $ | 5,001 |
| $ | — |
| $ | — |
| $ | 5,001 |
| $ | (1,491 | ) | |
Mortgage servicing rights | 2,191 |
| — |
| — |
| 2,191 |
| (2 | ) | |
Foreclosed assets | 28 |
| — |
| — |
| 28 |
| (10 | ) | |
Long-lived assets | 1,871 |
| — |
| — |
| 1,871 |
| (956 | ) | |
14.15. Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The methods and inputs used in the estimation of fair value for the financial instruments in the table below are discussed in the Fair Value Measurements and the Fair Value of Financial Instruments notes in the Company's 2016 Annual Report on Form 10-K. There have been no significant changes in these methods and inputs since December 31, 2016, except asAs mentioned in Note 103, the Company prospectively adopted ASU 2016-01 on Derivatives.January 1, 2018. In accordance with its requirements, the fair value of loans as of June 30, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.
The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as follows:follows at June 30, 2018 and December 31, 2017:
| | | Fair Value Hierarchy Level | June 30, 2017 | | December 31, 2016 | Carrying Amount | | Estimated Fair Value at June 30, 2018 |
(In thousands) | Carrying Amount | Estimated Fair Value | | Carrying Amount | Estimated Fair Value | | Level 1 | Level 2 | Level 3 | Total |
Financial Assets | | | | | | | |
Loans: | | | | | | | |
Business | Level 3 | $ | 4,852,408 |
| $ | 4,866,125 |
| | $ | 4,776,365 |
| $ | 4,787,469 |
| $ | 4,990,298 |
| | $ | — |
| $ | — |
| $ | 4,890,517 |
| $ | 4,890,517 |
|
Real estate - construction and land | Level 3 | 848,152 |
| 859,171 |
| | 791,236 |
| 800,426 |
| 967,151 |
| | — |
| — |
| 962,276 |
| 962,276 |
|
Real estate - business | Level 3 | 2,727,349 |
| 2,740,841 |
| | 2,643,374 |
| 2,658,093 |
| 2,727,580 |
| | — |
| — |
| 2,689,312 |
| 2,689,312 |
|
Real estate - personal | Level 3 | 2,009,203 |
| 2,022,671 |
| | 2,010,397 |
| 2,005,227 |
| 2,102,586 |
| | — |
| — |
| 2,038,381 |
| 2,038,381 |
|
Consumer | Level 3 | 2,038,514 |
| 2,021,537 |
| | 1,990,801 |
| 1,974,784 |
| 2,012,644 |
| | — |
| — |
| 1,976,911 |
| 1,976,911 |
|
Revolving home equity | Level 3 | 403,387 |
| 404,177 |
| | 413,634 |
| 414,499 |
| 374,557 |
| | — |
| — |
| 367,886 |
| 367,886 |
|
Consumer credit card | Level 3 | 740,865 |
| 754,763 |
| | 776,465 |
| 794,856 |
| 775,214 |
| | — |
| — |
| 720,044 |
| 720,044 |
|
Overdrafts | Level 3 | 6,714 |
| 6,714 |
| | 10,464 |
| 10,464 |
| 4,081 |
| | — |
| — |
| 3,018 |
| 3,018 |
|
Total loans | | 13,954,111 |
| | — |
| — |
| 13,648,345 |
| 13,648,345 |
|
Loans held for sale | Level 2 | 22,002 |
| 22,002 |
| | 14,456 |
| 14,456 |
| 20,352 |
| | — |
| 20,352 |
| — |
| 20,352 |
|
Investment securities: | | | | | |
Available for sale | Level 1 | 933,711 |
| 933,711 |
| | 945,871 |
| 945,871 |
| |
Available for sale | Level 2 | 8,489,165 |
| 8,489,165 |
| | 8,686,650 |
| 8,686,650 |
| |
Available for sale | Level 3 | 16,825 |
| 16,825 |
| | 16,682 |
| 16,682 |
| |
Trading | Level 2 | 22,291 |
| 22,291 |
| | 22,225 |
| 22,225 |
| |
Non-marketable | Level 3 | 102,388 |
| 102,388 |
| | 99,558 |
| 99,558 |
| |
Investment securities | | 8,560,285 |
| | 913,833 |
| 7,517,367 |
| 129,085 |
| 8,560,285 |
|
Federal funds sold | Level 1 | 16,520 |
| 16,520 |
| | 15,470 |
| 15,470 |
| 31,500 |
| | 31,500 |
| — |
| — |
| 31,500 |
|
Securities purchased under agreements to resell | Level 3 | 625,000 |
| 628,148 |
| | 725,000 |
| 728,179 |
| 700,000 |
| | — |
| — |
| 680,830 |
| 680,830 |
|
Interest earning deposits with banks | Level 1 | 80,860 |
| 80,860 |
| | 272,275 |
| 272,275 |
| 114,947 |
| | 114,947 |
| — |
| — |
| 114,947 |
|
Cash and due from banks | Level 1 | 433,747 |
| 433,747 |
| | 494,690 |
| 494,690 |
| 386,339 |
| | 386,339 |
| — |
| — |
| 386,339 |
|
Derivative instruments | Level 2 | 11,097 |
| 11,097 |
| | 13,146 |
| 13,146 |
| 6,239 |
| | — |
| 5,488 |
| 751 |
| 6,239 |
|
Derivative instruments | Level 3 | 930 |
| 930 |
| | 420 |
| 420 |
| |
Assets held in trust for deferred compensation plan | Level 1 | 11,893 |
| 11,893 |
| | 10,261 |
| 10,261 |
| 13,790 |
| | 13,790 |
| — |
| — |
| 13,790 |
|
Total | | $ | 23,787,563 |
| | $ | 1,460,409 |
| $ | 7,543,207 |
| $ | 14,459,011 |
| $ | 23,462,627 |
|
Financial Liabilities | | | | | | | |
Non-interest bearing deposits | Level 1 | $ | 7,314,506 |
| $ | 7,314,506 |
| | $ | 7,429,398 |
| $ | 7,429,398 |
| $ | 6,876,756 |
| | $ | 6,876,756 |
| $ | — |
| $ | — |
| $ | 6,876,756 |
|
Savings, interest checking and money market deposits | Level 1 | 11,427,615 |
| 11,427,615 |
| | 11,430,789 | 11,761,832 |
| | 11,761,832 |
| — |
| — |
| 11,761,832 |
|
Time open and certificates of deposit | Level 3 | 2,083,541 |
| 2,075,563 |
| | 2,240,908 |
| 2,235,218 |
| 1,682,969 |
| | — |
| — |
| 1,682,894 |
| 1,682,894 |
|
Federal funds purchased | Level 1 | 253,510 |
| 253,510 |
| | 52,840 |
| 52,840 |
| 131,685 |
| | 131,685 |
| — |
| — |
| 131,685 |
|
Securities sold under agreements to repurchase | Level 3 | 1,002,934 |
| 1,003,183 |
| | 1,671,065 |
| 1,671,227 |
| 1,035,074 |
| | — |
| — |
| 1,035,558 |
| 1,035,558 |
|
Other borrowings | Level 3 | 101,903 |
| 102,907 |
| | 102,049 |
| 104,298 |
| 9,291 |
| | — |
| 7,682 |
| 1,609 |
| 9,291 |
|
Derivative instruments | Level 2 | 6,108 |
| 6,108 |
| | 13,177 |
| 13,177 |
| 19,846 |
| | — |
| 19,779 |
| 67 |
| 19,846 |
|
Derivative instruments | Level 3 | 139 |
| 139 |
| | 162 |
| 162 |
| |
Liabilities held in trust for deferred compensation plan | Level 1 | 11,893 |
| 11,893 |
| | 10,261 |
| 10,261 |
| 13,790 |
| | 13,790 |
| — |
| — |
| 13,790 |
|
Total | | $ | 21,531,243 |
| | $ | 18,784,063 |
| $ | 27,461 |
| $ | 2,720,128 |
| $ | 21,531,652 |
|
|
| | | | | | | | | | | | | | | | |
| Carrying Amount | | Estimated Fair Value at December 31, 2017 |
(In thousands)
| | Level 1 | Level 2 | Level 3 | Total |
Financial Assets | | | | | | |
Loans: | | | | | | |
Business | $ | 4,958,554 |
| | $ | — |
| $ | — |
| $ | 4,971,401 |
| $ | 4,971,401 |
|
Real estate - construction and land | 968,820 |
| | — |
| — |
| 979,389 |
| 979,389 |
|
Real estate - business | 2,697,452 |
| | — |
| — |
| 2,702,598 |
| 2,702,598 |
|
Real estate - personal | 2,062,787 |
| | — |
| — |
| 2,060,443 |
| 2,060,443 |
|
Consumer | 2,104,487 |
| | — |
| — |
| 2,074,129 |
| 2,074,129 |
|
Revolving home equity | 400,587 |
| | — |
| — |
| 400,333 |
| 400,333 |
|
Consumer credit card | 783,864 |
| | — |
| — |
| 798,093 |
| 798,093 |
|
Overdrafts | 7,123 |
| | — |
| — |
| 7,123 |
| 7,123 |
|
Total loans | 13,983,674 |
| | — |
| — |
| 13,993,509 |
| 13,993,509 |
|
Loans held for sale | 21,398 |
| | — |
| 21,398 |
| — |
| 21,398 |
|
Investment securities | 8,893,307 |
| | 937,011 |
| 7,838,522 |
| 117,774 |
| 8,893,307 |
|
Federal funds sold | 42,775 |
| | 42,775 |
| — |
| — |
| 42,775 |
|
Securities purchased under agreements to resell | 700,000 |
| | — |
| — |
| 695,194 |
| 695,194 |
|
Interest earning deposits with banks | 30,631 |
| | 30,631 |
| — |
| — |
| 30,631 |
|
Cash and due from banks | 438,439 |
| | 438,439 |
| — |
| — |
| 438,439 |
|
Derivative instruments | 8,349 |
| | — |
| 7,723 |
| 626 |
| 8,349 |
|
Assets held in trust for deferred compensation plan | 12,843 |
| | 12,843 |
| — |
| — |
| 12,843 |
|
Total | $ | 24,131,416 |
| | $ | 1,461,699 |
| $ | 7,867,643 |
| $ | 14,807,103 |
| $ | 24,136,445 |
|
Financial Liabilities | | | | | | |
Non-interest bearing deposits | $ | 7,158,962 |
| | $ | 7,158,962 |
| $ | — |
| $ | — |
| $ | 7,158,962 |
|
Savings, interest checking and money market deposits | 11,499,620 |
| | 11,499,620 |
| — |
| — |
| 11,499,620 |
|
Time open and certificates of deposit | 1,766,864 |
| | — |
| — |
| 1,768,780 |
| 1,768,780 |
|
Federal funds purchased | 202,370 |
| | 202,370 |
| — |
| — |
| 202,370 |
|
Securities sold under agreements to repurchase | 1,304,768 |
| | — |
| — |
| 1,305,375 |
| 1,305,375 |
|
Other borrowings | 1,758 |
| | — |
| — |
| 1,758 |
| 1,758 |
|
Derivative instruments | 8,074 |
| | — |
| 7,951 |
| 123 |
| 8,074 |
|
Liabilities held in trust for deferred compensation plan | 12,843 |
| | 12,843 |
| — |
| — |
| 12,843 |
|
Total | $ | 21,955,259 |
| | $ | 18,873,795 |
| $ | 7,951 |
| $ | 3,076,036 |
| $ | 21,957,782 |
|
15.16. Legal and Regulatory Proceedings
On August 15, 2014, a customer filed a class action complaint against the Bank in the Circuit Court, Jackson County, Missouri. The case is Cassandra Warren, et al v. Commerce Bank (Case No. 1416-CV19197). In the case, the customer alleges violation of the Missouri usury statute in connection with the Bank charging overdraft fees in connection with point-of-sale/debit and automated-teller machine cards. The class was certified and consists of Missouri customers of the Bank who may have been similarly affected. The case has been stayed pending the final outcome of a similar case in which a ruling has been made in favor of the bank defendant. The Company believes that the stay will remain in effect until any appeals in the similar case have run their course. The Company believes the Warren complaint lacks merit and will defend itself vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time.
The Company has been in ongoing discussions with the U.S. Department of Labor concerning an investigation involving ERISA regulations related to a managed trust account. The investigation concluded in a non-material settlement between the Company and the U.S. Department of Labor during July 2017.
The Company has various other legal proceedings pending at June 30, 2017,2018, arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. The Company records a loss accrual for all legal and regulatory matters for which it deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet progressed to the point where a loss amount can be determined to be probable and estimable.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 20162017 Annual Report on Form 10-K. Results of operations for the three and six month periods ended June 30, 20172018 are not necessarily indicative of results to be attained for any other period.
Forward-Looking Information
This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 20162017 Annual Report on Form 10-K.
Critical Accounting Policies
The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan losses, the valuation of certain investment securities, and accounting for income taxes. A discussion of these policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Loan Losses" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 20162017 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2016.2017.
Selected Financial Data
| |
| | Three Months Ended June 30 | | Six Months Ended June 30 | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | 2017 | 2016 | | 2017 | 2016 | | 2018 | 2017 | | 2018 | 2017 |
Per Share Data | | | | | | | | |
Net income per common share — basic | | $ | .75 |
| $ | .67 | * | | $ | 1.43 |
| $ | 1.29 | * | | $ | 1.02 |
| $ | .71 | * | | $ | 1.94 |
| $ | 1.36 | * |
Net income per common share — diluted | | .75 |
| .66 | * | | 1.43 |
| 1.28 | * | | 1.01 |
| .71 | * | | 1.93 |
| 1.36 | * |
Cash dividends on common stock | | .225 |
| .214 | * | | .450 |
| .429 | * | | .235 |
| .214 | * | | .470 |
| .429 | * |
Book value per common share | | | | 24.44 |
| 23.49 | * | | | | 24.64 |
| 23.28 | * |
Market price | | | | 56.83 |
| 45.62 | * | | | | 64.71 |
| 54.12 | * |
Selected Ratios | | | | | | | | |
(Based on average balance sheets) | | | | | | | | |
Loans to deposits (1) | | 65.25 | % | 63.45 | % | | 64.82 | % | 63.13 | % | | 68.85 | % | 65.25 | % | | 68.97 | % | 64.82 | % |
Non-interest bearing deposits to total deposits | | 34.03 |
| 33.83 |
| | 34.25 |
| 34.13 |
| | 33.37 |
| 34.03 |
| | 33.61 |
| 34.25 |
|
Equity to loans (1) | | 19.26 |
| 19.15 |
| | 19.00 |
| 19.15 |
| | 19.59 |
| 19.26 |
| | 19.54 |
| 19.00 |
|
Equity to deposits | | 12.57 |
| 12.15 |
| | 12.32 |
| 12.09 |
| | 13.49 |
| 12.57 |
| | 13.48 |
| 12.32 |
|
Equity to total assets | | 10.42 |
| 10.13 |
| | 10.23 |
| 9.99 |
| | 11.12 |
| 10.42 |
| | 11.07 |
| 10.23 |
|
Return on total assets | | 1.26 |
| 1.15 |
| | 1.21 |
| 1.11 |
| | 1.80 |
| 1.26 |
| | 1.73 |
| 1.21 |
|
Return on common equity | | 12.48 |
| 11.69 |
| | 12.12 |
| 11.44 |
| | 16.78 |
| 12.48 |
| | 16.19 |
| 12.12 |
|
(Based on end-of-period data) | | | | | | | | |
Non-interest income to revenue (2) | | 40.24 |
| 40.42 |
| | 39.94 |
| 41.25 |
| | 37.18 |
| 38.69 |
| | 37.71 |
| 38.39 |
|
Efficiency ratio (3) | | 60.24 |
| 61.27 |
| | 61.67 |
| 61.93 |
| | 54.06 |
| 59.21 |
| | 56.06 |
| 60.67 |
|
Tier I common risk-based capital ratio | | | | 12.28 |
| 11.50 |
| | | | 13.71 |
| 12.28 |
|
Tier I risk-based capital ratio | | | | 13.05 |
| 12.29 |
| | | | 14.48 |
| 13.05 |
|
Total risk-based capital ratio | | | | 14.00 |
| 13.23 |
| | | | 15.33 |
| 14.00 |
|
Tangible common equity to tangible assets ratio (4) | | | | 9.37 |
| 9.09 |
| | | | 10.18 |
| 9.37 |
|
Tier I leverage ratio | | | | 9.87 |
| 9.36 |
| | | | 11.18 |
| 9.87 |
|
* Restated for the 5% stock dividend distributed in December 2016.2017.
(1) Includes loans held for sale.
(2) Revenue includes net interest income and non-interest income.
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization. It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP.
The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets.
| | | June 30 | June 30 |
(Dollars in thousands) | 2017 | 2016 | 2018 | 2017 |
Total equity | $ | 2,628,207 |
| $ | 2,526,821 |
| $ | 2,771,383 |
| $ | 2,628,207 |
|
Less non-controlling interest | 4,324 |
| 4,905 |
| 3,396 |
| 4,324 |
|
Less preferred stock | 144,784 |
| 144,784 |
| 144,784 |
| 144,784 |
|
Less goodwill | 138,921 |
| 138,921 |
| 138,921 |
| 138,921 |
|
Less core deposit premium | 3,356 |
| 4,370 |
| 2,620 |
| 3,356 |
|
Total tangible common equity (a) | $ | 2,336,822 |
| $ | 2,233,841 |
| $ | 2,481,662 |
| $ | 2,336,822 |
|
Total assets | $ | 25,078,843 |
| $ | 24,709,693 |
| $ | 24,524,742 |
| $ | 25,078,843 |
|
Less goodwill | 138,921 |
| 138,921 |
| 138,921 |
| 138,921 |
|
Less core deposit premium | 3,356 |
| 4,370 |
| 2,620 |
| 3,356 |
|
Total tangible assets (b) | $ | 24,936,566 |
| $ | 24,566,402 |
| $ | 24,383,201 |
| $ | 24,936,566 |
|
Tangible common equity to tangible assets ratio (a)/(b) | 9.37 | % | 9.09 | % | 10.18 | % | 9.37 | % |
Results of Operations
Summary
| | | Three Months Ended June 30 | | Six Months Ended June 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | 2017 | 2016 | % change | | 2017 | 2016 | % change | 2018 | 2017 | | % change | | 2018 | 2017 | % change |
Net interest income | $ | 182,807 |
| $ | 171,829 |
| 6.4 | % | | $ | 361,080 |
| $ | 335,604 |
| 7.6 | % | $ | 210,959 |
| $ | 182,807 |
| | 15.4 | % | | $ | 403,851 |
| $ | 361,080 |
| 11.8 | % |
Provision for loan losses | (10,758 | ) | (9,216 | ) | 16.7 |
| | (21,886 | ) | (18,655 | ) | 17.3 |
| (10,043 | ) | (10,758 | ) | | (6.6 | ) | | (20,439 | ) | (21,886 | ) | (6.6 | ) |
Non-interest income | 123,084 |
| 116,570 |
| 5.6 |
| | 240,150 |
| 235,594 |
| 1.9 |
| 124,850 |
| 115,380 |
| | 8.2 |
| | 244,540 |
| 224,993 |
| 8.7 |
|
Investment securities gains (losses), net | 1,651 |
| (744 | ) | N.M. |
| | 879 |
| (1,739 | ) | N.M. |
| (3,075 | ) | 1,651 |
| | N.M. |
| | 2,335 |
| 879 |
| N.M. |
|
Non-interest expense | (184,594 | ) | (177,089 | ) | 4.2 |
| | (371,424 | ) | (354,562 | ) | 4.8 |
| (181,860 | ) | (176,890 | ) | | 2.8 |
| | (364,137 | ) | (356,267 | ) | 2.2 |
|
Income taxes | (33,201 | ) | (31,542 | ) | 5.3 |
| | (58,108 | ) | (60,912 | ) | (4.6 | ) | (29,507 | ) | (33,201 | ) | | (11.1 | ) | | (52,765 | ) | (58,108 | ) | (9.2 | ) |
Non-controlling interest (expense) income | (29 | ) | 85 |
| N.M. |
| | (227 | ) | (63 | ) | N.M. |
| |
Non-controlling interest expense | | (994 | ) | (29 | ) | | N.M. |
| | (2,071 | ) | (227 | ) | N.M. |
|
Net income attributable to Commerce Bancshares, Inc. | 78,960 |
| 69,893 |
| 13.0 |
| | 150,464 |
| 135,267 |
| 11.2 |
| 110,330 |
| 78,960 |
| | 39.7 |
| | 211,314 |
| 150,464 |
| 40.4 |
|
Preferred stock dividends | (2,250 | ) | (2,250 | ) | — |
| | (4,500 | ) | (4,500 | ) | — |
| (2,250 | ) | (2,250 | ) | | — |
| | (4,500 | ) | (4,500 | ) | — |
|
Net income available to common shareholders | $ | 76,710 |
| $ | 67,643 |
| 13.4 | % | | $ | 145,964 |
| $ | 130,767 |
| 11.6 | % | $ | 108,080 |
| $ | 76,710 |
| | 40.9 | % | | $ | 206,814 |
| $ | 145,964 |
| 41.7 | % |
N.M. - Not meaningful.
For the quarter ended June 30, 2017,2018, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $79.0$110.3 million, an increase of $9.1$31.4 million, or 13.0%39.7%, compared to the second quarter of the previous year. For the current quarter, the annualized return on average assets was 1.26%1.80%, the annualized return on average common equity was 12.48%16.78% and the efficiency ratio was 60.24%54.06%. Diluted earnings per common share was $.75,$1.01, an increase of 13.6%42.3% compared to $.66$.71 per share in the second quarter of 20162017 and an increase of 10.3%9.8% compared to $.68$.92 per share in the previous quarter.
Compared to the second quarter of last year, net interest income increased $11.0$28.2 million, or 6.4%15.4%, mainly due to growth of $13.1$20.0 million in interest income on loans coupled with an increase of $10.6 million in interest income on investment securities, partly offset by an increase of $2.6$3.9 million in interest expense on deposits and borrowings interest expense.borrowings. The provision for loan losses totaled $10.8$10.0 million for the current quarter, representing an increasea decrease of $1.5 million over$715 thousand from the second quarter of 2016.2017. Non-interest income increased $6.5$9.5 million, or 5.6%8.2%, compared to the second quarter of 2016,2017, mainly due to combined growth of $5.3$10.9 million in trust, deposit and loanbank card fee income, in addition to current quarter gains of $1.7 million on sales of branch properties and equipment leased by customers.income. Non-interest expense increased $7.5$5.0 million, or 4.2%2.8%, over the second quarter of 20162017 primarily due to increases in salaries and employee benefits, data processing, and marketing expense. Although taxable income was higher in the contributionsecond quarter of $2.3 million in appreciated securities to a related foundation. A $2.2 million securities gain was recorded on the transaction, resulting in a pre-tax loss of $97 thousand and tax benefits of $873 thousand. The Company made a similar contribution2018 compared to the foundationprior year, income tax expense declined due to new tax legislation lowering the corporate tax rate in the first quarter of 2017 and intends to make similar contributions in subsequent quarters this year.2018.
Net investment securities gainslosses totaled $1.7$3.1 million in the current quarter and $879 thousandcompared to gains of $1.7 million in the first six monthssame quarter last year. Current quarter losses were primarily comprised of 2017. Gains resulting from the securities donations were $2.2an adjustment of $8.9 million in both the first and second quarters of 2017,to recognize dividend income on a liquidated equity security, partly offset by lossesunrealized gains in fair value on the Company’s holdings of private equity securities of $2.8 million in the six month period.investments. The dividend income adjustment was entirely offset this quarter by a comparable adjustment increasing interest on investment securities.
Net income for the first six months of 20172018 was $150.5$211.3 million, an increase of $15.2$60.9 million, or 11.2%40.4%, over the same period last year. Diluted earnings per common share was $1.43,$1.93, an increase of 11.7%41.9% compared to $1.28$1.36 per share in the same period last year. For the first six months of 2017,2018, the annualized return on average assets was 1.21%1.73%, the annualized return on average common equity was 12.12%16.19%, and the efficiency ratio was 61.67%56.06%. Net interest income increased $25.5$42.8 million, or 7.6%11.8%, over the same period last year. This growth was largely due to increases of $22.1$38.8 million in loan interest income and $6.7$8.6 million in investment securities interest income, offset by a $3.9$7.3 million increase in interest expense on deposits and borrowings interest expense.borrowings. The provision for loan losses was $21.9$20.4 million for the first six months of 2017, up $3.22018, down $1.4 million overfrom the same period last year. Non-interest income increased $4.6$19.5 million, or 1.9%8.7%, over the first six months of last year due to growth in bank card, trust, deposit and loandeposit fees. Non-interest expense increased $16.9$7.9 million, or 4.8%2.2%, due to higher salaries and benefits expense of $9.5$10.3 million, in addition to securities contributions ofpartly offset by a $4.5 million as mentioned above.decrease in community service expense.
Net Interest Income
The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.
Analysis of Changes in Net Interest Income
| | | Three Months Ended June 30, 2017 vs. 2016 | | Six Months Ended June 30, 2017 vs. 2016 | Three Months Ended June 30, 2018 vs. 2017 | | Six Months Ended June 30, 2018 vs. 2017 |
| Change due to | | | Change due to | | Change due to | | | Change due to | |
(In thousands) | Average Volume | Average Rate |
Total | | Average Volume | Average Rate |
Total | Average Volume | Average Rate |
Total | | Average Volume | Average Rate |
Total |
Interest income, fully taxable equivalent basis: | | | | | | |
Loans: | | | | | | |
Business | $ | 978 |
| $ | 3,766 |
| $ | 4,744 |
| | $ | 3,934 |
| $ | 5,303 |
| $ | 9,237 |
| $ | 1,099 |
| $ | 5,909 |
| $ | 7,008 |
| | $ | 1,284 |
| $ | 11,433 |
| $ | 12,717 |
|
Real estate - construction and land | 631 |
| 1,836 |
| 2,467 |
| | 1,888 |
| 2,488 |
| 4,376 |
| 1,173 |
| 1,825 |
| 2,998 |
| | 2,365 |
| 3,777 |
| 6,142 |
|
Real estate - business | 2,870 |
| 415 |
| 3,285 |
| | 5,282 |
| (242 | ) | 5,040 |
| 238 |
| 3,249 |
| 3,487 |
| | 1,038 |
| 6,137 |
| 7,175 |
|
Real estate - personal | 919 |
| (144 | ) | 775 |
| | 1,878 |
| (431 | ) | 1,447 |
| 695 |
| 619 |
| 1,314 |
| | 1,154 |
| 929 |
| 2,083 |
|
Consumer | 662 |
| 735 |
| 1,397 |
| | 1,047 |
| 689 |
| 1,736 |
| 273 |
| 2,294 |
| 2,567 |
| | 1,209 |
| 4,159 |
| 5,368 |
|
Revolving home equity | (121 | ) | 256 |
| 135 |
| | (332 | ) | 348 |
| 16 |
| (205 | ) | 635 |
| 430 |
| | (316 | ) | 1,223 |
| 907 |
|
Consumer credit card | (192 | ) | 713 |
| 521 |
| | (315 | ) | 984 |
| 669 |
| 674 |
| 282 |
| 956 |
| | 955 |
| 1,037 |
| 1,992 |
|
Overdrafts | — |
| — |
| — |
| | — |
| — |
| — |
| — |
| — |
| — |
| | — |
| — |
| — |
|
Total interest on loans | 5,747 |
| 7,577 |
| 13,324 |
| | 13,382 |
| 9,139 |
| 22,521 |
| 3,947 |
| 14,813 |
| 18,760 |
| | 7,689 |
| 28,695 |
| 36,384 |
|
Loans held for sale | (442 | ) | 13 |
| (429 | ) | | (388 | ) | 20 |
| (368 | ) | 7 |
| 102 |
| 109 |
| | 93 |
| 124 |
| 217 |
|
Investment securities: | | | | | | |
U.S. government and federal agency securities | 1,843 |
| (2,159 | ) | (316 | ) | | 2,023 |
| 1,682 |
| 3,705 |
| 78 |
| 1,519 |
| 1,597 |
| | 89 |
| 1,582 |
| 1,671 |
|
Government-sponsored enterprise obligations | (1,632 | ) | (1,601 | ) | (3,233 | ) | | (3,279 | ) | (1,916 | ) | (5,195 | ) | (381 | ) | 260 |
| (121 | ) | | (557 | ) | 513 |
| (44 | ) |
State and municipal obligations | 70 |
| 50 |
| 120 |
| | 651 |
| (106 | ) | 545 |
| (3,388 | ) | (1,902 | ) | (5,290 | ) | | (5,826 | ) | (4,125 | ) | (9,951 | ) |
Mortgage-backed securities | 1,846 |
| (36 | ) | 1,810 |
| | 3,862 |
| (790 | ) | 3,072 |
| 2,103 |
| 2,580 |
| 4,683 |
| | 3,089 |
| 4,891 |
| 7,980 |
|
Asset-backed securities | (153 | ) | 1,596 |
| 1,443 |
| | (776 | ) | 2,904 |
| 2,128 |
| (3,980 | ) | 2,077 |
| (1,903 | ) | | (7,575 | ) | 3,835 |
| (3,740 | ) |
Other securities | (360 | ) | 906 |
| 546 |
| | (835 | ) | 4,516 |
| 3,681 |
| 334 |
| 9,149 |
| 9,483 |
| | 556 |
| 5,719 |
| 6,275 |
|
Total interest on investment securities | 1,614 |
| (1,244 | ) | 370 |
| | 1,646 |
| 6,290 |
| 7,936 |
| (5,234 | ) | 13,683 |
| 8,449 |
| | (10,224 | ) | 12,415 |
| 2,191 |
|
Federal funds sold and short-term securities purchased under | | | | | | |
agreements to resell | 2 |
| 16 |
| 18 |
| | (9 | ) | 26 |
| 17 |
| 67 |
| 73 |
| 140 |
| | 150 |
| 147 |
| 297 |
|
Long-term securities purchased under agreements to resell | (648 | ) | 978 |
| 330 |
| | (1,159 | ) | 1,807 |
| 648 |
| 190 |
| (89 | ) | 101 |
| | 52 |
| 370 |
| 422 |
|
Interest earning deposits with banks | 17 |
| 194 |
| 211 |
| | 2 |
| 336 |
| 338 |
| 556 |
| 672 |
| 1,228 |
| | 614 |
| 1,357 |
| 1,971 |
|
Total interest income | 6,290 |
| 7,534 |
| 13,824 |
| | 13,474 |
| 17,618 |
| 31,092 |
| (467 | ) | 29,254 |
| 28,787 |
| | (1,626 | ) | 43,108 |
| 41,482 |
|
Interest expense: | | | | | | |
Deposits: | | | | | | |
Savings | 12 |
| 4 |
| 16 |
| | 23 |
| 11 |
| 34 |
| 15 |
| (16 | ) | (1 | ) | | 28 |
| (30 | ) | (2 | ) |
Interest checking and money market | 109 |
| 669 |
| 778 |
| | 258 |
| 908 |
| 1,166 |
| 43 |
| 2,135 |
| 2,178 |
| | 28 |
| 3,850 |
| 3,878 |
|
Time open & C.D.'s of less than $100,000 | (66 | ) | 31 |
| (35 | ) | | (132 | ) | (1 | ) | (133 | ) | (73 | ) | 93 |
| 20 |
| | (144 | ) | 182 |
| 38 |
|
Time open & C.D.'s of $100,000 and over | (184 | ) | 659 |
| 475 |
| | 76 |
| 1,176 |
| 1,252 |
| (738 | ) | 1,399 |
| 661 |
| | (1,648 | ) | 2,385 |
| 737 |
|
Total interest on deposits | (129 | ) | 1,363 |
| 1,234 |
| | 225 |
| 2,094 |
| 2,319 |
| (753 | ) | 3,611 |
| 2,858 |
| | (1,736 | ) | 6,387 |
| 4,651 |
|
Federal funds purchased and securities sold under | | | | | | |
agreements to repurchase | 89 |
| 1,224 |
| 1,313 |
| | 67 |
| 1,897 |
| 1,964 |
| (232 | ) | 2,150 |
| 1,918 |
| | (32 | ) | 4,412 |
| 4,380 |
|
Other borrowings | (17 | ) | 21 |
| 4 |
| | (1,254 | ) | 893 |
| (361 | ) | (900 | ) | 1 |
| (899 | ) | | (1,776 | ) | 1 |
| (1,775 | ) |
Total interest expense | (57 | ) | 2,608 |
| 2,551 |
| | (962 | ) | 4,884 |
| 3,922 |
| (1,885 | ) | 5,762 |
| 3,877 |
| | (3,544 | ) | 10,800 |
| 7,256 |
|
Net interest income, tax equivalent basis | $ | 6,347 |
| $ | 4,926 |
| $ | 11,273 |
| | $ | 14,436 |
| $ | 12,734 |
| $ | 27,170 |
| $ | 1,418 |
| $ | 23,492 |
| $ | 24,910 |
| | $ | 1,918 |
| $ | 32,308 |
| $ | 34,226 |
|
Net interest income in the second quarter of 20172018 was $182.8$211.0 million, an increase of $11.0$28.2 million over the second quarter of 2016.2017. On a tax equivalent (T/E) basis, net interest income totaled $190.9$215.8 million in the second quarter of 2017,2018, up $11.3$24.9 million over the same period last year and up $3.5$19.1 million over the previous quarter. The increase in net interest income compared to the second quarter of 20162017 was mainly due to higher interest income on loans (T/E) of $13.3$18.9 million. The increase in interest on loans was a result of higher loan yields on nearly all loan products, especially commercial loans, many of which have variable rates. Total interest
Interest income on investment securities (T/E) increased $370 thousand$8.4 million over the second quarter of 2016, mainly due2017, which included dividend income of $8.9 million related to higher interesta liquidated equity security which was carried at fair value. Also, inflation income earned on mortgage-backed and asset-backed securities. Securities interest also includes inflation-related interest on the Company's holdings of U.S. Treasurytreasury inflation-protected securities (TIPS), which is tied to the Consumer Price Index. Interest income related to TIPS increased $2.5$1.7 million in the first six months of 2017 compared toover the same period last year. This increase was partly offset by a $1.0 billion decrease in 2016, and totaled $2.9 millionaverage investment securities balances, resulting in a decline in interest income of $5.2 million. Excluding the current quarter and $3.7 million individend mentioned above, the second quarter of 2016. The Company's net yield on earning assets (T/E) was 3.19%3.50% in the current quarter compared to 3.11%3.18% in the second quarter of 2016.2017.
Total interest income (T/E) increased $13.8$28.8 million over the second quarter of 2016.2017. Interest income on loans (T/E) was $136.8$156.0 million during the second quarter of 2017,2018, and increased $13.3$18.9 million, or 10.8%13.8%, over the same quarter last year. The increase was due to growth of $669.4$377.7 million, or 5.2%2.8%, in average loan balances, and an increase of 2043 basis points in average rates earned. Most of the increase in interest income occurred in the business, construction and business real estate loan categories. The largest increase to interest income occurred in business loan interest, which grew $4.7$7.0 million due to higher average balances of $136.0 million, or 2.9%, coupled with a 3148 basis point increase in the average rate earned.earned, coupled with higher average balances of $134.7 million. Construction loan interest grew $2.5$3.0 million, as average balances increased $73.2$109.4 million, or 9.3%12.7%, and the average rate earned increased 8476 basis points. Business real estate loan interest increased $3.3$3.5 million due to an increase of 48 basis points in the average rate earned and an increase in average balances of $312.0$25.6 million. Personal real estate loan interest increased $1.3 million or 13.1%, withdue to an increase of five$75.0 million in average balances, or 3.7%, and an increase of 12 basis points in the average rate earned. Interest on consumer loans increased $1.4$2.6 million over the same period last year as the average rate increased 1445 basis points, coupled with a $69.8$27.8 million increase in average balances. This increase was mainly due to growth of $57.2 million in patient health care loans. During the quarter, auto loans totaling $25.9 million were sold to another financial institution, and contributed to an average decline of $6.7 million in auto loan balances, while average marine and recreational vehicle (RV) loans declined $26.1 million from the same quarter last year. In addition, interest on consumer credit card loans grew $956 thousand over the same period last year, as average balances increased $22.7 million and the average rate earned increased 15 basis points.
Interest income on investment securities (T/E) was $60.5$68.9 million during the second quarter of 2017,2018, which was an increase of $370 thousand$8.4 million over the same quarter last year. The increase resultedwas mainly from increased earningsdue to the receipt of $8.9 million in dividend income on mortgage-backed and asset-backed securities, partly offset by lower TIPSthe equity security mentioned above. In addition, interest of $869 thousand and lower interestincome earned on government-sponsored enterprise obligations. Higher interest on mortgage-backed securities of $1.8grew $4.7 million and resulted from an increase of $313.7$359.0 million in average balances. Interest income on asset-backed securities grew $1.4 million mainly due tobalances and a 2725 basis point increase in the average rate earned. Partly offsetting these increases was a $3.2 million decline in interest income on government-sponsored enterprise obligations, which was partly the result of early maturity calls on certain securities in the second quarter of 2016. The average balance of government-sponsored enterprise obligations decreased $216.0 million and the average rate earned decreased 144 basis points. During the current quarter and the same quarter last year, adjustmentsAdjustments to premium amortization expense, due to changes inslowing prepayment speeds on various mortgagemortgage-backed and asset-backed securities, were not significant.increased interest income $1.5 million in the current quarter, compared to minor adjustments in the same quarter last year. Interest income related to TIPS increased $1.7 million in the second quarter of 2018 compared to the same period in 2017 and totaled $4.5 million in the current quarter and $2.9 million in the second quarter of 2017. The largest decline in interest income occurred in state and municipal obligations, which declined $5.3 million and was impacted by a decline in average balances of $376.9 million and a lower tax equivalent adjustment. Interest income on asset-backed securities declined $1.9 million due to lower average balances of $928.0 million, partly offset by an increase in the average rate earned of 60 basis points. The average balance of the total investment portfolio (excluding unrealized fair value adjustments)adjustments on available for sale debt securities) was $9.6$8.7 billion in the second quarter of 2017,2018, compared to $9.4$9.7 billion in the second quarter of 2016.2017.
Interest income on long-term securities purchased under agreements to resellbalances at the Federal Reserve increased $330 thousand over the second quarter of 2016,$1.2 million due to ana 76 basis point increase in the average rate earned of 58 basis points, partly offset by lower balances invested of $159.3 million.and a $214.5 million increase in the average balance invested.
The average tax equivalent yield on total interest earning assets was 3.37%3.90% in the second quarter of 2017,2018, up from 3.25%3.36% in the second quarter of 2016.2017.
Total interest expense increased $2.6$3.9 million compared to the second quarter of 2016,2017 due to a $1.2$2.9 million increase in interest expense on interest bearing deposits and a $1.3$1.0 million increase in interest expense on borrowings. The increase in deposit expense resulted mainly from ana nine basis point increase of three basis points in the overall average rate paid on deposits. Interest expense on C.D.'s of $100,000 and over rose $475 thousand due to a 17 basis point increase in average rates paid, but was partly offset by lower average balances of $125.9 million. In addition, interest expense on interest checking and money market accounts increased $778$2.2 million due to higher rates paid. Interest expense on certificates of deposit rose $681 thousand, as average balances increased $379.1 million and averagethe effect of higher rates paid rose slightly.was mostly offset by lower average balances. Interest expense on borrowings increased due to higher rates paid on customer repurchase agreements, and overnight federal funds purchased.partly offset by lower average FHLB borrowings. The overall average rate incurred on all interest bearing liabilities was .29%.40% and .22%.29% in the second quarters of 20172018 and 2016,2017, respectively.
Net interest income (T/E) for the first six months of 20172018 was $378.2$412.4 million compared to $351.0$378.2 million for the same period in 2016.2017. For the first six months of 2017,2018, the net interest margin was 3.16%3.51% compared to 3.03%3.16% for the first six months of 2016.2017.
Total interest income (T/E) for the first six months of 20172018 increased $31.1$41.5 million over the same period last year mainly due to higher interest income on loans and investment securities.loans. Loan interest income (T/E) rose $22.5$36.6 million due to an $803.8a $384.7 million, or 6.3%2.8%, increase in total average loan balances and a 1242 basis point increase in the average rate earned. Most of the increase in loan interest occurred in the business, business real estate, construction and constructionconsumer loan categories. The growth in interestInterest income of $7.9 million on investment securities (T/E) wasgrew
$2.2 million mainly due to a $163.4 million increase in average balances coupled with a 1334 basis point increase in the average rate earned.earned, partly offset by a $1.0 billion decrease in average balances. Increased earnings were recorded for U.S.equity securities due to the receipt of $8.9 million in dividend income mentioned previously, while interest earned on mortgage-backed securities grew $8.0 million on higher average rates earned and higher average balances. Interest earned on U.S government and federal agency securities rose due to higher TIPS interest of $2.5 million, while interest earned on non-marketable investments rose $3.8 million partly due to one-time interest receipts of $2.7 million on a private equity investment in the first quarter of 2017. Other increases in interest income occurred in mortgage-backed and asset-backed securities, which grew $3.1 million and $2.1 million, respectively.$1.8 million. These increases were partly offset by lower interest earned on government-sponsored enterprisestate and municipal obligations of $5.2$10.0 million, which saw
declines in average balances and rates earned. InterestAlso, interest income on long-term resell agreements grew $648 thousandasset-backed securities declined $3.7 million due to higherlower average rates earned,balances, partly offset by lower average balances.higher rates earned.
Total interest expense for the first six months of 20172018 increased $3.9$7.3 million compared to last year. Interest expense on interest bearing deposits increased $2.3$4.7 million, mainly due to a threean eight basis point increase in the overall average rate paid. The overall rate increase included an increase of 15 basis points in rates paid on C.D.'s of $100,000 and over, in addition to a slight increase in rates paidInterest expense on interest checking and money market account balances increased $3.9 million due to a seven basis point increase in the rates paid. Interest expense on certificates of deposit rose $775 thousand and as noted above, the effect of higher rates paid were largely offset by a decline in average balances. Interest expense on borrowings also increased $1.6$2.6 million, mainly due to higher rates paid on federal funds purchased andcustomer repurchase agreements. Interest expense on FHLB borrowings declined $404 thousand, mainly due to lower average balances,agreements, which were partly offset by higher rates paid.lower FHLB borrowings. The overall cost of total interest bearing liabilities increased to .27%.38% compared to .22%.27% in the same period last year.
Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.
Non-Interest Income
| | | Three Months Ended June 30 | | Six Months Ended June 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | 2017 | 2016 | % change | | 2017 | 2016 | % change | 2018 | 2017 | | % change | | 2018 | 2017 | % change |
Bank card transaction fees | $ | 44,999 |
| $ | 45,065 |
| (.1 | )% | | $ | 88,203 |
| $ | 89,535 |
| (1.5 | )% | $ | 43,215 |
| $ | 37,295 |
| | 15.9 | % | | $ | 84,668 |
| $ | 73,046 |
| 15.9 | % |
Trust fees | 33,120 |
| 30,241 |
| 9.5 |
| | 65,134 |
| 59,484 |
| 9.5 |
| 37,036 |
| 33,120 |
| | 11.8 |
| | 73,098 |
| 65,134 |
| 12.2 |
|
Deposit account charges and other fees | 22,861 |
| 21,328 |
| 7.2 |
| | 44,803 |
| 42,019 |
| 6.6 |
| 23,893 |
| 22,861 |
| | 4.5 |
| | 46,875 |
| 44,803 |
| 4.6 |
|
Capital market fees | 2,156 |
| 2,500 |
| (13.8 | ) | | 4,498 |
| 5,225 |
| (13.9 | ) | 1,992 |
| 2,156 |
| | (7.6 | ) | | 4,283 |
| 4,498 |
| (4.8 | ) |
Consumer brokerage services | 3,726 |
| 3,491 |
| 6.7 |
| | 7,375 |
| 7,000 |
| 5.4 |
| 3,971 |
| 3,726 |
| | 6.6 |
| | 7,739 |
| 7,375 |
| 4.9 |
|
Loan fees and sales | 4,091 |
| 3,196 |
| 28.0 |
| | 7,259 |
| 5,706 |
| 27.2 |
| 3,229 |
| 4,091 |
| | (21.1 | ) | | 6,091 |
| 7,259 |
| (16.1 | ) |
Other | 12,131 |
| 10,749 |
| 12.9 |
| | 22,878 |
| 26,625 |
| (14.1 | ) | 11,514 |
| 12,131 |
| | (5.1 | ) | | 21,786 |
| 22,878 |
| (4.8 | ) |
Total non-interest income | $ | 123,084 |
| $ | 116,570 |
| 5.6 | % | | $ | 240,150 |
| $ | 235,594 |
| 1.9 | % | $ | 124,850 |
| $ | 115,380 |
| | 8.2 | % | | $ | 244,540 |
| $ | 224,993 |
| 8.7 | % |
Non-interest income as a % of total revenue* | 40.2 | % | 40.4 | % | | | 39.9 | % | 41.2 | % | | 37.2 | % | 38.7 | % | | | | 37.7 | % | 38.4 | % | |
* Total revenue includes net interest income and non-interest income.
For the second quarter of 2017,2018, total non-interest income amounted to $123.1$124.9 million compared with $116.6$115.4 million in the same quarter last year, which was an increase of $6.5$9.5 million, or 5.6%8.2%. The increase was mainly due to growth in bank card, trust, deposit and loanswap fee income, coupled with gains on sales of several branch propertiespartly offset by lower loan fees and equipment leased to customers.sales.
Bank card transaction fees for the current quarter decreased slightly fromincreased $5.9 million, or 15.9%, over the same quarter last year mainly due to a decline inand were comprised of fees on corporate card ($24.6 million), debit card ($10.2 million), merchant fees of $614 thousand, offset by growth of 2.9% in both debit($4.9 million) and credit card fees. Commercial($3.5 million) transactions. Corporate card fees increased slightlygrew $4.7 million over the same quarterperiod last year. The table below is a summaryyear due to growth in interchange income of bank14.2%, coupled with lower network costs, but higher rewards costs. Debit card transaction fees forgrew $1.8 million mostly because of lower network processing costs, which declined $1.5 million. Overall merchant income was down 10.0% compared to the threesame period last year due to lower merchant fees, while credit card fees declined 1.8% on higher rewards expense, partly offset by higher interchange income and six month periods ended June 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | 2017 | 2016 | % change | | 2017 | 2016 | % change |
Debit card fees | $ | 10,326 |
| $ | 10,032 |
| 2.9 | % | | $ | 19,967 |
| $19,417 | 2.8 | % |
Credit card fees | 6,482 |
| 6,302 |
| 2.9 |
| | 12,223 |
| 11,947 |
| 2.3 |
|
Merchant fees | 6,297 |
| 6,911 |
| (8.9 | ) | | 12,139 |
| 14,029 |
| (13.5 | ) |
Corporate card fees | 21,894 |
| 21,820 |
| .3 |
| | 43,874 |
| 44,142 |
| (.6 | ) |
Total bank card transaction fees | $ | 44,999 |
| $ | 45,065 |
| (.1 | )% | | $ | 88,203 |
| $ | 89,535 |
| (1.5 | )% |
lower network costs.
Trust fees for the quarter increased $2.9$3.9 million, or 9.5%11.8%, over the same quarter last year, resulting mainly from continued growth in private client trust fees, which were up $2.0$3.3 million, or 9.0%13.3%, and institutional trust fees, which were up $520 thousand, or 7.7%. Deposit account fees increased $1.5$1.0 million, or 7.2%4.5%, over the same quarter last year, as corporate cash management fees increased $618 thousand, or 6.5%, overdraft and return item fees increased $208 thousand, or 2.8%, and deposit account service charges increased $895$206 thousand, or 17.8%, while overdraft and return item fees and corporate cash management fees increased 4.8% and 3.3%, respectively.3.5%. Consumer brokerage fees grew $235$245 thousand, or 6.6%, on higher fixed annuity and advisory fees, while capital market fees declined $344 thousand on lower sales demand.$164 thousand. Loan fees and sales increased $895decreased $862 thousand, or 28.0%21.1%, this quarter mainly due to higherlower mortgage banking revenue related to the Company's fixed rate residential mortgage sale program. Other non-interest income increased $1.4 milliondecreased $617 thousand compared to the same quarter of last year. This increase wasyear, mainly the result of current quarterdue to lower gains of $860 thousand on sales of several branch properties, in addition to gains of $824 thousand recorded on sales of several leased assets to customers upon lease termination. Fees from thetermination, write downs on software costs, and lower gains on sales of tax credits grew $521 thousand this quarter compared with the same quarter last year, while letter of credit fees were higher by $294 thousand.branch properties. These increasesdecreases were partly offset by a declinehigher fees from sales of $289 thousand in fees on interest rate swap sales,swaps and income of $897 thousand recorded in the second quarter of last year for a trust-related settlement, which did not reoccur in the current period.tax credits.
Non-interest income for the first six monthsmonth of 20172018 was $240.2$244.5 million compared to $235.6$225.0 million in the first six months of 2016,
2017, resulting in an increase of $4.6$19.5 million, or 1.9%8.7%. Bank card fees decreased $1.3increased $11.6 million, or 1.5%15.9%, as a result of a declinegrowth in merchantcorporate card fees of $1.9$8.9 million, or 13.5%22.4%, and debit card fees of $3.2 million, or 19.5%, partly offset by increasesa decline of $550$552 thousand, or 5.4%, in debit card fees and $276 thousand in credit cardmerchant fees. Trust fee income increased $5.7$8.0 million, or 9.5%12.2%, as a result of growth in private client and institutional trust fees. Deposit account fees increased $2.8$2.1 million, or 6.6%4.6%, mainly due to growth of $1.6$1.1 million in deposit account service charges and $766corporate cash management fees, $540 thousand in overdraft and return item fees.fees and $428 thousand in deposit account service charges. Loan fees and sales increased $1.6decreased $1.2 million, or 27.2%16.1%, due to higherlower mortgage banking revenue. Consumer brokerage fees rose $375$364 thousand due to higher mutual fundannuity and advisory fee income, while capital market fees decreased $727$215 thousand, or 13.9%, due to continued lower sales volume.4.8%. Other non-interest income decreased $3.7$1.1 million, or 14.1%4.8%, mainly due to lower gains on sales of branch properties, lower gains on sales of leased assets, and software write downs. These declines were partly offset by higher fees from sales of interest rate swaps,swap sales and the prior year trust settlement mentioned above.cash sweep commissions.
Investment Securities Gains (Losses), Net
| | | Three Months Ended June 30 | | Six Months Ended June 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
(In thousands) | 2017 | 2016 | | 2017 | 2016 | 2018 | 2017 | | 2018 | 2017 |
Available for sale | $ | 1,671 |
| $ | (147 | ) | | $ | 3,719 |
| $ | (270 | ) | |
Non-marketable | (20 | ) | (597 | ) | | (2,840 | ) | (1,469 | ) | |
Net gains (losses) on sales and fair value adjustments of private equity investments | | $ | 3,791 |
| $ | (604 | ) | | $ | 8,096 |
| $ | (3,424 | ) |
Adjustment for dividend income on a liquidated equity investment | | (8,917 | ) | — |
| | (8,917 | ) | — |
|
Donations of equity securities | | — |
| 2,158 |
| | — |
| 4,315 |
|
Fair value adjustments on equity securities | | 1,752 |
| — |
| | 2,699 |
| — |
|
Other | | 299 |
| 97 |
| | 457 |
| (12 | ) |
Total investment securities gains (losses), net | $ | 1,651 |
| $ | (744 | ) | | $ | 879 |
| $ | (1,739 | ) | $ | (3,075 | ) | $ | 1,651 |
| | $ | 2,335 |
| $ | 879 |
|
Net gains and losses on investment securities which were recognized in earnings during the three and six months ended June 30, 20172018 and 20162017 are shown in the table above. Net securities gains amounted to $1.7losses of $3.1 million were reported in the second quarter of 2017 and $879 thousand2018, compared to net gains of $1.7 million in the first six monthssame period last year. The net losses in the second quarter of 2017. 2018 were mainly comprised of an adjustment to recognize dividend income on a liquidated equity security, partly offset by unrealized gains in fair value on the Company’s holdings of private equity investments. The net gains for the same quarter last year resulted from a gain recorded on the donation of appreciated equity securities to a charitable foundation, offset by losses on the disposition of certain private equity securities.
Included in these gains and losses are credit-related impairment losses on certain non-agency guaranteed mortgage-backed securities which have been identified as other-than-temporarily impaired. These identifiedImpairment losses on these securities had a total fair value of $30.3 million at June 30, 2017. Duringtotaled $68 thousand in the first six months of 2017, credit-related impairment losses of $320 thousand were recorded,2018, compared to $270$320 thousand in the same period last year. The current period also includedPrivate equity investment activity generated net gains on donations of appreciated common stock to a related charitable foundation, which were $2.2$8.1 million in both the first andsix months of 2018 compared to net losses of $3.4 million in the second quarters ofsame period in 2017.
Gains and losses on non-marketable investment securities include those relating to private equity investments, which are primarily held by the Parent's majority-owned private equity subsidiaries. These gains and losses includeincluded fair value adjustments, andin addition to gains and losses realized upon disposition. During the first six months of 2017, net losses in fair value of $2.8 million were recorded, compared to similar losses of $3.7 million in the same period in 2016. A gain of $1.8 million was also recorded in 2016 resulting from the Parent's withdrawal from a private equity fund, as required under the Volcker Rule investment prohibitions. The portion of the private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income, and resulted in expense of $1.6 million during the first six months of 2018 and income of $654 thousand during the first six months of 2017 and $379 thousand during the first six months of 2016.2017.
Non-Interest Expense
| | | Three Months Ended June 30 | | Six Months Ended June 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | 2017 | 2016 | % change | | 2017 | 2016 | % change | 2018 | 2017 | | % change | | 2018 | 2017 | % change |
Salaries and employee benefits | $ | 108,829 |
| $ | 104,808 |
| 3.8 | % | | $ | 221,198 |
| $ | 211,667 |
| 4.5 | % | $ | 115,589 |
| $ | 108,829 |
| | 6.2 | % | | $ | 231,483 |
| $ | 221,198 |
| 4.6 | % |
Net occupancy | 11,430 |
| 11,092 |
| 3.0 |
| | 22,873 |
| 22,395 |
| 2.1 |
| 11,118 |
| 11,430 |
| | (2.7 | ) | | 22,702 |
| 22,873 |
| (.7 | ) |
Equipment | 4,776 |
| 4,781 |
| (.1 | ) | | 9,385 |
| 9,415 |
| (.3 | ) | 4,594 |
| 4,776 |
| | (3.8 | ) | | 9,025 |
| 9,385 |
| (3.8 | ) |
Supplies and communication | 5,446 |
| 5,693 |
| (4.3 | ) | | 11,155 |
| 12,522 |
| (10.9 | ) | 5,126 |
| 5,446 |
| | (5.9 | ) | | 10,439 |
| 11,155 |
| (6.4 | ) |
Data processing and software | 23,356 |
| 22,770 |
| 2.6 |
| | 46,453 |
| 45,669 |
| 1.7 |
| 21,016 |
| 20,035 |
| | 4.9 |
| | 41,706 |
| 39,940 |
| 4.4 |
|
Marketing | 4,488 |
| 4,389 |
| 2.3 |
| | 7,712 |
| 8,202 |
| (6.0 | ) | 5,142 |
| 4,488 |
| | 14.6 |
| | 9,947 |
| 7,712 |
| 29.0 |
|
Deposit insurance | 3,592 |
| 3,143 |
| 14.3 |
| | 7,063 |
| 6,308 |
| 12.0 |
| 3,126 |
| 3,592 |
| | (13.0 | ) | | 6,583 |
| 7,063 |
| (6.8 | ) |
Community service | | 656 |
| 2,916 |
| | (77.5 | ) | | 1,385 |
| 5,860 |
| (76.4 | ) |
Other | 22,677 |
| 20,413 |
| 11.1 |
| | 45,585 |
| 38,384 |
| 18.8 |
| 15,493 |
| 15,378 |
| | .7 |
| | 30,867 |
| 31,081 |
| (.7 | ) |
Total non-interest expense | $ | 184,594 |
| $ | 177,089 |
| 4.2 | % | | $ | 371,424 |
| $ | 354,562 |
| 4.8 | % | $ | 181,860 |
| $ | 176,890 |
| | 2.8 | % | | $ | 364,137 |
| $ | 356,267 |
| 2.2 | % |
Non-interest expense for the second quarter of 20172018 amounted to $184.6$181.9 million, an increase of $7.5$5.0 million, or 4.2%2.8%, compared with $177.1$176.9 million in the second quarter of last year. The increase in expense over the same period last year was mainly due to
higher costs for salaries, employee benefits, data processing and marketing, partly offset by lower occupancy, supplies and communication, community service, and deposit insurance expense. Salaries expense increased $4.0$5.8 million, or 4.5%6.2%, mainly due to higher full-time salariessalary costs and incentive compensation costs.compensation. Employee benefits expense totaled $15.8$16.8 million, slightlyreflecting growth of $1.0 million, or 6.4%, as a result higher than in the same period last year as increases in payroll taxes and 401(k) expense were offset by lower medical costs. Growth in salaries expense resulted partly from higher staffing costs, mainly in the areas of commercial and consumer banking, commercial payments, residential lending and information technology business units. Full-time equivalent employees totaled 4,797 at June 30, 2018 compared to 4,805 at June 30, 2017
compared to 4,779 at June 30, 2016.2017. Occupancy costs increased $338decreased $312 thousand, or 3.0%2.7%, mostlypartly due to higher branchlower repair and maintenance costs, while suppliesequipment expense declined $182 thousand, or 3.8%, due to lower depreciation expense. Supplies and communication marketing and equipment costs were well controlled.expense declined $320 thousand, or 5.9%, mainly due to lower data network expense. Data processing expense increased $586$981 thousand, or 2.6%4.9%, mainly due to higher online subscription service expense. FDICprocessing and software costs, while marketing expense increased $654 thousand partly due to new bank card initiatives which are being funded by reduced bank card network costs. Deposit insurance costs increased $449expense decreased $466 thousand, or 14.3%13.0%, from the second quarter of last year due to higher insurance rates that were effective July 1, 2016. Other non-interestdecreases in average assets and the assessment rate. Community service expense increaseddeclined $2.3 million or 11.1%, compared to the same period in the previous year. This increase was mainly due to the donation of $2.3 million in appreciated securities to a related charitable foundation as previously mentioned. In addition, lower deferred loan origination costs and higher professional fees expense were recorded. Excludingin the donation expense, total non-interest expense grew 3.0% over the same period in 2016.previous year.
For the first six months of 2017,2018, non-interest expense amounted to $371.4$364.1 million, an increase of $16.9$7.9 million, or 4.8%2.2%, compared with $354.6$356.3 million in the same period last year. Salaries and benefits increased $9.5$10.3 million, or 4.5%4.6%, mainly due to higher full-time salaries, incentives and incentivesmedical expense. SuppliesEquipment expense declined $360 thousand, or 3.8%, while supplies and communication expense decreased $1.4was down $716 thousand, or 6.4%, both due to the trends mentioned above. Data processing and software expense increased $1.8 million, or 10.9%. This decrease was4.4%, mostly due to higher processing costs. Marketing expense increased $2.2 million, or 29.0%, mainly the result of higher chipdue to new bank card reissue costs last year that have now declined. Marketing costs were down$490 thousand, or 6.0%, due toinitiatives in 2018 and lower spending in the first quarter of 2017, but are expected to increase in subsequent quarters this year. FDIC insurance costs grew $755 thousand while data processing costs grew $784 thousand, both2017. Community service expense decreased due to the trends mentioned above. Other non-interest expense increased $7.2 million, or 18.8%, mainly due to donationsdonation of $4.5 million in appreciated securities in the current period. Higher costs were also recorded in professional fees,previous year, while deposit insurance expense decreased $480 thousand, or 6.8%. Other non-interest expense decreased $214 thousand mainly due to lower operating and bank card rewards and royalty fees expense,fraud losses in addition to lower deferred loan origination costs. Excluding the donation expense, total non-interest expense grew 3.5% over the prior year.professional fees, partly offset by higher directors fees and employee education expense.
Provision and Allowance for Loan Losses
| | | Three Months Ended | | Six Months Ended June 30 | Three Months Ended | | Six Months Ended June 30 |
(In thousands) | June 30, 2017 | Mar. 31, 2017 | June 30, 2016 | | 2017 | 2016 | June 30, 2018 | Mar. 31, 2018 | June 30, 2017 | | 2018 | 2017 |
Provision for loan losses | $ | 10,758 |
| $ | 11,128 |
| $ | 9,216 |
| | $ | 21,886 |
| $ | 18,655 |
| $ | 10,043 |
| $ | 10,396 |
| $ | 10,758 |
| | $ | 20,439 |
| $ | 21,886 |
|
Net loan charge-offs (recoveries): | | | | | | |
Commercial: | | | | | | |
Business | 318 |
| 97 |
| (65 | ) | | 415 |
| 398 |
| 36 |
| (14 | ) | 318 |
| | 22 |
| 415 |
|
Real estate-construction and land | (207 | ) | (535 | ) | (507 | ) | | (742 | ) | (518 | ) | (297 | ) | (36 | ) | (207 | ) | | (333 | ) | (742 | ) |
Real estate-business | (10 | ) | (39 | ) | (1,030 | ) | | (49 | ) | (1,272 | ) | (40 | ) | (205 | ) | (10 | ) | | (245 | ) | (49 | ) |
Commercial net loan charge-offs (recoveries) | 101 |
| (477 | ) | (1,602 | ) | | (376 | ) | (1,392 | ) | (301 | ) | (255 | ) | 101 |
| | (556 | ) | (376 | ) |
Personal Banking: | | | | | | |
Real estate-personal | (131 | ) | 19 |
| 305 |
| | (112 | ) | 110 |
| (95 | ) | 57 |
| (131 | ) | | (38 | ) | (112 | ) |
Consumer | 2,642 |
| 2,096 |
| 1,781 |
| | 4,738 |
| 4,380 |
| 1,862 |
| 2,528 |
| 2,642 |
| | 4,390 |
| 4,738 |
|
Revolving home equity | 104 |
| 7 |
| 75 |
| | 111 |
| 163 |
| — |
| 56 |
| 104 |
| | 56 |
| 111 |
|
Consumer credit card | 7,750 |
| 7,148 |
| 6,650 |
| | 14,898 |
| 12,568 |
| 8,251 |
| 7,566 |
| 7,750 |
| | 15,817 |
| 14,898 |
|
Overdrafts | 292 |
| 435 |
| 307 |
| | 727 |
| 526 |
| 326 |
| 444 |
| 292 |
| | 770 |
| 727 |
|
Personal banking net loan charge-offs | 10,657 |
| 9,705 |
| 9,118 |
| | 20,362 |
| 17,747 |
| 10,344 |
| 10,651 |
| 10,657 |
| | 20,995 |
| 20,362 |
|
Total net loan charge-offs | $ | 10,758 |
| $ | 9,228 |
| $ | 7,516 |
| | $ | 19,986 |
| $ | 16,355 |
| $ | 10,043 |
| $ | 10,396 |
| $ | 10,758 |
| | $ | 20,439 |
| $ | 19,986 |
|
| | | Three Months Ended | | Six Months Ended June 30 | Three Months Ended | | Six Months Ended June 30 |
| June 30, 2017 | Mar. 31, 2017 | June 30, 2016 | | 2017 | 2016 | June 30, 2018 | Mar. 31, 2018 | June 30, 2017 | | 2018 | 2017 |
Annualized net loan charge-offs (recoveries)*: | | | | | | |
Commercial: | | | | | | |
Business | .03 | % | .01 | % | (.01 | )% | | .02 | % | .02 | % | — | % | — | % | .03 | % | | — | % | .02 | % |
Real estate-construction and land | (.10 | ) | (.26 | ) | (.26 | ) | | (.18 | ) | (.14 | ) | (.12 | ) | (.02 | ) | (.10 | ) | | (.07 | ) | (.18 | ) |
Real estate-business | — |
| (.01 | ) | (.17 | ) | | — |
| (.11 | ) | (.01 | ) | (.03 | ) | — |
| | (.02 | ) | — |
|
Commercial net loan charge-offs (recoveries) | — |
| (.02 | ) | (.08 | ) | | (.01 | ) | (.04 | ) | (.01 | ) | (.01 | ) | — |
| | (.01 | ) | (.01 | ) |
Personal Banking: | | | | | | |
Real estate-personal | (.03 | ) | — |
| .06 |
| | (.01 | ) | .01 |
| (.02 | ) | .01 |
| (.03 | ) | | — |
| (.01 | ) |
Consumer | .53 |
| .43 |
| .37 |
| | .48 |
| .46 |
| .37 |
| .49 |
| .53 |
| | .43 |
| .48 |
|
Revolving home equity | .10 |
| .01 |
| .07 |
| | .06 |
| .08 |
| — |
| .06 |
| .10 |
| | .03 |
| .06 |
|
Consumer credit card | 4.25 |
| 3.88 |
| 3.62 |
| | 4.06 |
| 3.39 |
| 4.39 |
| 4.05 |
| 4.25 |
| | 4.22 |
| 4.06 |
|
Overdrafts | 26.00 |
| 42.15 |
| 31.53 |
| | 33.73 |
| 24.35 |
| 29.08 |
| 38.91 |
| 26.00 |
| | 34.04 |
| 33.73 |
|
Personal banking net loan charge-offs | .83 |
| .77 |
| .74 |
| | .80 |
| .71 |
| .79 |
| .82 |
| .83 |
| | .80 |
| .80 |
|
Total annualized net loan charge-offs | .32 | % | .28 | % | .24 | % | | .30 | % | .26 | % | .29 | % | .30 | % | .32 | % | | .30 | % | .30 | % |
* as a percentage of average loans (excluding loans held for sale)
The Company has an established process to determine the amount of the allowance for loan losses, which assesses the risks and losses inherent in its portfolio. This process provides an allowance consisting of a specific allowance component based on certain individually evaluated loans and a general component based on estimates of allowances for pools of loans. The Company's policies and processes for determining the allowance for loan losses are discussed in Note 1 to the consolidated financial statements and in the Allowance for Loan Losses discussion in Item 7 of the 20162017 Annual Report on Form 10-K.
Net loan charge-offs in the second quarter of 20172018 amounted to $10.8$10.0 million, compared with $9.2$10.4 million in the prior quarter and $7.5$10.8 million in the second quarter of last year. The increase in currentDuring the second quarter net charge-offs overof 2018, the previous quarter was mainly due to increases in consumer credit card, consumer, and business net loan charge-offs of $602 thousand, $546 thousand, and $221 thousand, respectively. The increase in net loan charge-offs was also driven by lowerCompany recorded net recoveries on construction loans which totaled $207of $297 thousand, compared to net recoveries of $36 thousand in the prior quarter. Additionally, net loan charge-offs on consumer loans declined $666 thousand in the second quarter of 2017,2018 compared to net recoveries of $535 thousand in the prior quarter.quarter, and the Company also recorded lower net charge-offs on personal real estate, overdraft, and revolving home equity loans. These increasesdecreases in net loan charge-offs were partially offset by decreases$685 thousand of $150 thousand and $143 thousand inhigher net charge-offs on personal real estateconsumer credit card loans and overdrafts, respectively.in the second quarter of 2018 compared to the prior quarter, as well as higher net charge-offs on business real-estate loans.
For the three months ended June 30, 2017,2018, annualized net loan charge-offs on average consumer credit card loans totaled 4.25%4.39%, compared with 3.88%to 4.05% in the previous quarter and 3.62%4.25% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .53%.37%, compared to .43%.49% in the prior quarter and .37%.53% in the same period last year. Annualized net charge-offs on personal real estate loans also remained low this quarter. In the second quarter of 2017,2018, total annualized net loan charge-offs were .32%.29%, compared to .28%.30% in the previous quarter and .24%.32% in the same period last year.
In the current quarter, the provision for loan losses totaled $10.0 million, a decrease of $353 thousand from $10.4 million in the prior quarter. The provision for loan losses in both the current and prior quarters matched net loan charge-offs. During the second quarter of 2017, the provision for loan losses totaled $10.8 million and matched net loan charge-offs. Incharge-offs for the prior quarter, the provision for loan losses totaled $11.1 million and exceeded net loan charge-offs by $1.9 million, and in the same period last year, the provision for loan losses totaled $9.2 million and exceeded net loan charge-offs by $1.7 million. The provision for loan losses in the current quarter decreased by $370 thousand compared to the previous quarter. period.
For the six months ended June 30, 2017,2018, net loan charge-offs totaled $20.0amounted to $20.4 million, compared to $16.4$20.0 million in 2016. The increasethe same period last year. During the first six months of 2018, the Company recorded net recoveries of $556 thousand on commercial loans, compared to net recoveries of $376 thousand in the first six months of 2017. Additionally, consumer loan net loan charge-offs resulted mainly from an increasedeclined $348 thousand in the first six months of 2018 compared to the first six months of the prior year, but the decrease was offset by $919 thousand of higher net charge-offs on consumer credit card loans. The provision expense for the first six months of 2018 was $20.4 million and matched net loan charge-offs, which increased $2.3 million, and fewer recoveries on business real estate loans, which declined $1.2 million.charge-offs. The provision for loan lossesexpense for the first six months of 2017 was $21.9 million and increased $3.2 million compared to the previous year. The increase in provision expense was the result of higherexceeded net loan losses duringcharge-offs for the six months ended June 30, 2017 compared to the same period in the prior year.by $1.9 million.
At June 30, 2017,2018, the allowance for loan losses amounted to $157.8$159.5 million, unchanged from December 31, 2017, and was 1.16%1.14% of total loans and more than ten times total non-accrual loans. At December 31, 2016,The Company considers the allowance for loan losses amountedadequate to $155.9 million and was 1.16%cover losses inherent in the loan portfolio at June 30, 2018.
Risk Elements of Loan Portfolio
The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual.
| | (Dollars in thousands) | June 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 |
Non-accrual loans | $ | 13,362 |
| $ | 14,283 |
| $ | 9,472 |
| $ | 11,983 |
|
Foreclosed real estate | 515 |
| 366 |
| 1,039 |
| 681 |
|
Total non-performing assets | $ | 13,877 |
| $ | 14,649 |
| $ | 10,511 |
| $ | 12,664 |
|
Non-performing assets as a percentage of total loans | .10 | % | .11 | % | .08 | % | .09 | % |
Non-performing assets as a percentage of total assets | .06 | % | .06 | % | .04 | % | .05 | % |
Total loans past due 90 days and still accruing interest | $ | 14,630 |
| $ | 16,396 |
| $ | 13,453 |
| $ | 18,127 |
|
Non-accrual loans, which are also classified as impaired, totaled $13.4$9.5 million at June 30, 2017,2018, and decreased $921 thousand$2.5 million from balances at December 31, 2016.2017. The decrease occurred mainly in consumer and business loans, which decreased $2.4 million, partly offset by an increase of $1.2 million in consumer loans.$834 thousand and $833 thousand, respectively. At June 30, 2017,2018, non-accrual loans were comprised mainly of business (47.4%(54.0%), business real estate (26.0%), and personal real estate (26.2%), and business real estate (13.7%(19.9%) loans. Foreclosed real estate totaled $515 thousand$1.0 million at June 30, 2017,2018, an increase of $149$358 thousand when compared to December 31, 2016.2017. Total loans past due 90 days or more and still accruing interest were $14.6$13.5 million as of June 30, 2017,2018, a decrease of $1.8$4.7 million when compared to December 31, 2016.2017. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements.
In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $107.8$202.4 million at June 30, 20172018 compared with $99.5$213.4 million at December 31, 2016,2017, resulting in an increasea decrease of $8.3$11.0 million, or 8.3%5.1%.
| |
(In thousands) | June 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 |
Potential problem loans: | | |
Business | $ | 47,860 |
| $ | 43,438 |
| $ | 154,797 |
| $ | 153,417 |
|
Real estate – construction and land | 2,703 |
| 1,172 |
| 2,153 |
| 2,702 |
|
Real estate – business | 51,693 |
| 52,913 |
| 43,180 |
| 51,134 |
|
Real estate – personal | 5,507 |
| 1,955 |
| 2,280 |
| 6,121 |
|
Total potential problem loans | $ | 107,763 |
| $ | 99,478 |
| $ | 202,410 |
| $ | 213,374 |
|
At June 30, 2017,2018, the Company had $59.2$106.6 million of loans whose terms have been modified or restructured under a troubled debt restructuring. These loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession, as defined by accounting guidance, and are further discussed in the "Troubled debt restructurings" section in Note 2 to the consolidated financial statements. This balance includes certain commercial loans totaling $36.8$86.9 million which are classified as substandard and included in the table above because of this classification.
Loans with Special Risk Characteristics
Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon.
Real Estate – Construction and Land Loans
The Company's portfolio of construction and land loans, as shown in the table below, amounted to 6.2%6.9% of total loans outstanding at June 30, 2017.2018. The largest component of construction and land loans was commercial construction, which grew $77.7decreased $2.2 million during the six months ended June 30, 2017.2018. At June 30, 2017,2018, multi-family residential construction loans totaled approximately $218.6$226.2 million, or 37.6%,31.6% of the commercial construction loan portfolio.portfolio, compared to $252.8 million, or 35.2%, at December 31, 2017.
| | (Dollars in thousands) | June 30, 2017 |
% of Total | % of Total Loans | December 31, 2016 |
% of Total | % of Total Loans | June 30, 2018 |
% of Total | % of Total Loans | December 31, 2017 |
% of Total | % of Total Loans |
Residential land and land development | $ | 79,120 |
| 9.3 | % | .6 | % | $ | 86,373 |
| 10.9 | % | .6 | % | $ | 78,899 |
| 8.2 | % | .6 | % | $ | 81,859 |
| 8.5 | % | .6 | % |
Residential construction | 130,231 |
| 15.4 |
| .9 |
| 132,334 |
| 16.8 |
| 1.0 |
| 124,394 |
| 12.9 |
| .9 |
| 121,138 |
| 12.5 |
| .9 |
|
Commercial land and land development | 57,637 |
| 6.8 |
| .4 |
| 69,057 |
| 8.7 |
| .5 |
| 48,756 |
| 5.0 |
| .3 |
| 48,474 |
| 5.0 |
| .3 |
|
Commercial construction | 581,164 |
| 68.5 |
| 4.3 |
| 503,472 |
| 63.6 |
| 3.8 |
| 715,102 |
| 73.9 |
| 5.1 |
| 717,349 |
| 74.0 |
| 5.1 |
|
Total real estate - construction and land loans | $ | 848,152 |
| 100.0 | % | 6.2 | % | $ | 791,236 |
| 100.0 | % | 5.9 | % | $ | 967,151 |
| 100.0 | % | 6.9 | % | $ | 968,820 |
| 100.0 | % | 6.9 | % |
Real Estate – Business Loans
Total business real estate loans were $2.7 billion at June 30, 20172018 and comprised 20.0%19.5% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At June 30, 2017, 36.8%2018, 37.6% of business real estate loans were for owner-occupied real estate properties, which present lower risk profiles.
| | (Dollars in thousands) | June 30, 2017 |
% of Total
| % of Total Loans | December 31, 2016 |
% of Total | % of Total Loans | June 30, 2018 |
% of Total
| % of Total Loans | December 31, 2017 |
% of Total | % of Total Loans |
Owner-occupied | $ | 1,002,503 |
| 36.8 | % | 7.4 | % | $ | 1,004,238 |
| 38.0 | % | 7.5 | % | $ | 1,024,291 |
| 37.6 | % | 7.3 | % | $ | 1,010,786 |
| 37.5 | % | 7.2 | % |
Multi-family | | 356,044 |
| 13.1 |
| 2.6 |
| 298,605 |
| 11.1 |
| 2.1 |
|
Office | 349,017 |
| 12.8 |
| 2.6 |
| 319,638 |
| 12.1 |
| 2.4 |
| 354,704 |
| 13.0 |
| 2.5 |
| 373,301 |
| 13.8 |
| 2.7 |
|
Retail | 353,936 |
| 13.0 |
| 2.6 |
| 344,221 |
| 13.0 |
| 2.5 |
| 298,277 |
| 10.9 |
| 2.0 |
| 338,937 |
| 12.6 |
| 2.4 |
|
Multi-family | 305,019 |
| 11.2 |
| 2.2 |
| 255,369 |
| 9.7 |
| 1.9 |
| |
Hotels | 155,979 |
| 5.7 |
| 1.1 |
| 174,207 |
| 6.6 |
| 1.3 |
| 202,488 |
| 7.4 |
| 1.5 |
| 181,704 |
| 6.7 |
| 1.3 |
|
Farm | 162,952 |
| 6.0 |
| 1.2 |
| 173,210 |
| 6.6 |
| 1.3 |
| 163,273 |
| 6.0 |
| 1.2 |
| 161,972 |
| 6.0 |
| 1.2 |
|
Industrial | 123,537 |
| 4.4 |
| .9 |
| 122,940 |
| 4.6 |
| .9 |
| 69,056 |
| 2.5 |
| .5 |
| 73,078 |
| 2.7 |
| .5 |
|
Other | 274,406 |
| 10.1 |
| 2.0 |
| 249,551 |
| 9.4 |
| 1.9 |
| 259,447 |
| 9.5 |
| 1.9 |
| 259,069 |
| 9.6 |
| 1.9 |
|
Total real estate - business loans | $ | 2,727,349 |
| 100.0 | % | 20.0 | % | $ | 2,643,374 |
| 100.0 | % | 19.7 | % | $ | 2,727,580 |
| 100.0 | % | 19.5 | % | $ | 2,697,452 |
| 100.0 | % | 19.3 | % |
Real Estate – Personal Loans
The Company's $2.0$2.1 billion personal real estate loan portfolio is composed mainly of residential first mortgage real estate loans. As shown on page 44,51, recent loss rates have remained low, and atlow. At June 30, 2017,2018, loans past due over 30 days decreased $3.2 million; however,$1.2 million, and non-accrual loans increased $101decreased $573 thousand compared to December 31, 2016.2017. Also, as shown in Note 2, only 3.9%3.1% of this portfolio has FICO scores of less than 660. Approximately $21.9$30.8 million, or 1.1%1.5%, of personal real estate loans were structured with interest only payments. These loans are typically made to high net-worth borrowers and generally have low LTV ratios at origination or have additional collateral pledged to secure the loan. Therefore, they are not perceived to represent above normal credit risk. Loans originated with interest only payments were not made to "qualify" the borrower for a lower payment amount. At June 30, 2017,2018, loans with no mortgage insurance and an original LTV higher than 80% totaled $165.6$182.9 million compared to $158.8$183.6 million at December 31, 2016.2017.
Revolving Home Equity Loans
The Company had $403.4$374.6 million in revolving home equity loans at June 30, 20172018 that were generally collateralized by residential real estate. Most of these loans (92.9%(92.2%) are written with terms requiring interest only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of June 30, 2017,2018, the outstanding principal of loans with an original LTV higher than 80% was $54.0$46.3 million, or 13.4%12.4% of the portfolio, compared to $55.1$51.3 million as of December 31, 2016.2017. Total revolving home equity loan balances over 30 days past due or on non-accrual status were $3.1$1.7 million at June 30, 20172018 compared to $2.2$3.2 million at December 31, 2016.2017. The weighted average FICO score for the total current portfolio balance is 793.794. At maturity, the accounts are re-underwritten, and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of 20172018 through 2019,2020, approximately 18%10% of the Company's current outstanding balances are expected to mature. Of these balances, approximately
81%94% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels.
Other Consumer Loans
Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs. Outstanding balances for auto loans were $993.3$952.1 million and $972.5 million$1.0 billion at June 30, 20172018 and December 31, 2016,2017, respectively. The balances over 30 days past due amounted to $12.7$13.1 million at June 30, 20172018 compared to $13.8$18.4 million at the end of 2016,2017, and comprised 1.3%1.4% and 1.4%1.8% of the outstanding balances of these loans at June 30, 20172018 and December 31, 2016,2017, respectively. For the six months ended June 30, 2017, $239.72018, $199.1 million of new auto loans were originated, compared to $431.0$239.7 million during the full yearfirst six months of 2016.2017. At June 30, 2017,2018, the automobile loan portfolio had a weighted average FICO score of 747.756.
Outstanding balances for motorcycle loans were $110.3 million at June 30, 2018, compared to $129.5 million at December 31, 2017. The balances over 30 days past due amounted to $1.6 million and $2.5 million at June 30, 2018 and December 31, 2017, respectively, and comprised 1.5% of the outstanding balance of these loans at June 30, 2018, compared to 1.9% at December 31, 2017. During the first six months of 2018, new motorcycle loan originations totaled $10.0 million compared to $55.3 million during the full year of 2017.
The Company's balance of marine and RV loans totaled $85.2$60.9 million at June 30, 2017,2018, compared to $102.4$71.8 million at December 31, 2016,2017, and the balances over 30 days past due amounted to $2.8$2.6 million at both June 30, 2017 compared to $4.3 million at the end of 2016.2018 and December 31, 2017. The net charge-offs on marine and RV loans increased slightlydecreased from $691$741 thousand in the first six months of 20162017 to $741$198 thousand in the first six months of the current year.
Additionally, the Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at June 30, 20172018 of $740.9$775.2 million in consumer credit card loans outstanding, approximately $155.1$177.1 million, or 20.9%23%, carried a low promotional rate. Within the next six months, $43.7$57.4 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters.
Energy Lending
The Company's energy lending portfolio wasis comprised of lending to the petroleum and natural gas sectors and totaled $140.8$134.3 million at June 30, 2017,2018, as shown in the table below. As of June 30, 2017, there were $6.9 million of energy loans, or 4.9%, of the energy portfolio, with a "substandard" rating or on non-accrual status, compared to $8.0 million, or 4.6% of the energy portfolio, at December 31, 2016. Included in these amounts were non-accrual loans of zero at June 30, 2017, compared to $847 thousand at December 31, 2016. There were no energy loans 90 days past due and still accruing interest at June 30, 2017 or December 31, 2016.
| | (In thousands) | June 30, 2017 | December 31, 2016 | | Unfunded commitments at June 30, 2017 | June 30, 2018 | December 31, 2017 | | Unfunded commitments at June 30, 2018 |
Extraction | $ | 87,935 |
| $ | 103,011 |
| | $ | 38,761 |
| $ | 97,049 |
| $ | 86,040 |
| | $ | 47,442 |
|
Mid-stream shipping and storage | 7,904 |
| 22,985 |
| | 61,800 |
| 4,796 |
| 9,310 |
| | 50,700 |
|
Downstream distribution and refining
| 30,900 |
| 30,231 |
| | 18,033 |
| 19,415 |
| 25,329 |
| | 20,976 |
|
Support activities | 14,028 |
| 15,296 |
| | 21,832 |
| 13,021 |
| 13,811 |
| | 13,953 |
|
Total energy lending portfolio | $ | 140,767 |
| $ | 171,523 |
| | $ | 140,426 |
| $ | 134,281 |
| $ | 134,490 |
| | $ | 133,071 |
|
Shared National Credits
The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $20$100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled $892.4$870.3 million at June 30, 2017,2018, compared to $836.1 million$1.1 billion at December 31, 2016.2017. Additional unfunded commitments at June 30, 20172018 totaled $1.3$1.1 billion.
Income Taxes
Income tax expense was $29.5 million in the second quarter of 2018, compared to $23.3 million in the first quarter of 2018 and $33.2 million in the second quarter of 2017, compared to $24.9 million in the first quarter of 2017 and $31.5 million in the second quarter of 2016.2017. The Company's effective tax rate, including the effect of non-controlling interest, was 21.1% in the second quarter of 2018, compared to 18.7% in the first quarter of 2018 and 29.6% in the second quarter of 2017,2017. For the six months ended June 30, 2018, income tax expense was $52.8 million, compared to 25.8%$58.1 million in the first six months ended June 30 2017. The Company's effective tax rate, including the effect of non-controlling interest, was 20.0% in the first six months of 2018, compared to 27.9% in the first six months of the prior year. Beginning in 2018, new tax reform legislation lowered the federal tax rate from 35% to 21%, which resulted in the lower effective tax rate in the first and second quarters of 2018. The effective tax rate in the first quarter of 2017 and 31.1%is also typically lower than in the second quarter of 2016. The lower effective tax rate for the first quarter of 2017 was primarilyother quarters due to the adoptionrecognition of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" on January 1, 2017. The ASU requires allshare-based excess tax benefits and tax deficiencies arising from share-based award payments to be recognized as income tax expense or benefit in the income statement, while in previous periods these benefits and deficiencies were recognized in equity. The amount of excess tax benefits (net of tax deficiencies) recognized as a reduction to income tax expense was $4.5 million in the first quarterexpense. These benefits result from transactions relating to equity award vesting, most of 2017 and $1.6 million in the second quarter of 2017. These tax benefits are expected to be seasonally higherwhich occur in the first quarter of each year when the majority of the Company’s equity compensation vests.
The decrease in the Company's effective tax rate for the three months ended June 30, 2017 compared to the same period in the prior year was due to tax benefits related to the donation of appreciated securities to a charitable foundation lowering the effective tax rate in the current quarter, as mentioned previously.year.
Financial Condition
Balance Sheet
Total assets of the Company were $25.1$24.5 billion at June 30, 20172018 and $25.6$24.8 billion at December 31, 2016.2017. Earning assets (excluding the allowance for loan losses and fair value adjustments on investmentdebt securities) amounted to $23.8$23.5 billion at June 30, 20172018 and $24.2$23.7 billion at December 31, 2016,2017, and consisted of 57%59% in loans and 40%37% in investment securities.
At June 30, 2017,2018, total loans increased $213.9decreased $30.6 million, or 1.6%.2%, compared with balances at December 31, 2016. On an overall basis, the largest contributions2017. This decrease was mainly due to loan growth occurreddecline in business loans and business real estateconsumer loans, which increased $76.0 million and $84.0 million, respectively, over year end balances. The increase in business loans primarily resulted from growth in commercial and industrial loans, commercial credit card loans, and tax-free loans. Business real estate loans increased largely because of growth in multi-family residential loans.decreased $91.8 million. Consumer loans, which includes automobile, marine and RV, fixed rate home equity, and other consumer loans, increased $47.7 million during the first six monthsdecreased largely because of the year. Higherdeclines in automobile lending activity. Lower demand for automobile and other consumerauto loans, grewcoupled with the sale of $25.9 million of loans to another financial institution in the second quarter of 2018, decreased auto loan balances $71.0 million. However, fixed rate home equity loans decreased by $6.1$57.7 million and marineat June 30, 2018 compared to balances at December 31, 2017. Marine and RV loans continued to run off during the period, by $17.2decreasing $11.0 million, and lower demand for fixed home equity loans decreased balances $15.5 million. ConstructionHowever, patient health care loans increased $56.9$16.9 million. Business loans increased $31.7 million during the first six months of the year, primarily due to higher commercial construction projects. Personaland industrial lending activity, partly offset by lower tax-free lending. Business real estate loans grew by $30.1 million over year end balances due to growth in multi-family residential projects, while personal real estate loan balances were largely unchanged from year end balances; however,increased $39.8 million during the first six months of 2018. The Company originated and sold $87.7 million of longer-term fixed rate loans during the first six months of 2017 compared to $64.5 million in the same period of 2016. Declines in consumerboth 2018 and 2017. Consumer credit card (down $35.6 million)loans and revolving home equity loans (down $10.2 million) partially offset growth throughout the year.declined $8.7 million and $26.0 million, respectively.
Available for sale investment securities, excluding fair value adjustments, decreased by $258.6$188.7 million at June 30, 20172018 compared to December 31, 2016.2017. Purchases of securities during this period totaled $672.4$787.9 million, offset by sales, maturities, and pay downs of $912.0$964.8 million. The largest decreases in outstanding balances occurred in asset-backed securities, agency mortgage-backed securities, and state and municipal obligations, and government-sponsored enterprise obligations, which decreased $139.8$143.9 million, $70.7$213.9 million, and $33.6$91.3 million, respectively. These decreases were partially offset by increases in agency mortgage-backed and non-agency mortgage-backed securities of $148.1 million and $115.6 million, respectively. At June 30, 2017,2018, the duration of the investment portfolio was 2.83.2 years, and maturities and pay downs of approximately $1.6$1.2 billion are expected to occur during the next 12 months.
Equity securities decreased $46.1 million at June 30, 2018 compared to December 31, 2017. The decline in equity securities during the first six months of 2018 was due to a third party merger transaction in June 2018, in which the majority of these securities were redeemed for cash of $39.9 million.
Total deposits at June 30, 20172018 amounted to $20.8$20.3 billion and decreased $275.4$103.9 million compared to depositDecember 31, 2017. The decrease in deposits resulted mainly from a decline in business demand (decrease of $262.8 million), but was partly offset by growth in savings, interest checking, and money market accounts (increase of $262.2 million). The Company’s borrowings totaled $1.2 billion at June 30, 2018, a decline of $332.8 million from balances at December 31, 2016. The decline in deposits was driven by decreases in certificates of deposit of $157.4 million, or 7.0%, mainly in jumbo accounts, and interest checking deposits of $106.3 million, or 8.3%. These decreases were offset by growth in money market deposits of $42.6 million, or .5%, and savings accounts of $60.6 million, or 7.8%. Non-interest bearing deposits also declined $114.9 million, or 1.5%,2017, mainly due to a reduction of $164.4 million in business accounts, partially offset by an increase of $66.3 million in personal accounts.fewer customer repurchase agreements.
Total borrowings were $1.4 billion at June 30, 2017 compared to $1.8 billion at December 31, 2016. Short-term borrowings
Liquidity and Capital Resources
Liquidity Management
The Company’s most liquid assets are comprised of available for sale investmentdebt securities, federal funds sold, securities purchased under agreements to resell (resale agreements), and balances at the Federal Reserve Bank, as follows:
| | (In thousands) | | June 30, 2017 | | March 31, 2017 | | December 31, 2016 | | June 30, 2018 | | March 31, 2018 | | December 31, 2017 |
Liquid assets: | | | | | | | | | | | | |
Available for sale investment securities | | $ | 9,439,701 |
| | $ | 9,671,975 |
| | $ | 9,649,203 |
| |
Available for sale debt securities | | | $ | 8,412,376 |
| | $ | 8,432,180 |
| | $ | 8,725,442 |
|
Federal funds sold | | 16,520 |
| | 2,205 |
| | 15,470 |
| | 31,500 |
| | 17,000 |
| | 42,775 |
|
Long-term securities purchased under agreements to resell | | 625,000 |
| | 725,000 |
| | 725,000 |
| | 700,000 |
| | 700,000 |
| | 700,000 |
|
Balances at the Federal Reserve Bank | | 80,860 |
| | 120,234 |
| | 272,275 |
| | 114,947 |
| | 134,697 |
| | 30,631 |
|
Total | | $ | 10,162,081 |
| | $ | 10,519,414 |
| | $ | 10,661,948 |
| | $ | 9,258,823 |
| | $ | 9,283,877 |
| | $ | 9,498,848 |
|
Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $16.5$31.5 million as of June 30, 2017.2018. Long-term resale agreements, maturing through 2018,2021, totaled $625.0$700.0 million at June 30, 2017.2018. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled $653.4$713.1 million in fair value at June 30, 2017.2018. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $80.9$114.9 million at June 30, 2017.2018. The fair value of the available for sale investmentdebt portfolio was $9.4$8.4 billion at June 30, 20172018 and included an unrealized net gainloss in fair value of $97.9$114.4 million. The total net unrealized gainloss included net gainslosses of $19.6$85.9 million on mortgage-backed and asset-backed securities, $32.7$14.2 million on stateU.S. government and municipalfederal agency obligations, $5.6 million on government-sponsored enterprise obligations, and $42.3$9.1 million on common and preferred stock held by the Parent.other debt securities.
Approximately $1.6$1.2 billion of the available for sale investmentdebt portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet new loan demand or help offset reductions in the Company's deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows:
| | (In thousands) | June 30, 2017 | March 31, 2017 | December 31, 2016 | June 30, 2018 | March 31, 2018 | December 31, 2017 |
Investment securities pledged for the purpose of securing: | | | | |
Federal Reserve Bank borrowings | $ | 99,541 |
| $ | 108,240 |
| $ | 115,858 |
| $ | 75,583 |
| $ | 81,419 |
| $ | 84,946 |
|
FHLB borrowings and letters of credit | 15,560 |
| 16,743 |
| 17,781 |
| 11,360 |
| 12,247 |
| 13,332 |
|
Securities sold under agreements to repurchase * | 1,747,101 |
| 1,726,909 |
| 2,447,835 |
| 1,623,193 |
| 1,719,583 |
| 2,001,401 |
|
Other deposits and swaps | 2,032,334 |
| 1,956,791 |
| 1,773,017 |
| 2,043,502 |
| 1,856,778 |
| 1,679,024 |
|
Total pledged securities | 3,894,536 |
| 3,808,683 |
| 4,354,491 |
| 3,753,638 |
| 3,670,027 |
| 3,778,703 |
|
Unpledged and available for pledging | 3,718,231 |
| 4,071,649 |
| 3,516,648 |
| 3,249,559 |
| 3,332,768 |
| 3,346,826 |
|
Ineligible for pledging | 1,826,934 |
| 1,791,643 |
| 1,778,064 |
| 1,409,179 |
| 1,429,385 |
| 1,599,913 |
|
Total available for sale securities, at fair value | $ | 9,439,701 |
| $ | 9,671,975 |
| $ | 9,649,203 |
| |
Total available for sale debt securities, at fair value | | $ | 8,412,376 |
| $ | 8,432,180 |
| $ | 8,725,442 |
|
* Includes securities pledged for collateral swaps, as discussed in Note 11 to the consolidated financial statements.
Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At June 30, 2017,2018, such deposits totaled $18.7$18.6 billion and represented 90.0%91.7% of total deposits. These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources. Time open and certificates of deposit of $100,000 and over totaled $1.4$1.1 billion at June 30, 2017.2018. These accounts are normally considered more volatile and higher costing and comprised 6.7%5.3% of total deposits at June 30, 2017.2018.
| | (In thousands) | June 30, 2017 | March 31, 2017 | December 31, 2016 | June 30, 2018 | March 31, 2018 | December 31, 2017 |
Core deposit base: | | |
Non-interest bearing | $ | 7,314,506 |
| $ | 7,237,815 |
| $ | 7,429,398 |
| $ | 6,876,756 |
| $ | 6,953,430 |
| $ | 7,158,962 |
|
Interest checking | 1,169,605 |
| 1,146,600 |
| 1,275,899 |
| 1,592,848 |
| 1,447,556 |
| 1,533,904 |
|
Savings and money market | 10,258,010 |
| 10,292,478 |
| 10,154,890 |
| 10,168,984 |
| 10,380,582 |
| 9,965,716 |
|
Total | $ | 18,742,121 |
| $ | 18,676,893 |
| $ | 18,860,187 |
| $ | 18,638,588 |
| $ | 18,781,568 |
| $ | 18,658,582 |
|
Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company's outside borrowings are mainly comprised of federal funds purchased, securities sold under agreements to repurchase, and advances from the FHLB, as follows:
| | (In thousands) | June 30, 2017 | March 31, 2017 | December 31, 2016 | June 30, 2018 | March 31, 2018 | December 31, 2017 |
Borrowings: | | |
Federal funds purchased | $ | 253,510 |
| $ | 340,195 |
| $ | 52,840 |
| $ | 131,685 |
| $ | 104,940 |
| $ | 202,370 |
|
Securities sold under agreements to repurchase | 1,002,934 |
| 980,954 |
| 1,671,065 |
| 1,035,074 |
| 1,027,389 |
| 1,304,768 |
|
FHLB advances | 100,000 |
| 100,000 |
| 100,000 |
| — |
| — |
| — |
|
Other debt | 1,903 |
| 1,975 |
| 2,049 |
| 9,291 |
| 9,214 |
| 1,758 |
|
Total | $ | 1,358,347 |
| $ | 1,423,124 |
| $ | 1,825,954 |
| $ | 1,176,050 |
| $ | 1,141,543 |
| $ | 1,508,896 |
|
Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Securities sold under agreements to repurchase are secured by a portion of the Company's investment portfolio and are comprised of non-insured customer funds totaling $1.0$1.2 billion, which generally mature overnight. The Company also borrows on a secured basis through advances from the FHLB, which totaled $100.0 million at June 30, 2017. These advances have fixed interest rates and mature in the fourth quarter of 2017.
The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral. Also, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged to support borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at June 30, 2017.2018.
| | | June 30, 2017 | June 30, 2018 |
(In thousands) |
FHLB | Federal Reserve |
Total |
FHLB | Federal Reserve |
Total |
Collateral value pledged | $ | 2,734,323 |
| $ | 1,272,837 |
| $ | 4,007,160 |
| $ | 2,454,301 |
| $ | 1,318,514 |
| $ | 3,772,815 |
|
Advances outstanding | (100,000 | ) | — |
| (100,000 | ) | — |
| — |
| — |
|
Letters of credit issued | (555,957 | ) | — |
| (555,957 | ) | (215,423 | ) | — |
| (215,423 | ) |
Available for future advances | $ | 2,078,366 |
| $ | 1,272,837 |
| $ | 3,351,203 |
| $ | 2,238,878 |
| $ | 1,318,514 |
| $ | 3,557,392 |
|
In addition to those mentioned above, several other sources of liquidity are available. No commercial paper has been issued or outstanding during the past ten years. The Company has no subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that it could generate additional liquidity through its Capital Markets Group from sources such as jumbo certificates of deposit or privately placed corporate debt. The Company receives strong outside rankings from both Standard & Poor's and Moody's on both the consolidated company level and it'sits subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise. These ratings are as follows:
|
| | |
| Standard & Poor’s | Moody’s |
Commerce Bancshares, Inc. |
|
|
Issuer rating | A- |
|
Rating outlook | Stable | Stable |
Preferred stock | BBB- | Baa1 |
Commerce Bank |
|
|
Issuer rating | A | A2 |
Rating outlook | Stable | Stable |
Baseline credit assessment |
| a1 |
Short-term rating | A-1 | P-1 |
The cash flows from the operating, investing and financing activities of the Company resulted in a net decreaseincrease in cash and cash equivalents of $251.3$23.2 million during the first six months of 2017,2018, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of
$212.0 $288.1 million and has historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment
securities portfolios, provided cash of $145.0$252.9 million. Activity in the investment securities portfolio provided cash of $291.0$256.8 million from sales, maturities and pay downs (net of purchases), and repayments of long-term securities purchased under agreements to resell provided cash of $100.0 million. These cash inflows were partly offset by a net increase in loans of $234.4 million.. Financing activities used cash of $608.4$517.7 million, largely resulting from a net decrease of $340.4 million in borrowings of federal funds purchased and securities sold under agreements to repurchase and dividend payments of $467.5 million. In addition, deposits decreased $79.8$54.7 million and cash was used to fund dividends paid on common and preferred stockstock. A net decrease in deposit balances resulted in a cash outflow of $50.3$111.1 million. Future short-term liquidity needs arising from daily operations are not expected to vary significantly, and the Company believes it will be able to meet these cash flow needs.
Capital Management
The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at June 30, 20172018 and December 31, 2016,2017, as shown in the following table.
| | (Dollars in thousands) | June 30, 2017 | December 31, 2016 | Minimum Ratios under Capital Adequacy Guidelines * | Minimum Ratios for Well-Capitalized Banks ** | June 30, 2018 | December 31, 2017 | Minimum Ratios under Capital Adequacy Guidelines * | Minimum Ratios for Well-Capitalized Banks ** |
Risk-adjusted assets | $ | 18,766,184 |
| $ | 18,994,730 |
| | $ | 18,932,765 |
| $ | 19,149,949 |
| |
Tier I common risk-based capital | 2,304,532 |
| 2,207,370 |
| | 2,596,487 |
| 2,422,480 |
| |
Tier I risk-based capital | 2,449,316 |
| 2,352,154 |
| | 2,741,271 |
| 2,567,264 |
| |
Total risk-based capital | 2,627,297 |
| 2,529,675 |
| | 2,901,878 |
| 2,747,863 |
| |
Tier I common risk-based capital ratio | 12.28 | % | 11.62 | % | 7.00 | % | 6.50 | % | 13.71 | % | 12.65 | % | 7.00 | % | 6.50 | % |
Tier I risk-based capital ratio | 13.05 | % | 12.38 | % | 8.50 | % | 8.00 | % | 14.48 | % | 13.41 | % | 8.50 | % | 8.00 | % |
Total risk-based capital ratio | 14.00 | % | 13.32 | % | 10.50 | % | 10.00 | % | 15.33 | % | 14.35 | % | 10.50 | % | 10.00 | % |
Tier I leverage ratio | 9.87 | % | 9.55 | % | 4.00 | % | 5.00 | % | 11.18 | % | 10.39 | % | 4.00 | % | 5.00 | % |
* as of the fully phased-in date of Jan. 1, 2019, including capital conservation buffer
**under Prompt Corrective Action requirements
The Company maintains a treasury stock buyback program under authorizations by its Board of Directors and normally purchases stock in the open market. The Company purchased 188,348322,448 shares at an average price of $56.43$59.14 during the six months ended June 30, 2017,2018, which waswere related to both open market purchases and stock-based compensation transactions. At June 30, 2017, 3,570,3272018, 3,121,075 shares remained available for purchase under the current Board authorization.
The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.225$.235 per share cash dividend on its common stock in both the first and second quarters of 2017,2018, which was a 5%9.8% increase compared to its 20162017 quarterly dividend.
Commitments, Off-Balance Sheet Arrangements and Contingencies
In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at June 30, 20172018 totaled $10.4$10.8 billion (including approximately $5.0$5.2 billion in unused approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $338.8$377.5 million and $13.3$4.3 million, respectively, at June 30, 2017.2018. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to $2.1$2.2 million at June 30, 2017.2018.
The Company regularly purchases various state tax credits arising from third-party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first six months of 2017,2018, purchases and sales of tax credits amounted to $42.0$37.6 million and $31.7$41.2 million, respectively. Fees from sales of tax credits were $1.9$2.3 million for the six months ended June 30, 2017,2018, compared to $1.7$1.9 million in the same period last year. At June 30, 2017,2018, the Company expected to fund outstanding purchase commitments of $79.2$87.7 million during the remainder of 2017.2018.
Segment Results
The table below is a summary of segment pre-tax income results for the first six months of 20172018 and 2016.2017.
| |
(Dollars in thousands) | Consumer | Commercial | Wealth | Segment Totals | Other/ Elimination | Consolidated Totals | Consumer | Commercial | Wealth | Segment Totals | Other/ Elimination | Consolidated Totals |
Six Months Ended June 30, 2018 | | |
Net interest income | | $ | 144,908 |
| $ | 167,816 |
| $ | 23,302 |
| $ | 336,026 |
| $ | 67,825 |
| $ | 403,851 |
|
Provision for loan losses | | (20,924 | ) | 488 |
| (48 | ) | (20,484 | ) | 45 |
| (20,439 | ) |
Non-interest income | | 62,332 |
| 100,862 |
| 84,997 |
| 248,191 |
| (3,651 | ) | 244,540 |
|
Investment securities gains, net | | — |
| — |
| — |
| — |
| 2,335 |
| 2,335 |
|
Non-interest expense | | (142,266 | ) | (148,158 | ) | (62,113 | ) | (352,537 | ) | (11,600 | ) | (364,137 | ) |
Income before income taxes | | $ | 44,050 |
| $ | 121,008 |
| $ | 46,138 |
| $ | 211,196 |
| $ | 54,954 |
| $ | 266,150 |
|
Six Months Ended June 30, 2017 | | |
Net interest income | $ | 136,628 |
| $ | 161,505 |
| $ | 23,771 |
| $ | 321,904 |
| $ | 39,176 |
| $ | 361,080 |
| $ | 136,628 |
| $ | 162,007 |
| $ | 23,778 |
| $ | 322,413 |
| $ | 38,667 |
| $ | 361,080 |
|
Provision for loan losses | (20,464 | ) | 624 |
| 1 |
| (19,839 | ) | (2,047 | ) | (21,886 | ) | (20,464 | ) | 624 |
| 1 |
| (19,839 | ) | (2,047 | ) | (21,886 | ) |
Non-interest income | 66,017 |
| 96,879 |
| 76,557 |
| 239,453 |
| 697 |
| 240,150 |
| 56,780 |
| 90,998 |
| 76,558 |
| 224,336 |
| 657 |
| 224,993 |
|
Investment securities gains, net | — |
| — |
| — |
| — |
| 879 |
| 879 |
| — |
| — |
| — |
| — |
| 879 |
| 879 |
|
Non-interest expense | (145,126 | ) | (147,839 | ) | (59,795 | ) | (352,760 | ) | (18,664 | ) | (371,424 | ) | (135,791 | ) | (142,499 | ) | (59,813 | ) | (338,103 | ) | (18,164 | ) | (356,267 | ) |
Income before income taxes | $ | 37,055 |
| $ | 111,169 |
| $ | 40,534 |
| $ | 188,758 |
| $ | 20,041 |
| $ | 208,799 |
| $ | 37,153 |
| $ | 111,130 |
| $ | 40,524 |
| $ | 188,807 |
| $ | 19,992 |
| $ | 208,799 |
|
Six Months Ended June 30, 2016 | | |
Net interest income | $ | 133,791 |
| $ | 153,266 |
| $ | 21,822 |
| $ | 308,879 |
| $ | 26,725 |
| $ | 335,604 |
| |
Provision for loan losses | (17,500 | ) | 1,487 |
| (115 | ) | (16,128 | ) | (2,527 | ) | (18,655 | ) | |
Non-interest income | 62,935 |
| 99,408 |
| 71,020 |
| 233,363 |
| 2,231 |
| 235,594 |
| |
Investment securities losses, net | — |
| — |
| — |
| — |
| (1,739 | ) | (1,739 | ) | |
Non-interest expense | (139,526 | ) | (140,250 | ) | (56,944 | ) | (336,720 | ) | (17,842 | ) | (354,562 | ) | |
Income before income taxes | $ | 39,700 |
| $ | 113,911 |
| $ | 35,783 |
| $ | 189,394 |
| $ | 6,848 |
| $ | 196,242 |
| |
Increase (decrease) in income before income taxes: | | |
Increase in income before income taxes: | | |
Amount | $ | (2,645 | ) | $ | (2,742 | ) | $ | 4,751 |
| $ | (636 | ) | $ | 13,193 |
| $ | 12,557 |
| $ | 6,897 |
| $ | 9,878 |
| $ | 5,614 |
| $ | 22,389 |
| $ | 34,962 |
| $ | 57,351 |
|
Percent | (6.7 | )% | (2.4 | )% | 13.3 | % | (.3 | )% | 192.7 | % | 6.4 | % | 18.6 | % | 8.9 | % | 13.9 | % | 11.9 | % | 174.9 | % | 27.5 | % |
Consumer
For the six months ended June 30, 2017,2018, income before income taxes for the Consumer segment decreased $2.6increased $6.9 million, or 6.7%18.6%, compared to the first six months of 2016.2017. This decreaseincrease in income before taxes was mainly due to growth in net interest income of $8.3 million, or 6.1%, and non-interest income of $5.6 million, or 9.8%. These increases to income were partly offset by higher non-interest expense of $5.6$6.5 million, or 4.0%4.8%, and an increase in the provision for loan losses of $3.0 million,$460 thousand, or 16.9%. These increases in expense were partly offset by growth in non-interest income of $3.1 million, or 4.9%, and net interest income of $2.8 million, or 2.1%2.2%. Net interest income increased due to a $4.3$6.0 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios partly offset by a declineand growth of $1.5$2.6 million in loan interest income. Non-interest income increased mainly due to growth in debit card fees and deposit fees (mainly deposit account service fees and overdraft and return item fees), bank card fees, and mortgage banking revenue.. Non-interest expense increased over the same period in the previous year due to higher allocated servicing and support costs, mainly administrative,marketing, online banking and information technology. In addition, salaries, bank card rewards, and royalty fees expense increased over the previous year, while supplies and communication expense decreased due to higher chip card reissue costs last year that have now declined. The provision for loan losses totaled $20.5$20.9 million, a $3.0 million$460 thousand increase over the first six months of 2016,2017, which was mainly due to higher consumer credit card loan and personal loan net charge-offs, partly offset by lower marine and RV loan net charge-offs.
Commercial
For the six months ended June 30, 2017,2018, income before income taxes for the Commercial segment decreased $2.7increased $9.9 million, or 2.4%8.9%, compared to the same period in the previous year. This decreaseincrease was mainly due to lowerhigher net interest income and non-interest income. These increases to income were partly offset by higher non-interest expense and an increase in the provision for loan losses and was partially offset by growth in net interest income.expense. Net interest income increased $8.2$5.8 million, or 5.4%3.6%, due to ana $32.6 million increase in loan interest income, partly offset by a decline of $17.6 million in net allocated funding credits and higher deposit interest expense.expense of $9.2 million on deposits and customer repurchase agreements. Non-interest income decreased $2.5increased $9.9 million, or 2.5%10.8%, fromover the previous year due to lowerhigher corporate card fees, swap fees, bank cardand deposit account fees and capital market fees.(mainly corporate cash management fees). These decreasesincreases were partly offset by growth in deposit account fees.lower gains on sales of leased assets to customers upon lease termination. Non-interest expense increased $7.6$5.7 million, or 5.4%4.0%, mainly due to increases in salaries and benefits expense and allocated service and support costs.costs (mainly deposit operations, information technology, and commercial sales and product support fees). In addition, salaries expense and data processing expense increased over the prior year. The provision for loan losses increased $863$136 thousand over the same period last year, due to lower net recoveries on construction loans. This increase was partly offset by lower net charge-offs on commercial card loans and higher net recoveries on business real estate loans.
Wealth
Wealth segment pre-tax profitability for the six months ended June 30, 20172018 increased $4.8$5.6 million, or 13.3%13.9%, over the same period in the previous year. Net interest income increased $1.9 million,decreased $476 thousand, or 8.9%2.0%, mainly due to a decline in net allocated funding credits, partly offset by an increase in loan interest income. Non-interest income increased $5.5$8.4 million, or 7.8%11.0%, over the prior year largely due to higher private client and institutional trust fees brokerage fees and cash sweep fees.commissions. These increases were partly offset by a trust related settlement received in the second quarter of 2016.write downs on software costs. Non-interest expense increased $2.9$2.3 million, or 5.0%3.8%, mainly due to higher salary and benefit costs, professional feestrust losses, and allocated support costs.and corporate management fee costs, partly offset by lower professional fees expense. The provision for loan losses decreased $116increased $49 thousand, mainly due to lower revolving home equityhigher personal real estate loan net charge-offs.
The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was higher than in the same period last year by $13.2$35.0 million. This increase was mainly due to higher unallocated net interest income of $12.5$29.2 million and lower non-interest expense of $6.6 million, partly offset by lower non-interest income of $1.5 million and higher non-interest expense of $822 thousand.$4.3 million. Unallocated securities gains were $879 thousand$2.3 million in the first six months of 20172018 compared to lossesgains of $1.7 million$879 thousand in 2016.2017. Also, the unallocated loan loss provision decreased $480 thousand,$2.1 million, as the provision was $1.9 million in excess of charge-offs in the first six months of 2017, compared to $2.3 million in excess ofwhile the provision equaled charge-offs induring the first six months of 2016.
Regulatory Changes Affecting the Banking Industry
In accordance with the Dodd-Frank Act, the Company began submitting its stress test results to the Federal Reserve in March 2014 and publicly disclosed the results of its stress testing for the first time in June 2015. In 2017, the Company submitted its stress test report to the Federal Reserve in July and expects to publicly disclose the results in October.
The Volcker Rule of the Dodd-Frank Act, effective on April 1, 2014, places trading restrictions on financial institutions and separates investment banking, private equity and proprietary trading (hedge fund) sections of financial institutions from their consumer lending arms. Key provisions restrict banks from simultaneously entering into advisory and creditor roles with their clients, such as with private equity firms. The Volcker Rule also restricts financial institutions from investing in and sponsoring certain types of investments, which must be divested by July 21, 2017. In 2016, the Company withdrew from a private equity fund investment to comply with the Volcker Rule requirement and holds no other significant investments requiring disposal.2018.
Impact of Recently Issued Accounting Standards
Derivatives In March 2016, theThe FASB issued ASU 2016-05, "Effect2017-12, "Targeted Improvements to Accounting for Hedging Activities", in August 2017. The ASU improves the financial reporting of Derivative Contract Novationshedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. These improvements allow the hedging of risk components, ease restrictions on Existing Hedge Accounting Relationships", which clarifies that athe measurement of the change in fair value of the counterparty to a derivative instrument that has been designated ashedged item, aligns the recognition and presentation of the effects of the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all otherthe hedged item, and otherwise simplify hedge accounting criteria continue to be met.guidance. The amendments wereare effective January 1, 2017 and2019 but may be adopted early in any interim period. The Company adopted the ASU on January 1, 2018, but as the Company did not have a significant effectutilize hedge accounting on that date, the Company's consolidated financial statements.
The FASB issued ASU 2016-06, "Contingent Put and Call Options in Debt Instruments", in March 2016. The ASU clarifiesstatements were not affected by the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. Under the new guidance, the embedded options should be assessed solely in accordance with a four-step decision sequence, with no additional assessment of whether the triggering event is indexed to interest rates or credit risk. The amendments were effective January 1, 2017 and did not have a significant effect on the Company's consolidated financial statements.
Investments The FASB issued ASU 2016-07, "Equity Method and Joint Ventures", in March 2016, which eliminates the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in ownership or influence. Instead, the cost of acquiring the additional interest should be added to the current basis of the previously held interest, and equity method accounting applied prospectively. The amendments were effective January 1, 2017 and did not have a significant effect on the Company's consolidated financial statements.
Stock Compensation The FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting", in March 2016, in order to reduce complexity in this area and improve the usefulness of information provided to users. Amendments which will affect public companies include the recognition of excess tax benefits and deficiencies in income tax expense or benefit in the income statement, guidance as to the classification of excess tax benefits on the statement of cash flows, an election to
account for award forfeitures as they occur, and the ability to withhold taxes up to the maximum statutory rate in the applicable jurisdictions without triggering liability classification of the award. The amendments were effective January 1, 2017. As further discussed in Note 12 to the consolidated financial statements, the Company elected to account for forfeitures as they occur.
Consolidation The FASB issued ASU 2016-17, "Interests Held through Related Parties That Are under Common Control", in October 2016. The ASU amends current guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. Current GAAP requires a single decision maker to attribute indirect interests held by certain of its related parties entirely to itself, while the amendments require inclusion of those interests on a proportionate basis consistent with indirect interests held through other related parties. The amendments were effective January 1, 2017 and did not have a significant effect on the Company's consolidated financial statements.adoption.
Revenue from Contracts with Customers The FASB issued ASU 2014-09, "Revenue from Contracts with Customers", in May 2014, which has been followed by additional clarifying guidance on specified implementation issues. The ASU supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most industry specific revenue recognition guidance in the FASB Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies specific steps that entities should apply in order to achieve this principle. Under the ASU and related amendments, the guidance is effective for interim and annual periods beginning January 1, 2018 and must be applied retrospectively, whether through a full restatement of prior periods or a cumulative adjustment upon adoption of the ASU.
Approximately 60% of the Company’s revenue is comprised of net interest income on financial assets and financial liabilities, and is explicitly out of scope of the guidance. The Company has identified the primary contracts in scope as those relating to brokerage commissions, trust fees, deposit account fees, real estate sales, and credit card revenues. Over the last twelve months, significant discussions have been held with representatives of the business lines associated with the revenues described above and documentation has been accumulated and reviewed. The Company is currently in the process of contract sampling, which should be completed early in the fourth quarter. The Company’s analysis to date suggests that adoption of this ASU should not alter the way in which revenue for these significant areas is determined currently, but could possibly net certain revenues against expense or certain expenses against revenue. Final conclusions are anticipated to be reached later this year. The Company plans to adopt this ASUwas adopted on January 1, 2018 under the full retrospective method with a cumulative effect adjustmentrestatement of prior periods. The impact of the adoption and required disclosures are discussed in Note 13 to opening retained earnings, if such adjustment is deemed to be significant.the consolidated financial statements.
Liabilities The FASB issued ASU 2016-04, "Recognition of Breakage for Certain Prepaid Stored-Value Products", in March 2016, in order to address current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. Such products include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid telecommunication cards, and traveler's checks. The amendments require that the portion of the dollar value of prepaid stored-value products that is ultimately unredeemed (that is, the breakage) be accounted for consistent with the breakage guidance for stored-value product transactions provided in ASC Topic 606 - Revenue from Contracts with Customers. These amendments arewere effective for interim and annual periods beginning January 1, 2018. The Company is in the process of evaluating the impact of the ASU's adoption2018 and did not have a significant effect on the Company's consolidated financial statements.
Income Taxes The FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory", in October 2016. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The amendments require the recognition of income tax consequences of an intra-entity transfer of an asset (other than inventory) when the transfer occurs. This change removes the current exception to the principal of comprehensive recognition of current and deferred income taxes in GAAP (except for inventory). These amendments arewere effective for reporting periods beginning January 1, 2018 and aredid not expected to have a significant effect on the Company's consolidated financial statements.
Financial Instruments The FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities", in January 2016. The amendments require all equity investments to be measured at fair value with changes in the fair value recognized through net income, other than those accounted for under the equity method of accounting or those that result
in the consolidation of the investee. Additionally, these amendments require presentation in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk for those liabilities measured at fair value. The amendments also require use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. These amendments are effective for interim and annual periods beginningwere adopted on January 1, 2018. The Company has formed a working group2018 and are further discussed in Notes 3 and 15 to evaluate the changes required as a result of the adoption of this ASU and
has also engaged outside consultants to assist with data collection and calculation of fair value information, particularly for fair value disclosures of the Company's loan portfolio.consolidated financial statements.
Statement of Cash Flows The FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments", in August 2016. The ASU addresses the presentation and classification in the Statement of Cash Flows of several specific cash flow issues. These include cash payments for debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, distributions received from equity method investees, and separately identifiable cash flows and application of the predominance principle. The amendments arewere effective January 1, 2018 and aredid not expected to have a significant effect on the Company's consolidated financial statements.
The FASB issued ASU 2016-18, "Restricted Cash", in November 2016. The ASU addresses the current diversity in the classification and presentation of changes in restricted cash on the statement of cash flows. The ASU requires that amounts described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning and end of period amounts shown on the statement of cash flows. Disclosures are to be provided on the amounts reported as restricted and the nature of the restrictions on cash and cash equivalents. When presented in more than one line item within the statement of financial position, the entity shall disclose the amounts, disaggregated by line item, of cash, cash equivalents, restricted cash, and restricted cash equivalents reported within the statement of financial position. The amendments, arewhich were applied on a retrospective basis, were effective January 1, 2018 and aredid not expected to have a significant effect on the Company's consolidated financial statements.
Retirement Benefits The FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost", in March 2017. Under current guidance, the different components comprising net benefit cost are aggregated for reporting in the financial statements. Because these components are heterogeneous, the current presentation reduces the transparency and usefulness of the financial statements. The ASU requires that an employer report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered during the period. The other components of net benefit cost are required to be presented separately from the servicing cost component. Only service cost is eligible for capitalization when applicable. The amendments arewere effective January 1, 2018 and areas noted in Note 6 to the consolidated financial statements, did not expected to have a significant effect on the Company's consolidated financial statements.
Leases In February 2016, the FASB issued ASU 2016-02, "Leases", in order to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU primarily affects lessee accounting, which requires the lessee to recognize a right-of-use asset and a liability to make lease payments for those leases classified as operating leases under previous GAAP. For leases with a term of 12 months or less, an election by class of underlying asset not to recognize lease assets and lease liabilities is permitted. The ASU also provides additional guidance as to the definition of a lease, identification of lease components, and sale and leaseback transactions. The amendments in the ASU are effective for interim and annual periods beginning January 1, 2019. The Company is the lessee in approximately 200 lease agreements that are subject to this ASU.agreements. At December 31, 2017, future minimum lease payments for operating leases totaled $34 million. The Company has formed a working group to assessis in the changes required and is actively working with its currentprocess of installing new lease accounting software vendor to acquire a new module designed to comply with the new accounting requirements.requirements and has reviewed all existing lease agreements for which the new accounting standard is to be applied. Also, the Company is developing methodologies and processes to estimate and account for right-of-use assets and lease liabilities, which are based on the present value of future lease payments.
Premium Amortization The FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities", in March 2017. Under current guidance, many entities amortize the premium on purchased callable debt securities over the contractual life of the instrument. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium to the earliest call date, and more closely align the amortization period to expectations incorporated in market pricing of the instrument. The amendments are effective January 1, 2019 and are not expected to have a significant effect on the Company's consolidated financial statements.
Financial Instruments ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", was issued in June 2016. Its implementation will result in a new loan loss accounting framework, also known as the current expected credit loss (CECL) model. CECL requires credit losses expected throughout the life of the asset portfolio on loans and held-to-maturity securities to be recorded at the time of origination. Under the current incurred loss model, losses are recorded when it is probable that a loss event has occurred. The new standard will require significant operational changes, especially in data collection and analysis. The ASU is effective for interim and annual periods beginning January 1, 2020, and is expected to increase the allowance upon adoption. The Company has formed a working group to assess the standard and has begun assessing the data needs required. In the second quarter of 2017, the Company formed a working group and contracted with a software supplier to assist in the data collection and calculation of the allowance for loan losses under the new model. Historical loan data has been collected in this software system and a CECL working group is actively working with outside professionals to select various model toinputs such as loans segments, modeling methods and other data as required under the CECL model, which would allow for pro-formaproforma calculations to begin by mid-2018.occur later this year.
Intangible Assets The FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", in January 2017. Under current guidance, a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with
the carrying amount of that goodwill by following procedures that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the new amendments, the goodwill impairment test compares the fair value of a reporting unit with its carrying amount and an impairment charge is measured as the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments are effective for impairment tests beginning January 1, 2020 and are not expected to have a significant effect on the Company's consolidated financial statements.
Comprehensive Income The FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income", in February 2018. The guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments are effective for all entities effective January 1, 2019, but early adoption is permitted in certain circumstances. The Company adopted the ASU effective January 1, 2018 and recorded a reclassification which increased accumulated other comprehensive income and reduced retained earnings by $2.9 million. As these are both categories within equity, total equity was unchanged. The adoption did not have a significant effect on the Company's consolidated financial statements.
AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Three Months Ended June 30, 20172018 and 20162017
| | | Second Quarter 2017 | | Second Quarter 2016 | Second Quarter 2018 | | Second Quarter 2017 |
(Dollars in thousands) | Average Balance | Interest Income/Expense | Avg. Rates Earned/Paid | | Average Balance | Interest Income/Expense | Avg. Rates Earned/Paid | Average Balance | Interest Income/Expense | Avg. Rates Earned/Paid | | Average Balance | Interest Income/Expense | Avg. Rates Earned/Paid |
ASSETS: | | | | | | | | | | |
Loans: | | | | | | | | | | |
Business(A) | $ | 4,827,439 |
| $ | 38,606 |
| 3.21 | % | | $ | 4,691,476 |
| $ | 33,862 |
| 2.90 | % | $ | 4,962,171 |
| $ | 45,614 |
| 3.69 | % | | $ | 4,827,439 |
| $ | 38,606 |
| 3.21 | % |
Real estate — construction and land | 862,479 |
| 9,256 |
| 4.30 |
| | 789,329 |
| 6,789 |
| 3.46 |
| 971,854 |
| 12,254 |
| 5.06 |
| | 862,479 |
| 9,256 |
| 4.30 |
|
Real estate — business | 2,701,144 |
| 25,219 |
| 3.74 |
| | 2,389,170 |
| 21,934 |
| 3.69 |
| 2,726,697 |
| 28,706 |
| 4.22 |
| | 2,701,144 |
| 25,219 |
| 3.74 |
|
Real estate — personal | 2,003,997 |
| 18,602 |
| 3.72 |
| | 1,905,968 |
| 17,827 |
| 3.76 |
| 2,078,972 |
| 19,916 |
| 3.84 |
| | 2,003,997 |
| 18,602 |
| 3.72 |
|
Consumer | 1,997,761 |
| 19,614 |
| 3.94 |
| | 1,927,925 |
| 18,217 |
| 3.80 |
| 2,025,585 |
| 22,181 |
| 4.39 |
| | 1,997,761 |
| 19,614 |
| 3.94 |
|
Revolving home equity | 399,730 |
| 3,822 |
| 3.84 |
| | 413,198 |
| 3,687 |
| 3.59 |
| 378,366 |
| 4,252 |
| 4.51 |
| | 399,730 |
| 3,822 |
| 3.84 |
|
Consumer credit card | 731,471 |
| 21,705 |
| 11.90 |
| | 738,130 |
| 21,184 |
| 11.54 |
| 754,199 |
| 22,661 |
| 12.05 |
| | 731,471 |
| 21,705 |
| 11.90 |
|
Overdrafts | 4,505 |
| — |
| — |
| | 3,916 |
| — |
| — |
| 4,497 |
| — |
| — |
| | 4,505 |
| — |
| — |
|
Total loans | 13,528,526 |
| 136,824 |
| 4.06 |
| | 12,859,112 |
| 123,500 |
| 3.86 |
| 13,902,341 |
| 155,584 |
| 4.49 |
| | 13,528,526 |
| 136,824 |
| 4.06 |
|
Loans held for sale | 18,341 |
| 263 |
| 5.75 |
| | 56,272 |
| 692 |
| 4.95 |
| 22,202 |
| 372 |
| 6.72 |
| | 18,341 |
| 263 |
| 5.75 |
|
Investment securities: | | | | | | | | | | | | |
U.S. government and federal agency obligations | 910,821 |
| 5,731 |
| 2.52 |
| | 698,374 |
| 6,047 |
| 3.48 |
| 923,183 |
| 7,328 |
| 3.18 |
| | 910,821 |
| 5,731 |
| 2.52 |
|
Government-sponsored enterprise obligations | 450,362 |
| 1,782 |
| 1.59 |
| | 666,354 |
| 5,015 |
| 3.03 |
| 354,156 |
| 1,661 |
| 1.88 |
| | 450,362 |
| 1,782 |
| 1.59 |
|
State and municipal obligations(A) | 1,771,674 |
| 15,924 |
| 3.61 |
| | 1,763,849 |
| 15,804 |
| 3.60 |
| 1,394,766 |
| 10,634 |
| 3.06 |
| | 1,771,674 |
| 15,924 |
| 3.61 |
|
Mortgage-backed securities | 3,708,124 |
| 21,702 |
| 2.35 |
| | 3,394,466 |
| 19,892 |
| 2.36 |
| 4,067,152 |
| 26,385 |
| 2.60 |
| | 3,708,124 |
| 21,702 |
| 2.35 |
|
Asset-backed securities | 2,335,344 |
| 10,037 |
| 1.72 |
| | 2,377,708 |
| 8,594 |
| 1.45 |
| 1,407,300 |
| 8,134 |
| 2.32 |
| | 2,335,344 |
| 10,037 |
| 1.72 |
|
Other marketable securities(A) | 326,398 |
| 2,249 |
| 2.76 |
| | 337,572 |
| 2,325 |
| 2.77 |
| |
Trading securities(A) | 21,062 |
| 142 |
| 2.70 |
| | 20,540 |
| 116 |
| 2.27 |
| |
Non-marketable securities(A) | 101,790 |
| 2,915 |
| 11.49 |
| | 116,103 |
| 2,319 |
| 8.03 |
| |
Other debt securities | | 340,246 |
| 2,229 |
| 2.63 |
| | 320,869 |
| 2,033 |
| 2.54 |
|
Trading debt securities(A) | | 26,101 |
| 205 |
| 3.15 |
| | 21,062 |
| 142 |
| 2.70 |
|
Equity securities(A) | | 47,179 |
| 10,548 |
| 89.68 |
| | 53,162 |
| 526 |
| 3.97 |
|
Other securities(A) | | 108,563 |
| 1,807 |
| 6.68 |
| | 99,545 |
| 2,605 |
| 10.50 |
|
Total investment securities | 9,625,575 |
| 60,482 |
| 2.52 |
| | 9,374,966 |
| 60,112 |
| 2.58 |
| 8,668,646 |
| 68,931 |
| 3.19 |
| | 9,670,963 |
| 60,482 |
| 2.50 |
|
Federal funds sold and short-term securities | | | | | | | | | | |
purchased under agreements to resell | 13,115 |
| 37 |
| 1.13 |
| | 11,916 |
| 19 |
| .64 |
| 36,791 |
| 177 |
| 1.93 |
| | 13,115 |
| 37 |
| 1.13 |
|
Long-term securities purchased | | | | | | | | | | |
under agreements to resell | 665,655 |
| 3,684 |
| 2.22 |
| | 824,999 |
| 3,354 |
| 1.64 |
| 700,000 |
| 3,785 |
| 2.17 |
| | 665,655 |
| 3,684 |
| 2.22 |
|
Interest earning deposits with banks | 139,061 |
| 362 |
| 1.04 |
| | 125,024 |
| 151 |
| .49 |
| 353,607 |
| 1,590 |
| 1.80 |
| | 139,061 |
| 362 |
| 1.04 |
|
Total interest earning assets | 23,990,273 |
| 201,652 |
| 3.37 |
| | 23,252,289 |
| 187,828 |
| 3.25 |
| 23,683,587 |
| 230,439 |
| 3.90 |
| | 24,035,661 |
| 201,652 |
| 3.36 |
|
Allowance for loan losses | (157,003 | ) | | | | (151,622 | ) | | | (158,664 | ) | | | | (157,003 | ) | | |
Unrealized gain on investment securities | 102,935 |
| | | | 191,565 |
| | | |
Unrealized gain (loss) on debt securities | | (122,114 | ) | | | | 57,547 |
| | |
Cash and due from banks | 349,132 |
| | | | 372,275 |
| | | 357,074 |
| | | | 349,132 |
| | |
Land, buildings and equipment, net | 344,310 |
| | | | 351,095 |
| | | 342,778 |
| | | | 344,310 |
| | |
Other assets | 413,086 |
| | | | 389,844 |
| | | 419,602 |
| | | | 413,086 |
| | |
Total assets | $ | 25,042,733 |
| | | | $ | 24,405,446 |
| | | $ | 24,522,263 |
| | | | $ | 25,042,733 |
| | |
LIABILITIES AND EQUITY: | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | |
Savings | $ | 831,038 |
| 240 |
| .12 |
| | $ | 787,478 |
| 224 |
| .11 |
| $ | 881,045 |
| 239 |
| .11 |
| | $ | 831,038 |
| 240 |
| .12 |
|
Interest checking and money market | 10,667,042 |
| 4,102 |
| .15 |
| | 10,287,923 |
| 3,324 |
| .13 |
| 10,850,123 |
| 6,280 |
| .23 |
| | 10,667,042 |
| 4,102 |
| .15 |
|
Time open & C.D.'s of less than $100,000 | 688,047 |
| 674 |
| .39 |
| | 758,703 |
| 709 |
| .38 |
| 609,011 |
| 694 |
| .46 |
| | 688,047 |
| 674 |
| .39 |
|
Time open & C.D.'s of $100,000 and over | 1,510,001 |
| 2,822 |
| .75 |
| | 1,635,892 |
| 2,347 |
| .58 |
| 1,134,900 |
| 3,483 |
| 1.23 |
| | 1,510,001 |
| 2,822 |
| .75 |
|
Total interest bearing deposits | 13,696,128 |
| 7,838 |
| .23 |
| | 13,469,996 |
| 6,604 |
| .20 |
| 13,475,079 |
| 10,696 |
| .32 |
| | 13,696,128 |
| 7,838 |
| .23 |
|
Borrowings: | | | | | | | | | | |
Federal funds purchased and securities sold | | | | | | | | | | |
under agreements to repurchase | 1,363,031 |
| 2,038 |
| .60 |
| | 1,211,892 |
| 725 |
| .24 |
| 1,339,278 |
| 3,956 |
| 1.18 |
| | 1,363,031 |
| 2,038 |
| .60 |
|
Other borrowings | 105,311 |
| 911 |
| 3.47 |
| | 104,649 |
| 907 |
| 3.49 |
| 1,913 |
| 12 |
| 2.52 |
| | 105,311 |
| 911 |
| 3.47 |
|
Total borrowings | 1,468,342 |
| 2,949 |
| .81 |
| | 1,316,541 |
| 1,632 |
| .50 |
| 1,341,191 |
| 3,968 |
| 1.19 |
| | 1,468,342 |
| 2,949 |
| .81 |
|
Total interest bearing liabilities | 15,164,470 |
| 10,787 |
| .29 | % | | 14,786,537 |
| 8,236 |
| .22 | % | 14,816,270 |
| 14,664 |
| .40 | % | | 15,164,470 |
| 10,787 |
| .29 | % |
Non-interest bearing deposits | 7,065,849 |
| | | | 6,885,889 |
| | | 6,749,104 |
| | | | 7,065,849 |
| | |
Other liabilities | 203,139 |
| | | | 260,179 |
| | | 229,080 |
| | | | 203,139 |
| | |
Equity | 2,609,275 |
| | | | 2,472,841 |
| | | 2,727,809 |
| | | | 2,609,275 |
| | |
Total liabilities and equity | $ | 25,042,733 |
| | | | $ | 24,405,446 |
| | | $ | 24,522,263 |
| | | | $ | 25,042,733 |
| | |
Net interest margin (T/E) | | $ | 190,865 |
| | | | $ | 179,592 |
| | | $ | 215,775 |
| | | | $ | 190,865 |
| |
Net yield on interest earning assets | | 3.19 | % | | | 3.11 | % | | 3.65 | % | | | 3.18 | % |
(A) Stated on a tax equivalent basis using a federal income tax rate of 21% in 2018 and 35%. in prior periods.
AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Six Months Ended June 30, 20172018 and 2017
| | | Six Months 2017 | | Six Months 2016 | Six Months 2018 | | Six Months 2017 |
(Dollars in thousands) | Average Balance | Interest Income/Expense | Avg. Rates Earned/Paid | | Average Balance | Interest Income/Expense | Avg. Rates Earned/Paid | Average Balance | Interest Income/Expense | Avg. Rates Earned/Paid | | Average Balance | Interest Income/Expense | Avg. Rates Earned/Paid |
ASSETS: | | | | | | | | | | |
Loans: | | | | | | | | | | |
Business(A) | $ | 4,866,837 |
| $ | 75,192 |
| 3.12 | % | | $ | 4,591,516 |
| $ | 65,955 |
| 2.89 | % | $ | 4,948,472 |
| $ | 87,909 |
| 3.58 | % | | $ | 4,866,837 |
| $ | 75,192 |
| 3.12 | % |
Real estate — construction and land | 845,343 |
| 17,126 |
| 4.09 |
| | 735,943 |
| 12,750 |
| 3.48 |
| 961,947 |
| 23,268 |
| 4.88 |
| | 845,343 |
| 17,126 |
| 4.09 |
|
Real estate — business | 2,673,491 |
| 48,915 |
| 3.69 |
| | 2,385,632 |
| 43,875 |
| 3.70 |
| 2,730,235 |
| 56,090 |
| 4.14 |
| | 2,673,491 |
| 48,915 |
| 3.69 |
|
Real estate — personal | 2,008,203 |
| 37,175 |
| 3.73 |
| | 1,907,750 |
| 35,728 |
| 3.77 |
| 2,070,574 |
| 39,258 |
| 3.82 |
| | 2,008,203 |
| 37,175 |
| 3.73 |
|
Consumer | 1,986,391 |
| 38,545 |
| 3.91 |
| | 1,931,251 |
| 36,809 |
| 3.83 |
| 2,048,748 |
| 43,913 |
| 4.32 |
| | 1,986,391 |
| 38,545 |
| 3.91 |
|
Revolving home equity | 402,565 |
| 7,464 |
| 3.74 |
| | 421,440 |
| 7,448 |
| 3.55 |
| 385,507 |
| 8,371 |
| 4.38 |
| | 402,565 |
| 7,464 |
| 3.74 |
|
Consumer credit card | 739,582 |
| 43,208 |
| 11.78 |
| | 745,114 |
| 42,539 |
| 11.48 |
| 755,936 |
| 45,200 |
| 12.06 |
| | 739,582 |
| 43,208 |
| 11.78 |
|
Overdrafts | 4,346 |
| — |
| — |
| | 4,344 |
| — |
| — |
| 4,562 |
| — |
| — |
| | 4,346 |
| — |
| — |
|
Total loans | 13,526,758 |
| 267,625 |
| 3.99 |
| | 12,722,990 |
| 245,104 |
| 3.87 |
| 13,905,981 |
| 304,009 |
| 4.41 |
| | 13,526,758 |
| 267,625 |
| 3.99 |
|
Loans held for sale | 15,174 |
| 459 |
| 6.10 |
| | 32,816 |
| 827 |
| 5.07 |
| 20,667 |
| 676 |
| 6.60 |
| | 15,174 |
| 459 |
| 6.10 |
|
Investment securities: | | | | | |
| | | | | |
|
U.S. government and federal agency obligations | 912,140 |
| 10,445 |
| 2.31 |
| | 700,793 |
| 6,740 |
| 1.93 |
| 919,937 |
| 12,116 |
| 2.66 |
| | 912,140 |
| 10,445 |
| 2.31 |
|
Government-sponsored enterprise obligations | 450,425 |
| 3,541 |
| 1.59 |
| | 721,421 |
| 8,736 |
| 2.44 |
| 379,776 |
| 3,497 |
| 1.86 |
| | 450,425 |
| 3,541 |
| 1.59 |
|
State and municipal obligations(A) | 1,777,357 |
| 31,991 |
| 3.63 |
| | 1,741,218 |
| 31,446 |
| 3.63 |
| 1,453,677 |
| 22,040 |
| 3.06 |
| | 1,777,357 |
| 31,991 |
| 3.63 |
|
Mortgage-backed securities | 3,734,065 |
| 43,800 |
| 2.37 |
| | 3,409,591 |
| 40,728 |
| 2.40 |
| 3,996,918 |
| 51,780 |
| 2.61 |
| | 3,734,065 |
| 43,800 |
| 2.37 |
|
Asset-backed securities | 2,347,427 |
| 19,517 |
| 1.68 |
| | 2,457,590 |
| 17,389 |
| 1.42 |
| 1,438,222 |
| 15,777 |
| 2.21 |
| | 2,347,427 |
| 19,517 |
| 1.68 |
|
Other marketable securities(A) | 329,503 |
| 4,559 |
| 2.79 |
| | 339,977 |
| 4,701 |
| 2.78 |
| |
Trading securities(A) | 23,102 |
| 314 |
| 2.74 |
| | 19,365 |
| 246 |
| 2.55 |
| |
Non-marketable securities(A) | 101,268 |
| 8,151 |
| 16.23 |
| | 121,936 |
| 4,396 |
| 7.25 |
| |
Other debt securities | | 341,029 |
| 4,461 |
| 2.64 |
| | 323,921 |
| 4,099 |
| 2.55 |
|
Trading debt securities(A) | | 24,045 |
| 353 |
| 2.96 |
| | 23,102 |
| 314 |
| 2.74 |
|
Equity securities(A) | | 48,834 |
| 11,002 |
| 45.43 |
| | 54,634 |
| 1,078 |
| 3.98 |
|
Other securities(A) | | 104,799 |
| 3,483 |
| 6.70 |
| | 99,004 |
| 7,533 |
| 15.34 |
|
Total investment securities | 9,675,287 |
| 122,318 |
| 2.55 |
| | 9,511,891 |
| 114,382 |
| 2.42 |
| 8,707,237 |
| 124,509 |
| 2.88 |
| | 9,722,075 |
| 122,318 |
| 2.54 |
|
Federal funds sold and short-term securities | | | | | | | | | | |
purchased under agreements to resell | 11,510 |
| 60 |
| 1.05 |
| | 14,647 |
| 43 |
| .59 |
| 40,544 |
| 357 |
| 1.78 |
| | 11,510 |
| 60 |
| 1.05 |
|
Long-term securities purchased | | | | | | | | | | |
under agreements to resell | 695,164 |
| 7,477 |
| 2.17 |
| | 837,637 |
| 6,829 |
| 1.64 |
| 700,000 |
| 7,899 |
| 2.28 |
| | 695,164 |
| 7,477 |
| 2.17 |
|
Interest earning deposits with banks | 173,263 |
| 759 |
| .88 |
| | 172,330 |
| 421 |
| .49 |
| 314,012 |
| 2,730 |
| 1.75 |
| | 173,263 |
| 759 |
| .88 |
|
Total interest earning assets | 24,097,156 |
| 398,698 |
| 3.34 |
| | 23,292,311 |
| 367,606 |
| 3.17 |
| 23,688,441 |
| 440,180 |
| 3.75 |
| | 24,143,944 |
| 398,698 |
| 3.33 |
|
Allowance for loan losses | (156,170 | ) | | | | (151,465 | ) | | | (158,721 | ) | | | | (156,170 | ) | | |
Unrealized gain on investment securities | 83,071 |
| | | | 170,442 |
| | | |
Unrealized gain (loss) on debt securities | | (82,894 | ) | | | | 36,283 |
| | |
Cash and due from banks | 362,723 |
| | | | 396,538 |
| | | 360,279 |
| | | | 362,723 |
| | |
Land, buildings and equipment, net | 345,115 |
| | | | 354,042 |
| | | 343,859 |
| | | | 345,115 |
| | |
Other assets | 415,036 |
| | | | 392,485 |
| | | 428,118 |
| | | | 415,036 |
| | |
Total assets | $ | 25,146,931 |
| | | | $ | 24,454,353 |
| | | $ | 24,579,082 |
| | | | $ | 25,146,931 |
| | |
LIABILITIES AND EQUITY: | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | |
Savings | $ | 813,464 |
| 486 |
| .12 |
| | $ | 774,249 |
| 452 |
| .12 |
| $ | 860,089 |
| 484 |
| .11 |
| | $ | 813,464 |
| 486 |
| .12 |
|
Interest checking and money market | 10,635,689 |
| 7,746 |
| .15 |
| | 10,208,233 |
| 6,580 |
| .13 |
| 10,794,286 |
| 11,624 |
| .22 |
| | 10,635,689 |
| 7,746 |
| .15 |
|
Time open & C.D.'s of less than $100,000 | 696,544 |
| 1,318 |
| .38 |
| | 766,962 |
| 1,451 |
| .38 |
| 617,120 |
| 1,356 |
| .44 |
| | 696,544 |
| 1,318 |
| .38 |
|
Time open & C.D.'s of $100,000 and over | 1,590,118 |
| 5,585 |
| .71 |
| | 1,559,796 |
| 4,333 |
| .56 |
| 1,134,549 |
| 6,322 |
| 1.12 |
| | 1,590,118 |
| 5,585 |
| .71 |
|
Total interest bearing deposits | 13,735,815 |
| 15,135 |
| .22 |
| | 13,309,240 |
| 12,816 |
| .19 |
| 13,406,044 |
| 19,786 |
| .30 |
| | 13,735,815 |
| 15,135 |
| .22 |
|
Borrowings: | | | | | | | | | | |
Federal funds purchased and securities sold | | | | | | | | | | |
under agreements to repurchase | 1,359,692 |
| 3,577 |
| .53 |
| | 1,308,323 |
| 1,613 |
| .25 |
| 1,449,314 |
| 7,957 |
| 1.11 |
| | 1,359,692 |
| 3,577 |
| .53 |
|
Other borrowings | 103,670 |
| 1,799 |
| 3.50 |
| | 241,180 |
| 2,160 |
| 1.80 |
| 1,913 |
| 24 |
| 2.53 |
| | 103,670 |
| 1,799 |
| 3.50 |
|
Total borrowings | 1,463,362 |
| 5,376 |
| .74 |
| | 1,549,503 |
| 3,773 |
| .49 |
| 1,451,227 |
| 7,981 |
| 1.11 |
| | 1,463,362 |
| 5,376 |
| .74 |
|
Total interest bearing liabilities | 15,199,177 |
| 20,511 |
| .27 | % | | 14,858,743 |
| 16,589 |
| .22 | % | 14,857,271 |
| 27,767 |
| .38 | % | | 15,199,177 |
| 20,511 |
| .27 | % |
Non-interest bearing deposits | 7,155,774 |
| | | | 6,895,781 |
| | | 6,786,693 |
| | | | 7,155,774 |
| | |
Other liabilities | 218,556 |
| | | | 257,308 |
| | | 213,824 |
| | | | 218,556 |
| | |
Equity | 2,573,424 |
| | | | 2,442,521 |
| | | 2,721,294 |
| | | | 2,573,424 |
| | |
Total liabilities and equity | $ | 25,146,931 |
| | | | $ | 24,454,353 |
| | | $ | 24,579,082 |
| | | | $ | 25,146,931 |
| | |
Net interest margin (T/E) | | $ | 378,187 |
| | | | $ | 351,017 |
| | | $ | 412,413 |
| | | | $ | 378,187 |
| |
Net yield on interest earning assets | | | 3.16 | % | | | 3.03 | % | | | 3.51 | % | | | 3.16 | % |
(A) Stated on a tax equivalent basis using a federal income tax rate of 21% in 2018 and 35%. in prior periods.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest income sensitivity to movement in interest rates. The Company performs monthly simulations which model interest rate movements and risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 20162017 Annual Report on Form 10-K.
The tables below compute the effects of gradual risingshifts in interest rates over a twelve month period on the Company’s net interest income, assuming a static balance sheet with the exception of deposit attrition. The difference between the two simulations is the amount of deposit attrition incorporated, which is shown in the tables below. In both simulations, three rising rate scenarios and one falling rates scenario were selected as shown in the tables, and net interest income was calculated and compared to a base scenario in which assets, liabilities and rates remained constant over a twelve month period. For each of the simulations, interest rates applicable to each interest earning asset or interest bearing liability were ratably increased or decreased during the year (by either 100, 200 or 300 basis points). The balances contained in the balance sheet were assumed not to change over the twelve month period, except that as presented in the tables below, it was assumed certain non-maturity type deposit attrition would occur, as a result of higher interest rates, and would be replaced with short-term federal funds borrowings.
The simulations reflect two different assumptions related to deposit attrition. The Company utilizes these simulations both for monitoring interest rate risk and for liquidity planning purposes. While the future effects of rising rates on deposit balances cannot be known, the Company maintains a practice of running multiple rate scenarios to better understand interest rate risk and its effect on the Company’s performance. The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising rates and falling rates and has adopted strategies which minimize impacts to overall interest rate risk.
| | Simulation A | June 30, 2017 | | March 31, 2017 | June 30, 2018 | | March 31, 2018 |
(Dollars in millions) | $ Change in Net Interest Income | % Change in Net Interest Income | | Assumed Deposit Attrition | | $ Change in Net Interest Income | % Change in Net Interest Income | | Assumed Deposit Attrition | $ Change in Net Interest Income | % Change in Net Interest Income | | Assumed Deposit Attrition | | $ Change in Net Interest Income | % Change in Net Interest Income | | Assumed Deposit Attrition |
300 basis points rising | $ | 15.1 |
| 2.09 | % | | $ | (368.0 | ) | | $ | 18.1 |
| 2.54 | % | | $ | (379.4 | ) | $ | (.2 | ) | (.02 | )% | | $ | (339.6 | ) | | $ | (2.3 | ) | (.30 | )% | | $ | (329.7 | ) |
200 basis points rising | 14.3 |
| 1.99 |
| | (256.2 | ) | | 16.6 |
| 2.33 |
| | (266.7 | ) | 2.0 |
| .24 |
| | (234.1 | ) | | 1.9 |
| .23 |
| | (230.4 | ) |
100 basis points rising | 9.1 |
| 1.26 |
| | (131.4 | ) | | 10.8 |
| 1.52 |
| | (140.0 | ) | 2.5 |
| .31 |
| | (120.3 | ) | | 3.0 |
| .38 |
| | (121.5 | ) |
100 basis points falling | | (18.7 | ) | (2.32 | ) | | 131.8 |
| | (28.5 | ) | (3.96 | ) | | 122.7 |
|
| | Simulation B | June 30, 2017 | | March 31, 2017 | June 30, 2018 | | March 31, 2018 |
(Dollars in millions) | $ Change in Net Interest Income | % Change in Net Interest Income | | Assumed Deposit Attrition | | $ Change in Net Interest Income | % Change in Net Interest Income | | Assumed Deposit Attrition | $ Change in Net Interest Income | % Change in Net Interest Income | | Assumed Deposit Attrition | | $ Change in Net Interest Income | % Change in Net Interest Income | | Assumed Deposit Attrition |
300 basis points rising | $ | (5.6 | ) | (.78 | )% | | $ | (1,181.4 | ) | | $ | (3.3 | ) | (.45 | )% | | $ | (1,269.4 | ) | $ | (21.4 | ) | (2.65 | )% | | $ | (933.9 | ) | | $ | (23.3 | ) | (3.01 | )% | | $ | (966.1 | ) |
200 basis points rising | (3.2 | ) | (.44 | ) | | (1,072.5 | ) | | (1.3 | ) | (.19 | ) | | (1,161.5 | ) | (16.8 | ) | (2.09 | ) | | (830.0 | ) | | (16.7 | ) | (2.15 | ) | | (867.1 | ) |
100 basis points rising | (5.1 | ) | (.71 | ) | | (952.4 | ) | | (3.6 | ) | (.51 | ) | | (1,042.3 | ) | (13.9 | ) | (1.72 | ) | | (717.9 | ) | | (13.0 | ) | (1.68 | ) | | (759.1 | ) |
The difference in these two simulations is the degree in which deposits are modeled to decline in a rising rate environment, as noted in the above table. Both simulations assume that a decline in deposits would be offset by increased short-term borrowings, which are more rate sensitive and can result in higher interest costs in a rising rate environment. Simulation B assumes a much larger deposit attrition factor with deposits declining $933.9 million in the 300 basis points scenario compared with a decline of $339.6 million in deposits under Simulation A. The 100 basis points falling rate scenario is used in both Simulation A and B and the scenario assumes that deposits would increase by $131.8 million due to greater customer deposit liquidity.
Under Simulation A, a gradual increase in interest rates of 100 basis points is expected to increase net interest income from the base calculation by $9.1$2.5 million, while a gradual increase in rates of 200 basis points would increase net interest income by $14.3$2.0 million. An increase in rates of 300 basis points would result in an increasea decrease in net interest income of $15.1$197 thousand, while a decrease in rates of 100 basis points would result in a decrease in net interest income of $18.7 million. The change in net interest income from the base calculation at June 30, 20172018 was lowerhigher than projections made at March 31, 2017 largelyin the prior quarter for both the 200 and 300 basis points rising scenarios mainly due to lower deposits and borrowings balances in the current quarter, which kept funding costs
lower in a Federal Reserverising rate increase duringenvironment than in previous projections. Under the second quarter of 2017100 basis point rising rate scenario, deposit attrition was lower, and higher rates paid on certificates ofdeposits provided a greater increase in funding costs than in the prior quarter’s projection. As a result, increased deposit partly offset lower balances. Higher rates and balances of repurchase agreements, as well as higher balances of interest checking and money market deposits, also increased interest expense this quarter, loweringresulted in a smaller increase in net interest income projectionsthis quarter than the previous quarter for the second quarter of 2017 compared100 basis point rising rate scenario. Under the 100 basis point falling rate scenario, net income is reduced by $18.7 million mainly due to the prior quarter.fact that rates on loans declined faster than rates paid on deposits. Furthermore, under this scenario, deposits are projected to grow $131.8 million, with these proceeds invested in lower-earning assets.
Under
Simulation B the sameutilizes similar assumptions utilized into Simulation A were applied. However,but assumes greater deposit attrition under rising rate scenarios. Doing so provides greater stress on projected net interest income to enable better analysis on interest rate risk. Under the rising rate scenarios in Simulation B, deposit attrition was accelerated to consider the effects that large deposit outflows might have on net interest income and liquidity planning purposes. The effect of higher deposit attrition was that greater reliance was placed on short-term borrowings at higher rates, which aredeclines more
rate sensitive. As shown in the table, under these assumptions, net interest income in Simulation B was significantly lower than in Simulation A reflectingas more expensive short-term borrowings are assumed to replace the declining deposit balances. The results under Simulation B were only slightly different than in the prior quarter mainly due to higher costs for short-term borrowings.loan balances and lower deposit balances in the current quarter. The falling rate scenario in Simulation B would approximate the results in Simulation A, as the same assumptions are utilized in both simulations.
Projecting deposit activity in a period of historically low interest rate environmentrates is difficult, and the Company cannot predict how deposits will actually react to rising rates. The comparison providedsimulations above providesprovide insight into potential effects of changes in rates and deposit levels on net interest income. The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of interest rate risk.
Item 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2017.2018. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The information required by this item is set forth in Part I, Item 1 under Note 15,16, Legal and Regulatory Proceedings.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information about the Company's purchases of its $5 par value common stock, its only class of common stock registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
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Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as part of Publicly Announced Program | Maximum Number that May Yet Be Purchased Under the Program |
April 1 — 30, 2017 | 53,468 |
| | $ | 54.05 |
| 53,468 |
| 3,578,470 |
|
May 1 — 31, 2017 | 5,501 |
| | $ | 55.19 |
| 5,501 |
| 3,572,969 |
|
June 1 — 30, 2017 | 2,642 |
| | $ | 56.91 |
| 2,642 |
| 3,570,327 |
|
Total | 61,611 |
| | $ | 54.27 |
| 61,611 |
| 3,570,327 |
|
|
| | | | | | | | | | |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as part of Publicly Announced Program | Maximum Number that May Yet Be Purchased Under the Program |
April 1 — 30, 2018 | 28,515 |
| | $ | 62.79 |
| 28,515 |
| 3,124,324 |
|
May 1 — 31, 2018 | 2,144 |
| | $ | 64.25 |
| 2,144 |
| 3,122,180 |
|
June 1 — 30, 2018 | 1,105 |
| | $ | 66.53 |
| 1,105 |
| 3,121,075 |
|
Total | 31,764 |
| | $ | 63.02 |
| 31,764 |
| 3,121,075 |
|
The Company's stock purchases shown above were made under authorizations by the Board of Directors. Under the most recent authorization in October 2015 of 5,000,000 shares, 3,570,3273,121,075 shares remained available for purchase at June 30, 2017.2018.
Item 6. EXHIBITS
101 — Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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COMMERCE BANCSHARES, INC. |
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By | /s/ THOMAS J. NOACK |
| Thomas J. Noack |
| Vice President & Secretary |
Date: August 7, 20176, 2018
|
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By | /s/ JEFFERY D. ABERDEEN |
| Jeffery D. Aberdeen |
| Controller |
| (Chief Accounting Officer) |
Date: August 7, 20176, 2018
INDEX TO EXHIBITS
31.1 — Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 — Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 — Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 — Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail