CBSH 3.31.2014 10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| |
(Mark One) | |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
_________________________________________________________
For the quarterly period ended March 31, 2014
OR
|
| |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
____________________________________________________________
For the transition period from to
Commission File No. 0-2989
|
| | |
| COMMERCE BANCSHARES, INC. | |
(Exact name of registrant as specified in its charter) |
|
| | |
Missouri | | 43-0889454 |
(State of Incorporation) | | (IRS Employer Identification No.) |
| | |
1000 Walnut, Kansas City, MO | | 64106 |
(Address of principal executive offices) | | (Zip Code) |
| | |
(816) 234-2000 | | |
(Registrant’s telephone number, including area code) | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | |
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of April 30, 2014, the registrant had outstanding 95,185,720 shares of its $5 par value common stock, registrant’s only class of common stock.
Commerce Bancshares, Inc. and Subsidiaries
Form 10-Q
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| (Unaudited) | | |
| (In thousands) |
ASSETS | | | |
Loans | $ | 11,222,038 |
| | $ | 10,956,836 |
|
Allowance for loan losses | (161,532 | ) | | (161,532 | ) |
Net loans | 11,060,506 |
| | 10,795,304 |
|
Investment securities: | | | |
|
Available for sale ($552,477,000 and $687,680,000 pledged in 2014 and 2013, | | | |
respectively, to secure swap and repurchase agreements) | 9,115,116 |
| | 8,915,680 |
|
Trading | 15,740 |
| | 19,993 |
|
Non-marketable | 126,119 |
| | 107,324 |
|
Total investment securities | 9,256,975 |
| | 9,042,997 |
|
Short-term federal funds sold and securities purchased under agreements to resell | 19,525 |
| | 43,845 |
|
Long-term securities purchased under agreements to resell | 950,000 |
| | 1,150,000 |
|
Interest earning deposits with banks | 198,417 |
| | 707,249 |
|
Cash and due from banks | 530,244 |
| | 518,420 |
|
Land, buildings and equipment, net | 344,790 |
| | 349,654 |
|
Goodwill | 138,921 |
| | 138,921 |
|
Other intangible assets, net | 8,811 |
| | 9,268 |
|
Other assets | 328,931 |
| | 316,378 |
|
Total assets | $ | 22,837,120 |
| | $ | 23,072,036 |
|
LIABILITIES AND EQUITY | | | |
Deposits: | | | |
|
Non-interest bearing | $ | 6,552,085 |
| | $ | 6,750,674 |
|
Savings, interest checking and money market | 10,328,912 |
| | 10,108,236 |
|
Time open and C.D.'s of less than $100,000 | 967,272 |
| | 983,689 |
|
Time open and C.D.'s of $100,000 and over | 1,389,065 |
| | 1,204,749 |
|
Total deposits | 19,237,334 |
| | 19,047,348 |
|
Federal funds purchased and securities sold under agreements to repurchase | 927,152 |
| | 1,346,558 |
|
Other borrowings | 105,114 |
| | 107,310 |
|
Other liabilities | 294,009 |
| | 356,423 |
|
Total liabilities | 20,563,609 |
| | 20,857,639 |
|
Commerce Bancshares, Inc. stockholders’ equity: | | | |
|
Preferred stock, $1 par value | | | |
Authorized and unissued 2,000,000 shares | — |
| | — |
|
Common stock, $5 par value | | | |
|
Authorized 100,000,000 shares; issued 96,244,762 shares in 2014 and 2013 | 481,224 |
| | 481,224 |
|
Capital surplus | 1,273,290 |
| | 1,279,948 |
|
Retained earnings | 492,559 |
| | 449,836 |
|
Treasury stock of 391,599 shares in 2014 and 235,986 shares in 2013, at cost | (17,193 | ) | | (10,097 | ) |
Accumulated other comprehensive income | 40,499 |
| | 9,731 |
|
Total Commerce Bancshares, Inc. stockholders' equity | 2,270,379 |
| | 2,210,642 |
|
Non-controlling interest | 3,132 |
| | 3,755 |
|
Total equity | 2,273,511 |
| | 2,214,397 |
|
Total liabilities and equity | $ | 22,837,120 |
| | $ | 23,072,036 |
|
See accompanying notes to consolidated financial statements.
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
|
| | | | | | |
| For the Three Months Ended March 31 |
(In thousands, except per share data) | 2014 | 2013 |
| (Unaudited) |
INTEREST INCOME | | |
Interest and fees on loans | $ | 110,702 |
| $ | 107,786 |
|
Interest and fees on loans held for sale | — |
| 85 |
|
Interest on investment securities | 45,019 |
| 44,959 |
|
Interest on short-term federal funds sold and securities purchased under | | |
agreements to resell | 26 |
| 9 |
|
Interest on long-term securities purchased under agreements to resell | 4,151 |
| 5,829 |
|
Interest on deposits with banks | 100 |
| 77 |
|
Total interest income | 159,998 |
| 158,745 |
|
INTEREST EXPENSE | | |
Interest on deposits: | | |
Savings, interest checking and money market | 3,306 |
| 3,924 |
|
Time open and C.D.'s of less than $100,000 | 1,120 |
| 1,749 |
|
Time open and C.D.'s of $100,000 and over | 1,452 |
| 1,699 |
|
Interest on federal funds purchased and securities sold under | | |
agreements to repurchase | 203 |
| 218 |
|
Interest on other borrowings | 851 |
| 812 |
|
Total interest expense | 6,932 |
| 8,402 |
|
Net interest income | 153,066 |
| 150,343 |
|
Provision for loan losses | 9,660 |
| 3,285 |
|
Net interest income after provision for loan losses | 143,406 |
| 147,058 |
|
NON-INTEREST INCOME | | |
Bank card transaction fees | 41,717 |
| 38,550 |
|
Trust fees | 26,573 |
| 25,169 |
|
Deposit account charges and other fees | 18,590 |
| 18,712 |
|
Capital market fees | 3,870 |
| 4,391 |
|
Consumer brokerage services | 2,747 |
| 2,686 |
|
Loan fees and sales | 1,209 |
| 1,473 |
|
Other | 7,921 |
| 8,896 |
|
Total non-interest income | 102,627 |
| 99,877 |
|
INVESTMENT SECURITIES GAINS (LOSSES), NET | | |
Change in fair value of other-than-temporarily impaired securities | (63 | ) | 1,389 |
|
Portion recognized in other comprehensive income | (283 | ) | (1,831 | ) |
Net impairment losses recognized in earnings | (346 | ) | (442 | ) |
Realized gains (losses) on sales and fair value adjustments | 10,383 |
| (1,723 | ) |
Investment securities gains (losses), net | 10,037 |
| (2,165 | ) |
NON-INTEREST EXPENSE | | |
Salaries and employee benefits | 94,263 |
| 90,881 |
|
Net occupancy | 11,616 |
| 11,235 |
|
Equipment | 4,504 |
| 4,683 |
|
Supplies and communication | 5,699 |
| 5,589 |
|
Data processing and software | 19,087 |
| 18,951 |
|
Marketing | 3,681 |
| 3,359 |
|
Deposit insurance | 2,894 |
| 2,767 |
|
Other | 20,596 |
| 17,572 |
|
Total non-interest expense | 162,340 |
| 155,037 |
|
Income before income taxes | 93,730 |
| 89,733 |
|
Less income taxes | 29,609 |
| 28,925 |
|
Net income | 64,121 |
| 60,808 |
|
Less non-controlling interest expense (income) | (192 | ) | (209 | ) |
Net income attributable to Commerce Bancshares, Inc. | $ | 64,313 |
| $ | 61,017 |
|
Net income per common share — basic | $ | .67 |
| $ | .64 |
|
Net income per common share — diluted | $ | .67 |
| $ | .63 |
|
See accompanying notes to consolidated financial statements.
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | |
| | For the Three Months Ended March 31 |
(In thousands) | | 2014 | 2013 |
| | (Unaudited) |
Net income | | $ | 64,121 |
| $ | 60,808 |
|
Other comprehensive income (loss): | | | |
Net unrealized gains on securities for which a portion of an other-than-temporary impairment has been recorded in earnings | | 166 |
| 1,137 |
|
Net unrealized gains (losses) on other securities | | 30,379 |
| (8,193 | ) |
Pension loss amortization | | 223 |
| 475 |
|
Other comprehensive income (loss) | | 30,768 |
| (6,581 | ) |
Comprehensive income | | 94,889 |
| 54,227 |
|
Less non-controlling interest expense (income) | | (192 | ) | (209 | ) |
Comprehensive income attributable to Commerce Bancshares, Inc. | $ | 95,081 |
| $ | 54,436 |
|
See accompanying notes to consolidated financial statements.
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
| | | | | | | | | | | | | | | | | | | | | |
| Commerce Bancshares, Inc. Shareholders | | |
(In thousands, except per share data) | Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Non-Controlling Interest | Total |
| (Unaudited) |
Balance January 1, 2014 | $ | 481,224 |
| $ | 1,279,948 |
| $ | 449,836 |
| $ | (10,097 | ) | $ | 9,731 |
| $ | 3,755 |
| $ | 2,214,397 |
|
Net income |
|
|
|
| 64,313 |
|
|
|
|
| (192 | ) | 64,121 |
|
Other comprehensive income |
|
|
|
|
|
|
|
| 30,768 |
|
|
| 30,768 |
|
Distributions to non-controlling interest |
|
|
|
|
|
|
|
|
|
| (431 | ) | (431 | ) |
Purchase of treasury stock |
|
|
|
|
|
| (20,900 | ) |
|
|
|
| (20,900 | ) |
Issuance of stock under purchase and equity compensation plans |
|
| (2,897 | ) |
|
| 6,982 |
|
|
|
|
| 4,085 |
|
Net tax benefit related to equity compensation plans |
|
| 800 |
|
|
|
|
|
|
|
|
| 800 |
|
Stock-based compensation |
|
| 2,261 |
|
|
|
|
|
|
|
|
| 2,261 |
|
Issuance of nonvested stock awards |
|
| (6,822 | ) |
|
| 6,822 |
|
|
|
|
| — |
|
Cash dividends ($.225 per share) |
|
|
|
| (21,590 | ) |
|
|
|
|
|
| (21,590 | ) |
Balance March 31, 2014 | $ | 481,224 |
| $ | 1,273,290 |
| $ | 492,559 |
| $ | (17,193 | ) | $ | 40,499 |
| $ | 3,132 |
| $ | 2,273,511 |
|
Balance January 1, 2013 | $ | 458,646 |
| $ | 1,102,507 |
| $ | 477,210 |
| $ | (7,580 | ) | $ | 136,344 |
| $ | 4,447 |
| $ | 2,171,574 |
|
Net income |
|
|
|
| 61,017 |
|
|
|
|
| (209 | ) | 60,808 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
| (6,581 | ) |
|
| (6,581 | ) |
Distributions to non-controlling interest |
|
|
|
|
|
|
|
|
|
| (192 | ) | (192 | ) |
Purchase of treasury stock |
|
|
|
|
|
| (29,993 | ) |
|
|
|
| (29,993 | ) |
Issuance of stock under purchase and equity compensation plans |
|
| (1,146 | ) |
|
| 3,752 |
|
|
|
|
| 2,606 |
|
Net tax benefit related to equity compensation plans |
|
| 181 |
|
|
|
|
|
|
|
|
| 181 |
|
Stock-based compensation |
|
| 1,223 |
|
|
|
|
|
|
|
|
| 1,223 |
|
Issuance of nonvested stock awards |
|
| (1,320 | ) |
|
| 1,320 |
|
|
|
|
| — |
|
Cash dividends ($.214 per share) |
|
|
|
| (20,435 | ) |
|
|
|
|
|
| (20,435 | ) |
Balance March 31, 2013 | $ | 458,646 |
| $ | 1,101,445 |
| $ | 517,792 |
| $ | (32,501 | ) | $ | 129,763 |
| $ | 4,046 |
| $ | 2,179,191 |
|
See accompanying notes to consolidated financial statements.
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | |
| For the Three Months Ended March 31 |
(In thousands) | 2014 | | 2013 |
| (Unaudited) |
OPERATING ACTIVITIES: | | | |
Net income | $ | 64,121 |
| | $ | 60,808 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Provision for loan losses | 9,660 |
| | 3,285 |
|
Provision for depreciation and amortization | 10,508 |
| | 10,424 |
|
Amortization of investment security premiums, net | 6,675 |
| | 12,539 |
|
Investment securities (gains) losses, net(A) | (10,037 | ) | | 2,165 |
|
Net decrease in trading securities | 16,597 |
| | 9,609 |
|
Stock-based compensation | 2,261 |
| | 1,223 |
|
Increase in interest receivable | (1,421 | ) | | (5 | ) |
Increase in interest payable | 25 |
| | 246 |
|
Increase in income taxes payable | 30,410 |
| | 26,894 |
|
Net tax benefit related to equity compensation plans | (800 | ) | | (181 | ) |
Other changes, net | (6,524 | ) | | (28,936 | ) |
Net cash provided by operating activities | 121,475 |
| | 98,071 |
|
INVESTING ACTIVITIES: | | | |
Proceeds from sales of investment securities(A) | 31,666 |
| | 52 |
|
Proceeds from maturities/pay downs of investment securities(A) | 456,956 |
| | 674,270 |
|
Purchases of investment securities(A) | (628,237 | ) | | (934,142 | ) |
Net increase in loans | (275,036 | ) | | (159,087 | ) |
Long-term securities purchased under agreements to resell | (100,000 | ) | | (50,000 | ) |
Repayments of long-term securities purchased under agreements to resell | 300,000 |
| | 50,000 |
|
Purchases of land, buildings and equipment | (3,954 | ) | | (5,867 | ) |
Sales of land, buildings and equipment | 5 |
| | 404 |
|
Net cash used in investing activities | (218,600 | ) | | (424,370 | ) |
FINANCING ACTIVITIES: | | | |
Net decrease in non-interest bearing, savings, interest checking and money market deposits | (132,858 | ) | | (138,419 | ) |
Net increase in time open and C.D.'s | 167,862 |
| | 310,948 |
|
Repayment of long-term securities sold under agreements to repurchase | (150,000 | ) | | — |
|
Net increase (decrease) in short-term federal funds purchased and securities sold under | | | |
agreements to repurchase | (269,406 | ) | | 43,308 |
|
Repayment of other long-term borrowings | (196 | ) | | (927 | ) |
Net decrease in other short-term borrowings | (2,000 | ) | | — |
|
Purchases of treasury stock | (20,900 | ) | | (29,993 | ) |
Issuance of stock under stock purchase and equity compensation plans | 4,085 |
| | 2,606 |
|
Net tax benefit related to equity compensation plans | 800 |
| | 181 |
|
Cash dividends paid on common stock | (21,590 | ) | | (20,435 | ) |
Net cash provided by (used in) financing activities | (424,203 | ) | | 167,269 |
|
Decrease in cash and cash equivalents | (521,328 | ) | | (159,030 | ) |
Cash and cash equivalents at beginning of year | 1,269,514 |
| | 779,825 |
|
Cash and cash equivalents at March 31 | $ | 748,186 |
| | $ | 620,795 |
|
(A) Available for sale and non-marketable securities | | | |
Income tax net payments (refunds) | $ | (807 | ) | | $ | 2,031 |
|
Interest paid on deposits and borrowings | $ | 6,869 |
| | $ | 8,156 |
|
Loans transferred to foreclosed real estate | $ | 836 |
| | $ | 3,925 |
|
See accompanying notes to consolidated financial statements.
Commerce Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014 (Unaudited)
1. Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2013 data to conform to current year presentation. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2014 are not necessarily indicative of results to be attained for the full year or any other interim period.
The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2013 Annual Report on Form 10-K.
2. Acquisition and Disposition
On September 1, 2013, the Company acquired Summit Bancshares Inc. (Summit). Summit's results of operations are included in the Company's consolidated financial results beginning on that date. The transaction was accounted for using the acquisition method of accounting and, as such, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair value on the acquisition date. In this transaction, the Company acquired all of the outstanding stock of Summit in exchange for shares of Company stock valued at $43.2 million. The valuation of Company stock was determined on the basis of the closing market price of the Company's common shares on August 30, 2013. The Company's acquisition of Summit added $261.6 million in assets (including $207.4 million in loans), $232.3 million in deposits and two branch locations in Tulsa and Oklahoma City, Oklahoma. Intangible assets recognized as a result of the transaction consisted of approximately $13.3 million in goodwill and $5.6 million in core deposit premium. Most of the goodwill was assigned to the Company's Commercial segment. None of the goodwill recognized is deductible for income tax purposes.
The Company has contracted to sell banking branches in Farmington, Desloge and Bonne Terre, Missouri. The transaction is expected to close in July 2014, pending regulatory approval. The Company expects to sell approximately $16 million in loans, $75 million in deposits, and various bank premises.
3. Loans and Allowance for Loan Losses
Major classifications within the Company’s held for investment loan portfolio at March 31, 2014 and December 31, 2013 are as follows:
|
| | | | | | | | |
(In thousands) | | March 31, 2014 | | December 31, 2013 |
Commercial: | | | | |
Business | | $ | 3,941,394 |
| | $ | 3,715,319 |
|
Real estate – construction and land | | 423,667 |
| | 406,197 |
|
Real estate – business | | 2,315,167 |
| | 2,313,550 |
|
Personal Banking: | | | | |
Real estate – personal | | 1,782,831 |
| | 1,787,626 |
|
Consumer | | 1,561,973 |
| | 1,512,716 |
|
Revolving home equity | | 419,376 |
| | 420,589 |
|
Consumer credit card | | 775,044 |
| | 796,228 |
|
Overdrafts | | 2,586 |
| | 4,611 |
|
Total loans | | $ | 11,222,038 |
| | $ | 10,956,836 |
|
At March 31, 2014, loans of $3.7 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.4 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.
Allowance for loan losses
A summary of the activity in the allowance for loan losses during the three months ended March 31, 2014 and 2013, respectively, follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, 2014 | | For the Three Months Ended March 31, 2013 |
(In thousands) | | Commercial | Personal Banking |
Total | | Commercial | Personal Banking |
Total |
Balance at January 1 | $ | 94,189 |
| $ | 67,343 |
| $ | 161,532 |
| | $ | 105,725 |
| $ | 66,807 |
| $ | 172,532 |
|
Provision | 4,067 |
| 5,593 |
| 9,660 |
| | (6,590 | ) | 9,875 |
| 3,285 |
|
Deductions: | | | | | | | |
Loans charged off | 1,130 |
| 12,751 |
| 13,881 |
| | 705 |
| 11,801 |
| 12,506 |
|
Less recoveries on loans | 755 |
| 3,466 |
| 4,221 |
| | 1,391 |
| 3,330 |
| 4,721 |
|
Net loan charge-offs (recoveries) | 375 |
| 9,285 |
| 9,660 |
| | (686 | ) | 8,471 |
| 7,785 |
|
Balance at March 31 | $ | 97,881 |
| $ | 63,651 |
| $ | 161,532 |
| | $ | 99,821 |
| $ | 68,211 |
| $ | 168,032 |
|
The following table shows the balance in the allowance for loan losses and the related loan balance at March 31, 2014 and December 31, 2013, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below, which are deemed to have similar risk characteristics and are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.
|
| | | | | | | | | | | | | |
| Impaired Loans | | All Other Loans |
(In thousands) | Allowance for Loan Losses | Loans Outstanding | | Allowance for Loan Losses | Loans Outstanding |
March 31, 2014 | | | | | |
Commercial | $ | 7,637 |
| $ | 79,325 |
| | $ | 90,244 |
| $ | 6,600,903 |
|
Personal Banking | 2,119 |
| 29,074 |
| | 61,532 |
| 4,512,736 |
|
Total | $ | 9,756 |
| $ | 108,399 |
| | $ | 151,776 |
| $ | 11,113,639 |
|
December 31, 2013 | | | | | |
Commercial | $ | 8,476 |
| $ | 78,516 |
| | $ | 85,713 |
| $ | 6,356,550 |
|
Personal Banking | 2,424 |
| 29,120 |
| | 64,919 |
| 4,492,650 |
|
Total | $ | 10,900 |
| $ | 107,636 |
| | $ | 150,632 |
| $ | 10,849,200 |
|
Impaired loans
The table below shows the Company’s investment in impaired loans at March 31, 2014 and December 31, 2013. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 13.
|
| | | | | | | | |
(In thousands) | | Mar. 31, 2014 | | Dec. 31, 2013 |
Non-accrual loans | | $ | 47,573 |
| | $ | 48,814 |
|
Restructured loans (accruing) | | 60,826 |
| | 58,822 |
|
Total impaired loans | | $ | 108,399 |
| | $ | 107,636 |
|
The following table provides additional information about impaired loans held by the Company at March 31, 2014 and December 31, 2013, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.
|
| | | | | | | | | |
(In thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance |
March 31, 2014 | | | |
With no related allowance recorded: | | | |
Business | $ | 7,969 |
| $ | 9,000 |
| $ | — |
|
Real estate – construction and land | 8,228 |
| 15,965 |
| — |
|
Real estate – business | 3,742 |
| 6,432 |
| — |
|
Consumer | 1,538 |
| 2,188 |
| — |
|
Revolving home equity | 2,191 |
| 2,741 |
| — |
|
| $ | 23,668 |
| $ | 36,326 |
| $ | — |
|
With an allowance recorded: | | | |
Business | $ | 25,834 |
| $ | 29,189 |
| $ | 2,806 |
|
Real estate – construction and land | 15,558 |
| 17,591 |
| 1,968 |
|
Real estate – business | 17,994 |
| 26,755 |
| 2,863 |
|
Real estate – personal | 9,496 |
| 12,517 |
| 1,127 |
|
Consumer | 3,948 |
| 3,948 |
| 75 |
|
Revolving home equity | 605 |
| 605 |
| 2 |
|
Consumer credit card | 11,296 |
| 11,296 |
| 915 |
|
| $ | 84,731 |
| $ | 101,901 |
| $ | 9,756 |
|
Total | $ | 108,399 |
| $ | 138,227 |
| $ | 9,756 |
|
December 31, 2013 | | | |
With no related allowance recorded: | | | |
Business | $ | 7,969 |
| $ | 9,000 |
| $ | — |
|
Real estate – construction and land | 8,766 |
| 16,067 |
| — |
|
Real estate – business | 4,089 |
| 6,417 |
| — |
|
Revolving home equity | 2,191 |
| 2,741 |
| — |
|
| $ | 23,015 |
| $ | 34,225 |
| $ | — |
|
With an allowance recorded: | | | |
Business | $ | 19,266 |
| $ | 22,597 |
| $ | 3,037 |
|
Real estate – construction and land | 17,632 |
| 19,708 |
| 2,174 |
|
Real estate – business | 20,794 |
| 29,287 |
| 3,265 |
|
Real estate – personal | 10,425 |
| 13,576 |
| 1,361 |
|
Consumer | 4,025 |
| 4,025 |
| 85 |
|
Revolving home equity | 666 |
| 666 |
| 2 |
|
Consumer credit card | 11,813 |
| 11,813 |
| 976 |
|
| $ | 84,621 |
| $ | 101,672 |
| $ | 10,900 |
|
Total | $ | 107,636 |
| $ | 135,897 |
| $ | 10,900 |
|
Total average impaired loans for the three month periods ended March 31, 2014 and 2013, respectively, are shown in the table below.
|
| | | | | | | | | |
(In thousands) | Commercial | Personal Banking | Total |
Average Impaired Loans: | | | |
For the three months ended March 31, 2014 | | | |
Non-accrual loans | $ | 40,302 |
| $ | 7,565 |
| $ | 47,867 |
|
Restructured loans (accruing) | 38,393 |
| 21,431 |
| 59,824 |
|
Total | $ | 78,695 |
| $ | 28,996 |
| $ | 107,691 |
|
For the three months ended March 31, 2013 | | | |
Non-accrual loans | $ | 41,108 |
| $ | 6,059 |
| $ | 47,167 |
|
Restructured loans (accruing) | 38,642 |
| 27,291 |
| 65,933 |
|
Total | $ | 79,750 |
| $ | 33,350 |
| $ | 113,100 |
|
The table below shows interest income recognized during the three month periods ended March 31, 2014 and 2013 for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 13.
|
| | | | | | |
| For the Three Months Ended March 31 |
(In thousands) | 2014 | 2013 |
Interest income recognized on impaired loans: | | |
Business | $ | 163 |
| $ | 397 |
|
Real estate – construction and land | 161 |
| 202 |
|
Real estate – business | 30 |
| 61 |
|
Real estate – personal | 63 |
| 73 |
|
Consumer | 75 |
| 93 |
|
Revolving home equity | 8 |
| 9 |
|
Consumer credit card | 202 |
| 240 |
|
Total | $ | 702 |
| $ | 1,075 |
|
Delinquent and non-accrual loans
The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at March 31, 2014 and December 31, 2013.
|
| | | | | | | | | | | | | | | |
(In thousands) | Current or Less Than 30 Days Past Due |
30 – 89 Days Past Due | 90 Days Past Due and Still Accruing | Non-accrual |
Total |
March 31, 2014 | | | | | |
Commercial: | | | | | |
Business | $ | 3,922,118 |
| $ | 7,780 |
| $ | 485 |
| $ | 11,011 |
| $ | 3,941,394 |
|
Real estate – construction and land | 409,592 |
| 4,609 |
| 19 |
| 9,447 |
| 423,667 |
|
Real estate – business | 2,284,479 |
| 11,592 |
| 42 |
| 19,054 |
| 2,315,167 |
|
Personal Banking: | | | | | |
Real estate – personal | 1,766,163 |
| 11,569 |
| 767 |
| 4,332 |
| 1,782,831 |
|
Consumer | 1,547,246 |
| 10,980 |
| 2,209 |
| 1,538 |
| 1,561,973 |
|
Revolving home equity | 415,637 |
| 884 |
| 664 |
| 2,191 |
| 419,376 |
|
Consumer credit card | 758,313 |
| 8,430 |
| 8,301 |
| — |
| 775,044 |
|
Overdrafts | 2,380 |
| 206 |
| — |
| — |
| 2,586 |
|
Total | $ | 11,105,928 |
| $ | 56,050 |
| $ | 12,487 |
| $ | 47,573 |
| $ | 11,222,038 |
|
December 31, 2013 | | | | | |
Commercial: | | | | | |
Business | $ | 3,697,589 |
| $ | 5,467 |
| $ | 671 |
| $ | 11,592 |
| $ | 3,715,319 |
|
Real estate – construction and land | 386,423 |
| 9,601 |
| — |
| 10,173 |
| 406,197 |
|
Real estate – business | 2,292,385 |
| 1,340 |
| 47 |
| 19,778 |
| 2,313,550 |
|
Personal Banking: | | | | | |
Real estate – personal | 1,771,231 |
| 9,755 |
| 1,560 |
| 5,080 |
| 1,787,626 |
|
Consumer | 1,492,960 |
| 17,482 |
| 2,274 |
| — |
| 1,512,716 |
|
Revolving home equity | 416,614 |
| 1,082 |
| 702 |
| 2,191 |
| 420,589 |
|
Consumer credit card | 777,564 |
| 9,952 |
| 8,712 |
| — |
| 796,228 |
|
Overdrafts | 4,315 |
| 296 |
| — |
| — |
| 4,611 |
|
Total | $ | 10,839,081 |
| $ | 54,975 |
| $ | 13,966 |
| $ | 48,814 |
| $ | 10,956,836 |
|
Credit quality
The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.
|
| | | | | | | | | | | | |
Commercial Loans |
(In thousands) |
Business | Real Estate-Construction | Real Estate- Business |
Total |
March 31, 2014 | | | | |
Pass | $ | 3,840,105 |
| $ | 391,080 |
| $ | 2,193,862 |
| $ | 6,425,047 |
|
Special mention | 59,603 |
| 1,917 |
| 48,782 |
| 110,302 |
|
Substandard | 30,675 |
| 21,223 |
| 53,469 |
| 105,367 |
|
Non-accrual | 11,011 |
| 9,447 |
| 19,054 |
| 39,512 |
|
Total | $ | 3,941,394 |
| $ | 423,667 |
| $ | 2,315,167 |
| $ | 6,680,228 |
|
December 31, 2013 | | | | |
Pass | $ | 3,618,120 |
| $ | 372,515 |
| $ | 2,190,344 |
| $ | 6,180,979 |
|
Special mention | 61,916 |
| 1,697 |
| 53,079 |
| 116,692 |
|
Substandard | 23,691 |
| 21,812 |
| 50,349 |
| 95,852 |
|
Non-accrual | 11,592 |
| 10,173 |
| 19,778 |
| 41,543 |
|
Total | $ | 3,715,319 |
| $ | 406,197 |
| $ | 2,313,550 |
| $ | 6,435,066 |
|
The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain Personal Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At March 31, 2014, these were comprised of $240.8 million in personal real estate loans and $12.3 million in consumer loans, or 5.6% of the Personal Banking portfolio. At December 31, 2013, these were comprised of $244.3 million in personal real estate loans and $47.5 million in consumer loans, or 6.5% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at March 31, 2014 and December 31, 2013 by FICO score.
|
| | | | | | | | |
Personal Banking Loans |
| % of Loan Category |
| Real Estate - Personal | Consumer | Revolving Home Equity | Consumer Credit Card |
March 31, 2014 | | | | |
FICO score: | | | | |
Under 600 | 1.7 | % | 5.5 | % | 3.0 | % | 4.4 | % |
600 - 659 | 3.2 |
| 10.3 |
| 4.9 |
| 12.1 |
|
660 - 719 | 10.4 |
| 23.0 |
| 14.6 |
| 34.0 |
|
720 - 779 | 26.1 |
| 28.9 |
| 31.9 |
| 27.7 |
|
780 and Over | 58.6 |
| 32.3 |
| 45.6 |
| 21.8 |
|
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
December 31, 2013 | | | | |
FICO score: | | | | |
Under 600 | 1.7 | % | 5.4 | % | 2.1 | % | 4.1 | % |
600 - 659 | 3.3 |
| 10.1 |
| 7.3 |
| 11.7 |
|
660 - 719 | 10.3 |
| 23.4 |
| 15.0 |
| 32.9 |
|
720 - 779 | 25.8 |
| 28.3 |
| 28.5 |
| 27.9 |
|
780 and Over | 58.9 |
| 32.8 |
| 47.1 |
| 23.4 |
|
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Troubled debt restructurings
As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $86.0 million at March 31, 2014. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected, and those non-accrual loans totaled $25.2 million at March 31, 2014. Other performing restructured loans totaled $60.8 million at March 31, 2014. These are primarily comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result were classified as troubled debt restructurings. These commercial loans totaled $41.0 million at March 31, 2014. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $11.3 million at March 31, 2014. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At March 31, 2014, these loans totaled $8.5 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.
The following table shows the outstanding balances of loans classified as troubled debt restructurings at March 31, 2014, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.
|
| | | | | | |
(In thousands) | March 31, 2014 | Balance 90 days past due at any time during previous 12 months |
Commercial: | | |
Business | $ | 30,973 |
| $ | 7,969 |
|
Real estate - construction and land | 23,217 |
| 5,014 |
|
Real estate - business | 7,414 |
| 2,421 |
|
Personal Banking: | | |
Real estate - personal | 7,002 |
| 60 |
|
Consumer | 5,486 |
| 1,676 |
|
Revolving home equity | 605 |
| — |
|
Consumer credit card | 11,296 |
| 854 |
|
Total restructured loans | $ | 85,993 |
| $ | 17,994 |
|
For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. No financial impact resulted from those performing loans where the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. The effects of modifications to consumer credit card loans were estimated to decrease interest income by approximately $1.2 million on an annual, pre-tax basis, compared to amounts contractually owed.
The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms. Performing commercial loans have had no other concessions granted other than being renewed at an interest rate judged not to be market. As such, they have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.
If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for loan losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing troubled debt restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for loan losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begun.
The Company had commitments of $10.5 million at March 31, 2014 to lend additional funds to borrowers with restructured loans.
The Company’s holdings of foreclosed real estate totaled $6.9 million and $6.6 million at March 31, 2014 and December 31, 2013, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.0 million and $2.8 million at March 31, 2014 and December 31, 2013, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.
4. Investment Securities
Investment securities, at fair value, consisted of the following at March 31, 2014 and December 31, 2013.
|
| | | | | | |
(In thousands) | Mar. 31, 2014 | Dec. 31, 2013 |
Available for sale | $ | 9,115,116 |
| $ | 8,915,680 |
|
Trading | 15,740 |
| 19,993 |
|
Non-marketable | 126,119 |
| 107,324 |
|
Total investment securities | $ | 9,256,975 |
| $ | 9,042,997 |
|
Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $46.5 million at both March 31, 2014 and December 31, 2013. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $79.5 million at March 31, 2014 and $60.7 million at December 31, 2013.
A summary of the available for sale investment securities by maturity groupings as of March 31, 2014 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments and does not hold trust preferred securities.
|
| | | | | | |
(In thousands) | Amortized Cost | Fair Value |
U.S. government and federal agency obligations: | | |
Within 1 year | $ | 42,859 |
| $ | 43,982 |
|
After 1 but within 5 years | 256,506 |
| 273,415 |
|
After 5 but within 10 years | 139,206 |
| 142,538 |
|
After 10 years | 52,996 |
| 47,703 |
|
Total U.S. government and federal agency obligations | 491,567 |
| 507,638 |
|
Government-sponsored enterprise obligations: | | |
Within 1 year | 35,317 |
| 35,599 |
|
After 1 but within 5 years | 492,447 |
| 492,574 |
|
After 5 but within 10 years | 143,543 |
| 135,524 |
|
After 10 years | 141,998 |
| 133,076 |
|
Total government-sponsored enterprise obligations | 813,305 |
| 796,773 |
|
State and municipal obligations: | | |
Within 1 year | 139,190 |
| 140,356 |
|
After 1 but within 5 years | 732,552 |
| 755,227 |
|
After 5 but within 10 years | 560,235 |
| 549,538 |
|
After 10 years | 186,056 |
| 177,527 |
|
Total state and municipal obligations | 1,618,033 |
| 1,622,648 |
|
Mortgage and asset-backed securities: | | |
Agency mortgage-backed securities | 2,850,043 |
| 2,892,499 |
|
Non-agency mortgage-backed securities | 287,342 |
| 298,633 |
|
Asset-backed securities | 2,813,445 |
| 2,816,012 |
|
Total mortgage and asset-backed securities | 5,950,830 |
| 6,007,144 |
|
Other debt securities: | | |
Within 1 year | 11,938 |
| 12,042 |
|
After 1 but within 5 years | 42,390 |
| 42,904 |
|
After 5 but within 10 years | 86,130 |
| 81,907 |
|
Total other debt securities | 140,458 |
| 136,853 |
|
Equity securities | 10,517 |
| 44,060 |
|
Total available for sale investment securities | $ | 9,024,710 |
| $ | 9,115,116 |
|
Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $507.5 million, at fair value, at March 31, 2014. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $127.0 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Included in equity securities is common stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $36.8 million at March 31, 2014.
For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.
|
| | | | | | | | | | | | |
(In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
March 31, 2014 | | | | |
U.S. government and federal agency obligations | $ | 491,567 |
| $ | 21,368 |
| $ | (5,297 | ) | $ | 507,638 |
|
Government-sponsored enterprise obligations | 813,305 |
| 2,264 |
| (18,796 | ) | 796,773 |
|
State and municipal obligations | 1,618,033 |
| 29,651 |
| (25,036 | ) | 1,622,648 |
|
Mortgage and asset-backed securities: | | | | |
Agency mortgage-backed securities | 2,850,043 |
| 62,175 |
| (19,719 | ) | 2,892,499 |
|
Non-agency mortgage-backed securities | 287,342 |
| 12,428 |
| (1,137 | ) | 298,633 |
|
Asset-backed securities | 2,813,445 |
| 9,290 |
| (6,723 | ) | 2,816,012 |
|
Total mortgage and asset-backed securities | 5,950,830 |
| 83,893 |
| (27,579 | ) | 6,007,144 |
|
Other debt securities | 140,458 |
| 752 |
| (4,357 | ) | 136,853 |
|
Equity securities | 10,517 |
| 33,543 |
| — |
| 44,060 |
|
Total | $ | 9,024,710 |
| $ | 171,471 |
| $ | (81,065 | ) | $ | 9,115,116 |
|
December 31, 2013 | | | | |
U.S. government and federal agency obligations | $ | 498,226 |
| $ | 20,614 |
| $ | (13,144 | ) | $ | 505,696 |
|
Government-sponsored enterprise obligations | 766,802 |
| 2,245 |
| (27,281 | ) | 741,766 |
|
State and municipal obligations | 1,624,195 |
| 28,321 |
| (33,345 | ) | 1,619,171 |
|
Mortgage and asset-backed securities: | | | | |
Agency mortgage-backed securities | 2,743,803 |
| 54,659 |
| (26,124 | ) | 2,772,338 |
|
Non-agency mortgage-backed securities | 236,595 |
| 12,008 |
| (1,620 | ) | 246,983 |
|
Asset-backed securities | 2,847,368 |
| 6,872 |
| (10,169 | ) | 2,844,071 |
|
Total mortgage and asset-backed securities | 5,827,766 |
| 73,539 |
| (37,913 | ) | 5,863,392 |
|
Other debt securities | 147,581 |
| 671 |
| (6,495 | ) | 141,757 |
|
Equity securities | 9,970 |
| 33,928 |
| — |
| 43,898 |
|
Total | $ | 8,874,540 |
| $ | 159,318 |
| $ | (118,178 | ) | $ | 8,915,680 |
|
The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At March 31, 2014, the fair value of securities on this watch list was $180.2 million compared to $188.8 million at December 31, 2013.
As of March 31, 2014, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $66.1 million. The cumulative credit-related portion of the impairment initially recorded on these securities totaled $13.2 million and was recorded in earnings. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.
The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at March 31, 2014 included the following:
|
| | | |
Significant Inputs | Range |
Prepayment CPR | 0% | - | 25% |
Projected cumulative default | 18% | - | 56% |
Credit support | 0% | - | 14% |
Loss severity | 20% | - | 81% |
The following table shows changes in the credit losses recorded in earnings during the three months ended March 31, 2014 and 2013, for which a portion of an OTTI was recognized in other comprehensive income.
|
| | | | | | |
| For the Three Months Ended March 31 |
(In thousands) | 2014 | 2013 |
Balance at January 1 | $ | 12,499 |
| $ | 11,306 |
|
Credit losses on debt securities for which impairment was previously recognized | 346 |
| 442 |
|
Increase in expected cash flows that are recognized over remaining life of security | (25 | ) | (20 | ) |
Balance at March 31 | $ | 12,820 |
| $ | 11,728 |
|
Securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period.
|
| | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or longer | | Total |
(In thousands) | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses |
March 31, 2014 | | | | | | | | |
U.S. government and federal agency obligations | $ | 29,349 |
| $ | 27 |
| | $ | 30,928 |
| $ | 5,270 |
| | $ | 60,277 |
| $ | 5,297 |
|
Government-sponsored enterprise obligations | 481,558 |
| 11,182 |
| | 106,412 |
| 7,614 |
| | 587,970 |
| 18,796 |
|
State and municipal obligations | 387,791 |
| 8,018 |
| | 189,058 |
| 17,018 |
| | 576,849 |
| 25,036 |
|
Mortgage and asset-backed securities: | | | | | | | | |
Agency mortgage-backed securities | 759,734 |
| 19,716 |
| | 107 |
| 3 |
| | 759,841 |
| 19,719 |
|
Non-agency mortgage-backed securities | 56,501 |
| 563 |
| | 22,388 |
| 574 |
| | 78,889 |
| 1,137 |
|
Asset-backed securities | 583,899 |
| 5,535 |
| | 118,267 |
| 1,188 |
| | 702,166 |
| 6,723 |
|
Total mortgage and asset-backed securities | 1,400,134 |
| 25,814 |
| | 140,762 |
| 1,765 |
| | 1,540,896 |
| 27,579 |
|
Other debt securities | 85,844 |
| 3,321 |
| | 15,294 |
| 1,036 |
| | 101,138 |
| 4,357 |
|
Total | $ | 2,384,676 |
| $ | 48,362 |
| | $ | 482,454 |
| $ | 32,703 |
| | $ | 2,867,130 |
| $ | 81,065 |
|
December 31, 2013 | | | | | | | | |
U.S. government and federal agency obligations | $ | 96,172 |
| $ | 243 |
| | $ | 59,677 |
| $ | 12,901 |
| | $ | 155,849 |
| $ | 13,144 |
|
Government-sponsored enterprise obligations | 487,317 |
| 18,155 |
| | 93,654 |
| 9,126 |
| | 580,971 |
| 27,281 |
|
State and municipal obligations | 478,818 |
| 15,520 |
| | 178,150 |
| 17,825 |
| | 656,968 |
| 33,345 |
|
Mortgage and asset-backed securities: | | | | | | | | |
Agency mortgage-backed securities | 717,778 |
| 26,124 |
| | — |
| — |
| | 717,778 |
| 26,124 |
|
Non-agency mortgage-backed securities | 53,454 |
| 918 |
| | 22,289 |
| 702 |
| | 75,743 |
| 1,620 |
|
Asset-backed securities | 1,088,556 |
| 9,072 |
| | 58,398 |
| 1,097 |
| | 1,146,954 |
| 10,169 |
|
Total mortgage and asset-backed securities | 1,859,788 |
| 36,114 |
| | 80,687 |
| 1,799 |
| | 1,940,475 |
| 37,913 |
|
Other debt securities | 90,028 |
| 5,604 |
| | 9,034 |
| 891 |
| | 99,062 |
| 6,495 |
|
Total | $ | 3,012,123 |
| $ | 75,636 |
| | $ | 421,202 |
| $ | 42,542 |
| | $ | 3,433,325 |
| $ | 118,178 |
|
The total available for sale portfolio consisted of approximately 1,800 individual securities at March 31, 2014. The portfolio included 431 securities, having an aggregate fair value of $2.9 billion, that were in an unrealized loss position at March 31, 2014, compared to 507 securities, with a fair value of $3.4 billion, at December 31, 2013. The total amount of unrealized loss on these securities decreased $37.1 million to $81.1 million at March 31, 2014. At March 31, 2014, the fair value of securities in an unrealized loss position for 12 months or longer totaled $482.5 million, or 5.3% of the total portfolio value, and did not include any securities identified as other-than-temporarily impaired.
The Company’s holdings of state and municipal obligations included gross unrealized losses of $25.0 million at March 31, 2014. Of these losses, $11.0 million related to auction rate securities and $14.1 million related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.5 billion at fair value, or 16.4% of total available for sale securities. The average credit quality of the portfolio, excluding auction rate securities, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and information about the top five largest holdings, by state and economic sector, is shown in the table below. The Company does not have exposure to obligations of municipalities which have filed for Chapter 9 bankruptcy. The Company has processes and procedures in place to monitor its holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner.
|
| | | | |
|
% of Portfolio | Average Life (in years) | Average Rating (Moody’s) |
At March 31, 2014 | | | |
Texas | 10.5 | % | 4.6 | Aa1 |
Florida | 9.8 |
| 4.5 | Aa3 |
New York | 6.2 |
| 6.1 | Aa2 |
Ohio | 6.0 |
| 4.9 | Aa2 |
Washington | 5.2 |
| 4.8 | Aa2 |
General obligation | 31.0 | % | 4.6 | Aa2 |
Lease | 16.5 |
| 4.7 | Aa3 |
Housing | 15.5 |
| 4.3 | Aa1 |
Transportation | 13.6 |
| 4.3 | A1 |
Limited tax | 6.0 |
| 5.3 | Aa1 |
The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.
|
| | | | | | |
| For the Three Months Ended March 31 |
(In thousands) | 2014 | 2013 |
Proceeds from sales of available for sale securities | $ | 30,998 |
| $ | — |
|
Proceeds from sales of non-marketable securities | 668 |
| 52 |
|
Total proceeds | $ | 31,666 |
| $ | 52 |
|
Available for sale: | | |
Losses realized on sales | $ | (5,197 | ) | $ | — |
|
Other-than-temporary impairment recognized on debt securities | (346 | ) | (442 | ) |
Non-marketable: | | |
Gains realized on sales | 2 |
| 52 |
|
Losses realized on sales | (134 | ) | — |
|
Fair value adjustments, net | 15,712 |
| (1,775 | ) |
Investment securities gains (losses), net | $ | 10,037 |
| $ | (2,165 | ) |
At March 31, 2014, securities totaling $4.8 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the Federal Reserve Bank and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $552.5 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.
5. Goodwill and Other Intangible Assets
The following table presents information about the Company's intangible assets which have estimable useful lives.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2014 | | December 31, 2013 |
(In thousands) | Gross Carrying Amount | Accumulated Amortization | Valuation Allowance | Net Amount | | Gross Carrying Amount | Accumulated Amortization | Valuation Allowance | Net Amount |
Amortizable intangible assets: | | | | | | | | | |
Core deposit premium | $ | 31,270 |
| $ | (23,302 | ) | $ | — |
| $ | 7,968 |
| | $ | 31,270 |
| $ | (22,781 | ) | $ | — |
| $ | 8,489 |
|
Mortgage servicing rights | 3,518 |
| (2,605 | ) | (70 | ) | 843 |
| | 3,430 |
| (2,567 | ) | (84 | ) | 779 |
|
Total | $ | 34,788 |
| $ | (25,907 | ) | $ | (70 | ) | $ | 8,811 |
| | $ | 34,700 |
| $ | (25,348 | ) | $ | (84 | ) | $ | 9,268 |
|
Aggregate amortization expense on intangible assets was $559 thousand and $557 thousand, respectively, for the three month periods ended March 31, 2014 and 2013. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of March 31, 2014. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.
|
| | | |
(In thousands) | |
2014 | $ | 1,997 |
|
2015 | 1,607 |
|
2016 | 1,244 |
|
2017 | 920 |
|
2018 | 687 |
|
Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2014 is as follows.
|
| | | | | | | | | |
(In thousands) | Goodwill | Core Deposit Premium | Mortgage Servicing Rights |
Balance January 1, 2014 | $ | 138,921 |
| $ | 8,489 |
| $ | 779 |
|
Originations | — |
| — |
| 88 |
|
Amortization | — |
| (521 | ) | (38 | ) |
Impairment reversal | — |
| — |
| 14 |
|
Balance March 31, 2014 | $ | 138,921 |
| $ | 7,968 |
| $ | 843 |
|
Goodwill allocated to the Company’s operating segments at March 31, 2014 and December 31, 2013 is shown below.
|
| | | |
(In thousands) | |
Consumer segment | $ | 70,721 |
|
Commercial segment | 67,454 |
|
Wealth segment | 746 |
|
Total goodwill | $ | 138,921 |
|
6. Guarantees
The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured, and in the event of nonperformance by customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.
Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At March 31, 2014 that net liability was $3.5 million, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $333.3 million at March 31, 2014.
The Company periodically enters into risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral, and at March 31, 2014, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term, with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 3 to 10 years. At March 31, 2014, the fair value of the Company's guarantee liabilities for RPAs was $71 thousand, and the notional amount of the underlying swaps was $65.4 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default.
7. Pension
The amount of net pension cost is shown in the table below:
|
| | | | | | |
| For the Three Months Ended March 31 |
(In thousands) | 2014 | 2013 |
Service cost - benefits earned during the period | $ | 133 |
| $ | 132 |
|
Interest cost on projected benefit obligation | 1,261 |
| 1,122 |
|
Expected return on plan assets | (1,561 | ) | (1,609 | ) |
Amortization of unrecognized net loss | 360 |
| 767 |
|
Net periodic pension cost | $ | 193 |
| $ | 412 |
|
Substantially all benefits accrued under the Company’s defined benefit pension plan were frozen effective January 1, 2005, and the remaining benefits were frozen effective January 1, 2011. During the first three months of 2014, the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets. The Company has no plans to make any further contributions, other than those related to the CERP, during the remainder of 2014.
8. Common Stock
Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 13.
|
| | | | | | |
| For the Three Months Ended March 31 |
(In thousands, except per share data) | 2014 | 2013 |
Basic income per common share: | | |
Net income attributable to Commerce Bancshares, Inc. | $ | 64,313 |
| $ | 61,017 |
|
Less income allocated to nonvested restricted stock | 802 |
| 594 |
|
Net income allocated to common stock | $ | 63,511 |
| $ | 60,423 |
|
Weighted average common shares outstanding | 94,773 |
| 94,722 |
|
Basic income per common share | $ | .67 |
| $ | .64 |
|
Diluted income per common share: | | |
Net income attributable to Commerce Bancshares, Inc. | $ | 64,313 |
| $ | 61,017 |
|
Less income allocated to nonvested restricted stock | 799 |
| 593 |
|
Net income allocated to common stock | $ | 63,514 |
| $ | 60,424 |
|
Weighted average common shares outstanding | 94,773 |
| 94,722 |
|
Net effect of the assumed exercise of stock-based awards - based on | | |
the treasury stock method using the average market price for the respective periods | 421 |
| 244 |
|
Weighted average diluted common shares outstanding | 95,194 |
| 94,966 |
|
Diluted income per common share | $ | .67 |
| $ | .63 |
|
Unexercised stock options and stock appreciation rights of 90 thousand were excluded in the computation of diluted income per share for the three month period ended March 31, 2014 because their inclusion would have been anti-dilutive. All unexercised stock options and rights were included in the computation of diluted income per share for the three month period ended March 31, 2013.
In the Annual Meeting of the Shareholders, held on April 16, 2014, a proposal to increase the shares of Company common stock authorized for issuance under its articles of incorporation was approved. This approval increased the authorized shares from 100,000,000 to 120,000,000.
9. Accumulated Other Comprehensive Income
The table below shows the activity and accumulated balances for components of other comprehensive income. The largest component is the unrealized holding gains and losses on available for sale securities. Unrealized gains and losses on debt securities for which an other-than-temporary impairment (OTTI) has been recorded in current earnings are shown separately below. The other component is the amortization from other comprehensive income of losses associated with pension benefits, which occurs as the losses are included in current net periodic pension cost.
|
| | | | | | | | | | | | |
| Unrealized Gains (Losses) on Securities (1) | Pension Loss (2) | Total Accumulated Other Comprehensive Income |
(In thousands) | OTTI | Other |
Balance January 1, 2014 | $ | 4,203 |
| $ | 21,303 |
| $ | (15,775 | ) | $ | 9,731 |
|
Other comprehensive income (loss) before reclassifications | (78 | ) | 43,801 |
| — |
| 43,723 |
|
Amounts reclassified from accumulated other comprehensive income | 346 |
| 5,197 |
| 360 |
| 5,903 |
|
Current period other comprehensive income, before tax | 268 |
| 48,998 |
| 360 |
| 49,626 | |