COMMERCE BANCSHARES, INC. Forward-Looking Statements 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 ofCommerce Bancshares, Inc. and its subsidiaries (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 which 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 the risk factors identified in Item 1a Risk Factors and the following: 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; failure of litigation settlement agreements to become final in accordance with their terms; and competition with other entities that offer financial services. Overview The Company operates as a super-community bank and offers a broad range of financial products to consumer and commercial customers, delivered with a focus on high-quality, personalized service. It is the largest bank holding company headquartered inMissouri , with its principal offices inKansas City andSt. Louis, Missouri . Customers are served from 316 locations inMissouri ,Kansas, Illinois ,Oklahoma andColorado and commercial offices throughout the nation's midsection. A variety of delivery platforms are utilized, including an extensive network of branches and ATM machines, full-featured online banking, a mobile application, and a centralized contact center. The core of the Company's competitive advantage is its focus on the local markets in which it operates, its offering of competitive, sophisticated financial products, and its concentration on relationship banking and high-touch service. In order to enhance shareholder value, the Company targets core revenue growth. To achieve this growth, the Company focuses on strategies that will expand new and existing customer relationships, offer opportunities for controlled expansion in additional markets, utilize improved technology, and enhance customer satisfaction. 16
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Various indicators are used by management in evaluating the Company's financial condition and operating performance. Among these indicators are the following: • Net income and earnings per share - Net income attributable toCommerce Bancshares, Inc. was$421.2 million , a decrease of 2.8% compared to the previous year. The return on average assets was 1.67% in 2019, and the return on average common equity was 14.06%. Diluted earnings per share decreased 0.6% in 2019 compared to 2018. • Total revenue - Total revenue is comprised of net interest income and non-interest income. Total revenue in 2019 increased$20.8 million , or
1.6% over 2018, driven by growth in non-interest income of
Growth in non-interest income resulted principally from an increase in
trust fees and a one-time gain of
our corporate trust business.
• Non-interest expense - Total non-interest expense increased 4.0% this year
compared to 2018, mainly due to higher expense for salaries and benefits.
• Asset quality - Net loan charge-offs totaled
increase of
loans compared to .30% in the previous year. Total non-performing assets,
which include non-accrual loans and foreclosed real estate, amounted to
31, 2018, and represented .07% of loans outstanding at December 31, 2019 .
• Shareholder return - During 2019, the Company paid cash dividends of $.99 per share on its common stock, representing an increase of 16.1% over the
previous year, and paid dividends of 6% on its preferred stock. In 2019,
the Company issued its 26th consecutive annual 5% common stock dividend,
and in
increase of 8.9% in the common cash dividend. The Company purchased
4,670,114 shares of treasury stock in 2019. Total shareholder return,
including the change in stock price and dividend reinvestment, was 16.8%,
13.7%, and 9.6% over the past 5, 10, and 15 years, respectively.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes. The historical trends reflected in the financial information presented below are not necessarily reflective of anticipated future results.
Key Ratios
2019 2018 2017 2016 2015
(Based on average balances)
Return on total assets 1.67 % 1.76 % 1.28 % 1.12 % 1.11 %
Return on common equity 14.06 16.16 12.46 11.33 11.43
Equity to total assets 12.20 11.24 10.53 10.16 10.00
Loans to deposits (1) 71.54 69.27 66.18 63.71 61.44
Non-interest bearing deposits to total
deposits 32.03 33.43 34.85 34.67 35.12
Net yield on interest earning assets
(tax equivalent basis) 3.48 3.53 3.20 3.04 2.94
(Based on end of period data)
Non-interest income to revenue (2) 38.98 37.83 39.88 41.09 41.40
Efficiency ratio (3) 56.87 55.58 62.18 61.04 61.42
Tier I common risk-based capital ratio
(4) 13.93 14.22 12.65 11.62 11.52
Tier I risk-based capital ratio (4) 14.66 14.98 13.41 12.38 12.33
Total risk-based capital ratio (4) 15.48 15.82 14.35 13.32 13.28
Tier I leverage ratio (4) 11.38 11.52 10.39 9.55 9.23
Tangible common equity to tangible
assets ratio (5) 10.99 10.45 9.84 8.66 8.48 Common cash dividend payout ratio 27.52 23.61 29.52 32.69 33.35
(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) Risk-based capital information was prepared under Basel III requirements,
which were effective
(5) 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 assist 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.
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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. (Dollars in thousands) 2019 2018 2017 2016 2015 Total equity$ 3,138,472 $ 2,937,149 $ 2,718,184 $ 2,501,132 $ 2,367,418 Less non-controlling interest 3,788 5,851 1,624 5,349 5,428 Less preferred stock 144,784 144,784 144,784 144,784 144,784 Less goodwill 138,921 138,921 138,921 138,921 138,921 Less core deposit premium 1,785 2,316 2,965 3,841 5,031 Total tangible common equity (a)$ 2,849,194 $ 2,645,277 $ 2,429,890 $ 2,208,237 $ 2,073,254 Total assets$ 26,065,789 $ 25,463,842 $ 24,833,415 $ 25,641,424 $ 24,604,962 Less goodwill 138,921 138,921 138,921 138,921 138,921 Less core deposit premium 1,785 2,316 2,965 3,841 5,031 Total tangible assets (b)$ 25,925,083 $ 25,322,605 $ 24,691,529 $ 25,498,662 $ 24,461,010 Tangible common equity to tangible assets ratio (a)/(b) 10.99 % 10.45 % 9.84 % 8.66 % 8.48 % Selected Financial Data (In thousands, except per share data) 2019 2018 2017 2016 2015 Net interest income$ 821,293 $ 823,825 $ 733,679 $ 680,049 $ 634,320 Provision for loan losses 50,438 42,694 45,244 36,318 28,727 Non-interest income 524,703 501,341 461,263 446,556 422,444 Investment securities gains (losses), net 3,626 (488 ) 25,051 (53 ) 6,320 Non-interest expense 767,398 737,821 744,343 689,229 650,792 Net income attributable to Commerce Bancshares, Inc. 421,231 433,542 319,383 275,391 263,730 Net income available to common shareholders 412,231 424,542 310,383 266,391 254,730 Net income per common share-basic* 3.59 3.61 2.63 2.26 2.11 Net income per common share-diluted* 3.58 3.60 2.62 2.26 2.10
Cash dividends on common stock 113,466 100,238 91,619
87,070 84,961
Cash dividends per common
share* .990 .853 .777 .740 .705
Market price per common share* 67.94 53.69 50.65
49.94 35.00
Book value per common share* 26.70 23.93 21.89 20.06 18.81
Common shares outstanding* 112,132 116,685 117,543 117,454 118,179
Total assets 26,065,789 25,463,842 24,833,415 25,641,424 24,604,962
Loans, including held for sale 14,751,626 14,160,992 14,005,072 13,427,192 12,444,299
Investment securities 8,741,888 8,698,666 8,893,307 9,770,986 9,901,680
Deposits 20,520,415 20,323,659 20,425,446 21,101,095 19,978,853
Long-term debt 2,418 8,702 1,758 102,049 103,818
Equity 3,138,472 2,937,149 2,718,184 2,501,132 2,367,418
Non-performing assets 10,585 13,949 12,664 14,649 29,394
* Restated for the 5% stock dividend distributed in
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Results of Operations
$ Change % Change
(Dollars in thousands) 2019 2018 2017 '19-'18 '18-'17 '19-'18 '18-'17
Net interest income $ 821,293 $ 823,825 $ 733,679 $ (2,532 ) $ 90,146 (.3 )% 12.3 %
Provision for loan
losses (50,438 ) (42,694 ) (45,244 ) 7,744 (2,550 ) 18.1 (5.6 )
Non-interest income 524,703 501,341 461,263 23,362 40,078 4.7 8.7
Investment securities
gains (losses), net 3,626 (488 ) 25,051 4,114 (25,539 ) N.M. N.M.
Non-interest expense (767,398 ) (737,821 ) (744,343 ) 29,577 (6,522 ) 4.0 (.9 )
Income taxes (109,074 ) (105,949 ) (110,506 ) 3,125 (4,557 ) 2.9 (4.1 )
Non-controlling interest
expense (1,481 ) (4,672 ) (517 ) (3,191 ) 4,155 (68.3 ) N.M.
Net income attributable
to Commerce Bancshares,
Inc. 421,231 433,542 319,383 (12,311 ) 114,159 (2.8 ) 35.7
Preferred stock
dividends (9,000 ) (9,000 ) (9,000 ) - - N.M. N.M.
Net income available to
common shareholders $ 412,231 $ 424,542 $ 310,383 $ (12,311 ) $ 114,159 (2.9 )% 36.8 %
N.M. - Not meaningful.
Net income attributable toCommerce Bancshares, Inc. (net income) for 2019 was$421.2 million , a decrease of$12.3 million , or 2.8%, compared to$433.5 million in 2018. Diluted income per common share was$3.58 in 2019, compared to$3.60 in 2018. The decline in net income resulted from a decrease of$2.5 million in net interest income, as well as increases of$29.6 million in non-interest expense,$7.7 million in the provision for loan losses and$3.1 million in income taxes. These decreases in net income were partly offset by increases of$23.4 million in non-interest income and$4.1 million in investment securities gains, coupled with a decrease of$3.2 million in non-controlling interest expense. The return on average assets was 1.67% in 2019 compared to 1.76% in 2018, and the return on average common equity was 14.06% in 2019 compared to 16.16% in 2018. AtDecember 31, 2019 , the ratio of tangible common equity to assets increased to 10.99%, compared to 10.45% at year end 2018. During 2019, net interest income declined mainly due to an increase of$38.0 million in interest expense on interest-bearing deposits and borrowings, largely due to higher rates paid, while lower average balances on investment securities also resulted in lower interest income this year. These decreases in interest income were partly offset by growth of$38.3 million in interest earned on loans, resulting from higher loan yields and average balances. Total rates earned on average earning assets grew 10 basis points this year, while funding costs for deposits and borrowings increased 23 basis points. The provision for loan losses totaled$50.4 million , an increase of$7.7 million over the previous year and exceeded net loan charge-offs by$750 thousand . Net loan charge-offs increased$7.4 million in 2019 compared to 2018, mainly due to higher credit card and business loan net charge-offs. The increase in business loan net charge-offs was primarily the result of a loan charge-off related to a single leasing customer. Non-interest income grew 4.7% in 2019, mainly due to growth in trust fees, loan fees and sales, and gains on sales of assets. Net investment securities gains of$3.6 million were recorded in 2019 and were mainly comprised of net gains realized on sales of equity investments. Non-interest expense grew$29.6 million in 2019 compared to 2018, largely due to higher salaries and benefits and data processing and software expense, which increased$24.7 million and$6.9 million , respectively. Net income attributable toCommerce Bancshares, Inc. for 2018 was$433.5 million , an increase of$114.2 million , or 35.7%, compared to$319.4 million in 2017. Diluted income per common share increased 37.0% to$3.60 in 2018, compared to$2.62 in 2017. The growth in net income resulted from increases of$90.1 million in net interest income and$40.1 million in non-interest income, as well as decreases of$6.5 million in non-interest expense,$4.6 million in income tax expense and$2.6 million in the provision for loan losses. These increases in net income were partly offset by a$25.5 million decrease in investment securities gains. The return on average assets was 1.76% in 2018 compared to 1.28% in 2017, and the return on average common equity was 16.16% in 2018 compared to 12.46% in 2017. AtDecember 31, 2018 , the ratio of tangible common equity to assets increased to 10.45%, compared to 9.84% at year end 2017. As compared to 2017, the increase in net interest income in 2018 resulted mainly from increased rates on the Company's loan and investment portfolios, partially offset by higher rates paid on interest-bearing deposits and borrowings. Total rates earned on average earning assets grew 44 basis points in 2018, while funding costs for deposits and borrowings increased 15 basis points. Non-interest income grew 8.7% in 2018, primarily from growth in bank card, trust and deposit fee income. Investment securities net losses in 2018 were mainly comprised of net losses on sales of available for sale debt securities of$9.7 million and an$8.9 million adjustment to recognize dividend income on a liquidated equity security. These losses were offset by realized and unrealized net gains on the Company's portfolio of private equity securities of$13.8 million , as well as gains of$4.3 million on sales and 19
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fair value adjustments on equity securities. Additionally, net securities gains
in 2017 included a gain of
Non-interest expense declined$6.5 million in 2018 compared to 2017, with the decrease resulting from a$32.0 million donation of appreciated securities to a charitable organization in 2017 that did not recur in 2018. This decrease in non-interest expense was partly offset by increases in salaries and benefits, data processing and software, and marketing expense, which increased$19.9 million ,$5.0 million , and$4.2 million , respectively. The provision for loan losses totaled$42.7 million , a decrease of$2.6 million from 2017. The Company distributed a 5% stock dividend for the 26th consecutive year onDecember 18, 2019 . All per share and average share data in this report has been restated for the 2019 stock dividend. Critical Accounting Policies The Company's consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 to the consolidated financial statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations which may significantly affect the Company's reported results and financial position for the current period or future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Current economic conditions may require the use of additional estimates, and some estimates may be subject to a greater degree of uncertainty due to the current instability of the economy. 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 and fair value measurement. Allowance for Loan Losses The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects the Company's estimate of the losses inherent in the loan portfolio at any point in time. While these estimates are based on substantive methods for determining allowance requirements, actual outcomes may differ significantly from estimated results, especially when determining allowances for business, construction and business real estate loans. These loans are normally larger and more complex, and their collection rates are harder to predict. Personal banking loans, including personal real estate, credit card and consumer loans, are individually smaller and perform in a more homogenous manner, making loss estimates more predictable. Further discussion of the methodology used in establishing the allowance is provided in the Allowance for Loan Losses section of Item 7 and in Note 1 to the consolidated financial statements. Fair Value Measurement Investment securities, including available-for-sale, trading, equity and other securities, residential mortgage loans held for sale, derivatives and deferred compensation plan assets and associated liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, other assets and liabilities may be recorded at fair value on a nonrecurring basis, such as impaired loans that have been reduced based on the fair value of the underlying collateral, other real estate (primarily foreclosed property), non-marketable equity securities and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve write-downs of individual assets or application of lower of cost or fair value accounting. Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability. Fair value measurement and disclosure guidance establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The fair value hierarchy, the extent to which fair value is used to measure assets and liabilities and the valuation methodologies and key inputs used are discussed in Note 17 on Fair Value Measurements. AtDecember 31, 2019 , assets and liabilities measured using observable inputs that are classified as either Level 1 or Level 2 represented 98.8% and 99.1% of total assets and liabilities recorded at fair value, respectively. Valuations generated from model-based techniques that use at least one significant assumption not observable in the market are considered Level 3, and the Company's Level 3 assets totaled$104.6 million , or 1.2% of total assets recorded at fair value on a recurring basis. Unobservable assumptions reflect estimates of assumptions market participants would use in pricing the asset or liability. Fair value measurements for assets and liabilities where limited or no observable market data exists often involves significant judgments about assumptions, such as determining an appropriate discount rate that factors in both liquidity and risk premiums, and in many cases may not reflect amounts exchanged in a current sale of the financial instrument. In addition, changes in market conditions may reduce the availability 20
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of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, the Company would use valuation techniques requiring more management judgment to estimate the appropriate fair value.
Net Interest Income
Net interest income, the largest source of revenue, results from the Company's
lending, investing, borrowing, and deposit gathering activities. It is affected
by both changes in the level of interest rates and changes in the amounts and
mix of interest earning assets and interest bearing liabilities. 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.
2019 2018
Change due to Change due to
(In thousands) Average Volume Average Rate Total Average Volume Average Rate Total
Interest income, fully taxable
equivalent basis
Loans:
Business $ 9,730 $ 7,741 $ 17,471 $ 4,235 $ 25,921 $ 30,156
Real estate- construction and
land (2,961 ) 3,223 262 3,614 8,511 12,125
Real estate - business 5,199 4,920 10,119 1,637 13,870 15,507
Real estate - personal 3,261 1,978 5,239 2,765 2,333 5,098
Consumer (3,541 ) 6,881 3,340 (1,018 ) 9,027 8,009
Revolving home equity (979 ) 1,670 691 (735 ) 2,732 1,997
Consumer credit card (475 ) 1,960 1,485 2,956 984 3,940
Total interest on loans 10,234 28,373 38,607 13,454 63,378 76,832
Loans held for sale (33 ) (56 ) (89 ) 154 144 298
Investment securities:
U.S. government and federal
agency obligations (1,667 ) 915 (752 ) 146 1,877 2,023
Government-sponsored enterprise
obligations (2,319 ) 778 (1,541 ) (2,331 ) 1,108 (1,223 )
State and municipal obligations (5,766 ) 1,261 (4,505 ) (11,184 ) (8,022 ) (19,206 )
Mortgage-backed securities 10,400 1,720 12,120 9,931 12,132 22,063
Asset-backed securities (1,953 ) 5,208 3,255 (11,051 ) 8,517 (2,534 )
Other securities (7,684 ) (6,054 ) (13,738 ) 734 11,382 12,116
Total interest on investment
securities (8,989 ) 3,828 (5,161 ) (13,755 ) 26,994 13,239
Federal funds sold and
short-term securities purchased
under agreements to resell (480 ) 16 (464 ) 105 184 289
Long-term securities purchased
under agreements to
resell 1,018 (1,001 ) 17 186 255 441
Interest earning deposits with
banks (71 ) 536 465 1,206 2,804 4,010
Total interest income 1,679 31,696 33,375 1,350 93,759 95,109
Interest expense
Interest bearing deposits:
Savings 57 (9 ) 48 57 (65 ) (8 )
Interest checking and money
market (369 ) 12,230 11,861 328 10,174 10,502
Certificates of deposit of less
than $100,000 (16 ) 3,169 3,153 (264 ) 834 570
Certificates of deposit of
$100,000 and over 4,336 7,951 12,287 (2,393 ) 6,192 3,799
Federal funds purchased and
securities sold under agreements
to repurchase 4,985 4,775 9,760 48 9,778 9,826
Other borrowings 920 (13 ) 907 (3,041 ) - (3,041 )
Total interest expense 9,913 28,103 38,016 (5,265 ) 26,913 21,648
Net interest income, fully
taxable equivalent basis $ (8,234 ) $ 3,593 $ (4,641 ) $ 6,615 $ 66,846 $ 73,461
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Net interest income totaled$821.3 million in 2019, decreasing$2.5 million compared to$823.8 million in 2018. On a tax equivalent (T/E) basis, net interest income totaled$835.4 million , and decreased$4.6 million from 2018. This decrease included combined growth of$38.0 million in interest expense on deposits and borrowings, due to higher average rates paid and higher average balances. In addition, interest earned on investment securities decreased$5.2 million , mainly due to lower average balances, while loan interest income (T/E) grew$38.6 million due to higher rates earned and higher average balances. The net yield on earning assets (T/E) was 3.48% in 2019 compared with 3.53% in 2018. During 2019, loan interest income (T/E) grew$38.6 million over 2018 mainly due to higher rates earned coupled with increased average balances for business, business real estate and personal real estate loan categories. The average tax equivalent rate earned on the loan portfolio increased 18 basis points to 4.71% in 2019 compared to 4.53% in 2018. In addition, average loan balances increased 2.1%, or$298.6 million , this year. Increased interest of$17.5 million earned on business loans was the main driver of overall higher loan interest income, due to growth of$251.1 million in average business loan balances and a 16 basis point increase in the average rate. While higher rates also contributed to the increase in interest income, rates were impacted by actions taken by theFederal Reserve during the second half of 2019 to lower short-term interest rates, as many of these loans contain variable interest rate terms. Business real estate interest was higher by$10.1 million as a result of an increase in average balances of$121.2 million , along with an increase in the average rate of 17 basis points. Personal real estate loan interest income increased$5.2 million and resulted from growth in average balances of$84.9 million and a nine basis point increase in the average rate earned. Interest on consumer loans increased$3.3 million as the average rate grew 36 basis points, but was partly offset by a decline in average balances of$79.9 million , or 4.0%. Interest on consumer credit card loans grew$1.5 million over the prior year as the average rate earned increased 26 basis points, while average balances declined$4.0 million . Tax equivalent interest income on total investment securities decreased$5.2 million during 2019, as average balances declined$74.4 million and the average rate earned decreased three basis points. The average rate on the total investment portfolio was 2.81% in 2019 compared to 2.84% in 2018, while the average balance of the total investment securities portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was$8.7 billion in 2019 compared to an average balance of$8.8 billion in 2018. The decrease in interest income was mainly due to lower interest and dividend income earned on equity and other securities, coupled with decreases in interest earned on state and municipal obligations, government-sponsored enterprise (GSE) obligations andU.S. government securities. Interest income on equity securities decreased$10.0 million , due to the receipt of$8.9 million in dividend income in the second quarter of 2018, which was related to a liquidated equity security that was carried at fair value. Interest on other securities decreased$3.9 million mainly due to receipts of non-recurring equity investment dividends in 2018, but was partly offset by higher average balances. Interest income on state and municipal obligations decreased$4.5 million , due to lower average balances of$189.7 million , partly offset by an increase of 10 basis points in the average rate earned. Interest income on GSE's decreased$1.5 million , due to a decline in average balances of$117.1 million , partly offset by an increase of 40 basis points in the average rate earned. Interest earned onU.S. government securities fell$752 thousand and was mainly impacted by a decline of$3.0 million in inflation income on treasury inflation-protected securities (TIPS). In addition, average balances declined$70.6 million , while the average rate earned increased 10 basis points. Partly offsetting these decreases in interest income was growth of$12.1 million and$3.3 million in interest earned on mortgage-backed and asset-backed securities, respectively. The growth in mortgage-backed interest resulted mainly from an increase of$391.0 million in average balances, coupled with a three basis point increase in the average rate earned. Asset-backed securities interest increased due to growth of 38 basis points in the average rate earned, partly offset by a decline of$83.1 million in average balances. During 2019, interest expense on deposits increased$27.3 million over 2018 and resulted mainly from a 20 basis point increase in the overall average rate paid on deposits. Interest expense on interest checking and money market accounts increased$11.9 million due to higher rates paid, which rose 11 basis points. The growth in interest expense on certificates of deposit was due to both higher rates paid on all certificates of deposit and higher average balances in certificates of deposit over$100,000 , which grew$281.9 million , or 25.3%. The overall rate paid on total deposits increased from .34% in 2018 to .54% in the current year. Interest expense on borrowings increased$10.7 million due to both higher rates paid and higher average balances of federal funds purchased and customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .67% in 2019, compared to .44% in 2018. Net interest income totaled$823.8 million in 2018, increasing$90.1 million , or 12.3%, compared to$733.7 million in 2017. On a tax equivalent (T/E) basis, net interest income totaled$840.1 million , and increased$73.5 million over 2017. This increase included growth of$76.8 million in loan interest income (T/E), resulting from higher average balances and higher rates earned. In addition, interest earned on investment securities increased$13.2 million , mainly due to higher rates earned and the receipt of$8.9 million in dividend income during the second quarter of 2018, as mentioned above. Interest expense on deposits and borrowings combined was$65.4 million and increased$21.6 million , mostly due to higher rates paid. The net yield on earning assets (T/E) was 3.53% in 2018 compared with 3.19% in 2017. 22
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During 2018, loan interest income (T/E) grew$76.8 million over 2017 mainly due to higher rates earned coupled with increased average balances for most loan categories. The average tax equivalent rate earned on the loan portfolio increased 46 basis points to 4.53% in 2018 compared to 4.07% in 2017. The higher rates earned on the loan portfolio in 2018 were partly related to short-term increases in interest rates, which enabled much of the Company's loan portfolio to re-price higher than 2017. In addition, average loan balances increased 2.3%, or$314.4 million , in 2018. Increased interest on business loans was the main driver of overall higher loan interest income, mostly due to higher rates, as many of these loans contain variable interest rate terms. Average business loan balances also grew$131.0 million in 2018. Increases in average balances and rates on construction and business real estate loans drove interest income growth a combined$27.6 million in 2018. Interest on personal real estate loans increased$5.1 million as average balances were higher by$74.1 million or 3.7%, and the average rate grew 11 basis points. Interest on consumer loans grew$8.0 million over 2017 as the average rate earned increased 45 basis points, but was partly offset by a decline in average balances of$25.6 million . Consumer credit card loan interest was higher by$3.9 million due to growth of$24.9 million in average balances, coupled with a 13 basis point increase in the average rate earned. Tax equivalent interest income on total investment securities increased$13.2 million during 2018, as the average rate earned increased 33 basis points, while average balances declined$661.6 million . The average rate on the total investment portfolio was 2.84% in 2018 compared to 2.51% in 2017, while the average balance of the total investment securities portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was$8.8 billion in 2018 compared to an average balance of$9.5 billion in 2017. The increase in interest income was mainly due to higher interest earned on mortgage-backed securities, coupled with increased interest and dividend income on equity and other securities. These increases were partly offset lower interest earned on state and municipal securities. Interest income on mortgage-backed securities increased$22.1 million , due to an increase in average balances of$419.0 million and an increase of 29 basis points in the average rate earned. Interest income on equity securities increased due to dividend income of$8.9 million recorded in 2018 (mentioned previously), while interest on other securities increased$1.9 million due to an increase in receipts of non-recurring equity investment dividends during 2018. Interest earned onU.S. government securities grew$2.0 million , which included growth of$2.1 million in inflation-adjusted interest on TIPS. Partly offsetting these increases in interest income were declines of$19.2 million ,$2.5 million and$1.2 million in interest earned on state and municipal, asset-backed and GSE securities, respectively. The decline in state and municipal interest resulted from a decline of$310.0 million in average balances coupled with a lower tax equivalent rate due to tax law changes in 2018. Asset-backed securities interest decreased mainly due to a decline of$627.9 million in average balances, partly offset by higher average rates. Interest earned on GSE's declined mainly due to lower average balances, partly offset by growth in the average rate. Interest earned on deposits with banks increased$4.0 million mainly due to an 88 basis point increase in average rates earned and an increase of$112.7 million in average balances. During 2018, interest expense on deposits increased$14.9 million over 2017 and resulted mainly from an 11 basis point increase in the overall average rate paid on deposits. Interest expense on interest checking and money market accounts increased$10.5 million due to higher rates paid, which rose nine basis points. The growth in interest expense on certificates of deposit was largely due to higher rates paid on certificates of deposit over$100,000 , which increased 54 basis points, partly offset by lower total average certificate of deposit balances, which fell$363.3 million , or 17.5%. The overall rate paid on total deposits increased from .23% in 2017 to .34% in 2018. Interest expense on borrowings increased due to higher rates paid on customer repurchase agreements, partly offset by the elimination of allFederal Home Loan Bank (FHLB) borrowings in 2018. The overall average rate incurred on all interest bearing liabilities was .44% in 2018, compared to .29% in 2017. Provision for Loan Losses The provision for loan losses is recorded to bring the allowance for loan losses to a level deemed adequate by management based on the factors mentioned in the "Allowance for Loan Losses" section of this discussion. The provision for loan losses totaled$50.4 million in 2019, an increase of$7.7 million from the 2018 provision of$42.7 million . In 2018, the provision exceeded net loan charge-offs by$400 thousand , increasing the allowance for loan losses by the same amount, whereas the 2019 provision was$750 thousand greater than net loan charge-offs for the year. Net loan charge-offs for the year totaled$49.7 million and increased$7.4 million compared to$42.3 million in 2018. The increase in net loan charge-offs over the previous year was mainly the result of higher net charge-offs on credit card loans and business loans, which increased$4.8 million and$2.0 million , respectively. In addition, personal real estate loan net charge-offs increased$391 thousand , while construction loan and business real estate loan net recoveries decreased$518 thousand and$318 thousand , respectively. Partly offsetting these increases in net charge-offs were lower net charge-offs on consumer loans, which decreased$732 thousand from the prior year. The allowance for loan losses totaled$160.7 million atDecember 31, 2019 , an increase of$750 thousand compared to the prior year, and represented 1.09% of outstanding loans at year end 2019, compared to 1.13% atDecember 31, 2018 . 23
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Non-Interest Income
% Change
(Dollars in thousands) 2019 2018 2017 '19-'18 '18-'17
Bank card transaction fees $ 167,879 $ 171,576 $ 155,100 (2.2 )% 10.6 %
Trust fees 155,628 147,964 135,159 5.2 9.5
Deposit account charges and
other fees 95,983 94,517 90,060 1.6 4.9
Capital market fees 8,146 7,721 7,996 5.5 (3.4 )
Consumer brokerage services 15,804 15,807 14,630 - 8.0
Loan fees and sales 15,767 12,723 13,948 23.9 (8.8 )
Other 65,496 51,033 44,370 28.3 15.0
Total non-interest income $ 524,703 $ 501,341 $ 461,263 4.7 % 8.7 %
Non-interest income as a %
of total revenue* 39.0 % 37.8 % 38.6 %
Total revenue per full-time
equivalent employee $ 277.1 $ 276.4 $ 248.9 * Total revenue is calculated as net interest income plus non-interest income.
The table below is a summary of net bank card transaction fees for the years
ended
% Change
(Dollars in thousands) 2019 2018 2017 '19-'18 '18-'17
Net debit card fees $ 40,025 $ 39,738 $ 35,636 0.7 % 11.5 %
Net credit card fees 14,177 12,965 14,576 9.3 (11.1 )
Net merchant fees 19,289 19,233 20,069 .3 (4.2 )
Net corporate card fees 94,388 99,640 84,819 (5.3 ) 17.5
Total bank card transaction fees
Non-interest income totaled$524.7 million , an increase of$23.4 million , or 4.7%, compared to$501.3 million in 2018. Bank card fees decreased$3.7 million , or 2.2%, from the prior year, largely due to a decline in net corporate card fees of$5.3 million . This decline was partly offset by growth in net credit card fees of$1.2 million and net debit card fees of$287 thousand . The decline in net corporate card from the prior year was due to lower interchange income and higher network and rewards expense, while the growth in net credit and debit card fees was mainly due to higher interchange income. Net credit card revenue also grew due to lower rewards expense. Trust fee income increased$7.7 million , or 5.2%, as a result of continued growth in private client trust fees (up 6.5%), which comprised 76.4% of trust fee income in 2019. The market value of total customer trust assets totaled$56.7 billion at year end 2019, which was an increase of 13.3% over year end 2018 balances. Deposit account fees increased$1.5 million , or 1.6%, mainly due to growth of$3.0 million in corporate cash management fees. This increase was partly offset by declines of$872 thousand in overdraft and return item fees and$636 thousand in deposit account service charges. In 2019, corporate cash management fees comprised 43.2% of total deposit fees, while overdraft fees comprised 31.9% of total deposit fees. Capital market fees grew$425 thousand , or 5.5%, compared to the prior year, while loan fees and sales increased$3.0 million , or 23.9%, mainly due to growth in mortgage banking revenue. Total mortgage banking revenue totaled$10.8 million in 2019 compared to$8.2 million in 2018 and increased as a result of higher loan originations in 2019. Other non-interest income increased$14.5 million , or 28.3%, mainly due to a one-time gain of$11.5 million resulting from the sale of the Company's corporate trust business in the fourth quarter of 2019. In addition, cash sweep commissions increased$2.7 million and higher gains of$2.4 million were recorded on sales of leased assets to customers upon lease termination. These increases were partly offset by gains of$6.6 million recorded on the sales of branch properties in 2018. During 2018, non-interest income increased$40.1 million , or 8.7%, to$501.3 million compared to$461.3 million in 2017. Bank card fees increased$16.5 million over 2017. This growth included increases of$4.1 million in net debit card fees and$14.8 million in net corporate card fees, partly offset by a decline of$1.6 million , or 11.1%, in net credit card fees, and$836 thousand , or 4.2%, in net merchant fees. Trust fee income increased$12.8 million , or 9.5%, as a result of growth in both private client (up 11.1%) and institutional trust (up 6.4%) fees. The market value of total customer trust assets totaled$50.0 billion at year end 2018, which was an increase of 2.7% over year end 2017 balances. Deposit account fees increased$4.5 million , or 4.9%, due to growth of$2.4 million in corporate cash management fees,$1.1 million in deposit account service charges and$892 thousand in overdraft and return item fees. Capital market fees declined$275 thousand , or 3.4%, due to lower sales volumes, while consumer brokerage services revenue increased$1.2 million , or 8.0%, mainly due to growth in advisory and fixed annuity fees. Loan fees and sales decreased$1.2 million in 2018 compared to 2017, mainly due to declines in mortgage banking revenue as a result of lower originations of fixed-rate loans in 2018. Other non-interest income increased$6.7 million , or 15.0%, over 2017 mainly due to gains of$6.6 million recorded on the sales of branch properties in 2018. In addition, cash sweep commissions, interest rate 24
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swap fees, and fees from sales of tax credits increased$1.6 million ,$2.1 million , and$1.6 million , respectively, over 2017. These increases were partly offset by lower gains of$1.1 million on sales of leased assets to customers upon lease termination. Investment Securities Gains (Losses), Net (In thousands) 2019 2018
2017
Net losses on sales of available for sale debt securities$ (214 ) $ (9,653 ) $ (9,695 ) Net gains on sales of equity securities 3,262 1,759
10,643
Fair value adjustments on equity securities 344 2,542 - Adjustment for dividend income on a liquidated equity investment - (8,917 ) - Donations of equity securities - -
31,074
Net gains (losses) on sales and fair value adjustments of private equity investments 367 13,849 (6,332 ) Other (133 ) (68
) (639 )
Total investment securities gains (losses), net
Net gains and losses on investment securities during 2019, 2018 and 2017 are shown in the table above. Included in these amounts are gains and losses arising from sales of securities from the Company's available for sale debt portfolio, including credit-related losses on debt securities identified as other-than-temporarily impaired. Also shown are gains and losses relating to private equity investments, which are primarily held by the Parent's majority-owned private equity subsidiaries. These include fair value adjustments, in addition to gains and losses realized upon disposition. The portions of private equity investment gains and losses that are attributable to minority interests are reported as non-controlling interest in the consolidated statements of income, and resulted in expense of$348 thousand in 2019, compared to expense of$2.8 million in 2018 and income of$575 thousand in 2017. Net securities gains of$3.6 million were recorded in 2019, which included$214 thousand in net losses realized on bond sales resulting from the Company's sale of approximately$400 million (book value) of bonds, mainly municipal securities, treasuries and asset-backed securities. Net securities gains also included$3.3 million in gains from sales of equity investments and a$1.1 million in gain from the sale of a private equity investment. These gains were offset by net losses totaling$727 thousand of fair value adjustments on private equity investments, in addition to net gains totaling$344 thousand of fair value adjustments on equity investments. Net securities losses of$488 thousand were recorded in 2018, which included$9.7 million in net losses realized on bond sales resulting from the Company's sale of approximately$680 million (book value) of bonds, mainly mortgage and asset-backed securities. Net securities losses also included$8.9 million in losses related to an adjustment for dividend income on a liquidated investment. These losses were offset by net gains totaling$13.8 million of fair value adjustments on private equity investments, in addition to fair value adjustments and net gains realized on sales of equity investments. Net securities gains of$25.1 million were recorded in 2017, which included$31.1 million in gains realized upon donation of appreciated stock and$10.6 million in net gains realized on sales of equity securities. These gains were offset by net losses of$9.7 million realized on sales of available for sale debt securities, resulting from the Company's sale of approximately$790 million of bonds, mainly mortgage and asset-backed securities. Additionally, net securities losses included$499 thousand in net losses realized on the sale of private equity investments and$5.8 million in losses related to fair value adjustments on private equity investments. 25
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Non-Interest Expense
% Change
(Dollars in thousands) 2019 2018 2017 '19-'18 '18-'17
Salaries $ 416,869 $ 396,897 $ 380,945 5.0 % 4.2 %
Employee benefits 76,058 71,297 67,376 6.7 5.8
Net occupancy 47,157 46,044 45,612 2.4 .9
Equipment 19,061 18,125 18,568 5.2 (2.4 )
Supplies and communication 20,394 20,637 22,790 (1.2 ) (9.4 )
Data processing and software 92,899 85,978 80,998 8.0 6.1
Marketing 21,914 20,548 16,325 6.6 25.9
Deposit insurance 6,676 11,546 13,986 (42.2 ) (17.4 )
Community service 2,446 2,445 34,377 - (92.9 )
Other 63,924 64,304 63,366 (0.6 ) 1.5
Total non-interest expense $ 767,398 $ 737,821 $ 744,343 4.0 % (.9 )%
Efficiency ratio 56.9 % 55.6 % 62.2 %
Salaries and benefits as a %
of total non-interest
expense 64.2 % 63.5 % 60.2 %
Number of full-time
equivalent employees 4,858 4,795 4,800
Non-interest expense was $767.4 million in 2019, an increase of $29.6 million ,
or 4.0%, over the previous year. Salaries and benefits expense increased $24.7
million , or 5.3%, mainly due to higher full-time salaries and medical expense.
Full-time salaries expense increased due to growth in consumer, commercial,
information technology and other support unit salaries expense. Full-time
equivalent employees totaled 4,858 at December 31, 2019 , reflecting a 1.3%
increase over 2018. Occupancy expense increased $1.1 million , or 2.4%, mainly
due to higher real estate taxes and building depreciation expense, partly offset
by a decline in utilities expense. Equipment expense increased $936 thousand , or
5.2%, due to higher equipment depreciation expense. Data processing and software
expense increased $6.9 million , or 8.0%, primarily due to higher costs for
service providers and higher bank card processing expense. Marketing expense
increased $1.4 million , or 6.6%, due to increased marketing efforts to support
consumer and healthcare banking initiatives, partly offset by bank card
marketing initiatives in the prior year. Deposit insurance expense declined $4.9
million , or 42.2%, from the prior year mainly due to reduced FDIC insurance
rates.
In 2018, non-interest expense was $737.8 million , a decrease of $6.5 million , or
.9%, from 2017. Salaries and benefits expense increased $19.9 million , or 4.4%,
mainly due to higher full-time salaries and medical expense. Growth in salaries
expense was driven by increases in full-time salaries in information technology,
consumer, wealth, commercial and other support units, while incentive
compensation expense declined slightly from 2017. Full-time equivalent employees
totaled 4,795 at December 31, 2018 , reflecting a small decrease from 2017.
Occupancy expense increased $432 thousand , or .9%, mainly due to higher rent,
utilities and building services expense, while equipment expense decreased $443
thousand , or 2.4%, due to lower equipment depreciation. Supplies and
communication expense decreased $2.2 million , or 9.4%, mainly due to lower voice
and data network costs. Data processing and software expense increased $5.0
million , or 6.1%, primarily due to higher third party processing costs.
Marketing expense increased $4.2 million , or 25.9%, due to new bank card
initiatives and consumer marketing initiatives in 2018. Deposit insurance
expense declined $2.4 million , or 17.4%, from the prior year mainly due to
decreases in average assets, a lower assessment rate, and the elimination of the
special FDIC surcharge in the fourth quarter of 2018. Community service costs
decreased $31.9 million due to the contribution of appreciated securities to a
related foundation during 2017, which did not recur in 2018. Other non-interest
expense increased $938 thousand , or 1.5%, over the prior year mainly due to
higher costs for professional fees (up $2.4 million ) and directors fees (up $936
thousand ). These increases were partly offset by lower bank card fraud losses
(down $961 thousand ).
Income Taxes
Income tax expense was $109.1 million in 2019, compared to $105.9 million in
2018 and $110.5 million in 2017. The effective tax rate, including the effect of
non-controlling interest, was 20.6% in 2019 compared to 19.6% in 2018 and 25.7%
in 2017.
Due to the enactment of new federal tax reform legislation in December 2017 ,
federal tax rates were lowered from 35% to 21%, which lowered the Company's
effective tax rate for years 2018 and after. The Company's effective tax rate in
the years noted above were lower than the federal statutory rates mainly due to
tax-exempt interest on state and local municipal obligations. Additional
information about income tax expense is provided in Note 9 to the consolidated
financial statements.
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Financial Condition Loan Portfolio Analysis Classifications of consolidated loans by major category atDecember 31 for each of the past five years are shown in the table below. This portfolio consists of loans which were acquired or originated with the intent of holding to their maturity. Loans held for sale are separately discussed in a following section. A schedule of average balances invested in each loan category below is disclosed within the Average Balance Sheets section of Management's Discussion and Analysis of Financial Condition and Results of Operations below. Balance at December 31 (In thousands) 2019 2018 2017 2016 2015 Commercial: Business$ 5,565,449 $ 5,106,427 $ 4,958,554 $ 4,776,365 $ 4,397,893 Real estate - construction and land 899,377 869,659 968,820 791,236 624,070 Real estate - business 2,833,554 2,875,788 2,697,452 2,643,374 2,355,544 Personal banking: Real estate - personal 2,354,760 2,127,083 2,062,787 2,010,397 1,915,953 Consumer 1,964,145 1,955,572 2,104,487 1,990,801 1,924,365 Revolving home equity 349,251 376,399 400,587 413,634 432,981 Consumer credit card 764,977 814,134 783,864 776,465 779,744 Overdrafts 6,304 15,236 7,123 10,464 6,142 Total loans$ 14,737,817 $ 14,140,298 $ 13,983,674 $ 13,412,736 $ 12,436,692
The contractual maturities of business and real estate loan categories at
Principal Payments Due
In After One After
One Year Year Through Five
(In thousands) or Less Five Years Years Total
Business $ 2,716,246 $ 2,369,727 $ 479,476 $ 5,565,449
Real estate - construction and land 525,774 327,895 45,708 899,377
Real estate - business 560,407 1,703,895 569,252 2,833,554
Real estate - personal 178,280 525,640
1,650,840 2,354,760
Total business and real estate loans
Business and real estate loans: Loans with fixed rates 21.3 % 49.2 % 57.2 % 41.6 % Loans with floating rates 78.7 % 50.8 %
42.8 % 58.4 % Total business and real estate loans 100.0 % 100.0 % 100.0 % 100.0 %
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The following table shows loan balances atDecember 31, 2019 , segregated between those with fixed interest rates and those with variable rates that fluctuate with an index. Fixed Rate Variable Rate % Variable Rate (In thousands) Loans Loans Total Loans Business$ 1,950,291 $ 3,615,158 $ 5,565,449 65.0 % Real estate - construction and land 38,414 860,963 899,377 95.7 Real estate - business 1,258,254 1,575,300 2,833,554 55.6 Real estate - personal 1,598,280 756,480 2,354,760 32.1 Consumer 1,342,175 621,970 1,964,145 31.7 Revolving home equity 5,572 343,679 349,251 98.4 Consumer credit card 51,622 713,355 764,977 93.3 Overdrafts 6,304 - 6,304 - Total loans$ 6,250,912 $ 8,486,905 $ 14,737,817 57.6 % Total loans atDecember 31, 2019 were$14.7 billion , an increase of$597.5 million , or 4.2%, over balances atDecember 31, 2018 . The growth in loans during 2019 occurred in the business, construction, personal real estate and consumer loan categories, while business real estate, consumer credit card, revolving home equity and overdraft loan categories declined from the prior year. Business loans increased$459.0 million , or 9.0%, reflecting growth in lease lending and commercial and industrial loans, while commercial card and tax-advantaged lending declined. Construction loans increased$29.7 million , or 3.4% mainly due to growth in commercial construction lending. Business real estate loans decreased$42.2 million , or 1.5%, due mainly to decreases in multi-family real estate lending. Personal real estate loans increased$227.7 million , or 10.8%, due to increased loan originations. The Company sells certain long-term fixed rate mortgage loans to the secondary market, and loan sales in 2019 totaled$239.0 million , compared to$193.5 million in 2018. Consumer loans increased$8.6 million , or .4%, mainly due to an increase in health service financing loans, offset by a decline in fixed rate home equity loans and the continued run off of marine and recreational vehicle loan balances. Consumer credit card loans decreased$49.2 million , or 6.0% and revolving home equity loan balances declined$27.1 million , or 7.2%, compared to balances at year end 2018. The Company currently holds approximately 28% of its loan portfolio in theKansas City market, 29% in theSt. Louis market, and 43% in other regional markets. The portfolio is diversified from a business and retail standpoint, with 63% in loans to businesses and 37% in loans to consumers. The Company believes a diversified approach to loan portfolio management, strong underwriting criteria and an aversion toward credit concentrations, from an industry, geographic and product perspective, have contributed to low levels of problem loans and loan losses experienced over the last several years. 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$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. AtDecember 31, 2019 , the balance of SNC loans totaled approximately$1.1 billion , with an additional$1.4 billion in unfunded commitments, compared to a balance of$830.2 million , with an additional$1.3 billion in unfunded commitments, at year end 2018. Commercial Loans Business Total business loans amounted to$5.6 billion atDecember 31, 2019 and include loans used mainly to fund customer accounts receivable, inventories, and capital expenditures. The business loan portfolio includes tax-advantaged loans and leases which carry tax free interest rates. These loans totaled$858.1 million atDecember 31, 2019 , a decline of$44.4 million , or 4.9%, fromDecember 31, 2018 balances. The business loan portfolio also includes direct financing and sales type leases totaling$584.3 million , which are used by commercial customers to finance capital purchases ranging from computer equipment to office and transportation equipment. These leases increased$26.9 million , or 4.8%, over 2018. The Company has outstanding energy-related loans totaling$197.4 million atDecember 31, 2019 , which are further discussed within the Energy Lending section of the Risk Elements of Loan Portfolio section located within Management's Discussion and Analysis of Financial Condition and Results of Operations. Also included in the business portfolio are corporate card loans, which totaled$293.7 million atDecember 31, 2019 and are made in conjunction with the Company's corporate card business for corporate trade purchases. Corporate card loans are made to corporate, non-profit and government customers nationwide, but have very short-term maturities, which limits credit risk. 28
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Business loans, excluding corporate card loans, are made primarily to customers in the regional trade area of the Company, generally the central Midwest, encompassing the states ofMissouri ,Kansas, Illinois , and nearby Midwestern markets, includingIowa ,Oklahoma ,Colorado, Texas andOhio . This portfolio is diversified from an industry standpoint and includes businesses engaged in manufacturing, wholesaling, retailing, agribusiness, insurance, financial services, public utilities, health care, and other service businesses. Emphasis is upon middle-market and community businesses with known local management and financial stability. Consistent with management's strategy and emphasis upon relationship banking, most borrowing customers also maintain deposit accounts and utilize other banking services. Net loan charge-offs in this category totaled$4.1 million in 2019 (mainly representing a charge-off related to the bankruptcy of a single leasing customer), compared to net loan charge-offs of$2.1 million recorded in 2018. Non-accrual business loans were$7.5 million (.1% of business loans) atDecember 31, 2019 compared to$9.0 million atDecember 31, 2018 .Real Estate-Construction and Land The portfolio of loans in this category amounted to$899.4 million atDecember 31, 2019 , which was an increase of$29.7 million , or 3.4%, from the prior year and comprised 6.1% of the Company's total loan portfolio. Commercial construction and land development loans totaled$705.1 million , or 78.4% of total construction loans atDecember 31, 2019 . These loans increased$40.6 million from 2018 year end balances, driving the growth in the total construction portfolio. Commercial construction loans are made during the construction phase for small and medium-sized office and medical buildings, manufacturing and warehouse facilities, apartment complexes, shopping centers, hotels and motels, and other commercial properties. Commercial land development loans relate to land owned or developed for use in conjunction with business properties. Residential construction and land development loans atDecember 31, 2019 totaled$194.3 million , or 21.6% of total construction loans. A stable construction market has contributed to low loss rates on these loans, with net loan recoveries of$117 thousand and$635 thousand recorded in 2019 and 2018, respectively. Real Estate-Business Total business real estate loans were$2.8 billion atDecember 31, 2019 and comprised 19.2% of the Company's total loan portfolio. This category includes mortgage loans for small and medium-sized office and medical buildings, manufacturing and warehouse facilities, multi-family housing, farms, shopping centers, hotels and motels, churches, and other commercial properties. The business real estate borrowers and/or properties are generally located in local and regional markets where Commerce does business, and emphasis is placed on owner-occupied lending (37.0% of this portfolio), which presents lower risk levels. Additional information about business real estate loans by borrower is disclosed within the Real Estate - Business Loans section of the Risk Elements of Loan Portfolio section located within Management's Discussion and Analysis of Financial Condition and Results of Operations. AtDecember 31, 2019 , balances of non-accrual loans amounted to$1.0 million , or less than .1% of business real estate loans, down from$1.7 million at year end 2018. The Company experienced net loan recoveries of$60 thousand in 2019, compared to net loan recoveries of$378 thousand in 2018. Personal Banking Loans Real Estate-Personal AtDecember 31, 2019 , there were$2.4 billion in outstanding personal real estate loans, which comprised 16.0% of the Company's total loan portfolio. The mortgage loans in this category are mainly for owner-occupied residential properties. The Company originates both adjustable and fixed rate mortgage loans, and atDecember 31, 2019 , 32% of the portfolio was comprised of adjustable rate loans, while 68% was comprised of fixed rate loans. The Company does not purchase any loans from outside parties or brokers, and has never maintained no-document products. Levels of mortgage loan origination activity increased in 2019, with originations of$871.6 million in 2019 compared to$563.0 million in 2018. Net loans retained by the Company increased$227.7 million , driven by growth in new loan production due to the lower interest rate environment. Loans sold to the secondary market increased$45.5 million . The loan sales were made under an initiative to originate and sell certain long term fixed rate loans, resulting in sales of$239.0 million in 2019 compared to$193.5 million in 2018. The Company has experienced lower loan losses in this category than many others in the industry and believes this is partly because of its conservative underwriting culture, stable markets, and the fact that it does not purchase loans from brokers. Net loan charge-offs in 2019 totaled$56 thousand , a slight increase from net loan recoveries of$335 thousand in 2018. Balances of non-accrual loans in this category decreased to$1.7 million atDecember 31, 2019 , compared to$1.8 million at year end 2018.
Consumer
Consumer loans consist of private banking, automobile, motorcycle, marine, tractor/trailer, recreational vehicle (RV), fixed rate home equity, patient health care financing and other types of consumer loans. These loans totaled$2.0 billion at year end 2019. Approximately 46% of the consumer portfolio consists of automobile loans, 21% in private banking loans, 4% in motorcycle loans, 14% in fixed rate home equity loans, 10% in healthcare financing loans and 2% in marine and RV loans. Total consumer 29
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loans increased$8.6 million at year end 2019 compared to year end 2018. Growth of$28.9 million in patient healthcare financing and$21.3 million in private banking loans was partially offset by declines of$14.7 million in fixed rate home equity loans,$15.6 million in marine and RV loans, and$17.5 million in motorcycle loans. Net charge-offs on total consumer loans were$8.6 million in 2019, compared to$9.3 million in 2018, averaging .4% and .5% of consumer loans in 2019 and 2018, respectively. Consumer loan net charge-offs included marine and RV loan net charge-offs of$393 thousand , which were 1.0% of average marine and RV loans in 2019, compared to 1.2% in 2018. Revolving Home Equity Revolving home equity loans, of which 98% are adjustable rate loans, totaled$349.3 million at year end 2019. An additional$750.9 million was available in unused lines of credit, which can be drawn at the discretion of the borrower. Home equity loans are secured mainly by second mortgages (and less frequently, first mortgages) on residential property of the borrower. The underwriting terms for the home equity line product permit borrowing availability, in the aggregate, generally up to 80% or 90% of the appraised value of the collateral property at the time of origination. Net charge-offs totaled$209 thousand in 2019, compared to$55 thousand in 2018. Consumer Credit Card Total consumer credit card loans amounted to$765.0 million atDecember 31, 2019 and comprised 5.2% of the Company's total loan portfolio. The credit card portfolio is concentrated within regional markets served by the Company. The Company offers a variety of credit card products, including affinity cards, rewards cards, and standard and premium credit cards, and emphasizes its credit card relationship product, Special Connections. Approximately 40% of the households that own a Commerce credit card product also maintain a deposit relationship with the subsidiary bank. AtDecember 31, 2019 , approximately 93% of the outstanding credit card loan balances had a floating interest rate, compared to 92% in the prior year. Net charge-offs amounted to$35.4 million in 2019, an increase of$4.8 million over$30.6 million in 2018. Loans Held for Sale AtDecember 31, 2019 , loans held for sale were comprised of certain long-term fixed rate personal real estate loans and loans extended to students while attending colleges and universities. The personal real estate loans are carried at fair value and totaled$9.2 million atDecember 31, 2019 . The student loans, carried at the lower of cost or fair value, totaled$4.6 million atDecember 31, 2019 . Both of these portfolios are further discussed in Note 2 to the consolidated financial statements. Allowance for Loan Losses 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 reserves needed for pools of loans. Loans subject to individual evaluation generally consist of business, construction, business real estate and personal real estate loans on non-accrual status, and include troubled debt restructurings that are on non-accrual status. These non-accrual loans are evaluated individually for impairment based on factors such as payment history, borrower financial condition and collateral. For collateral dependent loans, appraisals of collateral (including exit costs) are normally obtained annually but discounted based on date last received and market conditions. From these evaluations of expected cash flows and collateral values, specific allowances are determined. Loans which are not individually evaluated are segregated by loan type and sub-type and are collectively evaluated. These loans consist of commercial loans (business, construction and business real estate) which have been graded pass, special mention, or substandard, and also include all personal banking loans except personal real estate loans on non-accrual status. Collectively-evaluated loans include certain troubled debt restructurings with similar risk characteristics. Allowances for both personal banking and commercial loans use methods which consider historical and current loss trends, loss emergence periods, delinquencies, industry concentrations and unique risks. Economic conditions throughout the Company's markets, as monitored by Company credit officers, are also considered in the allowance determination process. The Company's estimate of the allowance for loan losses and the corresponding provision for loan losses rest upon various judgments and assumptions made by management. In addition to past loan loss experience, various qualitative factors are considered, such as current loan portfolio composition and characteristics, trends in delinquencies, portfolio risk ratings, levels of non-performing assets, credit concentrations, collateral values, and prevailing regional and national economic conditions. The Company has internal credit administration and loan review staff that continuously review loan quality and report the results of their reviews and examinations to the Company's senior management and Board of Directors. Such reviews also assist management in establishing the level of the allowance. In using this process and the information available, management must consider various 30
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assumptions and exercise considerable judgment to determine the overall level of the allowance for loan losses. Because of these subjective factors, actual outcomes of inherent losses can differ from original estimates. The Company's subsidiary bank continues to be subject to examination by several regulatory agencies, and examinations are conducted throughout the year, targeting various segments of the loan portfolio for review. Refer to Note 1 to the consolidated financial statements for additional discussion on the allowance and charge-off policies. AtDecember 31, 2019 , the allowance for loan losses was$160.7 million , compared to$159.9 million atDecember 31, 2018 . The percentage of allowance to loans decreased to 1.09% atDecember 31, 2019 compared to 1.13% at year end 2018. Total loans delinquent 90 days or more and still accruing were$19.9 million atDecember 31, 2019 , an increase of$3.2 million compared to year end 2018, mainly driven by a$3.5 million increase in construction loan delinquencies on one larger loan and a$955 thousand increase in consumer credit card loans delinquent 90 days or more, partly offset by a decrease of$1.6 million in consumer loan delinquencies. Non-accrual loans atDecember 31, 2019 were$10.2 million , a decrease of$2.3 million over the prior year, mainly due to a decrease in business and business real-estate non-accrual loans of$1.5 million and$685 thousand , respectively. The 2019 year end balance of non-accrual loans was comprised of$7.5 million of business loans,$1.0 million of business real estate loans and$1.7 million of personal real estate loans. Net loan charge-offs totaled$49.7 million in 2019, representing a$7.4 million increase compared to net charge-offs of$42.3 million in 2018. The increase was largely due to higher credit card loan and business loan charge-offs of$4.8 million and$2.0 million , respectively. In addition, personal real estate loan net charge-offs increased$391 thousand , while construction loan and business real estate net recoveries decreased$518 thousand and$318 thousand , respectively. Partly offsetting these increases in net charge-offs were lower net loan charge-offs of$732 thousand on consumer loans. Consumer credit card net charge-offs were 4.63% of average consumer credit card loans in 2019 compared to 3.98% in 2018. Consumer credit card loan net charge-offs as a percentage of total net charge-offs decreased to 71.3% in 2019 compared to 72.3% in 2018. Consumer loan net charge-offs were .44% of average consumer loans in 2019, compared to .46% in 2018, and represented 17.2% of total net loan charge-offs in 2019. The ratio of net charge-offs to total average loans outstanding in 2019 was .35%, compared to .30% in 2018 and .31% in 2017. The provision for loan losses in 2019 was$50.4 million , compared to provisions of$42.7 million in 2018 and$45.2 million in 2017.
The Company considers the allowance for loan losses of
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The schedules which follow summarize the relationship between loan balances and activity in the allowance for loan losses:
Years Ended December 31
(Dollars in thousands) 2019 2018 2017 2016 2015 Loans outstanding at end of year(A)$ 14,737,817 $ 14,140,298 $ 13,983,674 $ 13,412,736 $ 12,436,692 Average loans outstanding(A)$ 14,224,637 $ 13,926,079 $ 13,611,699 $ 12,927,778 $ 11,869,276 Allowance for loan losses: Balance at beginning of year$ 159,932 $ 159,532 $ 155,932 $ 151,532 $ 156,532 Additions to allowance through charges to expense 50,438 42,694 45,244 36,318 28,727 Loans charged off: Business 4,622 3,144 2,410 2,549 2,295 Real estate - construction and land 7 - 1 515 499 Real estate - business 82 20 127 194 1,263 Real estate - personal 294 176 417 556 1,037 Consumer 12,048 12,897 13,415 12,711 11,708 Revolving home equity 487 357 488 860 722 Consumer credit card 42,254 36,931 36,114 31,616 31,326 Overdrafts 2,086 2,296 2,207 1,977 2,200 Total loans charged off 61,880 55,821 55,179 50,978 51,050 Recoveries of loans previously charged off: Business 520 1,042 1,032 1,933 2,683 Real estate - construction and land 124 635 1,192 4,227 1,761 Real estate - business 142 398 330 1,475 1,396 Real estate - personal 238 511 722 562 596 Consumer 3,494 3,611 3,436 3,664 3,430 Revolving home equity 278 302 303 375 320 Consumer credit card 6,833 6,353 5,861 6,186 6,287 Overdrafts 563 675 659 638 850 Total recoveries 12,192 13,527 13,535 19,060 17,323 Net loans charged off 49,688 42,294 41,644 31,918 33,727 Balance at end of year$ 160,682 $ 159,932 $ 159,532 $ 155,932 $ 151,532 Ratio of allowance to loans at end of year 1.09 % 1.13 % 1.14 % 1.16 % 1.22 % Ratio of provision to average loans outstanding .35 % .31 % .33 %
.28 % .24 %
(A) Net of unearned income, before deducting allowance for loan losses, excluding
loans held for sale.
Years Ended December 31
2019 2018 2017 2016 2015
Ratio of net charge-offs (recoveries) to
average loans outstanding, by loan
category:
Business .08 % .04 % .03 % .01 % (.01 )%
Real estate - construction and land (.01 ) (.07 ) (.14 ) (.48 ) (.26 )
Real estate - business - (.01 ) (.01 ) (.05 ) (.01 )
Real estate - personal - (.02 ) (.02 ) - .02
Consumer .44 .46 .49 .46 .45
Revolving home equity .06 .01 .05 .12 .09
Consumer credit card 4.63 3.98 4.07 3.39 3.35
Overdrafts 16.55 33.93 33.71 28.42 24.93
Ratio of total net charge-offs to total
average loans outstanding .35 % .30 % .31 % .25 % .28 %
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The following schedule provides a breakdown of the allowance for loan losses by
loan category and the percentage of each loan category to total loans
outstanding at year end.
(Dollars in
thousands) 2019 2018 2017 2016 2015
Loan Loss % of Loans Loan Loss % of Loans Loan Loss % of Loans Loan Loss % of Loans Loan Loss % of Loans
Allowance to Total Allowance toTotal Allowance to Total Allowance to Total Allowance to Total
Allocation Loans Allocation Loans Allocation Loans Allocation Loans Allocation Loans
Business $ 44,268 37.8 % $ 42,890 36.1 % $ 44,462 35.4 % $ 43,910 35.6 % $ 43,617 35.4 %
RE - construction
and land 21,589 6.1 22,515 6.2 24,432 6.9 21,841 5.9 16,312 5.0
RE - business 25,903 19.2 27,717 20.3 24,810 19.3 25,610 19.7 22,157 18.9
RE - personal 3,125 16.0 3,250 15.0 4,201 14.8 4,110 15.0 6,680 15.4
Consumer 15,932 13.3 18,007 13.8 19,509 15.0 18,935 14.8 21,717 15.5
Revolving home
equity 638 2.4 825 2.7 1,189 2.9 1,164 3.1 1,393 3.5
Consumer credit
card 47,997 5.2 43,755 5.8 40,052 5.6 39,530 5.8 38,764 6.3
Overdrafts 1,230 - 973 .1 877 .1 832 .1 892 -
Total $ 160,682 100.0 % $ 159,932 100.0 % $ 159,532 100.0 % $ 155,932 100.0 % $ 151,532 100.0 %
Risk Elements of Loan Portfolio
Management reviews the loan portfolio continuously for evidence of problem
loans. During the ordinary course of business, management becomes aware of
borrowers that may not be able to meet the contractual requirements of loan
agreements. Such loans are placed under close supervision with consideration
given to placing the loan on non-accrual status, the need for an additional
allowance for loan loss, and (if appropriate) partial or full loan charge-off.
Loans are placed on non-accrual status when management does not expect to
collect payments consistent with acceptable and agreed upon terms of repayment.
After a loan is placed on non-accrual status, any interest previously accrued
but not yet collected is reversed against current income. Interest is included
in income only as received and only after all previous loan charge-offs have
been recovered, so long as management is satisfied there is no impairment of
collateral values. The loan is returned to accrual status only when the borrower
has brought all past due principal and interest payments current, and, in the
opinion of management, the borrower has demonstrated the ability to make future
payments of principal and interest as scheduled. 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
comprised of those personal banking loans that are exempt under regulatory rules
from being classified as non-accrual. Consumer installment loans and related
accrued interest are normally charged down to the fair value of related
collateral (or are charged off in full if no collateral) once the loans are more
than 120 days delinquent. Credit card loans and the related accrued interest are
charged off when the receivable is more than 180 days past due.
The following schedule shows non-performing assets and loans past due 90 days
and still accruing interest.
December 31
(Dollars in thousands) 2019 2018 2017 2016 2015
Total non-accrual loans $ 10,220 $ 12,536 $ 11,983 $ 14,283 $ 26,575
Real estate acquired in foreclosure 365 1,413 681 366 2,819
Total non-performing assets $ 10,585 $ 13,949 $ 12,664 $ 14,649 $ 29,394
Non-performing assets as a percentage of
total loans .07 % .10 % .09 % .11 % .24 %
Non-performing assets as a percentage of
total assets .04 % .05 % .05 % .06 % .12 %
Loans past due 90 days and still
accruing interest $ 19,859 $ 16,658 $ 18,127 $ 16,396 $ 16,467
The table below shows the effect on interest income in 2019 of loans on
non-accrual status at year end.
(In thousands)
Gross amount of interest that would have been recorded at original rate $ 1,543
Interest that was reflected in income 369
Interest income not recognized $
1,174
Non-accrual loans, which are also classified as impaired, totaled$10.2 million at year end 2019, a decrease of$2.3 million from the balance at year end 2018. The decrease fromDecember 31, 2018 occurred mainly in business loans, which decreased$1.5 million , and business real estate loans, which decreased$685 thousand . AtDecember 31, 2019 , non-accrual loans were comprised primarily of business (73.3%), personal real estate (16.6%), and business real estate (10.1%) loans. Foreclosed real estate totaled$365 thousand atDecember 31, 2019 , a decrease of$1.0 million when compared toDecember 31, 2018 . Total non-performing assets remain low compared to the overall banking industry in 2019, with the non-performing assets to total loans ratio 33
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at .07% atDecember 31, 2019 . Total loans past due 90 days or more and still accruing interest were$19.9 million as ofDecember 31, 2019 , an increase of$3.2 million when compared toDecember 31, 2018 . 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 of 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$164.8 million atDecember 31, 2019 , compared with$145.7 million atDecember 31, 2018 , resulting in an increase of$19.1 million or 13.1%. The increase in potential problem loans was largely driven by a$35.2 million increase in business real estate loans, which was partly offset by a$14.1 million decrease in business loans. December 31 (In thousands) 2019 2018 Potential problem loans: Business$ 83,943 $ 98,009
Real estate - construction and land 470 1,211 Real estate - business
80,071 44,854
Real estate - personal 283 1,586
Total potential problem loans
AtDecember 31, 2019 , the Company had$79.5 million of loans whose terms have been modified or restructured, meeting the definition of 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$55.9 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. Construction and land loans and business real estate loans are subject to higher risk because of the impact that volatile interest rates and a changing economy can have on real estate value, and because of the potential volatility of the real estate industry. Certain home equity loans have contractual features that could increase credit exposure in a market of declining real estate prices, when interest rates are steadily increasing, or when a geographic area experiences an economic downturn. For these home equity loans, higher risks could exist when 1) loan terms require a minimum monthly payment that covers only interest, or 2) loan-to-collateral value (LTV) ratios at origination are above 80%, with no private mortgage insurance. Information presented below for home equity loans is based on LTV ratios which were calculated with valuations at loan origination date. The Company does not attempt to obtain updated appraisals or valuations unless the loans become significantly delinquent or are in the process of being foreclosed upon. For credit monitoring purposes, the Company analyzes delinquency information, current FICO scores, and line utilization. This has remained an effective means of evaluating credit trends and identifying problem loans, partly because the Company offers standard, conservative lending products. 34
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Real Estate - Construction and Land LoansThe Company's portfolio of construction and land loans, as shown in the table below, amounted to 6.1% of total loans outstanding atDecember 31, 2019 . The largest component of construction and land loans was commercial construction, which increased$51.2 million during the year endedDecember 31, 2019 . AtDecember 31, 2019 , multi-family residential construction loans totaled approximately$213.4 million , or 31.8%, of the commercial construction loan portfolio. (Dollars in thousands) December 31, 2019 % of Total % of Total Loans December 31, 2018 % of Total % of Total Loans Commercial construction $ 670,590 74.6 % 4.6 % $ 619,370 71.2 % 4.4 % Residential construction 128,575 14.3 .9 123,369 14.2 .9 Residential land and land development 65,687 7.3 .4 81,740 9.4 .6 Commercial land and land development 34,525 3.8 .2 45,180 5.2 .3 Total real estate - construction and land loans $ 899,377 100.0 % 6.1 % $ 869,659 100.0 % 6.2 % Real Estate - Business Loans Total business real estate loans were$2.8 billion atDecember 31, 2019 and comprised 19.2% 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. Approximately 37.0% of these loans were for owner-occupied real estate properties, which present lower risk profiles. (Dollars in thousands) December 31, 2019 % of Total % of Total Loans December 31, 2018 % of Total % of Total Loans Owner-occupied $ 1,048,716 37.0 % 7.1 % $ 1,038,589 36.1 % 7.3 % Retail 383,234 13.5 2.6 307,915 10.7 2.2 Multi-family 306,577 10.8 2.1 408,151 14.2 2.9 Office 297,278 10.5 2.0 356,733 12.4 2.5 Hotels 210,557 7.4 1.4 209,693 7.3 1.5 Farm 177,669 6.3 1.2 160,935 5.6 1.1 Senior living 164,000 5.8 1.1 117,635 4.1 .8 Industrial 108,285 3.8 .7 109,391 3.8 .8 Other 137,238 4.9 1.0 166,746 5.8 1.2 Total real estate - business loans $ 2,833,554 100.0 % 19.2 % $ 2,875,788 100.0 % 20.3 % Revolving Home Equity Loans The Company has revolving home equity loans that are generally collateralized by residential real estate. Most of these loans (91.9%) 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 shown in the following tables, the percentage of loans with LTV ratios greater than 80% has remained a small segment of this portfolio, and delinquencies have been low and stable. The weighted average FICO score for the total portfolio balance atDecember 31, 2019 was 792. 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 to convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. Over the next three years, approximately 12.5% of the Company's current outstanding balances are expected to mature. Of these balances, 92.9% have a FICO score above 700. 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. 35
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Unused
Portion of
Available Balances
Principal New Lines Lines at Over 30
Outstanding at Originated December 31, Days Past
(Dollars in thousands) December 31, 2019 * During 2019 * 2019 * Due *
Loans with
interest-only payments $ 321,126 91.9 % $173,969 49.8 % $725,187 207.6 % $1,422 .4 %
Loans with LTV:
Between 80% and 90% 37,347 10.7 22,603 6.5 43,313 12.4 213 .1
Over 90% 3,775 1.1 1,643 .4 4,969 1.4 23 -
Over 80% LTV 41,122 11.8 24,246 6.9 48,282 13.8 236 .1
Total loan portfolio
from which above loans
were identified 349,251 184,085 751,283
* Percentage of total principal outstanding of $349.3 million at December 31,
2019 .
Unused
Portion of
Available Balances
Principal New Lines Lines at Over 30
Outstanding at Originated December 31, Days Past
(Dollars in thousands) December 31, 2018 * During 2018 * 2018 * Due *
Loans with
interest-only payments $ 345,302 91.7 % $198,875 52.8 % $692,293 183.9 % $1,274 .3 %
Loans with LTV:
Between 80% and 90% 40,327 10.7 19,608 5.2 38,960 10.4 375 .1
Over 90% 4,785 1.3 675 .2 4,176 1.1 56 -
Over 80% LTV 45,112 12.0 20,283 5.4 43,136 11.5 431 .1
Total loan portfolio
from which above loans
were identified 376,399 209,569 725,733
* Percentage of total principal outstanding of
Other Consumer Loans Within the consumer loan portfolio are several direct and indirect product lines comprised mainly of loans secured by automobiles, motorcycles, marine, and RVs. Outstanding balances for auto loans were$908.3 million and$910.5 million atDecember 31, 2019 and 2018, respectively. The balances over 30 days past due amounted to$13.2 million atDecember 31, 2019 , compared to$17.8 million at the end of 2018, and comprised 1.5% of the outstanding balances of these loans atDecember 31, 2019 compared to 2.0% atDecember 31, 2018 . For the year endedDecember 31, 2019 ,$414.9 million of new auto loans were originated, compared to$365.0 million during 2018. AtDecember 31, 2019 , the automobile loan portfolio had a weighted average FICO score of 756. Outstanding balances for motorcycle loans were$71.9 million atDecember 31, 2019 , compared to$89.4 million atDecember 31, 2018 . The balances over 30 days past due amounted to$1.3 million and$2.1 million atDecember 31, 2019 and 2018, respectively, and comprised 1.9% of the outstanding balances of these loans atDecember 31, 2019 , compared to 2.4% atDecember 31, 2018 . For the year endedDecember 31, 2019 ,$26.5 million of new motorcycle loans were originated, compared to$15.0 million during 2018. Marine and RV loan production has been significantly curtailed since 2008 with few new originations. While loss rates have remained low over the last five years, the loss ratios experienced for marine and RV loans in 2019 decreased over the prior year but have been higher than for other consumer loan products, at 1.0% and 1.2% in 2019 and 2018, respectively. Balances over 30 days past due for marine and RV loans decreased$1.1 million at year end 2019 compared to 2018. 36
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The table below provides the total outstanding principal and other data for this group of direct and indirect lending products atDecember 31, 2019 and 2018. 2019 2018 Principal Balances Over Principal Balances Over Outstanding at New Loans 30 Days Past Outstanding at New Loans 30 Days Past (In thousands) December 31 Originated Due December 31 Originated Due Automobiles$ 908,260 $ 414,885 $ 13,233 $ 910,478 $ 364,955 $ 17,790 Motorcycles 71,927 26,459 1,338 89,443 14,992 2,109 RV 26,121 1,124 1,184 37,914 1,276 1,887 Marine 9,243 1,577 302 13,003 1,603 647 Total$ 1,015,551 $ 444,045 $ 16,057 $ 1,050,838 $ 382,826 $ 22,433 Consumer Credit Card Loans Additionally, the Company offers low introductory rates on selected consumer credit card products. Out of a portfolio atDecember 31, 2019 of$765.0 million in consumer credit card loans outstanding, approximately$144.8 million , or 18.9%, carried a low promotional rate. Within the next six months,$64.9 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 promotional feature, 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 was comprised of lending to the petroleum and natural gas sectors and totaled$197.4 million atDecember 31, 2019 , an increase of$53.6 million from year end 2018, as shown in the table below. Unfunded commitments (In thousands) December 31, 2019 December 31, 2018 at December 31, 2019 Extraction $ 177,903 $ 114,152 $ 62,996 Downstream distribution and refining 7,168 17,300 19,271 Mid-stream shipping and storage 4,763 3,483 54,761 Support activities 7,598 8,892 27,667 Total energy lending portfolio $ 197,432 $ 143,827 $ 164,695 Investment Securities Analysis Investment securities are comprised of securities that are classified as available for sale, equity, trading or other. The largest component, available for sale debt securities, decreased 1.9% during 2019 to$8.4 billion (excluding unrealized gains/losses in fair value) at year end 2019. During 2019, debt securities of$1.8 billion were purchased, which included$167.1 million in state and municipal securities,$1.4 billion in agency mortgage-backed securities,$55.7 million in non-agency mortgage-based securities, and$106.6 million in asset-backed securities. Total sales, maturities and pay downs were$1.9 billion during 2019. During 2020, maturities and pay downs of approximately$1.3 billion are expected to occur. The average tax equivalent yield earned on total investment securities was 2.81% in 2019 and 2.84% in 2018. AtDecember 31, 2019 , the fair value of available for sale securities was$8.6 billion , which included a net unrealized gain in fair value of$136.1 million , compared to a net unrealized loss of$64.6 million atDecember 31, 2018 . The overall unrealized gain in fair value atDecember 31, 2019 included net gains of$42.4 million in state and municipal securities and net gains of$63.4 million in mortgage and asset-backed securities. The portfolio also included unrealized net gains of$23.9 million and$5.9 million onU.S. government and federal agency obligations and other debt securities, respectively. 37
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Available for sale investment securities at year end for the past two years are
shown below:
December 31
(In thousands) 2019 2018
Amortized Cost
1,225,532 1,322,785
Agency mortgage-backed securities 3,893,247 3,253,433
Non-agency mortgage-backed securities 796,451 1,053,854
Asset-backed securities 1,228,151 1,518,976
Other debt securities 325,555 339,595
Total available for sale debt securities
1,267,927 1,328,039
Agency mortgage-backed securities 3,937,964 3,214,985
Non-agency mortgage-backed securities 809,782 1,047,716
Asset-backed securities 1,233,489 1,511,614
Other debt securities 331,411 332,257
Total available for sale debt securities
AtDecember 31, 2019 , the available for sale portfolio included$3.9 billion of agency mortgage-backed securities, which are collateralized bonds issued by agencies includingFNMA , GNMA, FHLMC, FHLB, Federal Farm Credit Banks andFDIC . Non-agency mortgage-backed securities totaled$809.8 million and included$526.0 million collateralized by commercial mortgages and$283.8 million collateralized by residential mortgages atDecember 31, 2019 . Certain non-agency mortgage-backed securities are other-than-temporarily impaired, and the processes for determining impairment and the related losses are discussed in Note 3 to the consolidated financial statements.
At
The types of securities held in the available for sale security portfolio at
year end 2019 are presented in the table below. Additional detail by maturity
category is provided in Note 3 to the consolidated financial statements.
December 31, 2019
Estimated
Percent of Total Weighted Average
Debt Securities Average Yield Maturity*
Available for sale debt securities:
U.S. government and federal agency obligations 9.9 % 1.54 % 4.2 years
Government-sponsored enterprise obligations 1.6 2.26 6.0
State and municipal obligations 14.9 2.49 5.0
Agency mortgage-backed securities 45.9 2.87 4.8
Non-agency mortgage-backed securities 9.4 2.98 2.3
Asset-backed securities 14.4 2.61 3.0
Other debt securities 3.9 2.66 3.0
*Based on call provisions and estimated prepayment speeds.
Equity securities include common and preferred stock with readily determinable fair values that totaled$2.9 million atDecember 31, 2019 , compared to$2.6 million atDecember 31, 2018 . Other securities totaled$137.9 million atDecember 31, 2019 and$129.2 million atDecember 31, 2018 . These includeFederal Reserve Bank stock andFederal Home Loan Bank (Des Moines ) stock held by the bank subsidiary in accordance with debt and 38
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regulatory requirements. These are restricted securities and are carried at cost. Also included are private equity investments which are held by a subsidiary qualified as aSmall Business Investment Company . These investments are carried at estimated fair value, but are not readily marketable. While the nature of these investments carries a higher degree of risk than the normal lending portfolio, this risk is mitigated by the overall size of the investments and oversight provided by management, and management believes the potential for long-term gains in these investments outweighs the potential risks.
Other securities at year end for the past two years are shown below:
December 31
(In thousands) 2019 2018
Federal Reserve Bank stock $ 33,770 $ 33,498
Federal Home Loan Bank stock 10,000 10,000
Private equity investments in debt securities 44,635 39,831 Private equity investments in equity securities 49,487 45,828 Total other securities
$ 137,892 $ 129,157 In addition to its holdings in the investment securities portfolio, the Company invests in long-term securities purchased under agreements to resell, which totaled$850.0 million atDecember 31, 2019 and$700.0 million atDecember 31, 2018 . These investments mature in 2020 through 2023 and have fixed rates or variable rates that fluctuate with published indices. The counterparties to these agreements are other financial institutions from whom the Company has accepted collateral of$886.3 million in marketable investment securities atDecember 31, 2019 . The average rate earned on these agreements during 2019 was 1.99%. The Company also holds offsetting repurchase and resale agreements totaling$200.0 million atDecember 31, 2019 and$450.0 million atDecember 31, 2018 , which are further discussed in Note 20 to the consolidated financial statements. 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 been offset against each other in the balance sheet, as permitted under current accounting guidance. The agreements mature in 2020 and earned an average of 45 basis points during 2019. Deposits and Borrowings Deposits, including both individual and corporate customers, are the primary funding source for the Bank and are acquired from a broad base of local markets. Total period-end deposits were$20.5 billion atDecember 31, 2019 , compared to$20.3 billion last year, reflecting an increase of$196.8 million , or 1.0%. Average deposits declined by$221.4 million , or 1.1%, in 2019 compared to 2018, resulting from declines in average demand deposits, which decreased$352.8 million , primarily driven by lower balances in business demand deposits. Additionally, average money market deposit account balances decreased$734.0 million in 2019. Partially offsetting these decreases in deposit balances was growth in average certificates of deposit balances, which increased$289.6 million , and in average interest checking balances, which increased$524.0 million in 2019. The following table shows year end deposit balances by type, as a percentage of total deposits.December 31 2019 2018 Non-interest bearing 33.6 % 34.3 %
Savings, interest checking and money market 56.6 57.5
Certificates of deposit of less than
100.0 % 100.0 %
Core deposits, which include non-interest bearing, interest checking, savings,
and money market deposits, supported 75% and 77% of average earning assets in
2019 and 2018, respectively. Average balances by major deposit category for the
last six years are disclosed in the Average Balance Sheets section of
Management's Discussion and Analysis of Financial Condition and results of
Operations below. A maturity schedule of certificates of deposits outstanding at
December 31, 2019 is included in Note 7 on Deposits in the consolidated
financial statements.
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The Company's primary sources of overnight borrowings are federal funds purchased and securities sold under agreements to repurchase (repurchase agreements). Balances in these accounts can fluctuate significantly on a day-to-day basis and generally have one day maturities. Total balances of federal funds purchased and repurchase agreements outstanding atDecember 31, 2019 were$1.9 billion , a$105.6 million decrease from the$2.0 billion balance outstanding at year end 2018. On an average basis, these borrowings increased$308.0 million , or 20.3%, during 2019, due to an increase of$143.0 million in repurchase agreements, and an increase of$165.0 million in federal funds purchased. The average rate paid on total federal funds purchased and repurchase agreements was 1.61% during 2019 and 1.30% during 2018. Historically, the majority of the Company's long-term debt has been comprised of fixed rate advances from the FHLB. During 2019, the Company borrowed$250.0 million of short-term funds from the FHLB, and those borrowings were repaid by the Company inOctober 2019 . The average rate paid on FHLB advances was 2.19% during 2019. No advances were taken in 2018. Liquidity and Capital Resources Liquidity Management Liquidity is managed within the Company in order to satisfy cash flow requirements of deposit and borrowing customers while at the same time meeting its own cash flow needs. The Company has taken numerous steps to address liquidity risk and has developed a variety of liquidity sources which it believes will provide the necessary funds for future growth. The Company manages its liquidity position through a variety of sources including: • A portfolio of liquid assets including marketable investment securities and
overnight investments,
• A large customer deposit base and limited exposure to large, volatile
certificates of deposit,
• Lower long-term borrowings that might place demands on Company cash flow,
• Relatively low loan to deposit ratio promoting strong liquidity,
• Excellent debt ratings from both
rating services, and
• Available borrowing capacity from outside sources.
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The Company's most liquid assets include available for sale debt securities, federal funds sold, balances at theFederal Reserve Bank , and securities purchased under agreements to resell. AtDecember 31, 2019 and 2018, such assets were as follows: (In thousands) 2019
2018
Available for sale debt securities$ 8,571,626 $
8,538,041
Federal funds sold -
3,320
Long-term securities purchased under agreements to resell 850,000 700,000
Balances at the
395,850 689,876
Total $ 9,817,476 $ 9,931,237
There were no federal funds sold at December 31, 2019 , which are funds lent to
the Company's correspondent bank customers with overnight maturities. At
December 31, 2019 , the Company had lent funds totaling $850.0 million under
long-term resale agreements to other large financial institutions. The
agreements mature in years 2020 through 2023. Under these agreements, the
Company holds marketable securities, safekept by a third-party custodian, as
collateral. This collateral totaled $886.3 million in fair value at December 31,
2019 . Interest earning balances at the Federal Reserve Bank , which have
overnight maturities and are used for general liquidity purposes, totaled $395.9
million at December 31, 2019 . The Company's available for sale investment
portfolio includes scheduled maturities and expected pay downs of approximately
$1.3 billion during 2020, and these funds offer substantial resources to meet
either 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, repurchase agreements, trust funds,
letters of credit issued by the FHLB, and borrowing capacity at the Federal
Reserve Bank . At December 31, 2019 and 2018, total investment securities pledged
for these purposes were as follows:
(In thousands) 2019 2018
Investment securities pledged for the purpose of securing:
$ 48,304 $
67,675
FHLB borrowings and letters of credit 7,637 9,974 Repurchase agreements * 2,083,716 2,469,432 Other deposits 2,149,575 1,784,020 Total pledged securities 4,289,232 4,331,101 Unpledged and available for pledging 3,029,268
2,872,562
Ineligible for pledging 1,253,126
1,334,378
Total available for sale debt securities, at fair value
* Includes securities pledged for collateral swaps, as discussed in Note 20 to the consolidated financial statements
The average loans to deposits ratio is a measure of a bank's liquidity, and the Company's average loans to deposits ratio was 71.5% atDecember 31, 2019 . Core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts, totaled$18.5 billion and represented 90.2% of the Company's total deposits atDecember 31, 2019 . These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company promoting long lasting relationships and stable funding sources. Total core deposits decreased$153.1 million at year end 2019 compared to year end 2018, with declines in wealth management and commercial deposits of$104.7 million and$101.8 million , respectively. This decrease was partially offset by growth of$51.8 million in consumer deposits. While the Company considers core consumer and wealth management deposits less volatile, corporate deposits could decline if interest rates increase significantly or if corporate customers increase investing activities and reduce deposit balances. If these corporate deposits decline, the Company's funding needs can be met by liquidity supplied by investment security maturities and pay downs expected to total$1.3 billion over the next year, as noted above. In addition, as shown in the table of collateral available for future advances below, the Company has borrowing capacity of$3.6 billion through advances from the FHLB and theFederal Reserve . (In thousands) 2019 2018 Core deposit base: Non-interest bearing$ 6,890,687 $ 6,980,298 Interest checking 2,130,591 2,090,936 Savings and money market 9,491,125 9,594,303 Total$ 18,512,403 $ 18,665,537 41
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Certificates of deposit of
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, and repurchase agreements, as follows: (In thousands) 2019 2018
Borrowings:
Federal funds purchased$ 20,035 $ 13,170 Securities sold under agreements to repurchase 1,830,737 1,943,219 Other debt 2,418 8,702 Total$ 1,853,190 $ 1,965,091 Federal funds purchased, which totaled$20.0 million atDecember 31, 2019 , are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Retail repurchase agreements are offered to customers wishing to earn interest in highly liquid balances and are used by the Company as a funding source considered to be stable, but short-term in nature. Repurchase agreements are collateralized by securities in the Company's investment portfolio. Total repurchase agreements atDecember 31, 2019 were comprised of non-insured customer funds totaling$1.8 billion , and securities pledged for these retail agreements totaled$1.9 billion . The Company pledges certain assets, including loans and investment securities to both theFederal 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. Additionally, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. TheFederal Reserve Bank also establishes a collateral value of assets pledged and permits 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 atDecember 31, 2019 . December 31, 2019 (In thousands) FHLB Federal Reserve Total
Total collateral value pledged
- (396,608 )
Available for future advances
The Company receives outside ratings from both
Standard & Poor's Moody'sCommerce Bancshares, Inc. Issuer rating A- Preferred stock BBB- Baa1 Rating outlook Stable StableCommerce Bank Issuer rating A A2 Baseline credit assessment a1 Short-term rating A-1 P-1 Rating outlook Stable Stable The Company considers these ratings to be indications of a sound capital base and strong liquidity and believes that these ratings would help ensure the ready marketability of its commercial paper, should the need arise. No commercial paper has been outstanding during the past ten years. The Company has no subordinated or hybrid debt instruments which would affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that, through itsCapital Markets Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit, privately-placed corporate notes or other forms of debt. 42
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The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash equivalents and restricted cash of$301.4 million in 2019, as reported in the consolidated statements of cash flows. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of$512.8 million and has historically been a stable source of funds. Investing activities used cash of$730.2 million , mainly from an increase in the loan portfolio, partly offset by activity in the investment securities portfolio. Growth in the loan portfolio used cash of$647.9 million , purchases of long-term resale agreements used cash of$150.0 million , and net purchases of land, buildings and equipment used$40.5 million , while sales and maturities (net of purchases) of investment securities provided cash of$108.3 million . Investing activities are somewhat unique to financial institutions in that, while large sums of cash flow are normally used to fund growth in investment securities, loans, or other bank assets, they are normally dependent on the financing activities described below. During 2019, financing activities used cash of$84.1 million . The Company paid cash dividends of$122.5 million on common and preferred stock, and federal funds purchases and short-term securities sold under agreements to repurchase used cash in the amount of$105.6 million .Treasury stock purchases used cash of$284.9 million during 2019 and included a cash outflow of$150.0 million related to the Company's accelerated share repurchase agreement. Growth in deposits partially offset these cash outflows by providing cash of$435.3 million . Future short-term liquidity needs for daily operations are not expected to vary significantly, and the Company believes it maintains adequate liquidity to meet these cash flows. The Company's sound equity base, along with its long-term low debt level, common and preferred stock availability, and excellent debt ratings, provide several alternatives for future financing. Future acquisitions may utilize partial funding through one or more of these options.
Cash outflows resulting from the Company's transactions in its common and preferred stock were as follows: (In millions)
2019 2018 2017
Purchases of treasury stock $ 134.9 $ 75.2 $ 17.8
Accelerated share repurchase agreements 150.0 - -
Common cash dividends paid 113.5 100.2 91.6
Preferred cash dividends paid 9.0 9.0 9.0
Cash used $ 407.4 $ 184.4 $ 118.4
The Parent faces unique liquidity constraints due to legal limitations on its
ability to borrow funds from its bank subsidiary. The Parent obtains funding to
meet its obligations from two main sources: dividends received from bank and
non-bank subsidiaries (within regulatory limitations) and management fees
charged to subsidiaries as reimbursement for services provided by the Parent, as
presented below:
(In millions) 2019 2018 2017
Dividends received from subsidiaries $ 500.0 $ 200.0 $ 160.0
Management fees 36.8 37.7 30.4
Total $ 536.8 $ 237.7 $ 190.4
These sources of funds are used mainly to pay cash dividends on outstanding
stock, pay general operating expenses, and purchase treasury stock. At
December 31, 2019 , the Parent's investment securities totaled $4.4 million at
fair value, consisting mainly of preferred stock and non-agency mortgage-backed
securities. To support its various funding commitments, the Parent maintains a
$20.0 million line of credit with its subsidiary bank. There were no borrowings
outstanding under the line during 2019 or 2018.
Company senior management is responsible for measuring and monitoring the
liquidity profile of the organization with oversight by the Company's
Asset/Liability Committee. This is done through a series of controls, including
a written Contingency Funding Policy and risk monitoring procedures, which
include daily, weekly and monthly reporting. In addition, the Company prepares
forecasts to project changes in the balance sheet affecting liquidity and to
allow the Company to better plan for forecasted changes.
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Capital Management Under Basel III capital guidelines, atDecember 31, 2019 and 2018, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table. Minimum Ratios under Capital Minimum Ratios for Adequacy Well-Capitalized (Dollars in thousands) 2019 2018 Guidelines Banks* Risk-adjusted assets$ 19,713,813 $ 19,103,966 Tier I common risk-based capital 2,745,538 2,716,232 Tier I risk-based capital 2,890,322 2,861,016 Total risk-based capital 3,052,079 3,022,023 Tier I common risk-based capital ratio 13.93 % 14.22 % 7.00 % 6.50 % Tier I risk-based capital ratio 14.66 14.98 8.50 8.00 Total risk-based capital ratio 15.48 15.82 10.50 10.00 Tier I leverage ratio 11.38 11.52 4.00 5.00
Tangible common equity to tangible assets 10.99 10.45 Dividend payout ratio
27.52 23.61
*under Prompt Corrective Action requirements
The Company maintains a treasury stock buyback program under authorizations by its Board of Directors and periodically purchases stock in the open market. During 2018, the Company purchased 1.2 million shares through market purchases. During 2019, the Company purchased 4.7 million shares, including 2.4 million shares purchased under an accelerated share repurchase (ASR) agreement. The ASR agreement is further discussed in Note 14 to the consolidated financial statements. AtDecember 31, 2019 , 4.4 million 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 levels and alternative investment options. Per share cash dividends paid by the Company increased 16.1% in 2019 compared with 2018, and the Company increased its first quarter 2020 cash dividend 8.9%, making 2020 the Company's 52nd consecutive year of regular cash dividend increases. The Company also distributed its 26th consecutive annual 5% stock dividend inDecember 2019 . Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements In the normal course of business, various commitments and contingent liabilities arise that are not required to be recorded on the balance sheet. The most significant of these are loan commitments totaling$11.2 billion (including approximately$5.1 billion in unused, approved credit card lines) and the contractual amount of standby letters of credit totaling$377.3 million atDecember 31, 2019 . As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. Management does not anticipate any material losses arising from commitments or contingent liabilities and believes there are no material commitments to extend credit that represent risks of an unusual nature.
A table summarizing contractual cash obligations of the Company at
Payments Due by Period
After One Year After Three
In One Year or Through Three Years Through After Five
(In thousands) Less Years Five Years Years Total
Operating lease obligations* 6,213 10,605 7,690 16,113 40,621
Purchase obligations 231,336 349,100 103,185 42,013 725,634
Certificates of Deposit** 1,727,042 256,692 24,225 53 2,008,012
Total $ 1,964,591 $ 616,397 $ 135,100 $ 58,179 $ 2,774,267 * Includes operating leases signed but not yet commenced. ** Includes principal payments only.
The Company funds a defined benefit pension plan for a portion of its employees.
Under the funding policy for the plan, contributions are made as necessary to
provide for current service and for any unfunded accrued actuarial liabilities
over a reasonable period. No contributions to the defined benefit plan were made
in 2019 or 2018, and the Company is not required nor does it expect to make a
contribution in 2020.
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The Company has investments in low-income housing partnerships generally within the areas it serves. These partnerships supply funds for the construction and operation of apartment complexes that provide affordable housing to that segment of the population with lower family income. If these developments successfully attract a specified percentage of residents falling in that lower income range, federal (and sometimes state) income tax credits are made available to the partners. The tax credits are normally recognized over ten years, and they play an important part in the anticipated yield from these investments. In order to continue receiving the tax credits each year over the life of the partnership, the low-income residency targets must be maintained. Under the terms of the partnership agreements, the Company has a commitment to fund a specified amount that will be due in installments over the life of the agreements, which ranges from 8 to 17 years. AtDecember 31, 2019 , the investments totaled$37.3 million and are recorded as other assets in the Company's consolidated balance sheet. Unfunded commitments, which are recorded as liabilities, amounted to$19.4 million atDecember 31, 2019 . The Company regularly purchases various state tax credits arising from third-party property redevelopment. These credits are either resold to third parties or retained for use by the Company. During 2019, purchases and sales of tax credits amounted to$90.6 million and$84.9 million , respectively. Fees from the sales of tax credits were$3.5 million ,$4.9 million and$3.3 million in 2019, 2018 and 2017, respectively. AtDecember 31, 2019 , the Company had outstanding purchase commitments totaling$160.9 million that it expects to fund in 2020. These commitments, along with the commitments for the next five years, are included in the table above. Interest Rate Sensitivity The Company's Asset/Liability Management Committee (ALCO) measures and manages the Company's interest rate risk on a monthly basis to identify trends and establish strategies to maintain stability in net interest income throughout various rate environments. Analytical modeling techniques provide management insight into the Company's exposure to changing rates. These techniques include net interest income simulations and market value analysis. Management has set guidelines specifying acceptable limits within which net interest income and market value may change under various rate change scenarios. These measurement tools indicate that the Company is currently within acceptable risk guidelines as set by management. The Company's main interest rate measurement tool, income simulation, projects net interest income under various rate change scenarios in order to quantify the magnitude and timing of potential rate-related changes. Income simulations are able to capture option risks within the balance sheet where expected cash flows may be altered under various rate environments. Modeled rate movements include "shocks, ramps and twists." Shocks are intended to capture interest rate risk under extreme conditions by immediately shifting rates up and down, while ramps measure the impact of gradual changes and twists measure yield curve risk. The size of the balance sheet is assumed to remain constant so that results are not influenced by growth predictions. The Company also employs a sophisticated simulation technique known as a stochastic income simulation. This technique allows management to see a range of results from hundreds of income simulations. The stochastic simulation creates a vector of potential rate paths around the market's best guess (forward rates) concerning the future path of interest rates and allows rates to randomly follow paths throughout the vector. This allows for the modeling of non-biased rate forecasts around the market consensus. Results give management insight into a likely range of rate-related risk as well as worst and best-case rate scenarios. Additionally, the Company uses market value analyses to help identify longer-term risks that may reside on the balance sheet. This is considered a secondary risk measurement tool by management. The Company measures the market value of equity as the net present value of all asset and liability cash flows discounted along the current swap curve plus appropriate market risk spreads. It is the change in the market value of equity under different rate environments, or effective duration, that gives insight into the magnitude of risk to future earnings due to rate changes. Market value analyses also help management understand the price sensitivity of non-marketable bank products under different rate environments. The tables below show the effects of gradual shifts in interest rates over a twelve month period on the Company's net interest income versus the Company's net interest income in a flat rate scenario. Simulation A presents two rising rate scenarios and a falling rate scenario, and in each scenario, rates are assumed to change evenly over 12 months. In these scenarios, the balance sheet remains flat with the exception of deposit balances, which may fluctuate based on changes in rates. For instance, the Company may experience deposit disintermediation if the spread between market rates and bank deposit rates widens as rates rise. The sensitivity of deposit balances to changes in rates is particularly difficult to estimate in exceptionally low rate environments. Since the future effects of changes in rates on deposit balances cannot be known with certainty, the Company conservatively models alternate scenarios with greater deposit attrition as rates rise. Simulation B illustrates results from these higher attrition scenarios to provide added perspective on potential effects of higher rates. 45
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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.
Simulation A December 31, 2019 September 30, 2019
$ Change in % Change in $ Change in % Change in
(Dollars in Net Interest Net Interest Assumed Deposit Net Interest Net Interest Assumed Deposit
millions) Income Income Attrition Income Income Attrition
200 basis points
rising $ 7.8 .95 % $ (281.9 ) $ 10.7 1.35 % $ (262.4 )
100 basis points
rising 1.1 .14 (146.5 ) 7.3 .92 (138.2 )
100 basis points
falling (3.0 ) (0.36 ) 154.8 1.1 0.14 148.6
Simulation B December 31, 2019
$ Change in % Change in Assumed $ Change in % Change in Assumed
Net Interest Net Interest Deposit Net Interest Net Interest Deposit
(Dollars in millions) Income Income Attrition Income Income Attrition
200 basis points rising (6.0 ) (.74 ) (795.2 ) (.1 ) (.02 ) (662.2 )
100 basis points rising (10.5 ) (1.29 ) (664.8 ) (2.0 ) (.25 ) (542.4 )
Under Simulation A, in the two rising rate scenarios, higher variable rate loan
volumes and a slight decline in deposit sensitivity contributed to increases in
income if rates rise relative to the previous period. However, this was more
than offset by changes in rates earned on the Company's long-term structured
repurchase agreements. In the fourth quarter of 2019, lower market rates
increased structured repurchase agreement rates and income in the Base scenario
which are expected to decline again if rates rise, reducing the benefit of
higher rates.
In Simulation B, the assumed higher levels of deposit attrition were modeled to
be replaced by wholesale borrowed funds with higher costs than in Simulation A
and resulted in a reduction in net interest income under both rising rate
scenarios. In the 100 basis point falling scenario shown in Simulation A, it is
assumed that deposits would increase $154.8 million along with an increase in
earning assets, but rates on loans would fall faster than deposit rates.
Additionally, this scenario results in lower net interest income than in the
base calculation. The 100 basis point falling scenario is presented only in
Simulation A as the results would be the same under Simulation B.
Projecting deposit activity in a historically low interest rate environment is
difficult, and the Company cannot predict how deposits will react to shifting
rates. The comparison provided above provides 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.
Derivative Financial Instruments
The Company maintains an overall interest rate risk management strategy that
permits the use of derivative instruments to modify exposure to interest rate
risk. Such instruments include interest rate swaps, interest rate floors,
interest rate caps, credit risk participation agreements, foreign exchange
contracts, mortgage loan commitments, forward sale contracts, and forward
to-be-announced (TBA) contracts. The Company's interest rate risk management
strategy includes the ability to modify the re-pricing characteristics of
certain assets and liabilities so that changes in interest rates do not
adversely affect the net interest margin and cash flows. Interest rate floors
with a total notional amount of $1.5 billion have been entered into since the
beginning of 2018 as part of this strategy to manage interest rate risk. All of
these derivative instruments utilized by the Company are further discussed in
Note 19 on Derivative Instruments.
In all of these contracts, the Company is exposed to credit risk in the event of
nonperformance by counterparties, who may be bank customers or other financial
institutions. The Company controls the credit risk of its financial contracts
through credit approvals, limits and monitoring procedures. Because the Company
generally enters into transactions only with high quality counterparties, there
have been no losses associated with counterparty nonperformance on derivative
financial instruments.
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The following table summarizes the notional amounts and estimated fair values of the Company's derivative instruments atDecember 31, 2019 and 2018. Notional amount, along with the other terms of the derivative, is used to determine the amounts to be exchanged between the counterparties. Because the notional amount does not represent amounts exchanged by the parties, it is not a measure of loss exposure related to the use of derivatives nor of exposure to liquidity risk. 2019 2018 Positive Fair Negative Fair Notional Positive Fair Negative Fair (In thousands) Notional Amount Value Value Amount Value Value Interest rate swaps$ 2,606,181 $ 37,774 $ (9,916 ) $ 2,006,280 $ 11,537 $ (13,110 ) Interest rate floors 1,500,000 67,192 - 1,000,000 29,031 - Interest rate caps 59,316 4 (4 ) 62,163 24 (24 ) Credit risk participation agreements 316,225 140 (230 ) 143,460 47 (93 ) Foreign exchange contracts 10,936 97 (32 ) 6,206 20 (8 ) Mortgage loan commitments 13,755 459 - 14,544 536 - Mortgage loan forward sale contracts 1,943 6 (2 ) 5,768 15 (8 ) Forward TBA contracts 17,500 2 (35 ) 16,500 - (178 ) Total at December 31$ 4,525,856 $ 105,674 $ (10,219 ) $
3,254,921$ 41,210 $ (13,421 ) Operating Segments The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments. The results are determined based on the Company's management accounting process, which assigns balance sheet and income statement items to each responsible segment. These segments are defined by customer base and product type. The management process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Each segment is managed by executives who, in conjunction with the Chief Executive Officer, make strategic business decisions regarding that segment. The three reportable operating segments are Consumer, Commercial, and Wealth. Additional information is presented in Note 13 on Segments in the consolidated financial statements. The Company uses a funds transfer pricing method to value funds used (e.g., loans, fixed assets, cash, etc.) and funds provided (deposits, borrowings, and equity) by the business segments and their components. This process assigns a specific value to each new source or use of funds with a maturity, based on current swap rates, thus determining an interest spread at the time of the transaction. Non-maturity assets and liabilities are valued using weighted average pools. The funds transfer pricing process attempts to remove interest rate risk from valuation, allowing management to compare profitability under various rate environments. The Company also assigns loan charge-offs and recoveries (labeled in the table below as "provision for loan losses") directly to each operating segment instead of allocating an estimated loan loss provision. The operating segments also include a number of allocations of income and expense from various support and overhead centers within the Company. 47
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The table below is a summary of segment pre-tax income results for the past three years. (Dollars in thousands) Consumer Commercial Wealth Segment Totals Other/Elimination Consolidated Totals Year ended December 31, 2019: Net interest income$ 315,782 $ 342,736 $ 48,058 $ 706,576 $ 114,717 $ 821,293 Provision for loan losses (44,987 ) (4,204 ) (174 ) (49,365 ) (1,073 ) (50,438 )
Non-interest income 135,257 203,952 183,589 522,798
1,905 524,703
Investment securities
gains, net - - - - 3,626 3,626
Non-interest expense (297,581 ) (308,686 ) (124,123 ) (730,390 ) (37,008 )
(767,398 )
Income before income
taxes $ 108,471 $ 233,798 $ 107,350 $ 449,619 $ 82,167 $ 531,786
Year ended December
31, 2018:
Net interest income $ 294,798 $ 344,972 $ 46,946 $ 686,716 $ 137,109 $ 823,825
Provision for loan
losses (40,571 ) (1,134 ) 32 (41,673 ) (1,021 ) (42,694 )
Non-interest income 126,253 202,527 173,026 501,806
(465 ) 501,341
Investment securities
losses, net - - - - (488 ) (488 )
Non-interest expense (286,181 ) (297,847 ) (123,568 ) (707,596 ) (30,225 )
(737,821 )
Income before income
taxes $ 94,299 $ 248,518 $ 96,436 $ 439,253 $ 104,910 $ 544,163
2019 vs 2018
Increase in income
before income taxes:
Amount $ 14,172 $ (14,720 ) $ 10,914 $ 10,366 $ (22,743 ) $ (12,377 )
Percent 15.0 % (5.9 )% 11.3 % 2.4 % (21.7 )% (2.3 )%
Year ended December
31, 2017:
Net interest income $ 276,891 $ 329,087 $ 47,264 $ 653,242 $ 80,437 $ 733,679
Provision for loan
losses (40,619 ) 205 (41 ) (40,455 ) (4,789 ) (45,244 )
Non-interest income 121,362 184,577 158,175 464,114
(2,851 ) 461,263
Investment securities
gains, net - - - - 25,051 25,051
Non-interest expense (274,225 ) (281,845 ) (120,461 ) (676,531 ) (67,812 )
(744,343 )
Income before income
taxes $ 83,409 $ 232,024 $ 84,937 $ 400,370 $ 30,036 $ 430,406
2018 vs 2017
Increase in income
before income taxes:
Amount $ 10,890 $ 16,494 $ 11,499 $ 38,883 $ 74,874 $ 113,757
Percent 13.1 % 7.1 % 13.5 % 9.7 % N.M. 26.4 %
Consumer
The Consumer segment includes consumer deposits, consumer finance, and consumer
debit and credit cards. During 2019, income before income taxes for the Consumer
segment increased $14.2 million , or 15.0%, compared to 2018. This increase was
due to growth of $21.0 million , or 7.1%, in net interest income and an increase
in non-interest income of $9.0 million , or 7.1%. Net interest income increased
due to a $27.8 million increase in net allocated funding credits assigned to the
Consumer segment's loan and deposit portfolios and growth of $3.4 million in
loan interest income, partly offset by an increase of $10.1 million in deposit
interest expense. Non-interest income increased mainly due to growth in mortgage
banking revenue and net credit card fees, (mainly higher interchange fees and
lower rewards expense), partly offset by a decline in deposit fees (mainly
overdraft and deposit account service fees). These increases to income were
partly offset by growth of $11.4 million , or 4.0%, in non-interest expense.
Non-interest expense increased over the prior year due to higher salaries
expense, data processing and software expense and allocated servicing and
support costs (mainly teller services, online banking, installment loan and
management fees). The provision for loan losses totaled $45.0 million , a $4.4
million increase over the prior year, which was mainly due to higher net
charge-offs on consumer credit card loans. Total average loans in this segment
decreased $107.1 million , or 4.6%, in 2019 compared to 2018 mainly due to a
decline in auto and other consumer loans. Average deposits increased $25.8
million over the prior year, resulting from growth in interest checking,
savings, and certificate of deposit balances, partly offset by a decline in
money market deposit accounts.
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During 2018, income before income taxes for the Consumer segment increased$10.9 million , or 13.1%, compared to 2017. This increase was mainly due to growth of$17.9 million , or 6.5%, in net interest income and an increase in non-interest income of$4.9 million , or 4.0%. Net interest income increased due to a$14.2 million increase in net allocated funding credits and growth of$5.3 million in loan interest income, partly offset by an increase of$1.6 million in deposit interest expense. Non-interest income increased mainly due to growth in net debit card fees, (mainly lower network expense and higher interchange fees), deposit fees (mainly deposit account service fees and overdraft and return item fees) and mortgage banking revenue, partly offset by higher credit card rewards expense. These increases to income were partly offset by growth of$12.0 million , or 4.4%, in non-interest expense. Non-interest expense increased over 2017 due to an increase in full-time salaries expense and higher allocated servicing and support costs, mainly marketing, information technology and management fees. The provision for loan losses totaled$40.6 million , a slight decrease from 2017, which was mainly due to lower net charge-offs on home equity loans, partly offset by higher consumer credit card loan net charge-offs. Total average loans in this segment decreased$45.1 million , or 1.9%, in 2018 compared to 2017 mainly due to a decline in auto and other personal loans. Average deposits increased$19.9 million over 2017, resulting from growth in interest checking and savings accounts, partly offset by declines in demand, money market deposit accounts, and certificate of deposit balances.
Commercial
The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, international services, and business, government deposit, and related commercial cash management services, as well as merchant and commercial bank card products. The segment includes theCapital Markets Group , which sells fixed-income securities to correspondent banks, corporations, public institutions, municipalities, and individuals and also provides securities safekeeping and bond accounting services. Pre-tax income for 2019 decreased$14.7 million , or 5.9%, compared to 2018, mainly due to a decrease in net interest income and increases in non-interest expense and the provision for loan losses. Net interest income decreased$2.2 million , or .6%, due to a decline of$13.2 million in net allocated funding credits and higher interest expense of$18.4 million on deposits and customer repurchase agreements, partly offset by an increase of$29.3 million in loan interest income. The provision for loan losses increased$3.1 million over last year, due to higher lease loan net charge-offs (related to a charge-off on a single lease loan), partly offset by lower business loan net charge-offs. Non-interest income increased$1.4 million , or .7%, over 2018 due to higher deposit account fees (mainly corporate cash management), cash sweep commissions, and gains on sales of leased assets to customers upon lease termination. These increases were partly offset by lower net corporate card fees (driven by lower interchange income and higher network and rewards expense) and lower tax credit sales fees. Non-interest expense increased$10.8 million , or 3.6%, during 2019, mainly due to increases in salaries expense and allocated support costs (mainly information technology, marketing and commercial sales and product support). These increases were partly offset by lower deposit insurance expense and allocated servicing costs (mainly teller services and deposit operations). Average segment loans increased$310.9 million , or 3.5%, compared to 2018, with growth occurring in business and business real estate loans. Average deposits decreased$180.9 million , or 2.3%, due to declines in business demand and money market deposit accounts, partly offset by growth in certificate of deposit balances. Pre-tax income for 2018 increased$16.5 million , or 7.1%, compared to 2017, mainly due to increases in net interest income and non-interest income, partly offset by higher non-interest expense. Net interest income increased$15.9 million , or 4.8%, due to growth of$70.6 million in loan interest income, partly offset by a decline of$32.3 million in net allocated funding credits and higher interest expense of$22.5 million on deposits and customer repurchase agreements. The provision for loan losses increased$1.3 million over 2017, due to higher net charge-offs on business loans and lower recoveries on construction loans, partly offset by lower commercial card loan net charge-offs. Non-interest income increased$18.0 million , or 9.7%, over 2017 due to higher net corporate card fees (driven by higher fees), swap fees, tax credit sales fees and deposit account fees (mainly corporate cash management). These increases were partly offset by lower gains on sales of leased assets to customers upon lease termination. Non-interest expense increased$16.0 million , or 5.7%, during 2018, mainly due to increases in salaries expense and allocated support and service costs (mainly information technology and commercial sales and product support fees). Average segment loans increased$304.7 million , or 3.5%, compared to 2017, with growth occurring in commercial and industrial, construction, and healthcare loans. Average deposits decreased$271.8 million , or 3.3%, due to declines in business demand deposits, money market deposit accounts, and certificates of deposit, partly offset by growth in interest checking deposits.
Wealth
The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management services, brokerage services, and includes Private Banking accounts. AtDecember 31, 2019 , the Trust group managed investments with a market value of$34.4 billion and administered an additional$22.3 billion in non-managed assets. It also provides investment management services to The Commerce Funds, a series of mutual funds with$2.9 billion in total assets atDecember 31, 2019 . In 2019, pre-tax income for the Wealth segment was$107.4 million , compared to$96.4 million in 2018, an increase of$10.9 million , or 11.3%. Net interest income increased$1.1 million , or 2.4%, due to a$4.3 million increase in loan interest income and a$1.7 million increase in net allocated funding credits, partly offset by higher interest expense of$4.9 million . Non-interest 49
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income increased$10.6 million , or 6.1%, over the prior year largely due to higher private client fund trust fees and cash sweep commissions. Non-interest expense increased$555 thousand , or .4%, resulting from higher salaries and benefits expense and higher allocated costs for information technology. The provision for loan losses increased$206 thousand , mainly due to higher revolving home equity loan net charge-offs. Average assets increased$45.0 million , or 3.6%, during 2019 mainly due to growth in personal real estate and consumer loan balances. Average deposits decreased$39.2 million , or 2.1%, due to declines in interest checking account balances, partially offset by higher balances of demand deposits. During the fourth quarter of 2019, the Company sold its corporate trust business, which was included in the Wealth segment. In 2018, pre-tax income for the Wealth segment was$96.4 million , compared to$84.9 million in 2017, an increase of$11.5 million , or 13.5%. Net interest income decreased$318 thousand , or .7%, due to a$5.3 million decrease in net allocated funding credits, partly offset by a$5.5 million increase in loan interest income. Non-interest income increased$14.9 million , or 9.4%, over 2017 largely due to higher private client and institutional trust fees, brokerage fees and cash sweep commissions. These increases were partly offset by write downs on software costs. Non-interest expense increased$3.1 million , or 2.6%, resulting from higher salary and benefit costs, data processing expense and allocated support and corporate management fee costs, partly offset by lower trust losses. The provision for loan losses decreased$73 thousand , mainly due to personal real estate loan net recoveries. Average assets increased$25.2 million , or 2.1%, during 2018 mainly due to higher personal real estate and consumer loans. Average deposits decreased$219.0 million , or 10.5%, due to declines in money market deposit accounts and long-term certificates of deposit over$100,000 . 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 certain administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. Also included in this category is the difference between the Company's provision for loan losses and net loan charge-offs, which are generally assigned directly to the segments. In 2019, the pre-tax income in this category was$82.2 million , compared to$104.9 million in 2018. This decrease was due to lower unallocated net interest income of$22.4 million and higher unallocated non-interest expense of$6.8 million . Unallocated securities gains were$3.6 million in 2019, compared to securities losses of$488 thousand in 2018. Also, the unallocated loan loss provision increased$52 thousand , as the provision was$1.1 million in excess of charge-offs in 2019, while the provision was$1.0 million in excess of charge offs in 2018. Additionally in 2019, a$11.5 million gain on the sale of Company's corporate trust business, mentioned above, was also recorded in the Other segment.
Impact of Recently Issued Accounting Standards
Leases InFebruary 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 (ROU) asset and a liability to make lease payments for those leases classified as operating leases under previous GAAP. The ASU provides guidance as to the definition of a lease, identification of lease components, and sale and leaseback transactions. The FASB issued elections and expedients within the original ASU and additional amendments, clarifying the lease guidance for certain implementation issues. The Company has adopted the package of expedients, the lease component expedient as well as the disclosure expedient. Additionally, for leases with a term of 12 months or less, an election was made not to recognize lease assets and lease liabilities. The Company adopted the new accounting standard as ofJanuary 1, 2019 , and a lease liability of$28.1 million and a ROU asset of$27.5 million were recognized. The impact of the adoption and required disclosures are discussed in Note 6 to the consolidated financial statements. Premium Amortization The FASB issued ASU 2017-08, "Premium Amortization onPurchased Callable Debt Securities ", inMarch 2017 . Under former 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 were effectiveJanuary 1, 2019 and did not have a significant effect on the Company's consolidated financial statements. Financial Instruments ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", known as the current expected credit loss (CECL) model, was issued inJune 2016 , and has been followed by additional clarifying guidance on specified implementation issues. This new standard is effective for fiscal years beginning afterDecember 15, 2019 and was adopted by the Company onJanuary 1, 2020 using the modified retrospective method. 50
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This new measurement approach requires the calculation of expected lifetime credit losses and is applied to financial assets measured at amortized cost, including loans and held-to-maturity securities, as well as certain off-balance sheet credit exposures such as loan commitments. The standard also changes the impairment model of available for sale debt securities. The allowance for loan losses under the previously required incurred loss model that is reported on the Company's consolidated balance sheets is different under the requirements of the CECL model. Upon adoption in the first quarter of 2020, a cumulative-effect adjustment for the change in the allowance for credit losses will be recognized in retained earnings. The cumulative-effect adjustment to retained earnings, net of taxes, will be comprised of the impact to the allowance for credit losses on outstanding loans and leases and the impact to the liability for off-balance sheet commitments. There is no implementation impact on held-to-maturity debt securities as the Company does not hold any debt securities within the scope of CECL. The new accounting standard does not require the use of a specific loss estimation method for purposes of determining the allowance for credit losses. The Company selected a methodology that uses historical net charge-off rates, adjusted by the impacts of a reasonable and supportable forecast and the impacts of other qualitative factors to determine the expected credit losses. Key assumptions include the application of historical loss rates, prepayment speeds, forecast results of a reasonable and supportable period, the period to revert to historical loss rates, and qualitative factors. The forecast is determined using projections of certain macroeconomic variables, such as, unemployment rate, prime rate, BBB corporate yield, and housing price index. The model design and methodology requires management judgment. The allowance for credit losses on the commercial portfolio is expected to decrease due to the relatively short contractual lives of the commercial loan portfolios coupled with an economic forecast predicting stable macroeconomic factors similar to the current environment. The allowance for credit losses on the personal banking loan portfolio is expected to increase due to the relatively longer contractual lives of certain portfolios, primarily those collateralized with personal real estate. Because the commercial loan portfolio represents 63% of total loans atDecember 31, 2019 , the change in its allowance for credit losses will have a more significant impact on the total allowance for credit losses, resulting in a potential net reduction in the allowance for credit losses. Based on preliminary results, the Company expects its allowance for loan losses to total loans ratio to decline from 1.09% atDecember 31, 2019 , to within a range of approximately 0.85% to 1.05% upon adoption. Offsetting the overall reduction in the allowance for credit losses for outstanding loans and leases is an expected increase in the liability for off-balance sheet loan commitments. The liability will increase as the loss estimation is required to expand over the contractual commitment period. Preliminary results indicate the adoption adjustment will result in an immaterial impact to retained earnings. The Company is currently performing quality reviews on preliminary results and is planning to finalize the impact in the 1st quarter of 2020. The adoption adjustment is subject to the completion of the Company's governance and quality review processes that are in process. Moving beyond the impact of the adoption of CECL, volatility in the allowance for credit losses, and therefore earnings, will likely be experienced due to changes in the relevant forward-looking information including forecasts of macroeconomic conditions utilized in the CECL model and other key assumptions that are applied to the remaining life of the loan and lease portfolios. Intangible Assets The FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", inJanuary 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 were effective for impairment tests beginningJanuary 1, 2020 and did not have a significant effect on the Company's consolidated financial statements. Financial Instruments The FASB issued ASU 2018-13, "Changes to the Disclosure Requirements of Fair Value Measurement", inAugust 2018 . The amendments in the ASU eliminate or modify certain disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. In addition, the amendments in the ASU also require the addition of new disclosure requirements on fair value measurement, including the disclosure of changes in unrealized gains and losses for the period included in AOCI for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance was effectiveJanuary 1, 2020 and did not have a significant effect on the Company's consolidated financial statements. Retirement Benefits The FASB issued ASU 2018-14, "Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)", inAugust 2018 . The amendments in the ASU eliminate disclosures that are no longer considered cost beneficial and clarify specific requirements of disclosures. In addition, the amendments in the ASU also add new disclosures, including the explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments were effectiveJanuary 1, 2020 and did not have a significant effect on the Company's consolidated financial statements. 51
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Intangible Assets The FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", inAugust 2018 . Under current guidance the accounting for implementation costs of a hosting arrangement that is a service contract is not specifically addressed. Under the new amendments, the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract are aligned with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software or hosting arrangements that include internal-use software license. The guidance was effectiveJanuary 1, 2020 and did not have a significant effect on the Company's consolidated financial statements. Income Taxes The FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes", inDecember 2019 . The amendments in the ASU eliminate certain exceptions under current guidance for investments, intraperiod allocations, and the methodology for calculating interim income tax. In addition, the amendments also add new guidance to simplify accounting for income taxes. The amendments are effectiveJanuary 1, 2021 , but early adoption is permitted. The Company is still assessing the impact on the Company's consolidated financial statements. Corporate Governance The Company has adopted a number of corporate governance measures. These include corporate governance guidelines, a code of ethics that applies to its senior financial officers and the charters for its audit and risk committee, its committee on compensation and human resources, and its committee on governance/directors. This information is available on the Company's Web site www.commercebank.com under Social Responsibility. 52
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SUMMARY OF QUARTERLY STATEMENTS OF INCOME Year ended December 31, 2019 For the Quarter Ended (In thousands, except per share data) 12/31/2019 9/30/2019 6/30/2019 3/31/2019 Interest income$ 226,665 $ 231,743 $ 238,412 $ 227,865 Interest expense (24,006 ) (28,231 ) (26,778 ) (24,377 ) Net interest income 202,659 203,512 211,634 203,488 Non-interest income 143,461 132,743 127,259 121,240 Investment securities gains (losses), net (248 ) 4,909 (110 ) (925 ) Salaries and employee benefits (126,901 ) (123,836 ) (120,062 ) (122,128 ) Other expense (68,273 ) (67,184 ) (69,717 ) (69,297 ) Provision for loan losses (15,206 ) (10,963 ) (11,806 ) (12,463 ) Income before income taxes 135,492 139,181 137,198 119,915 Income taxes (28,214 ) (29,101 ) (28,899 ) (22,860 ) Non-controlling interest (398 ) (838 ) (328 ) 83 Net income attributable to Commerce Bancshares, Inc.$ 106,880 $ 109,242 $ 107,971 $ 97,138 Net income per common share - basic*$ .94 $ .93 $ .91 $ .81 Net income per common share - diluted*$ .93 $ .93 $ .91 $ .81 Weighted average shares - basic* 111,730 112,982
114,961 115,511 Weighted average shares - diluted* 112,011 113,249 115,240 115,816
Year ended December 31, 2018 For the Quarter Ended (In thousands, except per share data) 12/31/2018 9/30/2018 6/30/2018 3/31/2018 Interest income$ 232,832 $ 224,751 $ 225,623 $ 205,995 Interest expense (20,612 ) (16,997 ) (14,664 ) (13,103 ) Net interest income 212,220 207,754 210,959 192,892 Non-interest income 133,087 123,714 124,850 119,690 Investment securities gains (losses), net (7,129 ) 4,306 (3,075 ) 5,410 Salaries and employee benefits (120,517 ) (116,194 ) (115,589 ) (115,894 ) Other expense (68,108 ) (68,865 ) (66,271 ) (66,383 ) Provision for loan losses (12,256 ) (9,999 ) (10,043 ) (10,396 ) Income before income taxes 137,297 140,716 140,831 125,319 Income taxes (26,537 ) (26,647 ) (29,507 ) (23,258 ) Non-controlling interest (1,108 ) (1,493 ) (994 ) (1,077 ) Net income attributable to Commerce Bancshares, Inc.$ 109,652 $ 112,576 $ 110,330 $ 100,984 Net income per common share - basic*$ .92 $ .93 $ .92 $ .84 Net income per common share - diluted*$ .91 $ .94 $ .91 $ .84 Weighted average shares - basic* 116,000 116,434
116,519 116,462 Weighted average shares - diluted* 116,309 116,823 116,897 116,827
Year ended December 31, 2017 For the Quarter Ended (In thousands, except per share data) 12/31/2017 9/30/2017 6/30/2017 3/31/2017 Interest income$ 201,572 $ 194,244 $ 193,594 $ 187,997 Interest expense (11,564 ) (11,653 ) (10,787 ) (9,724 ) Net interest income 190,008 182,591 182,807 178,273 Non-interest income 119,383 116,887 115,380 109,613 Investment securities gains (losses), net 27,209 (3,037 ) 1,651 (772 ) Salaries and employee benefits (115,741 ) (111,382 ) (108,829 ) (112,369 ) Other expense (93,118 ) (67,835 ) (68,061 ) (67,008 ) Provision for loan losses (12,654 ) (10,704 ) (10,758 ) (11,128 ) Income before income taxes 115,087 106,520 112,190 96,609 Income taxes (20,104 ) (32,294 ) (33,201 ) (24,907 ) Non-controlling interest (628 ) 338 (29 ) (198 ) Net income attributable to Commerce Bancshares, Inc.$ 94,355 $ 74,564 $ 78,960 $ 71,504 Net income per common share - basic*$ .78 $ .61 $ .65 $ .59 Net income per common share - diluted*$ .78 $ .61 $ .65 $ .58 Weighted average shares - basic* 116,445 116,455
116,405 116,191 Weighted average shares - diluted* 116,839 116,844 116,803 116,650
* Restated for the 5% stock dividend distributed in 2019.
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AVERAGE BALANCE SHEETS - AVERAGE RATES AND YIELDS
Years Ended December 31
2019 2018 2017
Interest Average Rates Interest Average Rates Interest Average Rates
(Dollars in thousands) Average Balance Income/Expense Earned/Paid Average Balance Income/Expense Earned/Paid Average Balance Income/Expense Earned/Paid
ASSETS
Loans:(A)
Business(B) $ 5,214,158 $ 202,308 3.88 % $ 4,963,029 $ 184,837 3.72 %
49,702 5.47 967,320 49,440 5.11 881,879 37,315 4.23
Real estate - business 2,859,008 127,635 4.46 2,737,820 117,516 4.29 2,694,620 102,009 3.79
Real estate - personal 2,178,716 85,604 3.93 2,093,802 80,365 3.84 2,019,674 75,267 3.73
Consumer 1,930,883 92,414 4.79 2,010,826 89,074 4.43 2,036,393 81,065 3.98
Revolving home equity 358,474 18,204 5.08 379,715 17,513 4.61 398,611 15,516 3.89
Consumer credit card 764,828 93,754 12.26 768,789 92,269 12.00 743,885 88,329 11.87
Overdrafts 9,203 - - 4,778 - - 4,592 - -
Total loans 14,224,637 669,621 4.71 13,926,079 631,014 4.53 13,611,699 554,182 4.07
Loans held for sale 18,577 1,209 6.51 19,493 1,298 6.66 17,452 1,000 5.73
Investment securities:
U.S. government & federal agency
obligations 851,124 20,968 2.46 921,759 21,720 2.36 914,961 19,697 2.15
Government-sponsored enterprise
obligations 191,406 4,557 2.38 308,520 6,098 1.98 452,422 7,321 1.62
State & municipal obligations(B) 1,220,958 38,362 3.14 1,410,700 42,867 3.04 1,720,723 62,073 3.61
Mortgage-backed securities 4,594,576 123,806 2.69 4,203,625 111,686 2.66 3,784,602 89,623 2.37
Asset-backed securities 1,372,574 37,478 2.73 1,455,690 34,223 2.35 2,083,611 36,757 1.76
Other debt securities 333,105 9,017 2.71 340,458 8,912 2.62 330,365 8,410 2.55
Trading debt securities(B) 29,450 886 3.01 24,731 759 3.07 21,929 583 2.66
Equity securities(B) 4,547 1,792 39.41 26,459 11,816 44.66 60,772 2,283 3.76
Other securities(B) 134,255 8,466 6.31 114,438 12,412 10.85 98,564 10,507 10.66
Total investment securities 8,731,995 245,332
2.81 8,806,380 250,493 2.84 9,467,949 237,254 2.51
Federal funds sold and short-term
securities purchased under
agreements to resell 2,034 55 2.70 27,026 519 1.92 18,518 230 1.24
Long-term securities purchased
under agreements to resell 741,089 15,898 2.15 696,438 15,881 2.28 688,147 15,440 2.24
Interest earning deposits with
banks 316,299 6,698 2.12 319,948 6,233 1.95 207,269 2,223 1.07
Total interest earning assets 24,034,631 938,813 3.91 23,795,364 905,438 3.81 24,011,034 810,329 3.37
Allowance for loan losses (160,212 ) (158,791 ) (156,572 )
Unrealized gain (loss) on debt
securities 74,605 (113,068 ) 45,760
Cash and due from banks 370,709 360,732 361,414
Land, buildings and equipment - net 380,350 343,636 345,639
Other assets 513,442 438,362 424,333
Total assets $ 25,213,525 $ 24,666,235 $ 25,031,608
LIABILITIES AND EQUITY
Interest bearing deposits:
Savings $ 918,896 1,021 .11 $ 867,150 973 .11 $ 819,558 981 .12
Interest checking and money market 10,607,224 38,691 .36 10,817,169 26,830 .25 10,517,741 16,328 .16
Certificates of deposit of less
than $100,000 610,807 6,368 1.04 603,137 3,215 .53 676,272 2,645 .39
Certificates of deposit of $100,000
and over 1,396,760 26,945 1.93 1,114,825 14,658 1.31 1,404,960 10,859 .77
Total interest bearing deposits 13,533,687 73,025 .54 13,402,281 45,676 .34 13,418,531 30,813 .23
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase 1,822,098 29,415 1.61 1,514,144 19,655 1.30 1,462,387 9,829 .67 Other borrowings 43,919 952 2.17 1,747 45 2.58 87,696 3,086 3.52 Total borrowings 1,866,017 30,367 1.63 1,515,891 19,700 1.30 1,550,083 12,915 .83 Total interest bearing liabilities 15,399,704 103,392 .67 % 14,918,172 65,376 .44 % 14,968,614 43,728 .29 % Non-interest bearing deposits 6,376,204 6,728,971 7,176,255 Other liabilities 360,587 247,520 250,510 Equity 3,077,030 2,771,572 2,636,229 Total liabilities and equity$ 25,213,525 $ 24,666,235 $ 25,031,608 Net interest margin (T/E) $ 835,421 $ 840,062 $ 766,601 Net yield on interest earning assets 3.48 % 3.53 % 3.19 % Percentage increase (decrease) in net interest margin (T/E) compared to the prior year (.55 )% 9.58 % 7.75 %
(A) Loans on non-accrual status are included in the computation of average
balances. Included in interest income above are loan fees and late charges,
net of amortization of deferred loan origination fees and costs, which are
immaterial. Credit card income from merchant discounts and net interchange
fees are not included in loan income.
AVERAGE BALANCE SHEETS - AVERAGE RATES AND YIELDS
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Years Ended December 31
2016 2015 2014
Average Balance
Average Five Year
Interest Rates Interest Average Rates Interest Average Rates Compound Growth
Average Balance Income/Expense Earned/Paid Average Balance Income/Expense Earned/Paid Average Balance Income/Expense Earned/Paid Rate
$ 4,652,526 $ 134,438 2.89 % $ 4,186,101 $ 116,455 2.78 % $ 3,919,421 $ 110,791 2.83 % 5.87 %
778,822 27,452 3.52 477,320 17,075 3.58 418,702 15,826 3.78 16.78
2,440,955 89,305 3.66 2,293,839 85,751 3.74 2,300,855 88,206 3.83 4.44
1,936,420 72,417 3.74 1,899,234 71,666 3.77 1,818,125 69,054 3.80 3.68
1,947,240 75,076 3.86 1,829,830 72,625 3.97 1,617,039 68,434 4.23 3.61
417,514 14,797 3.54 431,033 15,262 3.54 426,720 16,188 3.79 (3.43 )
749,589 86,008 11.47 746,503 86,162 11.54 754,482 86,298 11.44 .27
4,712 - - 5,416 - - 4,889 - - 13.49
12,927,778 499,493 3.86 11,869,276 464,996 3.92 11,260,233 454,797 4.04 4.78
25,710 1,317 5.12 4,115 191 4.64 - - - -
735,081 15,628 2.13 466,135 5,180 1.11 497,271 13,750 2.77 11.35
591,785 13,173 2.23 938,589 17,319 1.85 794,752 13,211 1.66 (24.78 )
1,753,727 63,261 3.61 1,786,235 63,054 3.53 1,715,493 61,593 3.59 (6.58 )
3,460,821 82,888 2.40 3,164,447 80,936 2.56 2,981,225 80,229 2.69 9.04
2,418,118 35,346 1.46 2,773,069 29,558 1.07 2,834,013 24,976 .88 (13.50 )
331,289 8,382 2.53 255,558 6,191 2.42 141,266 3,287 2.33 18.72
19,722 489 2.48 20,517 562 2.74 18,423 411 2.23 9.84
47,763 2,208 4.62 45,200 1,805 3.99 48,847 1,448 2.96 (37.80 )
112,888 7,656 6.78 108,061 8,582 7.94 100,399 9,885 9.85 5.98
9,471,194 229,031 2.42 9,557,811 213,187 2.23 9,131,689 208,790 2.29 (.89 )
12,660 78 .62 16,184 60 .37 31,817 101 .32 (42.30 )
791,392 13,544 1.71 1,002,053 13,172 1.31 985,205 12,473 1.27 (5.54 )
188,581 973 .52 206,115 528 .26 220,876 555 .25 7.45
23,417,315 744,436 3.18 22,655,554 692,134 3.06 21,629,820 676,716 3.13 2.13
(152,628 ) (152,690 ) (160,828 ) (.08 )
143,842 112,352 90,392 (3.77 )
381,822 378,803 382,207 (.61 )
350,443 359,773 354,899 1.39
415,677 383,810 376,433 6.40
$ 24,556,471 $ 23,737,602 $ 22,672,923 2.15
$ 775,121 923 .12 $ 729,311 876 .12 $ 670,650 855 .13 6.50
10,285,288 13,443 .13 9,752,794 12,498 .13 9,477,947 12,667 .13 2.28
749,261 2,809 .37 832,343 3,236 .39 935,387 4,137 .44 (8.17 )
1,471,610 8,545 .58 1,224,402 6,051 .49 1,372,509 5,926 .43 .35
13,281,280 25,720 .19 12,538,850 22,661 .18 12,456,493 23,585 .19 1.67
1,266,093 3,315 .26 1,654,860 1,861 .11 1,257,660 1,019 .08 7.70
171,255 3,968 2.32 103,884 3,574 3.44 104,896 3,484 3.32 (15.98 )
1,437,348 7,283 .51 1,758,744 5,435 .31 1,362,556 4,503 .33 6.49
14,718,628 33,003 .22 % 14,297,594 28,096 .20 % 13,819,049 28,088 .20 % 2.19
7,049,633 6,786,741 6,339,183 .12
292,145 280,231 225,554 9.84
2,496,065 2,373,036 2,289,137 6.09
$ 24,556,471 $ 23,737,602 $ 22,672,923 2.15 %
$ 711,433 $ 664,038 $ 648,628
3.04 % 2.93 % 3.00 %
7.14 % 2.38 % .42 %
(B) Interest income and yields are presented on a fully-taxable equivalent basis
using a federal income tax rate of 21% in 2019 and 2018, and 35% in prior
periods. Loan interest income includes tax free loan income (categorized as
business loan income) which includes tax equivalent adjustments of
in 2019,
income includes tax equivalent adjustments of
in 2018,
obligations, trading securities, equity securities, and other securities.
55
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QUARTERLY AVERAGE BALANCE SHEETS - AVERAGE RATES AND YIELDS
Year ended
Fourth Quarter Third Quarter Second Quarter First Quarter
Average Average Rates Average Average Rates Average Average Rates Average Average Rates
(Dollars in millions) Balance Earned/Paid Balance Earned/Paid Balance Earned/Paid Balance Earned/Paid
ASSETS
Loans:
Business(A) $ 5,362 3.59 % $ 5,265 3.85 % $ 5,142 4.02 % $ 5,086 4.07 %
Real estate -
construction and land 901 5.05 920 5.46 909 5.63 907 5.73
Real estate - business 2,820 4.22 2,883 4.42 2,869 4.60 2,864 4.61
Real estate - personal 2,284 3.85 2,175 3.91 2,135 3.97 2,119 4.00
Consumer 1,962 4.76 1,924 4.88 1,908 4.77 1,929 4.73
Revolving home equity 348 4.76 354 5.17 362 5.20 371 5.17
Consumer credit card 749 12.11 763 12.42 766 12.33 781 12.18
Overdrafts 18 - 9 - 5 - 4 -
Total loans 14,444 4.47 14,293 4.71 14,096 4.82 14,061 4.85
Loans held for sale 15 5.32 20 6.15 21 6.98 18 7.38
Investment securities:
U.S. government &
federal agency
obligations 826 2.16 824 2.36 844 4.66 910 .78
Government-sponsored
enterprise obligations 185 2.17 182 2.69 200 2.32 199 2.35
State & municipal
obligations(A) 1,208 3.05 1,172 3.14 1,222 3.18 1,283 3.19
Mortgage-backed
securities 4,686 2.72 4,713 2.61 4,615 2.70 4,360 2.76
Asset-backed securities 1,258 2.62 1,298 2.80 1,412 2.79 1,526 2.70
Other debt securities 331 2.82 334 2.63 331 2.68 336 2.69
Trading debt
securities(A) 33 2.81 30 2.91 30 3.14 25 3.24
Equity securities(A) 4 49.40 5 35.67 5 35.97 5 37.55
Other securities(A) 142 6.58 135 6.19 130 6.69 130 5.73
Total investment
securities 8,673 2.78 8,693 2.76 8,789 3.04 8,774 2.66
Federal funds sold and
short-term securities
purchased under
agreements to resell 1 2.22 1 2.57 2 2.76 5 2.79
Long-term securities
purchased under
agreements to resell 850 2.26 713 2.01 700 2.11 700 2.18
Interest earning
deposits with banks 390 1.61 227 2.17 332 2.40 317 2.42
Total interest earning
assets 24,373 3.75 23,947 3.90 23,940 4.05 23,875 3.93
Allowance for loan
losses (160 ) (160 ) (161 ) (159 )
Unrealized gain (loss)
on debt securities 150 153 42 (49 )
Cash and due from banks 379 367 369 367
Land, buildings and
equipment - net 387 380 378 376
Other assets 549 545 504 454
Total assets $ 25,678 $ 25,232 $ 25,072 $ 24,864
LIABILITIES AND EQUITY
Interest bearing
deposits:
Savings $ 924 .11 $ 925 .11 $ 930 .11 $ 896 .11
Interest checking and
money market 10,619 .35 10,409 .38 10,643 .38 10,763 .35
Certificates of deposit
under $100,000 627 1.16 620 1.11 605 1.01 590 .87
Certificates of deposit
$100,000 & over 1,434 1.79 1,504 1.99 1,378 2.02 1,268 1.92
Total interest bearing
deposits 13,604 .52 13,458 .58 13,556 .55 13,517 .51
Borrowings:
Federal funds purchased
and securities sold
under agreements to
repurchase 1,837 1.20 1,885 1.74 1,794 1.80 1,772 1.72
Other borrowings 94 2.05 77 2.33 2 1.52 1 1.62
Total borrowings 1,931 1.25 1,962 1.76 1,796 1.80 1,773 1.72
Total interest bearing
liabilities 15,535 .61 % 15,420 .73 % 15,352 .70 % 15,290 .65 %
Non-interest bearing
deposits 6,553 6,290 6,336 6,325
Other liabilities 459 391 307 283
Equity 3,131 3,131 3,077 2,966
Total liabilities and
equity $ 25,678 $ 25,232 $ 25,072 $ 24,864
Net interest margin
(T/E) $ 206 $ 207 $ 215 $ 207
Net yield on interest
earning assets 3.36 % 3.43 % 3.61 % 3.52 %
(A) Includes tax equivalent calculations.
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QUARTERLY AVERAGE BALANCE SHEETS - AVERAGE RATES AND YIELDS
Year ended December 31, 2018
Fourth Quarter Third Quarter Second Quarter First Quarter
Average Average Rates Average Average Rates Average Average Rates Average Average Rates
(Dollars in millions) Balance Earned/Paid Balance Earned/Paid Balance Earned/Paid Balance Earned/Paid
ASSETS
Loans:
Business(A) $ 5,030 3.93 % $ 4,925 3.80 % $ 4,962 3.69 % $ 4,934 3.48 %
Real estate -
construction and land 953 5.47 992 5.21 972 5.06 952 4.69
Real estate - business 2,758 4.53 2,733 4.35 2,727 4.22 2,734 4.06
Real estate - personal 2,122 3.87 2,111 3.83 2,079 3.84 2,062 3.80
Consumer 1,962 4.62 1,985 4.46 2,026 4.39 2,072 4.25
Revolving home equity 374 4.98 374 4.72 378 4.51 393 4.25
Consumer credit card 788 11.91 775 11.99 754 12.05 758 12.06
Overdrafts 5 - 5 - 4 - 5 -
Total loans 13,992 4.72 13,900 4.59 13,902 4.49 13,910 4.33
Loans held for sale 18 6.59 18 6.87 22 6.72 19 6.45
Investment securities:
U.S. government &
federal agency
obligations 923 1.90 925 2.23 924 3.18 916 2.12
Government-sponsored
enterprise obligations 215 2.24 262 2.10 354 1.88 406 1.84
State & municipal
obligations(A) 1,361 3.06 1,376 2.98 1,395 3.06 1,513 3.06
Mortgage-backed
securities 4,380 2.75 4,434 2.65 4,067 2.60 3,926 2.62
Asset-backed securities 1,519 2.55 1,427 2.42 1,407 2.32 1,469 2.11
Other debt securities 340 2.60 340 2.59 340 2.63 342 2.65
Trading debt
securities(A) 26 3.21 24 3.13 26 3.15 22 2.73
Equity securities(A) 4 39.92 4 32.69 47 89.68 51 3.64
Other securities(A) 128 15.51 120 13.00 109 6.68 101 6.73
Total investment
securities 8,896 2.86 8,912 2.76 8,669 3.19 8,746 2.58
Federal funds sold and
short-term securities
purchased under
agreements to resell 14 2.56 13 2.10 37 1.93 44 1.65
Long-term securities
purchased under
agreements to resell 700 2.31 686 2.26 700 2.17 700 2.38
Interest earning
deposits with banks 353 2.28 299 1.96 354 1.80 274 1.69
Total interest earning
assets 23,973 3.92 23,828 3.80 23,684 3.90 23,693 3.59
Allowance for loan
losses (159 ) (159 ) (159 ) (159 )
Unrealized loss on debt
securities (166 ) (119 ) (122 ) (43 )
Cash and due from banks 365 357 357 364
Land, buildings and
equipment - net 343 344 343 345
Other assets 452 445 419 437
Total assets $ 24,808 $ 24,696 $ 24,522 $ 24,637
LIABILITIES AND EQUITY
Interest bearing
deposits:
Savings $ 871 .11 $ 877 .11 $ 881 .11 $ 839 .12
Interest checking and
money market 10,839 .30 10,840 .26 10,850 .23 10,738 .20
Certificates of deposit
under $100,000 585 .70 594 .56 609 .46 625 .43
Certificates of deposit
$100,000 & over 1,091 1.61 1,100 1.41 1,135 1.23 1,134 1.02
Total interest bearing
deposits 13,386 .41 13,411 .35 13,475 .32 13,336 .28
Borrowings:
Federal funds purchased
and securities sold
under agreements to
repurchase 1,656 1.60 1,500 1.33 1,339 1.18 1,560 1.04
Other borrowings 1 2.67 2 2.60 3 2.52 2 2.54
Total borrowings 1,657 1.60 1,502 1.33 1,342 1.19 1,562 1.04
Total interest bearing
liabilities 15,043 .54 % 14,913 .45 % 14,817 .40 % 14,898 .36 %
Non-interest bearing
deposits 6,667 6,678 6,749 6,825
Other liabilities 265 296 228 199
Equity 2,833 2,809 2,728 2,715
Total liabilities and
equity $ 24,808 $ 24,696 $ 24,522 $ 24,637
Net interest margin
(T/E) $ 216 $ 211 $ 216 $ 197
Net yield on interest
earning assets 3.58 % 3.52 % 3.65 % 3.37 %
(A) Includes tax equivalent calculations.
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