(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of class
Trading symbol(s)
Name of exchange on which registered
$5 Par Value Common Stock
CBSH
NASDAQ Global Select Market
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. Yesþ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesþ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerþ Accelerated filer o Non-accelerated filer o Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of April 30, 2021, the registrant had outstanding 117,034,676 shares of its $5 par value common stock, registrant’s only class of common stock.
Loans held for sale (including $30,505,000 and $39,396,000 of residential mortgage loans carried at fair value at March 31, 2021 and December 31, 2020, respectively)
38,076
45,089
Investment securities:
Available for sale debt, at fair value (amortized cost of $12,388,041,000 and $12,097,533,000 and
allowance for credit losses of $— at March 31, 2021 and December 31, 2020, respectively)
12,528,203
12,449,264
Trading debt
26,925
35,321
Equity
4,337
4,363
Other
155,913
156,745
Total investment securities
12,715,378
12,645,693
Federal funds sold and short-term securities purchased under agreements to resell
500
—
Long-term securities purchased under agreements to resell
850,000
850,000
Interest earning deposits with banks
2,017,128
1,747,363
Cash and due from banks
338,666
437,563
Premises and equipment – net
371,737
371,083
Goodwill
138,921
138,921
Other intangible assets – net
13,098
11,207
Other assets
594,738
567,248
Total assets
$
33,269,786
$
32,922,974
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing
$
11,076,556
$
10,497,598
Savings, interest checking and money market
14,572,378
14,604,456
Certificates of deposit of less than $100,000
504,472
529,802
Certificates of deposit of $100,000 and over
1,267,219
1,314,889
Total deposits
27,420,625
26,946,745
Federal funds purchased and securities sold under agreements to repurchase
1,938,110
2,098,383
Other borrowings
3,791
802
Other liabilities
589,875
477,072
Total liabilities
29,952,401
29,523,002
Commerce Bancshares, Inc. stockholders’ equity:
Common stock, $5 par value
Authorized 140,000,000; issued 117,870,372 shares
589,352
589,352
Capital surplus
2,420,393
2,436,288
Retained earnings
173,173
73,000
Treasury stock of 560,185 shares at March 31, 2021
and 497,413 shares at December 31, 2020, at cost
(39,080)
(32,970)
Accumulated other comprehensive income
168,752
331,377
Total Commerce Bancshares, Inc. stockholders' equity
3,312,590
3,397,047
Non-controlling interest
4,795
2,925
Total equity
3,317,385
3,399,972
Total liabilities and equity
$
33,269,786
$
32,922,974
See accompanying notes to consolidated financial statements.
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
(6,232)
57,953
Provision for depreciation and amortization
11,379
10,581
Amortization of investment security premiums, net
22,079
10,362
Investment securities (gains) losses, net (A)
(9,853)
13,301
Net gains on sales of loans held for sale
(7,381)
(1,793)
Originations of loans held for sale
(172,435)
(33,351)
Proceeds from sales of loans held for sale
184,155
42,221
Net (increase) decrease in trading debt securities
4,872
(16,107)
Stock-based compensation
3,933
3,729
(Increase) decrease in interest receivable
444
(1,681)
Decrease in interest payable
(1,804)
(2,161)
Increase in income taxes payable
28,105
7,992
Other changes, net
11,178
(60,881)
Net cash provided by operating activities
201,669
79,768
INVESTING ACTIVITIES:
Proceeds from sales of investment securities (A)
9,292
2
Proceeds from maturities/pay downs of investment securities (A)
938,527
641,950
Purchases of investment securities (A)
(1,194,891)
(569,079)
Net increase in loans
(72,497)
(346,910)
Purchases of premises and equipment
(10,730)
(7,574)
Sales of premises and equipment
2,568
17
Net cash used in investing activities
(327,731)
(281,594)
FINANCING ACTIVITIES:
Net increase in non-interest bearing, savings, interest checking and money market deposits
585,579
181,625
Net decrease in certificates of deposit
(73,000)
(233,664)
Net decrease in federal funds purchased and securities sold under agreements to repurchase
(160,273)
(422,759)
Net increase in short-term borrowings
2,989
754,043
Purchases of treasury stock
(25,923)
(53,145)
Issuance of stock under equity compensation plans
(15)
(26)
Cash dividends paid on common stock
(30,799)
(30,292)
Cash dividends paid on preferred stock
—
(2,250)
Net cash provided by financing activities
298,558
193,532
Increase (decrease) in cash, cash equivalents and restricted cash
172,496
(8,294)
Cash, cash equivalents and restricted cash at beginning of year
2,208,328
907,808
Cash, cash equivalents and restricted cash at March 31
$
2,380,824
$
899,514
Income tax payments, net
$
2,510
$
1,170
Interest paid on deposits and borrowings
$
5,753
$
22,581
Loans transferred to foreclosed real estate
$
115
$
57
(A) Available for sale debt securities, equity securities, and other securities.
See accompanying notes to consolidated financial statements.
Restricted cash is comprised of cash collateral posted by the Company to secure interest rate swap agreements. This balance is included in other assets in the consolidated balance sheets and totaled $24.5 million and $23.8 million at March 31, 2021 and 2020, respectively.
The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2020 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three month period ended March 31, 2021 are not necessarily indicative of results to be attained for the full year or any other interim period.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company's most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto.
Major classifications within the Company’s held for investment loan portfolio at March 31, 2021 and December 31, 2020 are as follows:
(In thousands)
March 31, 2021
December 31, 2020
Commercial:
Business
$
6,624,209
$
6,546,087
Real estate – construction and land
1,073,036
1,021,595
Real estate – business
3,017,242
3,026,117
Personal Banking:
Real estate – personal
2,828,418
2,820,030
Consumer
1,966,833
1,950,502
Revolving home equity
285,261
307,083
Consumer credit card
593,833
655,078
Overdrafts
3,239
3,149
Total loans
$
16,392,071
$
16,329,641
Accrued interest receivable totaled $42.9 million and $41.9 million at March 31, 2021 and December 31, 2020, respectively, and was included within other assets on the consolidated balance sheets. For the three months ended March 31, 2021, the Company wrote-off accrued interest by reversing interest income of $125 thousand and $2.0 million in the Commercial and Personal Banking portfolios, respectively. Similarly, for the three months ended March 31, 2020, the Company wrote-off accrued interest of $54 thousand and $1.9 million in the Commercial and Personal Banking portfolios, respectively.
At March 31, 2021, loans of $3.6 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 credit losses
The allowance for credit losses is measured using an average historical loss model which incorporates relevant information about past events (including historical credit loss experience on loans with similar risk characteristics), current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily large loans on non-accrual status, are evaluated on an individual basis.
For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using the Company’s historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and outstanding loan balances during a lookback period. Lookback periods can be different based on the individual pool and represent management’s credit expectations for the pool of loans over the remaining contractual life. In certain loan pools, if the Company’s own historical loss rate is not reflective of the loss expectations, the historical loss rate is augmented by industry and peer data. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given a single path economic forecast of key macroeconomic variables including GDP, disposable income, unemployment rate, various interest rates, CPI inflation rate, HPI, CREPI and market volatility. The adjustments are based on results from various regression models projecting the impact of the macroeconomic variables to loss rates. The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method. The forecast adjusted loss rate is applied to the amortized cost of loans over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions (except for contractual extensions at the option of the customer), renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring will be executed. Credit cards and certain similar consumer lines of credit do not have stated maturities and therefore, for these loan classes, remaining contractual lives are determined by estimating future cash flows expected to be received from customers until payments have been fully allocated to outstanding balances. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.
Key model assumptions in the Company’s allowance for credit loss model include the economic forecast, the reasonable and supportable period, prepayment assumptions and qualitative factors applied for portfolio composition changes, underwriting practices, or significant unique events or conditions. The assumptions utilized in estimating the Company’s allowance for credit losses at March 31, 2021 and December 31, 2020 are discussed below.
Key Assumption
March 31, 2021
December 31, 2020
Overall economic forecast
•The recovery from the Global Coronavirus Recession (GCR) continues
•Assumes improving health conditions and expanding vaccine distribution
•Considers government stimulus
•Continued uncertainty regarding the assumptions related to the health crisis
•The recovery from the Global Coronavirus Recession (GCR) continues to be gradual throughout 2021 and 2022
•Assumes no additional systemic lockdown measures
•Considers government stimulus in the beginning of 2021
•Continued uncertainty regarding the health crisis
Reasonable and supportable period and related reversion period
•One year for commercial and personal banking loans
•Reversion to historical average loss rates within two quarters using straight-line method
•Two years for both commercial and personal banking loans
•Reversion to historical average loss rates within two quarters using a straight-line method
Forecasted macro-economic variables
•Unemployment rate ranging from 5.8% to 4.5% during the supportable forecast period
•Real GDP growth ranges from 11.1% to 1.0%
•Prime rate of 3.25%
•Unemployment rate ranging from 6.5% to 5.2% during the supportable forecast period
•Real GDP growth ranges from 3.7% to 2.2%
•Prime rate of 3.25%
Prepayment assumptions
Commercial loans
•5% for most loan pools
Personal banking loans
•Ranging from 26.4% to 23.6% for most loan pools
•58.5% for consumer credit cards
Commercial loans
•5% for most loan pools
Personal banking loans
•Ranging from 23.1% to 23.3% for most loan pools
•58.0% for consumer credit cards
Qualitative factors
Added net reserves using qualitative processes related to:
•Loans originated in our expansion markets, loans that are designated as shared national credits, and certain portfolios considered to be COVID-19 impacted
•Changes in the composition of the loan portfolios
•Loans downgraded to special mention, substandard, or non-accrual status
Added net reserves using qualitative processes related to:
•Loans originated in our expansion markets, loans that are designated as shared national credits, and certain portfolios considered to be COVID-19 impacted
•Changes in the composition of the loan portfolios
•Loans downgraded to special mention, substandard, or non-accrual status
The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans, however, the liability for unfunded lending commitments incorporates an assumption for the portion of unfunded commitments that are expected to be funded.
Sensitivity in the Allowance for Credit Loss model
The allowance for credit losses is an estimate that requires significant judgment including projections of the macro-economic environment. The forecasted macro-economic environment continuously changes which can cause fluctuations in estimated expected losses.
The current forecast projects a continued recovery of the COVID-19 pandemic induced recession. This pandemic is unprecedented and information that could be used in the estimation of the allowance for credit losses changes frequently. Trends in health conditions and vaccine distribution could significantly modify economic projections used in the estimation of the allowance for credit losses.
A summary of the activity in the allowance for credit losses on loans and the liability for unfunded lending commitments during the three months ended March 31, 2021 and 2020, respectively, follows:
For the Three Months Ended March 31, 2021
(In thousands)
Commercial
Personal Banking
Total
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period
$
121,549
$
99,285
$
220,834
Provision for credit losses on loans
(1,909)
(8,446)
(10,355)
Deductions:
Loans charged off
232
12,709
12,941
Less recoveries on loans
215
2,774
2,989
Net loan charge-offs
17
9,935
9,952
Balance March 31, 2021
$
119,623
$
80,904
$
200,527
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at beginning of period
$
37,259
$
1,048
$
38,307
Provision for credit losses on unfunded lending commitments
4,254
(131)
4,123
Balance March 31, 2021
$
41,513
$
917
$
42,430
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS
$
161,136
$
81,821
$
242,957
For the Three Months Ended March 31, 2020
(In thousands)
Commercial
Personal Banking
Total
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at end of prior period
$
91,760
$
68,922
$
160,682
Adoption of ASU 2016-13
(29,711)
8,672
(21,039)
Balance at beginning of period
$
62,049
$
77,594
$
139,643
Provision for credit losses on loans
21,108
21,760
42,868
Deductions:
Loans charged off
416
13,976
14,392
Less recoveries on loans
810
2,724
3,534
Net loan charge-offs (recoveries)
(394)
11,252
10,858
Balance March 31, 2020
$
83,551
$
88,102
$
171,653
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at end of prior period
$
399
$
676
$
1,075
Adoption of ASU 2016-13
16,057
33
16,090
Balance at beginning of period
$
16,456
$
709
$
17,165
Provision for credit losses on unfunded lending commitments
14,605
480
15,085
Balance March 31, 2020
$
31,061
$
1,189
$
32,250
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS
The Company considers loans past due on the day following the contractual repayment date, if the contractual repayment was not received by the Company as of the end of the business day. 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, 2021 and December 31, 2020.
(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, 2021
Commercial:
Business
$
6,601,246
$
2,384
$
364
$
20,215
$
6,624,209
Real estate – construction and land
1,069,805
3,231
—
—
1,073,036
Real estate – business
3,013,518
2,146
6
1,572
3,017,242
Personal Banking:
Real estate – personal
2,820,687
3,592
2,420
1,719
2,828,418
Consumer
1,940,997
15,439
10,397
—
1,966,833
Revolving home equity
282,967
1,567
727
—
285,261
Consumer credit card
581,216
5,019
7,598
—
593,833
Overdrafts
3,123
116
—
—
3,239
Total
$
16,313,559
$
33,494
$
21,512
$
23,506
$
16,392,071
December 31, 2020
Commercial:
Business
$
6,517,838
$
2,252
$
3,473
$
22,524
$
6,546,087
Real estate – construction and land
1,021,592
—
3
—
1,021,595
Real estate – business
3,016,215
7,666
6
2,230
3,026,117
Personal Banking:
Real estate – personal
2,808,886
6,521
2,837
1,786
2,820,030
Consumer
1,921,822
25,417
3,263
—
1,950,502
Revolving home equity
305,037
1,656
390
—
307,083
Consumer credit card
635,770
7,090
12,218
—
655,078
Overdrafts
2,896
253
—
—
3,149
Total
$
16,230,056
$
50,855
$
22,190
$
26,540
$
16,329,641
At March 31, 2021, the Company had $8.2 million and $908 thousand of non-accrual business and business real estate loans, respectively, that had no allowance for credit loss. At December 31, 2020, the Company had $9.4 million of non-accrual business loans that had no allowance for credit loss. The Company did not record any interest income on non-accrual loans during the three months ended March 31, 2021 and 2020, respectively.
Credit quality indicators
The following table provides information about the credit quality of the Commercial loan portfolio. The Company utilizes an internal risk rating system comprised of a series of grades to categorize loans according to perceived risk associated with the expectation of debt repayment based on borrower specific information including but not limited to current financial information, historical payment experience, industry information, collateral levels and collateral types. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. A loan is assigned the risk rating at origination and then monitored throughout the contractual term for possible risk rating changes. 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.
All loans are analyzed for risk rating updates annually. For larger loans, rating assessments may be more frequent if relevant information is obtained earlier through debt covenant monitoring or overall relationship management. Smaller loans
are monitored as identified by the loan officer based on the risk profile of the individual borrower or if the loan becomes past due related to credit issues. Loans rated Special Mention, Substandard or Non-accrual are subject to quarterly review and monitoring processes. In addition to the regular monitoring performed by the lending personnel and credit committees, loans are subject to review by a credit review department which verifies the appropriateness of the risk ratings for the loans chosen as part of its risk-based review plan.
The risk category of loans in the Commercial portfolio as of March 31, 2021 and December 31, 2020 are as follows:
Term Loans Amortized Cost Basis by Origination Year
The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided as of March 31, 2021 and December 31, 2020 below:
Term Loans Amortized Cost Basis by Origination Year
Term Loans Amortized Cost Basis by Origination Year
(In thousands)
2020
2019
2018
2017
2016
Prior
Revolving Loans Amortized Cost Basis
Total
December 31, 2020
Real estate-personal
Current to 90 days past due
$
1,123,918
$
488,379
$
218,390
$
201,971
$
227,265
$
544,008
$
11,476
$
2,815,407
Over 90 days past due
534
375
281
411
388
848
—
2,837
Non-accrual
29
191
116
45
65
1,340
—
1,786
Total Real estate-personal:
$
1,124,481
$
488,945
$
218,787
$
202,427
$
227,718
$
546,196
$
11,476
$
2,820,030
Consumer
Current to 90 days past due
$
536,799
$
337,431
$
161,337
$
115,886
$
75,769
$
86,831
$
633,186
$
1,947,239
Over 90 days past due
212
358
328
220
174
397
1,574
3,263
Total Consumer:
$
537,011
$
337,789
$
161,665
$
116,106
$
75,943
$
87,228
$
634,760
$
1,950,502
Revolving home equity
Current to 90 days past due
$
—
$
—
$
—
$
—
$
—
$
—
$
306,693
$
306,693
Over 90 days past due
—
—
—
—
—
—
390
390
Total Revolving home equity:
$
—
$
—
$
—
$
—
$
—
$
—
$
307,083
$
307,083
Consumer credit card
Current to 90 days past due
$
—
$
—
$
—
$
—
$
—
$
—
$
642,860
$
642,860
Over 90 days past due
—
—
—
—
—
—
12,218
12,218
Total Consumer credit card:
$
—
$
—
$
—
$
—
$
—
$
—
$
655,078
$
655,078
Overdrafts
Current to 90 days past due
$
3,149
$
—
$
—
$
—
$
—
$
—
$
—
$
3,149
Total Overdrafts:
$
3,149
$
—
$
—
$
—
$
—
$
—
$
—
$
3,149
Personal banking loans
Current to 90 days past due
$
1,663,866
$
825,810
$
379,727
$
317,857
$
303,034
$
630,839
$
1,594,215
$
5,715,348
Over 90 days past due
746
733
609
631
562
1,245
14,182
18,708
Non-accrual
29
191
116
45
65
1,340
—
1,786
Total Personal banking loans:
$
1,664,641
$
826,734
$
380,452
$
318,533
$
303,661
$
633,424
$
1,608,397
$
5,735,842
Collateral-dependent loans
The Company's collateral-dependent loans are comprised of large loans on non-accrual status. The Company requires that collateral-dependent loans are either over-collateralized or carry collateral equal to the amortized cost of the loan. The following table presents the amortized cost basis of collateral-dependent loans as of March 31, 2021 and December 31, 2020.
As noted above, 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 section on "Credit quality indicators." 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 and is considered supplementary information utilized by the Company, as management does not consider this information in evaluating the allowance for credit losses on loans. 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 real estate loans for which FICO scores are not obtained because the loans generally pertain to commercial customer activities and are often underwritten with other collateral considerations. These loans totaled $188.6 million at March 31, 2021 and $191.1 million at December 31, 2020. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $179.8 million at March 31, 2021 and $188.1 million at December 31, 2020. As the healthcare loans are guaranteed by the hospital, customer FICO scores are not obtained for these loans. The personal real estate loans and consumer loans excluded below totaled less than 7% 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, 2021 and December 31, 2020 by FICO score.
Personal Banking Loans
% of Loan Category
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
March 31, 2021
FICO score:
Under 600
0.9
%
2.2
%
1.3
%
4.3
%
600 - 659
2.1
3.9
2.3
11.7
660 - 719
8.1
14.4
9.1
32.9
720 - 779
22.9
25.4
22.8
28.0
780 and over
66.0
54.1
64.5
23.1
Total
100.0
%
100.0
%
100.0
%
100.0
%
December 31, 2020
FICO score:
Under 600
0.8
%
2.3
%
1.3
%
5.0
%
600 - 659
1.9
4.2
2.4
12.3
660 - 719
8.8
14.1
8.6
31.2
720 - 779
24.5
23.9
22.2
28.0
780 and over
64.0
55.5
65.5
23.5
Total
100.0
%
100.0
%
100.0
%
100.0
%
Troubled debt restructurings
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. Commercial performing restructured loans are primarily comprised of certain business, construction and business real estate loans classified as substandard but renewed at rates judged to be non-market. These 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 and other small consumer loans under various debt management and assistance programs. Modifications to these loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. Certain personal real estate, revolving home equity, and consumer loans were classified as consumer bankruptcy troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments. Other consumer loans classified as troubled debt restructurings consist of various other workout arrangements with consumer customers.
Section 4013 of the CARES Act was signed into law on March 27, 2020, and includes a provision that short-term modifications are not troubled debt restructurings, if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to December 31, 2019. The Company follows the guidance under the CARES Act when determining if a customer’s modification is subject to troubled debt restructuring classification. If it is deemed the modification is not short-term, not COVID-19 related or the customer does not meet the criteria under the guidance to be scoped out of troubled debt restructuring classification, the Company will evaluate the loan modifications under its existing framework which requires modifications that result in a concession to a borrower experiencing financial difficulty be accounted for as a troubled debt restructuring.
The initial guidance issued under the CARES Act was due to expire on December 31, 2020. During January 2021, the Consolidated Appropriations Act, 2021 was enacted and extended relief offered under the CARES Act related to the accounting and disclosure requirements for troubled debt restructurings as a result of COVID-19. The Company elected to adopt the extension of this guidance.
The table below shows the balance of troubled debt restructurings by loan classification at March 31, 2021, 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, 2021
Balance 90 days past due at any time during previous 12 months
Commercial:
Business
$
62,384
$
630
Real estate - construction and land
10,107
—
Real estate - business
54,024
908
Personal Banking:
Real estate - personal
3,153
308
Consumer
3,176
213
Revolving home equity
27
—
Consumer credit card
6,700
506
Total troubled debt restructurings
$
139,571
$
2,565
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. However, the effects of modifications to loans under various debt management and assistance programs were estimated to decrease interest income by approximately $1.0 million on an annual, pre-tax basis, compared to amounts contractually owed. Other modifications to consumer loans mainly involve extensions and other small modifications that did not include the forgiveness of principal or interest.
The allowance for credit 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 having no other concessions granted other than being renewed at non-market interest rates are judged to 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 credit 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 credit losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begin.
The Company had commitments of $30.7 million at March 31, 2021 to lend additional funds to borrowers with restructured loans. Included in these commitments at March 31, 2021 are $27.7 million of letters of credit with borrowers with restructured loans.
Loans held for sale
The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 11. The loans are primarily sold to FNMA and FHLMC. At March 31, 2021, the fair value of these loans was $30.5 million, and the unpaid principal balance was $30.0 million
The Company also designates certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which at March 31, 2021 totaled $7.6 million.
At March 31, 2021, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing.
Foreclosed real estate/repossessed assets
The Company’s holdings of foreclosed real estate totaled $208 thousand and $93 thousand at March 31, 2021 and December 31, 2020, respectively. Personal property acquired in repossession, generally autos, marine and recreational vehicles (RV), totaled $1.8 million and $1.4 million at March 31, 2021 and December 31, 2020, respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.
Investment securities consisted of the following at March 31, 2021 and December 31, 2020.
(In thousands)
March 31, 2021
December 31, 2020
Available for sale debt securities
$
12,528,203
$
12,449,264
Trading debt securities
26,925
35,321
Equity securities:
Readily determinable fair value
2,931
2,966
No readily determinable fair value
1,406
1,397
Other:
Federal Reserve Bank stock
34,222
34,070
Federal Home Loan Bank stock
10,125
10,307
Equity method investments
17,309
18,000
Private equity investments
94,257
94,368
Total investment securities (1)
$
12,715,378
$
12,645,693
(1)Accrued interest receivable totaled $39.8 million and $41.5 million at March 31, 2021 and December 31, 2020, respectively,and was included within other assets on the consolidated balance sheet.
The Company has elected to measure equity securities with no readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. This portfolio includes the Company's holdings of Visa Class B shares, which have a carrying value of zero, as there have not been observable price changes in orderly transactions for identical or similar investments of the same issuer. During the period, the Company did not record any impairment or other adjustments to the carrying amount of its portfolio of equity securities with no readily determinable fair value.
Other investment securities include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, equity method investments, and investments in portfolio concerns held by the Company's private equity subsidiary. FRB stock and FHLB stock are held for debt and regulatory purposes. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. These holdings are carried at cost. Additionally, the Company's equity method investments are carried at cost, adjusted to reflect the Company's portion of income, loss, or dividends of the investee. These holdings are carried at cost. The Company's private equity investments, in the absence of readily ascertainable market values, are carried at estimated fair value.
The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in accumulated other comprehensive income (AOCI). A summary of the available for sale debt securities by maturity groupings as of March 31, 2021 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, and GNMA, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.
Total U.S. government and federal agency obligations
717,614
773,590
Government-sponsored enterprise obligations:
Within 1 year
14,993
14,065
After 10 years
35,803
36,751
Total government-sponsored enterprise obligations
50,796
50,816
State and municipal obligations:
Within 1 year
91,179
92,217
After 1 but within 5 years
839,094
872,047
After 5 but within 10 years
619,310
631,678
After 10 years
397,103
384,869
Total state and municipal obligations
1,946,686
1,980,811
Mortgage and asset-backed securities:
Agency mortgage-backed securities
6,296,555
6,327,450
Non-agency mortgage-backed securities
358,400
358,498
Asset-backed securities
2,418,692
2,436,885
Total mortgage and asset-backed securities
9,073,647
9,122,833
Other debt securities:
Within 1 year
46,537
47,170
After 1 but within 5 years
278,766
286,310
After 5 but within 10 years
258,563
251,640
After 10 years
15,432
15,033
Total other debt securities
599,298
600,153
Total available for sale debt securities
$
12,388,041
$
12,528,203
Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $372.9 million, at fair value, at March 31, 2021. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. At maturity, the principal paid is the greater of an inflation-adjusted principal or the original principal.
Allowance for credit losses on available for sale debt securities
The Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. The adoption of ASU 2016-13 had no impact to the Company's available for sale securities reported in its consolidated financial statements at January 1, 2020. For the three months ended March 31, 2021 and 2020, the Company did not recognize a credit loss expense on any available for sale debt securities.
The Company’s model for establishing its allowance for credit losses uses 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. Securities for which fair value is less than amortized cost are reviewed for impairment. Special emphasis is placed on securities whose credit rating has fallen below Baa3 (Moody's) or BBB- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price, or who have been identified based on management’s judgment. These securities are placed on a watch list and cash flow analyses are prepared on an individual security basis. Credit impairment is determined using input factors such as cash flow projections, contractual payments required, expected delinquency rates, credit support from other tranches, prepayment speeds, collateral loss severity rates (including loan to values), and various other information related to the underlying collateral. At March 31, 2021, the fair value of securities on this watch list was $25.6 million compared to $31.0 million at December 31, 2020.
Significant inputs to the cash flow model used at March 31, 2021 to quantify credit losses were primarily credit support agreements, as the securities on the Company's watch list at March 31, 2021 were securities backed by government-guaranteed student loans and are expected to perform as contractually required. As of March 31, 2021, the Company did not identify any securities for which a credit loss exists.
The table below summarizes debt securities available for sale in an unrealized loss position, aggregated by length of loss period, for which an allowance for credit losses has not been recorded at March 31, 2021 and December 31, 2020. Unrealized losses on these available for sale securities have not been recognized into income because after review, the securities were deemed not to be impaired. The unrealized losses on these securities are primarily attributable to changes in interest rates and current market conditions. Additionally, management does not intend to sell the securities, and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery.
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, 2021
Government-sponsored enterprise obligations
$
18,535
$
1,283
$
—
$
—
$
18,535
$
1,283
State and municipal obligations
653,549
20,627
2,851
34
656,400
20,661
Mortgage and asset-backed securities:
Agency mortgage-backed securities
3,373,029
64,787
3,630
17
3,376,659
64,804
Non-agency mortgage-backed securities
162,080
2,063
—
—
162,080
2,063
Asset-backed securities
657,219
4,939
192,697
1,351
849,916
6,290
Total mortgage and asset-backed securities
4,192,328
71,789
196,327
1,368
4,388,655
73,157
Other debt securities
263,768
10,325
—
—
263,768
10,325
Total
$
5,128,180
$
104,024
$
199,178
$
1,402
$
5,327,358
$
105,426
December 31, 2020
Government-sponsored enterprise obligations
$
19,720
$
98
$
—
$
—
$
19,720
$
98
State and municipal obligations
45,622
230
—
—
45,622
230
Mortgage and asset-backed securities:
Agency mortgage-backed securities
470,373
2,802
—
—
470,373
2,802
Non-agency mortgage-backed securities
112,861
380
—
—
112,861
380
Asset-backed securities
21,360
56
253,734
2,617
275,094
2,673
Total mortgage and asset-backed securities
604,594
3,238
253,734
2,617
858,328
5,855
Other debt securities
24,522
175
—
—
24,522
175
Total
$
694,458
$
3,741
$
253,734
$
2,617
$
948,192
$
6,358
Theentireavailable for sale debt portfolio included $5.3 billion of securities that were in a loss position at March 31, 2021, compared to $948.2 million at December 31, 2020. The total amount of unrealized loss on these securities was $105.4 million at March 31, 2021, an increase of $99.1 million compared to the loss at December 31, 2020. Securities with significant unrealized losses are discussed in the "Allowance for credit losses on available for sale debt securities" section above.
For debt securities classified as available for sale, the following tables show the amortized cost, fair value, and allowance for credit losses of securities available for sale at March 31, 2021 and December 31, 2020, and the corresponding amounts of gross unrealized gains and losses (pre-tax) in AOCI, by security type.
(In thousands)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Allowance for Credit Losses
Fair Value
March 31, 2021
U.S. government and federal agency obligations
$
717,614
$
55,976
$
—
$
—
$
773,590
Government-sponsored enterprise obligations
50,796
1,303
(1,283)
—
50,816
State and municipal obligations
1,946,686
54,786
(20,661)
—
1,980,811
Mortgage and asset-backed securities:
Agency mortgage-backed securities
6,296,555
95,699
(64,804)
—
6,327,450
Non-agency mortgage-backed securities
358,400
2,161
(2,063)
—
358,498
Asset-backed securities
2,418,692
24,483
(6,290)
—
2,436,885
Total mortgage and asset-backed securities
9,073,647
122,343
(73,157)
—
9,122,833
Other debt securities
599,298
11,180
(10,325)
—
600,153
Total
$
12,388,041
$
245,588
$
(105,426)
$
—
$
12,528,203
December 31, 2020
U.S. government and federal agency obligations
$
775,592
$
62,467
$
—
$
—
$
838,059
Government-sponsored enterprise obligations
50,803
3,780
(98)
—
54,485
State and municipal obligations
1,968,006
77,323
(230)
—
2,045,099
Mortgage and asset-backed securities:
Agency mortgage-backed securities
6,557,098
157,789
(2,802)
—
6,712,085
Non-agency mortgage-backed securities
358,074
3,380
(380)
—
361,074
Asset-backed securities
1,853,791
31,125
(2,673)
—
1,882,243
Total mortgage and asset-backed securities
8,768,963
192,294
(5,855)
—
8,955,402
Other debt securities
534,169
22,225
(175)
—
556,219
Total
$
12,097,533
$
358,089
$
(6,358)
$
—
$
12,449,264
The following tables present proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.
For the Three Months Ended March 31
(In thousands)
2021
2020
Proceeds from sales of securities:
Equity securities
$
—
$
2
Other
9,292
—
Total proceeds
$
9,292
$
2
Investment securities gains (losses), net:
Equity securities:
Gains realized on sales
$
—
$
2
Fair value adjustments, net
(35)
(295)
Other:
Gains realized on sales
1,523
—
Fair value adjustments, net
8,365
(13,008)
Total investment securities gains (losses), net
$
9,853
$
(13,301)
Net gains on investment securities for the three months ended March 31, 2021 were mainly comprised of gains of $1.5 million realized on the sale of a private equity investment and net gains in fair value of $8.4 million on private equity investments, due to fair value adjustments.
At March 31, 2021, securities totaling $4.7 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB, compared to $4.8 billion at December 31,
2020. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $209.1 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.
4. Goodwill and Other Intangible Assets
The following table presents information about the Company's intangible assets which have estimable useful lives.
March 31, 2021
December 31, 2020
(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
$
(30,006)
$
—
$
1,264
$
31,270
$
(29,912)
$
—
$
1,358
Mortgage servicing rights
17,025
(7,743)
(1,048)
8,234
15,238
(6,886)
(2,103)
6,249
Total
$
48,295
$
(37,749)
$
(1,048)
$
9,498
$
46,508
$
(36,798)
$
(2,103)
$
7,607
Aggregate amortization expense on intangible assets was $951 thousand and $268 thousand for the three month periods ended March 31, 2021 and 2020, respectively. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of March 31, 2021. 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)
2021
$
2,198
2022
1,437
2023
1,194
2024
991
2025
817
Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2021 are as follows:
(In thousands)
Goodwill
Easement
Core Deposit Premium
Mortgage Servicing Rights
Balance January 1, 2021
$
138,921
$
3,600
$
1,358
$
6,249
Originations
1,787
Amortization
(94)
(857)
Impairment reversal
1,055
Balance March 31, 2021
$
138,921
$
3,600
$
1,264
$
8,234
Goodwill allocated to the Company’s operating segments at March 31, 2021 and December 31, 2020 is shown below.
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, 2021, that net liability was $3.0 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 $440.4 million at March 31, 2021.
The Company periodically enters into credit risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral and at March 31, 2021, 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 2 years to 11 years. At March 31, 2021, the fair value of the Company's guarantee liabilities for RPAs was $339 thousand, and the notional amount of the underlying swaps was $272.0 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.
The Company has net investments in direct financing and sales-type leases to commercial, industrial, and tax-exempt entities. These leases are included within business loans on the Company's consolidated balance sheets. The Company primarily leases various types of equipment, trucks and trailers, and office furniture and fixtures. Lease agreements may include options for the lessee to renew or purchase the leased equipment at the end of the lease term. The Company has elected to adopt the lease component expedient in which the lease and nonlease components are combined into the total lease receivable. The Company also leases office space to third parties, and these leases are classified as operating leases. The leases may include options to renew or expand the leased space, and currently the leases have remaining terms of 4 months to 7 years.
The following table provides the components of lease income.
For the Three Months Ended March 31
(in thousands)
2021
2020
Direct financing and sales-type leases
$
6,121
$
6,358
Operating leases(a)
2,074
2,061
Total lease income
$
8,195
$
8,419
(a) Includes rent from Tower Properties Company, a related party, of $19 thousand for the three months ended March 31, 2021 and 2020.
7. Pension
The amount of net pension cost is shown in the table below:
For the Three Months Ended March 31
(In thousands)
2021
2020
Service cost - benefits earned during the period
$
95
$
101
Interest cost on projected benefit obligation
556
822
Expected return on plan assets
(1,124)
(1,297)
Amortization of prior service cost
(68)
(68)
Amortization of unrecognized net loss
651
542
Net periodic pension cost
$
110
$
100
All benefits accrued under the Company’s defined benefit pension plan have been frozen since January 1, 2011. During the first three months of 2021, 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.
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 pay nonforfeitable common stock 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)
2021
2020
Basic income per common share:
Net income attributable to Commerce Bancshares, Inc.
$
130,972
$
51,857
Less preferred stock dividends
—
2,250
Net income available to common shareholders
130,972
49,607
Less income allocated to nonvested restricted stock
1,200
470
Net income allocated to common stock
$
129,772
$
49,137
Weighted average common shares outstanding
116,260
116,674
Basic income per common share
$
1.12
$
.42
Diluted income per common share:
Net income available to common shareholders
$
130,972
$
49,607
Less income allocated to nonvested restricted stock
1,198
469
Net income allocated to common stock
$
129,774
$
49,138
Weighted average common shares outstanding
116,260
116,674
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
313
271
Weighted average diluted common shares outstanding
116,573
116,945
Diluted income per common share
$
1.11
$
.42
Unexercised stock appreciation rights of 52 thousand and 241 thousand for the three month periods ended March 31, 2021 and 2020, respectively, were excluded from the computation of diluted income per common share because their inclusion would have been anti-dilutive.
On September 1, 2020, the Company redeemed all outstanding shares of its 6.00% Series B Non-Cumulative Perpetual Preferred Stock, $1.00 par value per share (Series B Preferred Stock) and the corresponding depositary shares representing fractional interests in the Series B Preferred Stock (Series B Depositary Shares).
* All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December 2020.
The table below shows the activity and accumulated balances for components of other comprehensive income. The largest component is the unrealized holding gains and losses on available for sale debt securities. Another 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. The remaining component is gains and losses in fair value on certain interest rate floors that have been designated as cash flow hedging instruments. The interest rate floors were terminated during 2020, and the realized gains will be amortized into interest income through the original maturity dates of the interest rate floors. Information about unrealized gains and losses on securities can be found in Note 3, and information about unrealized gains and losses on cash flow hedge derivatives is located in Note 11.
Unrealized Gains (Losses) on Securities (1)
Pension Loss
Unrealized Gains (Losses) on Cash Flow Hedge Derivatives (2)
Total Accumulated Other Comprehensive Income (Loss)
(In thousands)
Balance January 1, 2021
$
263,801
$
(25,118)
$
92,694
$
331,377
Other comprehensive loss before reclassifications to current earnings
(211,569)
—
—
(211,569)
Amounts reclassified to current earnings from accumulated other comprehensive income
—
583
(5,848)
(5,265)
Current period other comprehensive income (loss), before tax
(211,569)
583
(5,848)
(216,834)
Income tax (expense) benefit
52,893
(146)
1,462
54,209
Current period other comprehensive income (loss), net of tax
(158,676)
437
(4,386)
(162,625)
Balance March 31, 2021
$
105,125
$
(24,681)
$
88,308
$
168,752
Balance January 1, 2020
$
102,073
$
(21,940)
$
30,311
$
110,444
Other comprehensive income before reclassifications to current earnings
104,942
—
84,617
189,559
Amounts reclassified to current earnings from accumulated other comprehensive income
(46)
474
268
696
Current period other comprehensive income, before tax
104,896
474
84,885
190,255
Income tax expense
(26,224)
(118)
(21,221)
(47,563)
Current period other comprehensive income, net of tax
78,672
356
63,664
142,692
Balance March 31, 2020
$
180,745
$
(21,584)
$
93,975
$
253,136
(1) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "investment securities gains (losses), net" in the consolidated statements of income.
(2)The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "interest and fees on loans" in the consolidated statements of income.
The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial and Wealth. The Consumer segment consists of various consumer loan and deposit products offered through its retail branch network of approximately 160 locations. This segment also includes indirect and other consumer loan financing businesses, along with debit and credit card loan and fee businesses. Residential mortgage origination, sales and servicing functions are included in this Consumer segment, but residential mortgage loans retained by the Company are not considered part of this segment and are instead included in the Other/Elimination column. The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, and international services, along with business and governmental deposit products and commercial cash management services. This segment also includes both merchant and commercial bank card products as well as the Capital Markets Group, which sells fixed income securities and provides securities safekeeping and accounting services to its business and correspondent bank customers. The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management, and brokerage services. This segment also provides various loan and deposit related services to its private banking customers.
The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues between the three segments. Management periodically makes changes to methods of assigning costs and income to its business segments to better reflect operating results. If appropriate, these changes are reflected in prior year information presented below.
(In thousands)
Consumer
Commercial
Wealth
Segment Totals
Other/Elimination
Consolidated Totals
Three Months Ended March 31, 2021
Net interest income
$
77,939
$
110,169
$
17,457
$
205,565
$
183
$
205,748
Provision for credit losses
(9,901)
(27)
5
(9,923)
16,155
6,232
Non-interest income
38,248
50,728
50,985
139,961
(3,916)
136,045
Investment securities gains, net
—
—
—
—
9,853
9,853
Non-interest expense
(70,504)
(79,281)
(33,043)
(182,828)
(9,745)
(192,573)
Income before income taxes
$
35,782
$
81,589
$
35,404
$
152,775
$
12,530
$
165,305
Three Months Ended March 31, 2020
Net interest income
$
78,981
$
85,896
$
12,959
$
177,836
$
23,229
$
201,065
Provision for credit losses
(11,206)
356
(3)
(10,853)
(47,100)
(57,953)
Non-interest income
34,081
49,887
47,409
131,377
(7,714)
123,663
Investment securities losses, net
—
—
—
—
(13,301)
(13,301)
Non-interest expense
(77,412)
(80,820)
(31,769)
(190,001)
(3,697)
(193,698)
Income before income taxes
$
24,444
$
55,319
$
28,596
$
108,359
$
(48,583)
$
59,776
The information presented above was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting procedures and methods, which have been developed to reflect the underlying economics of the businesses. The methodologies are applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided by) assets and liabilities based on their maturity, prepayment and/or repricing characteristics.
The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column include activity not related to the segments, such as that relating to administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. The provision for credit losses in this category contains the difference between net loan charge-offs assigned directly to the segments and the recorded provision for credit loss expense. Included in this category’s net interest income are earnings of the investment portfolio, which are not allocated to a segment.
The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities.
The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. At March 31, 2021, the Company’s derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings.
(In thousands)
March 31, 2021
December 31, 2020
Interest rate swaps
$
2,297,174
$
2,367,017
Interest rate caps
186,110
103,028
Credit risk participation agreements
352,107
381,170
Foreign exchange contracts
4,514
7,431
Mortgage loan commitments
72,668
67,543
Mortgage loan forward sale contracts
13,671
—
Forward TBA contracts
68,000
89,000
Total notional amount
$
2,994,244
$
3,015,189
The largest group of notional amounts relate to interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. The customers are engaged in a variety of businesses, including real estate, manufacturing, retail product distribution, education, and retirement communities. These customer swaps are offset by matching contracts purchased by the Company from other financial dealer institutions. Contracts with dealers that require central clearing are novated to a clearing agency who becomes the Company's counterparty. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings.
Many of the Company’s interest rate swap contracts with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions or instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.
During the year ended December 31, 2020, the Company monetized three interest rate floors that were previously classified as cash flow hedges with a combined notional balance of $1.5 billion and an asset fair value of $163.2 million. As of March 31, 2021, the total realized gains on the monetized cash flow hedges remaining in AOCI was $117.7 million (pre-tax). The unrealized gains will be reclassified into interest income as the underlying forecasted transactions impact earnings through the original maturity dates of the hedged forecasted transactions, or approximately 5.7 years.
The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further discussed in Note 5 on Guarantees. In addition, the Company enters into foreign exchange contracts, which are mainly comprised of contracts to purchase or deliver foreign currencies for customers at specific future dates.
Under its program to sell residential mortgage loans in the secondary market, the Company designates certain newly-originated residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments and forward loan sale contracts. Changes in the fair values of the loan commitments and funded loans prior to sale that are due to changes in interest rates are economically hedged with forward contracts to sell residential mortgage-backed securities in the to-be-announced (TBA) market. These forward TBA contracts are also considered to be derivatives and are settled in cash at the security settlement date.
The fair values of the Company's derivative instruments, whose notional amounts are listed above, are shown in the table below. Information about the valuation methods used to determine fair value is provided in Note 17 on Fair Value Measurements in the 2020 Annual Report on Form 10-K.
The Company's policy is to present its derivative assets and derivative liabilities on a gross basis in its consolidated balance sheets and these are reported in other assets and other liabilities. Certain collateral posted to and from the Company's clearing counterparty has been applied to the fair values of the cleared swaps, such that at March 31, 2021 in the table below, the positive fair values of cleared swaps were reduced by $312 thousand and the negative fair values of cleared swaps were reduced by $46.9 million. At December 31, 2020, there were no reductions to the positive fair values of cleared swaps and the negative fair values of cleared swaps were reduced by $69.2 million.
Asset Derivatives
Liability Derivatives
Mar. 31, 2021
Dec. 31, 2020
Mar. 31, 2021
Dec. 31, 2020
(In thousands)
Fair Value
Fair Value
Derivative instruments:
Interest rate swaps
$
59,620
$
86,389
$
(13,047)
$
(17,199)
Interest rate caps
92
1
(92)
(1)
Credit risk participation agreements
120
216
(339)
(701)
Foreign exchange contracts
62
57
(12)
(103)
Mortgage loan commitments
1,876
3,226
(21)
—
Mortgage loan forward sale contracts
39
—
—
—
Forward TBA contracts
978
—
(1)
(671)
Total
$
62,787
$
89,889
$
(13,512)
$
(18,675)
The pre-tax effects of derivative instruments on the consolidated statements of income are shown in the table below.
Amount of Gain or (Loss) Recognized in OCI
Location of Gain (Loss) Reclassified from AOCI into Income
Amount of Gain (Loss) Reclassified from AOCI into Income
(In thousands)
Total
Included Component
Excluded Component
Total
Included Component
Excluded Component
For the Three Months Ended March 31, 2020
Derivatives in cash flow hedging relationships:
Interest rate floors
$
84,617
$
107,621
$
(23,004)
Interest and fees on loans
$
(268)
$
763
$
(1,031)
Total
$
84,617
$
107,621
$
(23,004)
Total
$
(268)
$
763
$
(1,031)
Location of Gain or (Loss) Recognized in Income on Derivatives
Amount of Gain or (Loss) Recognized in Income on Derivatives
For the Three Months Ended March 31
(In thousands)
2021
2020
Derivative instruments:
Interest rate swaps
Other non-interest income
$
1,075
$
266
Interest rate caps
Other non-interest income
15
19
Credit risk participation agreements
Other non-interest income
365
(27)
Foreign exchange contracts
Other non-interest income
96
(38)
Mortgage loan commitments
Loan fees and sales
(1,372)
(459)
Mortgage loan forward sale contracts
Loan fees and sales
39
(4)
Forward TBA contracts
Loan fees and sales
2,906
380
Total
$
3,124
$
137
The following table shows the extent to which assets and liabilities relating to derivative instruments have been offset in the consolidated balance sheets. It also provides information about these instruments which are subject to an enforceable master
netting arrangement, irrespective of whether they are offset, and the extent to which the instruments could potentially be offset. Also shown is collateral received or pledged in the form of other financial instruments, which is generally cash or marketable securities. The collateral amounts in this table are limited to the outstanding balances of the related asset or liability (after netting is applied); thus, amounts of excess collateral are not shown. Most of the derivatives in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.
While the Company is party to master netting arrangements with most of its swap derivative counterparties, the Company does not offset derivative assets and liabilities under these agreements on its consolidated balance sheet. Collateral exchanged between the Company and dealer bank counterparties is generally subject to thresholds and transfer minimums, and usually consists of marketable securities. By contract, these may be sold or re-pledged by the secured party until recalled at a subsequent valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash or securities to its clearing agent. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below.
Gross Amounts Not Offset in the Balance Sheet
(In thousands)
Gross Amount Recognized
Gross Amounts Offset in the Balance Sheet
Net Amounts Presented in the Balance Sheet
Financial Instruments Available for Offset
Collateral Received/Pledged
Net Amount
March 31, 2021
Assets:
Derivatives subject to master netting agreements
$
60,782
$
—
$
60,782
$
(183)
$
—
$
60,599
Derivatives not subject to master netting agreements
2,005
—
2,005
Total derivatives
$
62,787
$
—
$
62,787
Liabilities:
Derivatives subject to master netting agreements
$
13,399
$
—
$
13,399
$
(183)
$
(12,153)
$
1,063
Derivatives not subject to master netting agreements
113
—
113
Total derivatives
$
13,512
$
—
$
13,512
December 31, 2020
Assets:
Derivatives subject to master netting agreements
$
86,497
$
—
$
86,497
$
(108)
$
—
$
86,389
Derivatives not subject to master netting agreements
3,392
—
3,392
Total derivatives
$
89,889
$
—
$
89,889
Liabilities:
Derivatives subject to master netting agreements
$
18,420
$
—
$
18,420
$
(108)
$
(16,738)
$
1,574
Derivatives not subject to master netting agreements
The following table shows the extent to which assets and liabilities relating to securities purchased under agreements to resell (resale agreements) and securities sold under agreements to repurchase (repurchase agreements) have been offset in the consolidated balance sheets, in addition to the extent to which they could potentially be offset. Also shown is collateral received or pledged, which consists of marketable securities. The collateral amounts in the table are limited to the outstanding balances of the related asset or liability (after netting is applied); thus, amounts of excess collateral are not shown. The agreements in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.
Resale and repurchase agreements are agreements to purchase/sell securities subject to an obligation to resell/repurchase the same or similar securities. They are accounted for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral accepted or pledged in resale and repurchase agreements with other financial institutions also may be sold or re-pledged by the secured party but is usually delivered to and held by third party trustees. The Company generally retains custody of securities pledged for repurchase agreements with customers.
The Company is party to agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase and resale agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the consolidated balance sheets, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $200.0 million at March 31, 2021 and December 31, 2020. At March 31, 2021, the Company had posted collateral of $203.2 million in marketable securities, consisting of agency mortgage-backed bonds, and had accepted $209.3 million in agency mortgage-backed bonds.
Gross Amounts Not Offset in the Balance Sheet
(In thousands)
Gross Amount Recognized
Gross Amounts Offset in the Balance Sheet
Net Amounts Presented in the Balance Sheet
Financial Instruments Available for Offset
Securities Collateral Received/Pledged
Net Amount
March 31, 2021
Total resale agreements, subject to master netting arrangements
$
1,050,000
$
(200,000)
$
850,000
$
—
$
(850,000)
$
—
Total repurchase agreements, subject to master netting arrangements
2,109,620
(200,000)
1,909,620
—
(1,909,620)
—
December 31, 2020
Total resale agreements, subject to master netting arrangements
$
1,050,000
$
(200,000)
$
850,000
$
—
$
(850,000)
$
—
Total repurchase agreements, subject to master netting arrangements
The table below shows the remaining contractual maturities of repurchase agreements outstanding at March 31, 2021 and December 31, 2020, in addition to the various types of marketable securities that have been pledged by the Company as collateral for these borrowings.
Remaining Contractual Maturity of the Agreements
(In thousands)
Overnight and continuous
Up to 90 days
Greater than 90 days
Total
March 31, 2021
Repurchase agreements, secured by:
U.S. government and federal agency obligations
$
10,158
$
24,241
$
29,940
$
64,339
Agency mortgage-backed securities
1,562,951
10,774
247,023
1,820,748
Non-agency mortgage-backed securities
39,295
—
—
39,295
Asset-backed securities
151,469
—
—
151,469
Other debt securities
33,769
—
—
33,769
Total repurchase agreements, gross amount recognized
$
1,797,642
$
35,015
$
276,963
$
2,109,620
December 31, 2020
Repurchase agreements, secured by:
U.S. government and federal agency obligations
$
150,305
$
—
$
—
$
150,305
Agency mortgage-backed securities
1,598,614
34,018
220,849
1,853,481
Non-agency mortgage-backed securities
62,742
—
—
62,742
Asset-backed securities
155,917
—
—
155,917
Other debt securities
33,668
—
—
33,668
Total repurchase agreements, gross amount recognized
The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights (SARs). Most of the awards are issued during the first quarter of each year. The stock-based compensation expense that has been charged against income was $3.9 million and $3.7 million in the three months ended March 31, 2021 and 2020, respectively.
Nonvested stock awards granted generally vest in 4 to 7 years and contain restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant. A summary of the status of the Company’s nonvested share awards as of March 31, 2021, and changes during the three month period then ended, is presented below.
Shares
Weighted Average Grant Date Fair Value
Nonvested at January 1, 2021
1,099,866
$52.11
Granted
197,191
71.97
Vested
(219,705)
43.20
Forfeited
(4,037)
56.66
Nonvested at March 31, 2021
1,073,315
$57.56
SARs are granted with exercise prices equal to the market price of the Company’s stock at the date of grant. SARs vest ratably over 4 years of continuous service and have contractual terms of 10 years. All SARs must be settled in stock under provisions of the plan. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs on date of grant. The current year per share average fair value and the model assumptions are shown in the table below.
Weighted per share average fair value at grant date
$16.78
Assumptions:
Dividend yield
1.4
%
Volatility
28.2
%
Risk-free interest rate
.7
%
Expected term
5.7 years
A summary of SAR activity during the first three months of 2021 is presented below.
The core principle of ASU 2014-09, "Revenue from Contracts with Customers," is that an entity should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For the three months ended March 31, 2021, approximately 60% of the Company’s total revenue was comprised of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services.
The following table disaggregates non-interest income subject to ASU 2014-09 by major product line.
Three Months Ended March 31
(In thousands)
2021
2020
Bank card transaction fees
$
37,695
$
40,200
Trust fees
44,127
39,965
Deposit account charges and other fees
22,575
23,677
Consumer brokerage services
4,081
4,077
Other non-interest income
7,696
8,709
Total non-interest income from contracts with customers
116,174
116,628
Other non-interest income (1)
19,871
7,035
Total non-interest income
$
136,045
$
123,663
(1) This revenue is not within the scope of ASU 2014-09, and includes fees relating to capital market activities, loan fees and sales, derivative instruments, standby letters of credit and various other transactions.
For bank card transaction fees, the majority of debit and credit card fees are earned in the Consumer segment, while corporate card and merchant fees are earned in the Commercial segment. The Consumer and Commercial segments each contribute approximately half of the Company's deposit account charge revenue. All trust fees and consumer brokerage services income are earned in the Wealth segment.
The following table presents the opening and closing receivable balances for the three month periods ended March 31, 2021 and 2020 for the Company’s significant revenue categories subject to ASU 2014-09.
(In thousands)
March 31, 2021
December 31, 2020
March 31, 2020
December 31, 2019
Bank card transaction fees
$
12,437
$
14,199
$
9,692
$
13,915
Trust fees
2,017
2,071
2,625
2,093
Deposit account charges and other fees
5,281
6,933
5,002
6,523
Consumer brokerage services
323
432
1,029
596
For these revenue categories, none of the transaction price has been allocated to performance obligations that are unsatisfied as of the end of a reporting period.
The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale debt securities, equity securities, trading debt securities, certain investments relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or fair value accounting or write-downs of individual assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
•Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
•Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).
•Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.
The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value Measurements note in the Company's 2020 Annual Report on Form 10-K. There have been no significant changes in these methodologies since then.
Instruments Measured at Fair Value on a Recurring Basis
The table below presents the March 31, 2021 and December 31, 2020 carrying values of assets and liabilities measured at fair value on a recurring basis. There were no transfers among levels during the first three months of 2021 or the year ended December 31, 2020.
Fair Value Measurements Using
(In thousands)
Total Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
March 31, 2021
Assets:
Residential mortgage loans held for sale
$
30,505
$
—
$
30,505
$
—
Available for sale debt securities:
U.S. government and federal agency obligations
773,590
773,590
—
—
Government-sponsored enterprise obligations
50,816
—
50,816
—
State and municipal obligations
1,980,811
—
1,972,841
7,970
Agency mortgage-backed securities
6,327,450
—
6,327,450
—
Non-agency mortgage-backed securities
358,498
—
358,498
—
Asset-backed securities
2,436,885
—
2,436,885
—
Other debt securities
600,153
—
600,153
—
Trading debt securities
26,925
—
26,925
—
Equity securities
2,931
2,931
—
—
Private equity investments
94,257
—
—
94,257
Derivatives *
62,787
—
60,791
1,996
Assets held in trust for deferred compensation plan
19,848
19,848
—
—
Total assets
12,765,456
796,369
11,864,864
104,223
Liabilities:
Derivatives *
13,512
—
13,152
360
Liabilities held in trust for deferred compensation plan
19,848
19,848
—
—
Total liabilities
$
33,360
$
19,848
$
13,152
$
360
December 31, 2020
Assets:
Residential mortgage loans held for sale
$
39,396
$
—
$
39,396
$
—
Available for sale debt securities:
U.S. government and federal agency obligations
838,059
838,059
—
—
Government-sponsored enterprise obligations
54,485
—
54,485
—
State and municipal obligations
2,045,099
—
2,037,131
7,968
Agency mortgage-backed securities
6,712,085
—
6,712,085
—
Non-agency mortgage-backed securities
361,074
—
361,074
—
Asset-backed securities
1,882,243
—
1,882,243
—
Other debt securities
556,219
—
556,219
—
Trading debt securities
35,321
—
35,321
—
Equity securities
2,966
2,966
—
—
Private equity investments
94,368
—
—
94,368
Derivatives *
89,889
—
86,447
3,442
Assets held in trust for deferred compensation plan
19,278
19,278
—
—
Total assets
12,730,482
860,303
11,764,401
105,778
Liabilities:
Derivatives *
18,675
—
17,974
701
Liabilities held in trust for deferred compensation plan
19,278
19,278
—
—
Total liabilities
$
37,953
$
19,278
$
17,974
$
701
* The fair value of each class of derivative is shown in Note 11.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
(In thousands)
State and Municipal Obligations
Private Equity
Investments
Derivatives
Total
For the three months ended March 31, 2021
Balance January 1, 2021
$
7,968
$
94,368
$
2,741
$
105,077
Total gains or losses (realized/unrealized):
Included in earnings
—
8,365
(1,007)
7,358
Included in other comprehensive income *
(1)
—
—
(1)
Discount accretion
3
—
—
3
Sale/pay down of private equity investments
—
(8,476)
—
(8,476)
Sale of risk participation agreement
—
—
(98)
(98)
Balance March 31, 2021
$
7,970
$
94,257
$
1,636
$
103,863
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2021
$
—
$
8,365
$
2,050
$
10,415
Total gains or losses for the three months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2021
$
(1)
$
—
$
—
$
(1)
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
(In thousands)
State and Municipal Obligations
Private Equity
Investments
Derivatives
Total
For the three months ended March 31, 2020
Balance January 1, 2020
$
9,853
$
94,122
$
369
$
104,344
Total gains or losses (realized/unrealized):
Included in earnings
—
(13,008)
(486)
(13,494)
Included in other comprehensive income *
(1,495)
—
—
(1,495)
Discount accretion
4
—
—
4
Purchases of private equity investments
—
114
—
114
Sale/pay down of private equity investments
—
(69)
—
(69)
Sale of risk participation agreement
—
—
(440)
(440)
Balance March 31, 2020
$
8,362
$
81,159
$
(557)
$
88,964
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2020
$
—
$
(13,008)
$
(55)
$
(13,063)
Total gains or losses for the three months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2020
$
(1,495)
$
—
$
—
$
(1,495)
* Included in "net unrealized gains (losses) on other securities" in the consolidated statements of comprehensive income.
Gains and losses included in earnings for the Level 3 assets and liabilities in the previous table are reported in the following line items in the consolidated statements of income:
(In thousands)
Loan Fees and Sales
Other Non-Interest Income
Investment Securities Gains (Losses), Net
Total
For the three months ended March 31, 2021
Total gains or losses included in earnings
$
(1,372)
$
365
$
8,365
$
7,358
Change in unrealized gains or losses relating to assets still held at March 31, 2021
$
1,855
$
195
$
8,365
$
10,415
For the three months ended March 31, 2020
Total gains or losses included in earnings
$
(459)
$
(27)
$
(13,008)
$
(13,494)
Change in unrealized gains or losses relating to assets still held at March 31, 2020
$
—
$
(55)
$
(13,008)
$
(13,063)
Level 3 Inputs
The Company's significant Level 3 measurements, which employ unobservable inputs that are readily quantifiable, pertain to auction rate securities (ARS), investments in portfolio concerns held by the Company's private equity subsidiaries, and held for sale residential mortgage loan commitments. ARS are included in state and municipal securities and totaled $8.0 million at March 31, 2021, while private equity investments, included in other securities, totaled $94.3 million.
Information about these inputs is presented in the table below.
Quantitative Information about Level 3 Fair Value Measurements
Weighted
Valuation Technique
Unobservable Input
Range
Average*
Auction rate securities
Discounted cash flow
Estimated market recovery period
5 years
5 years
Estimated market rate
1.4%
-
1.7%
1.4%
Private equity investments
Market comparable companies
EBITDA multiple
4.0
-
6.0
5.3
Mortgage loan commitments
Discounted cash flow
Probability of funding
69.4%
-
100.0%
88.8%
Embedded servicing value
.6%
-
1.2%
1.0%
* Unobservable inputs were weighted by the relative fair value of the instruments.
Instruments Measured at Fair Value on a Nonrecurring Basis
For assets measured at fair value on a nonrecurring basis during the first three months of 2021 and 2020, and still held as of March 31, 2021 and 2020, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation inputs used to determine each adjustment, and the carrying value of the related individual assets or portfolios at March 31, 2021 and 2020.
Fair Value Measurements Using
(In thousands)
Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total Gains (Losses) Recognized During the Three Months Ended March 31
March 31, 2021
Collateral dependent loans
$
11,233
$
—
$
—
$
11,233
$
(2,926)
Mortgage servicing rights
8,234
—
—
8,234
1,055
March 31, 2020
Collateral dependent loans
$
124
$
—
$
—
$
124
$
(16)
Mortgage servicing rights
6,768
—
—
6,768
(1,056)
The Company's significant Level 3 measurements that are measured on a nonrecurring basis pertain to the Company's mortgage servicing rights retained on certain fixed rate personal real estate loan originations. Mortgage servicing rights are included in other assets on the consolidated balance sheet, and information about these inputs is presented in the table below.
Quantitative Information about Level 3 Fair Value Measurements
Weighted
Valuation Technique
Unobservable Input
Range
Average*
Mortgage servicing rights
Discounted cash flow
Discount rate
9.03
%
-
9.36
%
9.21
%
Prepayment speeds (CPR)*
10.35
%
-
14.11
%
12.42
%
Loan servicing costs - annually per loan
Performing loans
$
70
-
$
73
$
72
Delinquent loans
$
200
-
$
750
Loans in foreclosure
$
1,000
*Ranges and weighted averages based on interest rate tranches.
The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are updated periodically for changes in market conditions. Actual rates may differ from our estimates. Increases in prepayment speed and discount rates negatively impact the fair value of our mortgage servicing rights.
The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as follows at March 31, 2021 and December 31, 2020:
Carrying Amount
Estimated Fair Value at March 31, 2021
(In thousands)
Level 1
Level 2
Level 3
Total
Financial Assets
Loans:
Business
$
6,624,209
$
—
$
—
$
6,552,890
$
6,552,890
Real estate - construction and land
1,073,036
—
—
1,044,188
1,044,188
Real estate - business
3,017,242
—
—
3,009,811
3,009,811
Real estate - personal
2,828,418
—
—
2,834,405
2,834,405
Consumer
1,966,833
—
—
1,965,384
1,965,384
Revolving home equity
285,261
—
—
282,849
282,849
Consumer credit card
593,833
—
—
546,154
546,154
Overdrafts
3,239
—
—
2,970
2,970
Total loans
16,392,071
—
—
16,238,651
16,238,651
Loans held for sale
38,076
—
38,076
—
38,076
Investment securities
12,696,663
776,521
11,773,568
146,574
12,696,663
Federal funds sold
500
500
—
—
500
Securities purchased under agreements to resell
850,000
—
—
881,377
881,377
Interest earning deposits with banks
2,017,128
2,017,128
—
—
2,017,128
Cash and due from banks
338,666
338,666
—
—
338,666
Derivative instruments
62,787
—
60,791
1,996
62,787
Assets held in trust for deferred compensation plan
19,848
19,848
—
—
19,848
Total
$
32,415,739
$
3,152,663
$
11,872,435
$
17,268,598
$
32,293,696
Financial Liabilities
Non-interest bearing deposits
$
11,076,556
$
11,076,556
$
—
$
—
$
11,076,556
Savings, interest checking and money market deposits
14,572,378
14,572,378
—
—
14,572,378
Certificates of deposit
1,771,691
—
—
1,775,795
1,775,795
Federal funds purchased
28,490
28,490
—
—
28,490
Securities sold under agreements to repurchase
1,909,620
—
—
1,909,673
1,909,673
Other borrowings
2,999
—
2,999
—
2,999
Derivative instruments
13,512
—
13,152
360
13,512
Liabilities held in trust for deferred compensation plan
Assets held in trust for deferred compensation plan
19,278
19,278
—
—
19,278
Total
$
32,145,119
$
3,045,229
$
11,770,094
$
17,192,074
$
32,007,397
Financial Liabilities
Non-interest bearing deposits
$
10,497,598
$
10,497,598
$
—
$
—
$
10,497,598
Savings, interest checking and money market deposits
14,604,456
14,604,456
—
—
14,604,456
Certificates of deposit
1,844,691
—
—
1,847,277
1,847,277
Federal funds purchased
42,270
42,270
—
—
42,270
Securities sold under agreements to repurchase
2,056,113
—
—
2,056,173
2,056,173
Derivative instruments
18,675
—
17,974
701
18,675
Liabilities held in trust for deferred compensation plan
19,278
19,278
—
—
19,278
Total
$
29,083,081
$
25,163,602
$
17,974
$
3,904,151
$
29,085,727
17. Legal and Regulatory Proceedings
The Company has various legal proceedings pending at March 31, 2021, arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at early stages of the legal process. The Company records a loss accrual for all legal and regulatory matters for which it deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet progressed to the point where a loss amount can be determined to be probable and estimable.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2020 Annual Report on Form 10-K. Results of operations for the three and three month periods ended March 31, 2021 are not necessarily indicative of results to be attained for any other period.
Forward-Looking Information
This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, the effects of the COVID-19 pandemic, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2020 Annual Report on Form 10-K and in Part II Item 1A of this Quarterly Report on Form 10-Q. Except as set forth in Part II, Item 1A, during the quarter ended March 31, 2021, there were no material changes to the Risk Factors disclosed in the Company's 2020 Annual Report on Form 10-K.
Critical Accounting Policies
The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses and the valuation of certain investment securities. A discussion of these policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2020 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2020.
Tangible common equity to tangible assets ratio (4)
9.57
11.13
Tier I leverage ratio
9.38
11.13
* Restated for the 5% stock dividend distributed in December 2020.
(1) Includes loans held for sale.
(2) Revenue includes net interest income and non-interest income.
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization. It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP.
The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets.
March 31
(Dollars in thousands)
2021
2020
Total equity
$
3,317,385
$
3,252,464
Less non-controlling interest
4,795
1,449
Less preferred stock
—
144,784
Less goodwill
138,921
138,921
Less core deposit premium
4,864
1,665
Total tangible common equity (a)
$
3,168,805
$
2,965,645
Total assets
$
33,269,786
$
26,793,017
Less goodwill
138,921
138,921
Less core deposit premium
4,864
1,665
Total tangible assets (b)
$
33,126,001
$
26,652,431
Tangible common equity to tangible assets ratio (a)/(b)
Net income attributable to Commerce Bancshares, Inc.
130,972
51,857
79,115
152.6
Preferred stock dividends
—
(2,250)
2,250
(100.0)
Net income available to common shareholders
$
130,972
$
49,607
81,365
164.0
%
N.M. - Not meaningful.
For the quarter ended March 31, 2021, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $131.0 million, an increase of $79.1 million, or 152.6%, compared to the first quarter of the previous year. For the current quarter, the annualized return on average assets was 1.63%, the annualized return on average equity was 15.69%, and the efficiency ratio was 56.37%. Diluted earnings per common share was $1.11 in both the current and previous quarters, and increased 164.3% compared to $.42 per share in the first quarter of 2020.
Compared to the first quarter of last year, net interest income increased $4.7 million, or 2.3%, mainly due to a decline of $16.5 million in interest expense on deposits and borrowings and an increase of $3.7 million in interest income on long-term securities purchased under agreements to resell. These increases to net interest income were partly offset by a decrease of $12.7 million in interest income on loans. The provision for credit losses during the current quarter was a recovery of $6.2 million, reflecting a decrease in the estimate of the allowance for credit losses on loans in the current quarter. As a result, the provision for credit losses in the current quarter was $64.2 million lower than the provision for the first quarter of 2020. Non-interest income increased $12.4 million, or 10.0%, compared to the first quarter of 2020, mainly due to growth in loan fees and sales, trust fees and capital market fees, and a gain on the sale of a branch location. These increases were partly offset by lower net bank card and deposit account fees. Net investment securities gains totaled $9.9 million in the current quarter compared to losses of $13.3 million in the same quarter last year. Net securities gains in the current quarter primarily resulted from $8.4 million in unrealized fair value gains and $1.5 million from the sale of an investment in the Company's private equity investment portfolio. Non-interest expense decreased $1.1 million from the first quarter of 2020 mainly due to lower travel and entertainment expense, higher deferred origination costs and a reduction in impairment expense on mortgage servicing rights, partly offset by higher data processing and software expense.
The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.
Analysis of Changes in Net Interest Income
Three Months Ended March 31, 2021 vs. 2020
Change due to
(In thousands)
Average
Volume
Average
Rate
Total
Interest income, fully taxable equivalent basis:
Loans:
Business
$
9,240
$
(7,407)
$
1,833
Real estate - construction and land
1,979
(3,422)
(1,443)
Real estate - business
1,737
(5,028)
(3,291)
Real estate - personal
4,112
(3,192)
920
Consumer
(37)
(3,847)
(3,884)
Revolving home equity
(578)
(940)
(1,518)
Consumer credit card
(3,592)
(2,119)
(5,711)
Overdrafts
—
—
—
Total interest on loans
12,861
(25,955)
(13,094)
Loans held for sale
228
(121)
107
Investment securities:
U.S. government and federal agency securities
(398)
772
374
Government-sponsored enterprise obligations
(863)
(240)
(1,103)
State and municipal obligations
5,638
(3,198)
2,440
Mortgage-backed securities
13,515
(17,144)
(3,629)
Asset-backed securities
5,855
(6,452)
(597)
Other securities
1,926
(1,262)
664
Total interest on investment securities
25,673
(27,524)
(1,851)
Federal funds sold and short-term securities purchased under
agreements to resell
(2)
—
(2)
Long-term securities purchased under agreements to resell
—
3,666
3,666
Interest earning deposits with banks
1,864
(2,786)
(922)
Total interest income
40,624
(52,720)
(12,096)
Interest expense:
Deposits:
Savings
103
(89)
14
Interest checking and money market
1,661
(7,881)
(6,220)
Certificates of deposit of less than $100,000
(302)
(1,000)
(1,302)
Certificates of deposit of $100,000 and over
(393)
(3,780)
(4,173)
Total interest on deposits
1,069
(12,750)
(11,681)
Federal funds purchased and securities sold under
agreements to repurchase
162
(4,620)
(4,458)
Other borrowings
(328)
(1)
(329)
Total interest expense
903
(17,371)
(16,468)
Net interest income, tax equivalent basis
$
39,721
$
(35,349)
$
4,372
Net interest income in the first quarter of 2021 was $205.7 million, an increase of $4.7 million over the first quarter of 2020. On a tax equivalent (T/E) basis, net interest income totaled $208.8 million in the first quarter of 2021, up $4.4 million over the same period last year and down $4.2 million from the previous quarter. The increase in net interest income compared to the first quarter of 2020 was mainly due to lower interest expense on interest bearing deposits and borrowings of $16.5 million and higher interest income on long-term securities purchased under agreements to resell of $3.7 million, partly offset by lower interest income on loans (T/E) of $13.1 million. The decrease in interest earned on loans (T/E) was mainly the result of lower yields on all loan products, especially commercial loans, many of which have variable rates. Total interest income on
investment securities (T/E) decreased $1.9 million from the first quarter of last year due to a decline in the average rate earned, but growth in average balances largely offset the decline in interest income driven by lower rates. The decrease in expense on interest bearing deposits and borrowings was a result of a decline in the average rate paid. The Company's net yield on earning assets (T/E) was 2.71% in the current quarter compared to 3.33% in the first quarter of 2020.
Total interest income (T/E) decreased $12.1 million from the first quarter of 2020. Interest income on loans (T/E) was $147.4 million during the first quarter of 2021, and decreased $13.1 million, or 8.2%, from the same quarter last year. The decrease in interest income from the same quarter last year was primarily due to a decline of 73 basis points in the average rate earned, partly offset by growth of $1.6 billion, or 11.2%, in average loan balances. Most of the decrease in interest income occurred in the consumer credit card, consumer, business real estate, revolving home equity and construction and land loan categories. Consumer credit card loan interest decreased $5.7 million due to a decline of $118.8 million in average balances, coupled with a 129 basis point decline in the average rate earned. Consumer loan interest declined $3.9 million due to a decrease of 76 basis points in the average rate earned. Business real estate loan interest income fell $3.3 million due to a 64 basis point decrease in the average rate earned, partly offset by higher average balances of $169.3 million, or 5.9%. Revolving home equity loan interest declined $1.5 million due to a decrease of 123 basis points in the average rate earned, coupled with a decline of $50.9 million, or 14.5%, in average balances. Construction and land loan interest decreased $1.4 million due to a decline of 124 basis points in the average rate earned, partly offset by growth in the average balance of $167.9 million. These decreases to interest income (T/E) were partly offset by an increase of $1.8 million in interest income on business loans, due to growth of $1.0 billion, or 18.9%, in average balances, while the average rate earned on these loans declined 41 basis points. The growth in average balances was mainly the result of Paycheck Protection Program (PPP) loans secured for customers as part of the program sponsored by the Small Business Administration (SBA). Personal real estate loan interest grew $920 thousand over same quarter last year due to growth of $435.4 million in average balances, partly offset by a 43 basis point decline in the average rate earned.
Interest income on investment securities (T/E) was $53.5 million during the first quarter of 2021, which was a decrease of $1.9 million from the same quarter last year. The decrease in interest income occurred mainly in interest earned on mortgage-backed securities, which fell $3.6 million due to a 98 basis point decline in the average rate earned, partly offset by an increase of $2.3 billion in the average balance. An adjustment to premium amortization of $4.1 million was recorded in the current quarter to reflect a slowdown in forward prepayment speed estimates on mortgage-backed securities due to rising interest rates during the quarter. This adjustment mostly offset higher premium amortization recorded on these securities during the quarter due to the recent surge in mortgage refinancing. In addition, interest on asset-backed securities declined $597 thousand as a result of a 124 basis point decline in the average rate earned, partly offset by an increase of $902.9 million in the average balance. Interest income on government-sponsored enterprise obligations decreased $1.1 million and resulted from a decline in the average balance of $83.5 million, or 62.2%, and a decrease of 183 basis points in the average rate earned. These decreases to interest income on investment securities (T/E) were partly offset by an increase of $2.4 million in interest earned on state and municipal obligations. This increase was a result of growth in the average balance of $736.0 million, partly offset by a 65 basis point decline in the average rate earned. Interest on U.S. government and federal agency obligations grew $374 thousand mainly due to an increase in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS). Interest income related to TIPS, which is tied to the Consumer Price Index, increased $486 thousand over the same quarter last year. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $12.6 billion in the first quarter of 2021, compared to $8.5 billion in the first quarter of 2020.
Interest income on long-term securities purchased under agreements to resell increased $3.7 million over the same quarter last year, due to an increase of 178 basis points in the average rate earned, as these assets were structured with floor spreads to protect against falling rates. Of the $850.0 million in securities purchased under agreements to resell held by the Company, $450.0 million of those agreements will mature throughout 2021. Interest income on balances at the Federal Reserve declined $922 thousand mainly due to a 76 basis point decrease in the average rate earned, partly offset by an $878.9 million increase in the average balance invested.
The average tax equivalent yield on total interest earning assets was 2.76% in the first quarter of 2021, down from 3.66% in the first quarter of 2020.
Total interest expense decreased $16.5 million compared to the first quarter of 2020 due to a $11.7 million decrease in interest expense on interest bearing deposits and a $4.8 million decrease in interest expense on borrowings. The decrease in deposit interest expense resulted mainly from a 36 basis point decline in the overall average rate paid, slightly offset by higher average balances of $2.4 billion. Interest expense on interest checking and money market accounts declined $6.2 million, due to a 24 basis point decrease in the average rate paid, slightly offset by higher average balances of $2.2 billion. Interest expense on certificates of deposit declined $5.5 million due to a 111 basis point decrease in the average rate paid. Interest expense on
borrowings decreased due to lower rates paid, mainly on customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .09% and .52% in the first quarters of 2021 and 2020, respectively.
Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.
Non-Interest Income
Three Months Ended March 31
Increase (Decrease)
(Dollars in thousands)
2021
2020
Amount
% change
Bank card transaction fees
$
37,695
$
40,200
$
(2,505)
(6.2)
%
Trust fees
44,127
39,965
4,162
10.4
Deposit account charges and other fees
22,575
23,677
(1,102)
(4.7)
Capital market fees
4,981
3,790
1,191
31.4
Consumer brokerage services
4,081
4,077
4
.1
Loan fees and sales
10,184
3,235
6,949
214.8
Other
12,402
8,719
3,683
42.2
Total non-interest income
$
136,045
$
123,663
$
12,382
10.0
%
Non-interest income as a % of total revenue*
39.8
%
38.1
%
* Total revenueincludes net interest income and non-interest income.
The table below is a summary of net bank card transaction fees for the three month periods ended March 31, 2021 and 2020.
Three Months Ended March 31
(Dollars in thousands)
2021
2020
% change
Net debit card fees
$
9,367
$
9,322
.5
%
Net credit card fees
3,421
3,487
(1.9)
Net merchant fees
4,614
4,388
5.2
Net corporate card fees
20,293
23,003
(11.8)
Total bank card transaction fees
$
37,695
$
40,200
(6.2)
%
For the first quarter of 2021, total non-interest income amounted to $136.0 million compared to $123.7 million in the same quarter last year, which was an increase of $12.4 million, or 10.0%. The increase was mainly due to higher loan fees and sales, trust fees, capital market fees and other non-interest income, partly offset by lower net bank card fees and deposit account fees. Bank card transaction fees for the current quarter declined $2.5 million, or 6.2%, from the same period last year, mostly due to lower net corporate card fees of $2.7 million, partly offset by higher net merchant fees of $226 thousand. The decline in net corporate card fees from the same quarter last year was mainly due to lower fee income, partly offset by lower rewards expense. The growth in net merchant fees was mainly due to higher discount fees, partly offset by higher interchange expense. Trust fees for the quarter increased $4.2 million, or 10.4%, over the same quarter last year, resulting from higher private client and institutional trust fee income, which were up 11.4% and 6.1%, respectively. Compared to the same period last year, deposit account fees decreased $1.1 million, or 4.7%, mainly due to lower overdraft and return item fees, partly offset by an increase in corporate cash management fees. Capital market fees increased $1.2 million, or 31.4%, while loan fees and sales increased $6.9 million due to higher mortgage banking revenue. Other non-interest income increased $3.7 million, or 42.2%, mainly due gains of $2.4 million recorded in the current quarter on the sale of a branch location and growth of $1.2 million in interest rate swap fees. Fair value adjustments on the Company's deferred compensation plan assets, which are held in a trust and recorded as both an asset and liability, increased $3.4 million over the same quarter last year, affecting both other income and other expense. These increases were partly offset by a decline of $2.8 million in cash sweep commissions.
Net gains (losses) on sales and fair value adjustments of private equity investments
9,888
(13,008)
Fair value adjustments on equity securities, net
(35)
(295)
Total investment securities gains (losses), net
$
9,853
$
(13,301)
Net gains and losses on investment securities, which were recognized in earnings during the three months ended March 31, 2021 and 2020, are shown in the table above. Net securities gains of $9.9 million were reported in the first quarter of 2021, compared to net losses of $13.3 million in the same period last year. The net gains in the first quarter of 2021 were primarily comprised of a net gain of $1.5 million on the sale of a private equity investment and $8.4 million of net gains in fair value on the Company’s private equity investments. The net losses on investment securities for the same quarter last year were mainly comprised of $295 thousand of net losses in fair value on equity investments and $13.0 million of net losses in fair value on the Company’s private equity investments, as the economic conditions resulting from the COVID-19 pandemic negatively impacted investment valuations. The portion of private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in expense of $2.0 million during the first three months of 2021 and income of $2.5 million during the first three months of 2020.
Non-Interest Expense
Three Months Ended March 31
Increase (Decrease)
(Dollars in thousands)
2021
2020
Amount
% change
Salaries and employee benefits
$
129,033
$
128,937
$
96
.1
%
Net occupancy
12,021
11,748
273
2.3
Equipment
4,353
4,821
(468)
(9.7)
Supplies and communication
4,125
4,658
(533)
(11.4)
Data processing and software
25,463
23,555
1,908
8.1
Marketing
5,158
5,979
(821)
(13.7)
Other
12,420
14,000
(1,580)
(11.3)
Total non-interest expense
$
192,573
$
193,698
$
(1,125)
(.6)
%
Non-interest expense for the first quarter of 2021 amounted to $192.6 million, a decrease of $1.1 million, or .6%, compared to expense of $193.7 million in the first quarter of last year. The decrease in expense was due to lower expenses in most areas, particularly in travel and entertainment expense, partly offset by higher costs for data processing and software. Salaries expense increased $1.9 million, or 1.8%, driven by growth in incentive compensation, partly offset by a decline in full-time salary costs. Employee benefits expense totaled $21.7 million, reflecting a decrease of $1.8 million, or 7.6%, mainly as a result of lower healthcare expense. Full-time equivalent employees totaled 4,619 at March 31, 2021, compared to 4,854 at March 31, 2020. Supplies and communication expense declined $533 thousand, or 11.4%, due to lower supplies and postage expense, and equipment expense declined $468 thousand, or 9.7%. Data processing and software expense increased $1.9 million, or 8.1%, which reflects a continuing investment in technology, while marketing expense declined $821 thousand, or 13.7%. Other non-interest expense decreased $1.6 million, or 11.3% mainly due to a lower travel and entertainment expense of $2.0 million, higher deferred origination costs of $1.1 million, and a $2.1 million reduction in impairment expense on mortgage servicing rights. These decreases were partly offset by the previously mentioned fair value equity adjustments of $3.4 million on the Company's deferred compensation plan assets.
The Company has an established process to determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, which assesses the risks and losses expected in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded lending commitments, as well as a second, smaller component based on certain individually evaluated loans and unfunded lending commitments. The Company's policies and processes for determining the allowance for credit losses on loans and the liability for unfunded lending commitments are discussed in Note 1 to the consolidated financial statements and in the "Allowance for Credit Losses" discussion within Critical Accounting Policies in Item 7 of the 2020 Annual Report on Form 10-K.
Net loan charge-offs in the first quarter of 2021 amounted to $10.0 million, compared to $8.0 million in the prior quarter and $10.9 million in the first quarter of last year. During the first quarter of 2021, the Company recorded net charge-offs on commercial loans of $17 thousand, compared to net charge-offs of $572 thousand in the prior quarter. The decrease in commercial loan net charge-offs was primarily driven by a $585 thousand decrease in net charge-offs on business loans this quarter, compared to the prior quarter. In addition to the decrease in commercial net loan charge-offs, net charge-offs on consumer loans decreased $397 thousand in the first quarter of 2021 compared to the prior quarter. These decreases were offset by an increase of $3.0 million in net charge-offs on consumer credit card loans in the first quarter of 2021 compared to the prior quarter. The increase in consumer credit card net charge-offs compared to prior quarter was a result of a COVID-related relief program offered during 2020 that caused the past due and charge-off process on some loans to not advance for several months. As the short-term relief expired, those loans progressed into past due stages during the fourth quarter of 2020 and were ultimately charged-off during the first quarter of 2021. Compared to the same period last year, net loan charge-offs in the first quarter of 2021 decreased $906 thousand. The decrease in net charge-offs during the first quarter of 2021 compared to the same quarter last year was driven by lower net charge-offs on consumer, overdraft, and consumer credit card loans of $948 thousand, $273 thousand, and $176 thousand, respectively, partly offset by lower net recoveries on business loans of $369 thousand.
For the three months ended March 31, 2021, annualized net charge-offs on average consumer credit card loans totaled 5.98%, compared to 3.72% in the previous quarter and 5.06% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .16%, compared to .23% in the prior quarter and .35% in the same period last year. In the first quarter of 2021, total annualized net loan charge-offs were .25%, compared to .19% in the previous quarter, and .30% in the same period last year.
In the current quarter, the provision for credit losses on loans was a recovery of $10.4 million, which was a $2.8 million increase from the recovery on the provision of $7.5 million in the prior quarter. The provision for credit losses on loans in the current quarter decreased $53.2 million compared to the provision expense in the first quarter of 2020. The continued recovery of the provision for credit losses on loans is the result of an improved forecast coupled with lower than projected net charge-offs. The allowance for credit losses significantly increased during the first half of 2020 due to the pandemic-induced recession. The economic forecast utilized in the first half of 2020 captured extreme uncertainty with high unemployment rates, but through various governmental stimulus programs, improvements in the public health crisis due to the development and increasing availability of a COVID-19 vaccine, the projected net charge-offs were not realized and the economic forecast improved, thus allowing the release of the allowance for credit losses during the fourth quarter of 2020 and the first quarter of 2021.
In the current quarter, the provision for credit losses on unfunded lending commitments totaled $4.1 million, a $1.0 million increase over the provision of $3.1 million in the prior quarter, and decreased $11.0 million compared to the first quarter of 2020.
For the quarter ended March 31, 2021, the allowance for credit losses on loans decreased $20.3 million, compared to the allowance for credit losses on loans as of December 31, 2020. The decrease was primarily due to the improved economic forecast. The allowance for credit losses on consumer credit card loans decreased $14.5 million as a result of the improved economic forecast combined with lower loan balances and lower than expected net charge-offs. Additionally, the allowance for credit losses related to personal banking loans, excluding consumer credit card loans, decreased $3.9 million, while the allowance for credit losses on commercial loans decreased $1.9 million. While the forecast continued to improve, the allowance considers the uncertainty of future potential COVID-19 disruptions on both the consumer and commercial portfolios.
The allowance for credit losses on loans and the liability for unfunded lending commitments are estimates that require significant judgment including projections of the macro-economic environment. The Company utilizes a third-party macro-economic forecast that continuously changes due to economic conditions and events. These changes in the forecast cause fluctuations in the allowance for credit losses on loans and the liability for unfunded lending commitments. The Company used its best judgment to assess the macro-economic forecast and internal loss data in estimating the allowance for credit losses on
loans and the liability for unfunded lending commitments. These estimates are subject to periodic refinement based on changes in the underlying external and internal data.
At March 31, 2021, the allowance for credit losses on loans amounted to $200.5 million, compared to $220.8 million at December 31, 2020, and was 1.22% and 1.35% of total loans at March 31, 2021 and December 31, 2020, respectively. The Company considers the allowance for credit losses and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at March 31, 2021.
Risk Elements of Loan Portfolio
The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual. During 2020, Section 4013 of the CARES Act was signed into law and provided financial institutions the option to suspend the requirement to categorize modifications related to the COVID-19 pandemic as troubled debt restructurings. The 2021 Consolidated Appropriations Act signed on December 27, 2020 extends this temporary suspension through January 1, 2022. The Company follows the guidance under the CARES Act when determining if a customer's modification is subject to troubled debt restructuring classification. Refer to Note 2 for additional information.
(Dollars in thousands)
March 31, 2021
December 31, 2020
Non-accrual loans
$
23,506
$
26,540
Foreclosed real estate
208
93
Total non-performing assets
$
23,714
$
26,633
Non-performing assets as a percentage of total loans
.14
%
.16
%
Non-performing assets as a percentage of total assets
.07
%
.08
%
Total loans past due 90 days and still accruing interest
$
21,512
$
22,190
Non-accrual loans totaled $23.5 million at March 31, 2021, a decrease of $3.0 million from the balance at December 31, 2020. The decrease occurred mainly in business loans which decreased $2.3 million. At March 31, 2021, non-accrual loans were comprised mainly of business (86.0%), personal real estate (7.3%), and business real estate (6.7%) loans. Foreclosed real estate totaled $208 thousand at March 31, 2021, an increase of $115 thousand when compared to December 31, 2020. Total loans past due 90 days or more and still accruing interest were $21.5 million as of March 31, 2021, a decrease of $678 thousand from December 31, 2020. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements.
In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $429.1 million at March 31, 2021 compared with $361.8 million at December 31, 2020, resulting in an increase of $67.4 million, or 18.6%.
(In thousands)
March 31, 2021
December 31, 2020
Potential problem loans:
Business
$
114,656
$
133,039
Real estate – construction and land
38,586
29,378
Real estate – business
275,204
198,666
Real estate – personal
661
670
Total potential problem loans
$
429,107
$
361,753
At March 31, 2021, the Company had $139.6 million of loans whose terms have been modified or restructured under a troubled debt restructuring. These loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession, as defined by accounting guidance, and are further discussed in the "Troubled debt
restructurings" section in Note 2 to the consolidated financial statements. This balance includes certain commercial loans totaling $118.5 million which are classified as substandard and included in the table above because of this classification.
Loans with Special Risk Characteristics
Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon.
Real Estate – Construction and Land Loans
The Company's portfolio of construction and land loans, as shown in the table below, amounted to 6.5% of total loans outstanding at March 31, 2021. The largest component of construction and land loans was commercial construction, which increased $50.1 million during the three months ended March 31, 2021. At March 31, 2021, multi-family residential construction loans totaled approximately $218.9 million, or 24.9%, of the commercial construction loan portfolio, compared to $238.0 million, or 28.8%, at December 31, 2020.
(Dollars in thousands)
March 31, 2021
% of Total
% of
Total
Loans
December 31, 2020
% of Total
% of
Total
Loans
Commercial construction
$
877,636
81.8
%
5.4
%
$
827,546
81.0
%
5.1
%
Residential construction
97,091
9.0
.5
94,729
9.3
.6
Residential land and land development
56,463
5.3
.3
59,299
5.8
.4
Commercial land and land development
41,846
3.9
.3
40,021
3.9
.2
Total real estate - construction and land loans
$
1,073,036
100.0
%
6.5
%
$
1,021,595
100.0
%
6.3
%
Real Estate – Business Loans
Total business real estate loans were $3.0 billion at March 31, 2021 and comprised 18.4% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At March 31, 2021, 36.9% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans.
(Dollars in thousands)
March 31, 2021
% of Total
% of
Total
Loans
December 31, 2020
% of Total
% of
Total
Loans
Owner-occupied
$
1,113,863
36.9
%
6.8
%
$
1,145,862
37.9
%
7.0
%
Office
388,519
12.9
2.4
385,392
12.7
2.4
Multi-family
362,846
12.0
2.2
301,161
10.0
1.8
Retail
341,857
11.3
2.1
349,461
11.5
2.1
Hotels
269,929
8.9
1.6
271,189
9.0
1.7
Senior living
171,982
5.7
1.0
195,800
6.5
1.2
Farm
168,219
5.6
1.0
169,692
5.6
1.0
Industrial
72,097
2.4
.4
78,341
2.6
.5
Other
127,930
4.3
.9
129,219
4.2
.8
Total real estate - business loans
$
3,017,242
100.0
%
18.4
%
$
3,026,117
100.0
%
18.5
%
Revolving Home Equity Loans
The Company had $285.3 million in revolving home equity loans at March 31, 2021 that were generally collateralized by residential real estate. Most of these loans (93.1%) are written with terms requiring interest only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of March 31, 2021, the outstanding principal of loans with an original LTV higher than 80% was $29.0 million, or 10.2% of the portfolio, compared to $32.1 million as of December 31, 2020. Total revolving home equity loan balances over 30 days past due were $2.3 million at
March 31, 2021 compared to $2.0 million at December 31, 2020, and there were no revolving home equity loans on non-accrual status at March 31, 2021 or December 31, 2020. The weighted average FICO score for the total current portfolio balance is 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 convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of 2021 through 2023, approximately 15.1% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 91% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels.
Consumer Loans
Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs. Auto loans comprised 44% of the consumer loan portfolio at March 31, 2021, and outstanding balances for auto loans were $871.7 million and $879.9 million at March 31, 2021 and December 31, 2020, respectively. The balances over 30 days past due amounted to $5.5 million at March 31, 2021 compared to $9.2 million at December 31, 2020, and comprised .6% and 1.0% of the outstanding balances of these loans at March 31, 2021 and December 31, 2020, respectively. For the three months ended March 31, 2021, $106.2 million of new auto loans were originated, compared to $100.0 million during the first three months of 2020. At March 31, 2021, the automobile loan portfolio had a weighted average FICO score of 757, and net charge-offs on auto loans were .20% of average auto loans at March 31, 2021.
The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 12% of the consumer loan portfolio at March 31, 2021. Losses on these loans have historically been low, and the Company saw a small recovery in 2021. Private banking loans comprised 26% of the consumer loan portfolio at March 31, 2021. The Company's private banking loans are generally well-collateralized and at March 31, 2021 were secured primarily by assets held by the Company's trust department. The remaining portion of the Company's consumer loan portfolio is comprised of health services financing, motorcycles, marine and RV loans. Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $345 thousand in the first three months of 2021 and were .17% of the average balances of these loans at March 31, 2021.
Consumer Credit Card Loans
The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at March 31, 2021 of $593.8 million in consumer credit card loans outstanding, approximately $99.4 million, or 16.7%, carried a low promotional rate. Within the next six months, $30.0 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters.
Oil and Gas Energy Lending
The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $194.6 million, or 1.2% of total loans at March 31, 2021, an increase of $15.9 million from year end 2020, as shown in the table below.
Information about the credit quality of the Company's energy lending portfolio as of March 31, 2021 and December 31, 2020 is provided in the table below.
(Dollars in thousands)
March 31, 2021
% of Energy Lending
December 31, 2020
% of Energy Lending
Pass
$
146,547
75.3
%
$
126,380
70.7
%
Special mention
18,518
9.5
17,978
10.1
Substandard
26,881
13.8
31,676
17.7
Non-accrual
2,637
1.4
2,695
1.5
Total
$
194,583
100.0
%
$
178,729
100.0
%
Energy lending balances classified as substandard and non-accrual represented 13.8% and 1.4% respectively, of total energy lending loan balances at March 31, 2021. The Company saw a small recovery on energy loans during the three months ended March 31, 2021. The Company recorded $15 thousand of net loan charge-offs on energy loans for the year ended December 31, 2020.
Pandemic-Sensitive Industry Lending
As a result of the ongoing COVID-19 global pandemic, the United States economy is currently in an unprecedented state of uncertainty. While nearly every industry has been impacted to some degree by business disruptions, the Company identified the following industries and lending exposures, excluding PPP loans, within its loan portfolio at March 31, 2021 and December 31, 2020.
(In thousands)
March 31, 2021
% of Loan Portfolio at March 31, 2021
December 31, 2020
Unfunded commitments at March 31, 2021
Commercial real estate - retail
$
387,753
2.6
%
$
386,939
$
11,694
Hotels
308,968
2.1
302,606
31,294
Senior living
306,749
2.0
310,771
90,088
Energy
185,889
1.2
172,533
198,605
Retail stores
118,400
.8
111,126
195,873
Restaurants
63,552
.4
67,247
81,174
Total
$
1,371,311
9.1
%
$
1,351,222
$
608,728
Due to the significant deterioration of the U.S. economy resulting from the COVID-19 pandemic, the Company saw an increase in loan payment deferral requests through the end of the second quarter of 2020. Loans on active deferral decreased significantly in the third quarter of 2020. A summary of loan balances related to active loan payment deferral requests as of March 31, 2021 are shown in the table below.
(Dollars in thousands)
Number of Payment Deferral Requests (1)
Loan Balance Outstanding at March 31, 2021
% of Loan Class - based on March 31, 2021 Loan Balance
Commercial (2)
8
$
116,947
1.1
%
Real estate - personal
55
12,246
.4
Consumer credit card
18
122
—
Consumer
299
4,127
.2
Total
380
$
133,442
.8
%
(1) Excludes deferrals offered through the Company's skip pay program.
Active payment deferral requests on commercial loans as of March 31, 2021, categorized by industry, are listed below. All of the loans have been deferred more than 90 days.
(Dollars in thousands)
Number of Payment Deferral Requests
Loan Balance Outstanding at March 31, 2021
Hotels
4
$
73,371
Multifamily
1
28,223
Nursing and residential care facilities
1
15,129
Real estate developer/owner
1
212
Restaurants and dining
1
12
Total
8
$
116,947
Small Business Lending
During April 2020, in response to the COVID-19 crisis, the federal government created the PPP, sponsored by the Small Business Administration ("SBA"), under the CARES Act. As a participating lender under the program, the Company funded loans of $1.5 billion for 7,618 customers during 2020 (round 1), with a median loan size of $33 thousand. The balance of PPP loans at March 31, 2021 was $1.4 billion, which was an increase of $66.7 million compared to December 31, 2020. The growth in PPP loan balances reflected $331.4 million of loan balances originated during the first quarter of 2021 (round 2), partially offset by a decline of $264.7 million in loan balances from December 31, 2020 (round 1).
The Company understands that the loans are fully guaranteed by the SBA. Therefore, there was no increase in the allowance for credit losses on loans related to these loans as there is no expectation of credit loss. The maximum term of the loans is five years, however, the Company believes that the majority of the loan balances are expected to be forgiven by the SBA. The process of loan forgiveness began during the third quarter of 2020, and the Company believes the majority of loan balances will be forgiven in 2021.
Shared National Credits
The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled $1.0 billion at March 31, 2021 and December 31, 2020. Additional unfunded commitments at March 31, 2021 totaled $1.9 billion.
Income Taxes
Income tax expense was $32.1 million in the first quarter of 2021, compared to $33.1 million in the fourth quarter of 2020 and $10.2 million in the first quarter of 2020. The Company's effective tax rate, including the effect of non-controlling interest, was 19.7% in the first quarter of 2021, compared to 20.3% in the fourth quarter of 2020 and 16.4% in the first quarter of 2020. The effective tax rate in the first quarter has historically been lower than other quarters due to the recognition of share-based excess tax benefits as a reduction to income tax expense. These benefits result from transactions relating to equity award vesting, most of which occur in the first quarter of each year.
Total assets of the Company were $33.3 billion at March 31, 2021 and $32.9 billion at December 31, 2020. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $31.9 billion at March 31, 2021 and $31.3 billion at December 31, 2020, and consisted of 52% in loans and 39% in investment securities at March 31, 2021.
During the first quarter of 2021, average loans totaled $16.3 billion, a decrease of $28.3 million from the prior quarter, and an increase of $1.6 billion, or 11.2%, over the same quarter last year. Period-end loans increased $62.4 million compared to the prior quarter. Compared to the previous quarter, average balances of business, consumer, consumer credit card, and revolving home equity loans declined $47.4 million, $33.7 million, $29.4 million, and $17.5 million, respectively. The period-end balance of PPP loans (included in business loans) increased $66.7 million during the first quarter and totaled $1.4 billion at March 31, 2021. This growth reflected $331.4 million of loan balances originated this quarter, partly offset by a decline of $264.7 million in loan balances from year end. Average PPP loan balances declined $102.3 million compared to the prior quarter. Partially offsetting the declines in average loan balances listed above were increases in the average balances of construction and land and personal real estate loans, which grew $59.1 million and $47.7 million, respectively. Growth in personal real estate loan balances was due to continued strong demand for residential mortgage loans this quarter. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $177.8 million, compared to $136.0 million in the prior quarter.
Total average available for sale debt securities increased $532.3 million over the previous quarter to $12.7 billion, at fair value. The increase in investment securities was mainly the result of growth in mortgage-backed and asset-backed securities. During the current quarter, purchases of securities totaled $1.3 billion with a weighted average yield of approximately .93%. Maturities and pay downs were $939.6 million. At March 31, 2021, the duration of the investment portfolio was 3.9 years, and maturities and pay downs of approximately $2.3 billion are expected to occur during the next 12 months.
Total average deposits increased $898.6 million this quarter compared to the previous quarter. The increase in deposits resulted from growth in interest checking and money market ($771.7 million) and savings deposits ($98.7 million), partly offset by a decline in certificates of deposit ($134.7 million). Average demand deposits also increased $162.9 million over the previous quarter. Compared to the previous quarter, total average consumer and wealth deposits (including private banking) grew $570.2 million and $305.2 million, respectively, while average commercial deposits declined $49.2 million. The average loans to deposits ratio was 61.79% in the current quarter and 64.05% in the prior quarter. The Company's average borrowings, which includes customer repurchase agreements, were $2.2 billion in the first quarter of 2021 and $2.0 billion in the prior quarter.
Liquidity and Capital Resources
Liquidity Management
The Company’s most liquid assets are comprised of available for sale debt securities, federal funds sold, securities purchased under agreements to resell (resale agreements), and balances at the Federal Reserve Bank, as follows:
(In thousands)
March 31, 2021
March 31, 2020
December 31, 2020
Liquid assets:
Available for sale debt securities
$
12,528,203
$
8,678,586
$
12,449,264
Federal funds sold
500
400
—
Long-term securities purchased under agreements to resell
850,000
850,000
850,000
Balances at the Federal Reserve Bank
2,017,128
474,156
1,747,363
Total
$
15,395,831
$
10,003,142
$
15,046,627
Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $500 thousand as of March 31, 2021. Long-term resale agreements, maturing through 2023, totaled $850.0 million at March 31, 2021. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled $895.2 million in fair value at March 31, 2021. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity
purposes, totaled $2.0 billion at March 31, 2021. The fair value of the available for sale debt portfolio was $12.5 billion at March 31, 2021 and included an unrealized net gain of $140.2 million. The total net unrealized gain included net gains of $56.0 million on U.S. government and federal agency obligations, $49.2 million on mortgage-backed and asset-backed securities, and $34.1 million on state and municipal obligations.
Approximately $2.3 billion of the available for sale debt portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet new loan demand or help offset potential reductions in the Company's deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows:
(In thousands)
March 31, 2021
March 31, 2020
December 31, 2020
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings
$
39,586
$
44,660
$
40,792
FHLB borrowings and letters of credit
4,874
7,072
5,376
Securities sold under agreements to repurchase *
2,170,744
1,662,630
2,322,941
Other deposits and swaps
2,477,132
2,146,632
2,438,628
Total pledged securities
4,692,336
3,860,994
4,807,737
Unpledged and available for pledging
6,490,351
3,459,988
6,310,907
Ineligible for pledging
1,345,516
1,357,604
1,330,620
Total available for sale debt securities, at fair value
$
12,528,203
$
8,678,586
$
12,449,264
* Includes securities pledged for collateral swaps, as discussed in Note 12 to the consolidated financial statements.
Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At March 31, 2021, such deposits totaled $25.6 billion and represented 93.5% of total deposits. These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources. Certificates of deposit of $100,000 and over totaled $1.3 billion at March 31, 2021. These accounts are normally considered more volatile and higher costing and comprised 4.6% of total deposits at March 31, 2021.
(In thousands)
March 31, 2021
March 31, 2020
December 31, 2020
Core deposit base:
Non-interest bearing
$
11,076,556
$
6,952,236
$
10,497,598
Interest checking
2,180,434
2,032,642
2,402,272
Savings and money market
12,391,944
10,016,637
12,202,184
Total
$
25,648,934
$
19,001,515
$
25,102,054
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)
March 31, 2021
March 31, 2020
December 31, 2020
Borrowings:
Federal funds purchased
$
28,490
$
18,720
$
42,270
Securities sold under agreements to repurchase
1,909,620
1,409,293
2,056,113
FHLB advances
—
750,000
—
Other debt
3,791
6,461
802
Total
$
1,941,901
$
2,184,474
$
2,099,185
Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Repurchase agreements are collateralized by securities in the Company's investment portfolio and are comprised of non-insured customer funds totaling $1.9 billion, which generally mature overnight. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were no advances outstanding from the FHLB at March 31, 2021.
The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral. Also, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged 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 at March 31, 2021.
March 31, 2021
(In thousands)
FHLB
Federal Reserve
Total
Collateral value pledged
$
2,198,055
$
1,140,797
$
3,338,852
Letters of credit issued
(127,665)
—
(127,665)
Available for future advances
$
2,070,390
$
1,140,797
$
3,211,187
In addition to those mentioned above, several other sources of liquidity are available. No commercial paper has been issued or outstanding during the past ten years. The Company has no subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that it could generate additional liquidity through its Capital Markets Group from sources such as jumbo certificates of deposit or privately placed corporate debt. The Company receives strong outside rankings from both Standard & Poor's and Moody's on both the consolidated company level and its subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise. These ratings are as follows:
Standard & Poor’s
Moody’s
Commerce Bancshares, Inc.
Issuer rating
A-
Rating outlook
Stable
Commerce Bank
Issuer rating
A
A2
Baseline credit assessment
a1
Short-term rating
A-1
P-1
Rating outlook
Stable
Stable
The cash flows from the operating, investing and financing activities of the Company resulted in a net increase in cash, cash equivalents and restricted cash of $172.5 million during the first three months of 2021, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $201.7 million and has historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, used cash of $327.7 million. Activity in the investment securities portfolio used cash of $247.1 million from purchases (net of sales, maturities and pay downs), while growth in the loan portfolio used cash of $72.5 million. Financing activities provided cash of $298.6 million, largely resulting from an increase in deposits of $512.6 million partially offset by a decrease of $160.3 million in federal funds purchased and securities sold under agreements to repurchase, dividend payments of $30.8 million on common stock, and treasury stock purchases of $25.9 million.
The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at March 31, 2021 and December 31, 2020, as shown in the following table.
(Dollars in thousands)
March 31, 2021
December 31, 2020
Minimum Ratios under Capital Adequacy Guidelines
Minimum Ratios
for
Well-Capitalized
Banks *
Risk-adjusted assets
$
21,991,816
$
21,516,461
Tier I common risk-based capital
3,025,279
2,950,926
Tier I risk-based capital
3,025,279
2,950,926
Total risk-based capital
3,251,646
3,189,432
Tier I common risk-based capital ratio
13.76
%
13.71
%
7.00
%
6.50
%
Tier I risk-based capital ratio
13.76
%
13.71
%
8.50
%
8.00
%
Total risk-based capital ratio
14.79
%
14.82
%
10.50
%
10.00
%
Tier I leverage ratio
9.38
%
9.45
%
4.00
%
5.00
%
*under Prompt Corrective Action requirements
The Company is subject to a 2.5% capital conservation buffer, which is an amount above the minimum ratios under capital adequacy guidelines, and is required under Basel III. The capital conservation buffer is intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, share repurchases, and executive compensation.
In the first quarter of 2020, the interim final rule of the Federal Reserve Bank and other U.S. banking agencies became effective, providing banks that adopt CECL (ASU 2016-13) during the 2020 calendar year the option to delay recognizing the estimated impact on regulatory capital until after a two year deferral period, followed by a three year transition period. In connection with the adoption of CECL on January 1, 2020, the Company has elected to utilize this option. As a result, the two-year deferral period for the Company extends through December 31, 2021. Beginning on January 1, 2022, the Company will be required to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025.
The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and normally purchases stock in the open market. During the three months ended March 31, 2021, the Company purchased 354,181 shares at an average price of $73.19 in open market purchases and through stock-based compensation transactions. At March 31, 2021, 3,190,398 shares remained available for purchase under the Board authorization.
The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.263 per share cash dividend on its common stock in the first quarter of 2021, which was an 2.1% increase compared to its 2020 quarterly dividend.
On September 1, 2020, the Company redeemed all 6,000 outstanding shares of its 6.00% Series B Non-Cumulative Perpetual Preferred Stock and the corresponding depositary shares representing fractional interests in the Series B Preferred Stock at a redemption price of $25 per depositary share (equivalent to $1,000 per share of preferred stock).
Commitments, Off-Balance Sheet Arrangements and Contingencies
In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at March 31, 2021 totaled $13.3 billion (including $4.9 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $440.4 million and $4.5 million, respectively, at March 31, 2021. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to $3.0 million at March 31, 2021. The allowance for these commitments is recorded in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheet. At March 31, 2021, the liability for unfunded commitments totaled $42.4 million. See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements.
During the third quarter of 2020, the Company signed a $106.6 million agreement with U.S. Capital Development to develop a 280,000 square foot commercial office building in a two building complex in Clayton, Missouri, which is expected to be completed near the end of 2022. As of March 31, 2021, the Company has made payments totaling $25.1 million. While the Company intends to occupy a portion of the office building for executive offices, a 15 year lease agreement has been signed by an anchor tenant to lease approximately 40% of the office building.
The Company regularly purchases various state tax credits arising from third party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first three months of 2021, purchases and sales of tax credits amounted to $19.8 million and $28.1 million, respectively. Fees from sales of tax credits were $1.2 million for the three months ended March 31, 2021, compared to $1.1 million in the same period last year. At March 31, 2021, the Company expected to fund outstanding purchase commitments of $129.8 million during the remainder of 2021.
Segment Results
The table below is a summary of segment pre-tax income results for the first three months of 2021 and 2020.
(Dollars in thousands)
Consumer
Commercial
Wealth
Segment
Totals
Other/ Elimination
Consolidated Totals
Three Months Ended March 31, 2021
Net interest income
$
77,939
$
110,169
$
17,457
$
205,565
$
183
$
205,748
Provision for credit losses
(9,901)
(27)
5
(9,923)
16,155
6,232
Non-interest income
38,248
50,728
50,985
139,961
(3,916)
136,045
Investment securities gains, net
—
—
—
—
9,853
9,853
Non-interest expense
(70,504)
(79,281)
(33,043)
(182,828)
(9,745)
(192,573)
Income before income taxes
$
35,782
$
81,589
$
35,404
$
152,775
$
12,530
$
165,305
Three Months Ended March 31, 2020
Net interest income
$
78,981
$
85,896
$
12,959
$
177,836
$
23,229
$
201,065
Provision for credit losses
(11,206)
356
(3)
(10,853)
(47,100)
(57,953)
Non-interest income
34,081
49,887
47,409
131,377
(7,714)
123,663
Investment securities losses, net
—
—
—
—
(13,301)
(13,301)
Non-interest expense
(77,412)
(80,820)
(31,769)
(190,001)
(3,697)
(193,698)
Income before income taxes
$
24,444
$
55,319
$
28,596
$
108,359
$
(48,583)
$
59,776
Increase in income before income taxes:
Amount
$
11,338
$
26,270
$
6,808
$
44,416
$
61,113
$
105,529
Percent
46.4
%
47.5
%
23.8
%
41.0
%
125.8
%
176.5
%
Consumer
For the three months ended March 31, 2021, income before income taxes for the Consumer segment increased $11.3 million, or 46.4%, compared to the first three months of 2020. This increase in income before income taxes was mainly due to growth in non-interest income of $4.2 million, or 12.2%, lower non-interest expense of $6.9 million, or 8.9%, and a decrease in the provision for credit losses of $1.3 million. These increases to income were partly offset by lower net-interest income of $1.0 million, or 1.3%. Net interest income decreased due to an $8.3 million decrease to loan interest income, partly offset by a $2.8 million increase in net allocated funding credits and a $4.5 million decrease in deposit interest expense. Non-interest income increased mainly due to growth in mortgage banking revenue, partly offset by a decrease in deposit account fees (mainly overdraft and return item fees). Non-interest expense decreased from the same period in the previous year due to lower salaries expense, lower allocated service and support costs (mainly bank card servicing, mortgage operations, information technology and online banking), and a reduction in impairment expense on mortgage servicing rights. The provision for credit losses totaled $9.9 million, a $1.3 million decrease from the first three months of 2020, mainly due to lower personal, overdraft, and credit card loan net charge-offs.
Commercial
For the three months ended March 31, 2021, income before income taxes for the Commercial segment increased $26.3 million, or 47.5%, compared to the same period in the previous year. This increase was mainly due to higher net interest income. Net interest income increased $24.3 million, or 28.3%, due to a $25.4 million increase in net allocated funding credits and a decrease in deposit and borrowings interest expense of $9.5 million. These increases to income were partly offset by a
$10.5 million decrease in loan interest income. Non-interest income increased $841 thousand, or 1.7%, over the previous year mainly due to higher capital market, interest rate swap and deposit account fees (mainly corporate cash management fees). These increases were partly offset by a decline in net corporate card fees (driven by lower transaction volume) and cash sweep commissions. Non-interest expense decreased $1.5 million, or 1.9%, mainly due to higher deferred origination costs, lower travel and entertainment expense and lower allocated support costs (mainly information technology and commercial payments). These decreases were partly offset by higher incentive compensation expense. The provision for credit losses increased $383 thousand over the same period last year, mainly due to net recoveries recorded on lease loans in the prior year, partly offset by lower net charge-offs on commercial card loans.
Wealth
Wealth segment pre-tax profitability for the three months ended March 31, 2021 increased $6.8 million, or 23.8%, over the same period in the previous year. Net interest income increased $4.5 million, or 34.7%, mainly due to a $4.8 million increase in net allocated funding credits and lower deposit interest expense of $1.5 million, partly offset by a $1.8 million decrease in loan interest income. Non-interest income increased $3.6 million, or 7.5%, over the prior year largely due to higher trust fees (mainly private client trust fees) and mortgage banking revenue, partly offset by lower cash sweep commissions. Non-interest expense increased $1.3 million, or 4.0%, mainly due to a miscellaneous recovery recorded in the prior year, coupled with higher salaries and benefits expense and allocated servicing and support costs (mainly mortgage operations and online banking). These increases were partly offset by lower travel and entertainment expense. The provision for credit losses decreased $8 thousand from the same period last year due to net recoveries on overdrafts and revolving home equity loans.
The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was higher than in the same period last year by $61.1 million. This increase was partly due to higher non-interest income of $3.8 million, partly offset by lower net interest income of $23.0 million and an increase in non-interest expense of $6.0 million. Unallocated securities gains were $9.9 million in the first three months of 2021 compared to losses of $13.3 million in 2020. Also, the unallocated provision for credit losses decreased $63.3 million, as the provision was $20.3 million less than net charge-offs in the first three months of 2021, while the provision was $32.0 million in excess of net charge-offs during the first three months of 2020. Net charge-offs are allocated to the segments when incurred for management reporting purposes. Additionally, the Company's provision for credit losses on unfunded lending commitments, which is not allocated to the segments for management reporting, was $4.1 million for the three months ended March 31, 2021.
Impact of Recently Issued Accounting Standards
Income Taxes The FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes", in December 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 were effective January 1, 2021, and the Company adopted them on that date. The adoption did not have a significant effect on the Company's consolidated financial statements.
Investment Securities The FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs", in October 2020. The amendments in the ASU clarify that for each reporting period an entity should evaluate whether a callable debt security that has multiple call dates may consider estimates of future principal prepayments when applying the interest method. The guidance was effective January 1, 2021, and the Company adopted it on that date. The adoption did not have a significant effect on the Company's consolidated financial statements.
Reference Rate Reform The FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting", in March 2020, and has been followed by additional clarifying guidance related to derivatives that are modified as a result of reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if they reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Further, the guidance applies to derivative instruments that are affected by the discounting transition. The expedients and exceptions provided by the new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022. The guidance is effective as of March 12, 2020 through December 31, 2022, and the Company is in the process of evaluating and applying, as applicable, the optional expedients and exceptions for eligible contracts and transaction available through December 31, 2022.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest income sensitivity to movement in interest rates. The Company performs monthly simulations that model interest rate movements and risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2020 Annual Report on Form 10-K.
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 three rising rate scenarios 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.
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
March 31, 2021
December 31, 2020
(Dollars in millions)
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
300 basis points rising
$
73.6
9.46
%
$
(558.6)
$
85.4
11.47
%
$
(560.6)
200 basis points rising
59.8
7.68
(387.8)
69.5
9.33
(392.5)
100 basis points rising
32.6
4.19
(200.5)
38.9
5.23
(204.7)
Simulation B
March 31, 2021
December 31, 2020
(Dollars in millions)
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
300 basis points rising
$
41.6
5.34
%
$
(1,847.4)
$
57.5
7.73
%
$
(1,940.3)
200 basis points rising
31.2
4.01
(1,686.5)
45.3
6.09
(1,782.8)
100 basis points rising
7.9
1.01
(1,517.6)
18.9
2.54
(1,614.7)
Under Simulation A, in the three rising rate scenarios, interest rate risk is less asset sensitive than the previous quarter, which primarily resulted from the addition of PPP loans to the simulation in the current quarter. In the previous quarter, PPP loans were not included in the simulation and contributed to higher deposit balances at the Federal Reserve. For the quarter ended March 31, 2021, the addition of the PPP loans to the simulation extended the maturity of the portfolio, causing the assets in the simulation to reprice more gradually, which resulted in a smaller increase in interest income. The Company did not model a 100 basis point falling scenario due to the already low interest rate environment.
In Simulation B, the assumed higher levels of deposit attrition were modeled to capture the results of a shrinking balance sheet.
Projecting deposit activity in a period of historically low interest rates is difficult, and the Company cannot predict how deposits will actually react to shifting rates. The comparisons above provide 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.
An evaluation was performed under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2021. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
The information required by this item is set forth in Part I, Item 1 under Note 17, Legal and Regulatory Proceedings.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information about the Company's purchases of its $5 par value common stock, its only class of common stock registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as part of Publicly Announced Program
Maximum Number that May Yet Be Purchased Under the Program
January 1 - 31, 2021
57,637
$
69.05
57,637
3,486,942
February 1 - 28, 2021
184,645
$
72.01
184,645
3,302,297
March 1 - 31, 2021
111,899
$
77.27
111,899
3,190,398
Total
354,181
$
73.19
354,181
3,190,398
The Company's stock purchases shown above were made under authorizations by the Board of Directors. Under the most recent authorization in November 2019 of 5,000,000 shares, 3,190,398 shares remained available for purchase at March 31, 2021.
101 — Interactive data files in Inline XBRL pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
104 — Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
