e10vq
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark
One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009 OR
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o
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TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the transition period
from
to
Commission File
No. 0-2989
COMMERCE
BANCSHARES, INC.
(Exact name of registrant as
specified in its charter)
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Missouri
(State
of Incorporation)
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43-0889454
(IRS
Employer Identification No.)
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1000 Walnut,
Kansas City, MO
(Address
of principal executive offices)
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64106
(Zip
Code)
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(816) 234-2000
(Registrants
telephone number, including area code)
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Indicate by check mark whether the
registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for
the past 90 days.
Yes þ No o
Indicate by check mark whether the
registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes o No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer,
accelerated filer and smaller reporting
company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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Indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act).
Yes o No þ
As of August 3, 2009, the
registrant had outstanding 79,000,740 shares of its $5 par
value common stock, registrants only class of common stock.
Commerce
Bancshares, Inc. and Subsidiaries
Form 10-Q
2
PART I:
FINANCIAL INFORMATION
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Item 1.
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FINANCIAL
STATEMENTS
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Commerce
Bancshares, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
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June 30
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December 31
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2009
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2008
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(Unaudited)
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(In thousands)
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ASSETS
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Loans
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$
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10,699,674
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$
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11,283,246
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Allowance for loan losses
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(186,001
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(172,619
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Net loans
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10,513,673
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11,110,627
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Loans held for sale
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388,706
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361,298
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Investment securities:
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Available for sale ($539,587,000 and $525,993,000 pledged in
2009 and 2008, respectively, to secure structured repurchase
agreements)
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5,156,343
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3,630,753
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Trading
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17,259
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9,463
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Non-marketable
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133,925
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139,900
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Total investment securities
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5,307,527
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3,780,116
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Federal funds sold and securities purchased under agreements to
resell
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40,155
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169,475
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Interest earning deposits with banks
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8,318
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638,158
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Cash and due from banks
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376,051
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491,723
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Land, buildings and equipment, net
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406,612
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411,168
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Goodwill
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125,585
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125,585
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Other intangible assets, net
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15,849
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17,191
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Other assets
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537,567
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427,106
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Total assets
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$
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17,720,043
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$
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17,532,447
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LIABILITIES AND EQUITY
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Deposits:
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Non-interest bearing demand
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$
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1,517,398
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$
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1,375,000
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Savings, interest checking and money market
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8,281,652
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7,610,306
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Time open and C.D.s of less than $100,000
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2,137,049
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2,067,266
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Time open and C.D.s of $100,000 and over
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1,770,243
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1,842,161
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Total deposits
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13,706,342
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12,894,733
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Federal funds purchased and securities sold under agreements to
repurchase
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1,174,121
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1,026,537
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Other borrowings
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847,108
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1,747,781
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Other liabilities
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294,163
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283,929
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Total liabilities
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16,021,734
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15,952,980
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Commerce Bancshares, Inc. stockholders equity:
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Preferred stock, $1 par value
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Authorized and unissued 2,000,000 shares
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Common stock, $5 par value
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Authorized 100,000,000 shares; issued
77,162,355 shares in 2009 and 75,901,097 shares in 2008
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385,812
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379,505
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Capital surplus
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655,020
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621,458
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Retained earnings
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664,189
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633,159
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Treasury stock of 22,053 shares in 2009 and
18,789 shares in 2008, at cost
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(823
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(761
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Accumulated other comprehensive loss
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(7,928
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(56,729
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Total Commerce Bancshares, Inc. stockholders equity
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1,696,270
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1,576,632
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Non-controlling interest
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2,039
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2,835
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Total equity
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1,698,309
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1,579,467
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Total liabilities and equity
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$
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17,720,043
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$
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17,532,447
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See accompanying notes to consolidated financial
statements.
3
Commerce
Bancshares, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME
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For the Three Months
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For the Six Months
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Ended June 30
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Ended June 30
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(In thousands, except per share data)
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2009
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2008
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2009
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2008
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(Unaudited)
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INTEREST INCOME
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Interest and fees on loans
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$
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141,423
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$
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161,007
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$
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283,832
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$
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335,345
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Interest and fees on loans held for sale
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1,963
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3,623
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5,395
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7,540
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Interest on investment securities
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55,517
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41,310
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102,987
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82,207
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Interest on federal funds sold and securities purchased under
agreements to resell
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36
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2,264
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150
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5,665
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Interest on deposits with banks
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53
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502
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Total interest income
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198,992
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208,204
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392,866
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430,757
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INTEREST EXPENSE
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Interest on deposits:
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Savings, interest checking and money market
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7,978
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14,353
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16,031
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34,967
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Time open and C.D.s of less than $100,000
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14,545
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20,468
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29,292
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45,727
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Time open and C.D.s of $100,000 and over
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9,915
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13,886
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21,215
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31,186
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Interest on federal funds purchased and securities sold under
agreements to repurchase
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849
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5,882
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2,079
|
|
|
|
17,634
|
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Interest on other borrowings
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|
8,260
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8,836
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16,789
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16,357
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Total interest expense
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|
41,547
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|
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63,425
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85,406
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145,871
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Net interest income
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|
|
157,445
|
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144,779
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307,460
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284,886
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Provision for loan losses
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41,166
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|
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18,000
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|
|
84,334
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|
|
38,000
|
|
|
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Net interest income after provision for loan losses
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|
|
116,279
|
|
|
|
126,779
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|
|
|
223,126
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|
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246,886
|
|
|
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NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Deposit account charges and other fees
|
|
|
26,935
|
|
|
|
28,260
|
|
|
|
52,527
|
|
|
|
55,335
|
|
Bank card transaction fees
|
|
|
30,105
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|
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29,394
|
|
|
|
57,273
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|
|
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55,702
|
|
Trust fees
|
|
|
19,355
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|
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20,286
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|
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38,228
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40,399
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Bond trading income
|
|
|
6,151
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|
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3,183
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|
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11,547
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|
|
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7,347
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Consumer brokerage services
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|
|
3,213
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|
|
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3,411
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6,521
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|
|
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6,820
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Loan fees and sales
|
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|
3,733
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|
|
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1,150
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|
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6,694
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|
|
|
3,290
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Other
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9,070
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|
|
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17,049
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|
|
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18,203
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|
|
|
26,000
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|
|
|
Total non-interest income
|
|
|
98,562
|
|
|
|
102,733
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190,993
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194,893
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INVESTMENT SECURITIES GAINS (LOSSES), NET
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|
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Impairment losses on securities
|
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(10,080
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)
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(31,965
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)
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Less noncredit-related losses on securities not expected to be
sold
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|
9,286
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|
|
|
|
|
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|
30,618
|
|
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|
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|
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Net impairment losses
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(794
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)
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|
|
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(1,347
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)
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Realized gains (losses) on sales and fair value adjustments
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(1,959
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)
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|
|
1,008
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|
|
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(3,578
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)
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24,331
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|
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Investment securities gains (losses), net
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|
(2,753
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)
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|
|
1,008
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|
|
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(4,925
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)
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|
|
24,331
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NON-INTEREST EXPENSE
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|
|
|
|
|
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Salaries and employee benefits
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86,279
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83,247
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173,032
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166,257
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Net occupancy
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|
11,088
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10,805
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|
22,900
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|
22,874
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Equipment
|
|
|
6,255
|
|
|
|
6,244
|
|
|
|
12,577
|
|
|
|
12,151
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|
Supplies and communication
|
|
|
8,249
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|
|
|
8,545
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|
|
|
16,933
|
|
|
|
17,269
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|
Data processing and software
|
|
|
15,007
|
|
|
|
14,159
|
|
|
|
29,354
|
|
|
|
27,722
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|
Marketing
|
|
|
4,906
|
|
|
|
5,447
|
|
|
|
9,253
|
|
|
|
10,734
|
|
Deposit insurance
|
|
|
12,969
|
|
|
|
522
|
|
|
|
17,075
|
|
|
|
1,025
|
|
Indemnification obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,808
|
)
|
Other
|
|
|
15,258
|
|
|
|
18,096
|
|
|
|
31,773
|
|
|
|
38,022
|
|
|
|
Total non-interest expense
|
|
|
160,011
|
|
|
|
147,065
|
|
|
|
312,897
|
|
|
|
287,246
|
|
|
|
Income before income taxes
|
|
|
52,077
|
|
|
|
83,455
|
|
|
|
96,297
|
|
|
|
178,864
|
|
Less income taxes
|
|
|
15,257
|
|
|
|
27,118
|
|
|
|
28,849
|
|
|
|
57,786
|
|
|
|
Net income before non-controlling interest
|
|
|
36,820
|
|
|
|
56,337
|
|
|
|
67,448
|
|
|
|
121,078
|
|
Less non-controlling interest expense (income)
|
|
|
(148
|
)
|
|
|
358
|
|
|
|
(356
|
)
|
|
|
932
|
|
|
|
Net income
|
|
$
|
36,968
|
|
|
$
|
55,979
|
|
|
$
|
67,804
|
|
|
$
|
120,146
|
|
|
|
Net income per common share basic
|
|
$
|
.48
|
|
|
$
|
.74
|
|
|
$
|
.89
|
|
|
$
|
1.59
|
|
Net income per common share diluted
|
|
$
|
.48
|
|
|
$
|
.74
|
|
|
$
|
.88
|
|
|
$
|
1.58
|
|
|
|
See accompanying notes to consolidated financial
statements.
4
Commerce
Bancshares, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerce Bancshares, Inc. Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
(In thousands,
|
|
Common
|
|
|
Capital
|
|
|
Retained
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Controlling
|
|
|
|
|
except per share data)
|
|
Stock
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
(Unaudited)
|
|
|
Balance January 1, 2009
|
|
$
|
379,505
|
|
|
$
|
621,458
|
|
|
$
|
633,159
|
|
|
$
|
(761
|
)
|
|
$
|
(56,729
|
)
|
|
$
|
2,835
|
|
|
$
|
1,579,467
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
67,804
|
|
|
|
|
|
|
|
|
|
|
|
(356
|
)
|
|
|
67,448
|
|
Change in unrealized gain (loss) related to available for sale
securities for which a portion of an
other-than-temporary
impairment has been recorded in earnings, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,476
|
|
|
|
|
|
|
|
1,476
|
|
Change in unrealized gain (loss) on all other available for sale
securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,475
|
|
|
|
|
|
|
|
46,475
|
|
Amortization of pension loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
850
|
|
|
|
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(440
|
)
|
|
|
(440
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(391
|
)
|
|
|
|
|
|
|
|
|
|
|
(391
|
)
|
Issuance of stock under open market sale program
|
|
|
5,246
|
|
|
|
30,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,501
|
|
Issuance of stock under purchase and equity compensation plans
|
|
|
297
|
|
|
|
1,123
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
1,380
|
|
Net tax benefit related to equity compensation plans
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Stock-based compensation
|
|
|
|
|
|
|
3,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,237
|
|
Issuance of nonvested stock awards
|
|
|
764
|
|
|
|
(1,133
|
)
|
|
|
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid ($.480 per share)
|
|
|
|
|
|
|
|
|
|
|
(36,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,774
|
)
|
|
|
Balance June 30, 2009
|
|
$
|
385,812
|
|
|
$
|
655,020
|
|
|
$
|
664,189
|
|
|
$
|
(823
|
)
|
|
$
|
(7,928
|
)
|
|
$
|
2,039
|
|
|
$
|
1,698,309
|
|
|
|
Balance January 1, 2008
|
|
$
|
359,694
|
|
|
$
|
475,220
|
|
|
$
|
669,142
|
|
|
$
|
(2,477
|
)
|
|
$
|
26,107
|
|
|
$
|
2,470
|
|
|
$
|
1,530,156
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
120,146
|
|
|
|
|
|
|
|
|
|
|
|
932
|
|
|
|
121,078
|
|
Change in unrealized gain (loss) on available for sale
securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,507
|
)
|
|
|
|
|
|
|
(10,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(308
|
)
|
|
|
(308
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,343
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,343
|
)
|
Issuance of stock under purchase and equity compensation plans
|
|
|
343
|
|
|
|
(2,031
|
)
|
|
|
|
|
|
|
9,998
|
|
|
|
|
|
|
|
|
|
|
|
8,310
|
|
Net tax benefit related to equity compensation plans
|
|
|
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
761
|
|
Stock-based compensation
|
|
|
|
|
|
|
3,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,285
|
|
Issuance of nonvested stock awards
|
|
|
88
|
|
|
|
(738
|
)
|
|
|
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid ($.476 per share)
|
|
|
|
|
|
|
|
|
|
|
(35,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,985
|
)
|
Adoption of fair value guidelines allowing use of transaction
price at initial measurement
|
|
|
|
|
|
|
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903
|
|
Adoption of guidelines requiring recognition of liabilities for
benefits payable under split-dollar life insurance arrangements
|
|
|
|
|
|
|
|
|
|
|
(716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(716
|
)
|
|
|
Balance June 30, 2008
|
|
$
|
360,125
|
|
|
$
|
476,497
|
|
|
$
|
753,490
|
|
|
$
|
(172
|
)
|
|
$
|
15,600
|
|
|
$
|
3,094
|
|
|
$
|
1,608,634
|
|
|
|
See accompanying notes to
consolidated financial statements.
5
Commerce
Bancshares, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
|
Ended June 30
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
67,804
|
|
|
$
|
120,146
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
84,334
|
|
|
|
38,000
|
|
Provision for depreciation and amortization
|
|
|
25,436
|
|
|
|
25,606
|
|
Amortization of investment security premiums, net
|
|
|
1,132
|
|
|
|
3,002
|
|
Investment securities (gains) losses, net(A)
|
|
|
4,925
|
|
|
|
(24,331
|
)
|
Gains on sales of branches
|
|
|
(644
|
)
|
|
|
(6,938
|
)
|
Net gains on sales of loans held for sale
|
|
|
(4,600
|
)
|
|
|
(1,671
|
)
|
Originations of loans held for sale
|
|
|
(276,352
|
)
|
|
|
(187,350
|
)
|
Proceeds from sales of loans held for sale
|
|
|
110,886
|
|
|
|
95,607
|
|
Net (increase) decrease in trading securities
|
|
|
(9,628
|
)
|
|
|
7,183
|
|
Stock-based compensation
|
|
|
3,237
|
|
|
|
3,285
|
|
(Increase) decrease in interest receivable
|
|
|
(2,211
|
)
|
|
|
12,235
|
|
Increase (decrease) in interest payable
|
|
|
3,720
|
|
|
|
(25,002
|
)
|
Increase (decrease) in income taxes payable
|
|
|
(8,344
|
)
|
|
|
13,120
|
|
Net tax benefit related to equity compensation plans
|
|
|
(80
|
)
|
|
|
(761
|
)
|
Other changes, net
|
|
|
44,559
|
|
|
|
(11,957
|
)
|
|
|
Net cash provided by operating activities
|
|
|
44,174
|
|
|
|
60,174
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash paid in branch sales
|
|
|
(3,494
|
)
|
|
|
(54,490
|
)
|
Proceeds from sales of investment securities(A)
|
|
|
27,459
|
|
|
|
128,157
|
|
Proceeds from maturities/pay downs of investment securities(A)
|
|
|
567,239
|
|
|
|
534,355
|
|
Purchases of investment securities(A)
|
|
|
(2,045,848
|
)
|
|
|
(1,148,303
|
)
|
Net (increase) decrease in loans
|
|
|
512,620
|
|
|
|
(560,593
|
)
|
Purchases of land, buildings and equipment
|
|
|
(14,473
|
)
|
|
|
(19,828
|
)
|
Sales of land, buildings and equipment
|
|
|
55
|
|
|
|
235
|
|
|
|
Net cash used in investing activities
|
|
|
(956,442
|
)
|
|
|
(1,120,467
|
)
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net increase in non-interest bearing demand, savings, interest
checking and money market deposits
|
|
|
791,104
|
|
|
|
277,264
|
|
Net decrease in time open and C.D.s
|
|
|
(375
|
)
|
|
|
(290,258
|
)
|
Net increase in federal funds purchased and securities sold
under agreements to repurchase
|
|
|
147,584
|
|
|
|
374,889
|
|
Repayment of long-term borrowings
|
|
|
(200,673
|
)
|
|
|
(7,951
|
)
|
Additional long-term borrowings
|
|
|
100,000
|
|
|
|
300,000
|
|
Net increase (decrease) in short-term borrowings
|
|
|
(800,000
|
)
|
|
|
199,997
|
|
Purchases of treasury stock
|
|
|
(391
|
)
|
|
|
(8,343
|
)
|
Issuance of stock under open market stock sale program, stock
purchase and equity compensation plans
|
|
|
36,881
|
|
|
|
8,310
|
|
Net tax benefit related to equity compensation plans
|
|
|
80
|
|
|
|
761
|
|
Cash dividends paid on common stock
|
|
|
(36,774
|
)
|
|
|
(35,985
|
)
|
|
|
Net cash provided by financing activities
|
|
|
37,436
|
|
|
|
818,684
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(874,832
|
)
|
|
|
(241,609
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
1,299,356
|
|
|
|
1,328,246
|
|
|
|
Cash and cash equivalents at June 30
|
|
$
|
424,524
|
|
|
$
|
1,086,637
|
|
|
|
(A) Available for sale and non-marketable securities
|
|
|
|
|
|
|
|
|
|
|
Income tax net payments
|
|
$
|
36,780
|
|
|
$
|
45,474
|
|
Interest paid on deposits and borrowings
|
|
$
|
81,672
|
|
|
$
|
170,873
|
|
|
|
See accompanying notes to
consolidated financial statements.
6
Commerce
Bancshares, Inc. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
|
|
1.
|
Principles
of Consolidation and Presentation
|
The accompanying consolidated financial statements include the
accounts of Commerce Bancshares, Inc. and all majority-owned
subsidiaries (the Company). The consolidated financial
statements in this report have not been audited. All significant
intercompany accounts and transactions have been eliminated.
Certain reclassifications were made to 2008 data to conform to
current year presentation. In the opinion of management, all
adjustments necessary to present fairly the financial position
and the results of operations for the interim periods have been
made. All such adjustments are of a normal recurring nature. The
results of operations for the three and six month periods ended
June 30, 2009 are not necessarily indicative of results to
be attained for the full year or any other interim periods. The
Company evaluated subsequent events for recognition or
disclosure through August 7, the date on which the
financial statements were issued.
The significant accounting policies followed in the preparation
of the quarterly financial statements are disclosed in the 2008
Annual Report on
Form 10-K.
|
|
2.
|
Acquisitions
and Dispositions
|
In February 2009, the Company sold its branch in Lakin, Kansas.
In this transaction, the Company sold the bank facility and
certain deposits totaling approximately $4.7 million and
recorded a gain of $644 thousand.
During the second quarter of 2008, the Company sold its banking
branch in Independence, Kansas. In this transaction,
approximately $23.3 million in loans, $85.0 million in
deposits, and various other assets and liabilities were sold,
and the Company recorded a gain of $6.9 million.
|
|
3.
|
Loans and
Allowance for Loan Losses
|
Major classifications within the Companys loan portfolio
at June 30, 2009 and December 31, 2008 are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Business
|
|
$
|
3,186,518
|
|
|
$
|
3,404,371
|
|
Real estate construction and land
|
|
|
732,104
|
|
|
|
837,369
|
|
Real estate business
|
|
|
2,156,810
|
|
|
|
2,137,822
|
|
Real estate personal
|
|
|
1,591,036
|
|
|
|
1,638,553
|
|
Consumer
|
|
|
1,462,328
|
|
|
|
1,615,455
|
|
Home equity
|
|
|
492,411
|
|
|
|
504,069
|
|
Student
|
|
|
344,190
|
|
|
|
358,049
|
|
Consumer credit card
|
|
|
707,912
|
|
|
|
779,709
|
|
Overdrafts
|
|
|
26,365
|
|
|
|
7,849
|
|
|
|
Total loans
|
|
$
|
10,699,674
|
|
|
$
|
11,283,246
|
|
|
|
At June 30, 2009, loans of $3.2 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 $1.3 billion were pledged at the Federal Reserve
Bank as collateral for discount window borrowings and borrowings
under the Term Auction Facility.
Included in the table above are impaired loans, which are
generally placed on non-accrual status. Such loans totaled
$122.6 million at June 30, 2009 and $72.9 million
at December 31, 2008. A loan is considered to be impaired
when, based on current information and events, it is probable
that all amounts due under the contractual terms of the
agreement will not be collected. Such loans increased
$49.8 million in the first six months of 2009, mainly
because of higher levels of impaired construction and land real
estate loans. At June 30, 2009, approximately 10% of this
construction portfolio was considered to be impaired.
7
The Companys portfolio of construction loans amounted to
6.8% of total loans outstanding at June 30, 2009. The table
below shows the Companys holdings of the major types of
construction loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
|
|
|
December 31
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
% of Total
|
|
|
2008
|
|
|
% of Total
|
|
|
|
|
Residential land and land development
|
|
$
|
200,121
|
|
|
|
27.3
|
%
|
|
$
|
246,335
|
|
|
|
29.4
|
%
|
Residential construction
|
|
|
135,554
|
|
|
|
18.5
|
|
|
|
141,405
|
|
|
|
16.9
|
|
Commercial land and land development
|
|
|
135,419
|
|
|
|
18.5
|
|
|
|
139,726
|
|
|
|
16.7
|
|
Commercial construction
|
|
|
261,010
|
|
|
|
35.7
|
|
|
|
309,903
|
|
|
|
37.0
|
|
|
|
Total real estate-construction and land loans
|
|
$
|
732,104
|
|
|
|
100.0
|
%
|
|
$
|
837,369
|
|
|
|
100.0
|
%
|
|
|
Total business real estate loans were $2.2 billion at
June 30, 2009 and comprised 20.2% of the Companys
total loan portfolio. Approximately 46% of these loans were for
owner-occupied real estate properties, which present lower risk
profiles. 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.
In addition to its basic portfolio, the Company originates loans
which it intends to sell in secondary markets. Loans classified
as held for sale primarily consist of loans originated to
students while attending colleges and universities. The Company
maintains contracts with the Federal Department of Education and
various student loan agencies to sell student loans at various
times while the student is attending school or shortly after
graduation. Also included as held for sale are certain fixed
rate residential mortgage loans which are sold in the secondary
market, generally within three months of origination. The
following table presents information about loans held for sale,
including an impairment valuation allowance resulting from
declines in fair value, which is further discussed in
Note 14 on Fair Value Measurements. Previously recognized
impairment losses amounting to $1.5 million were reversed
during the first six months of 2009, as certain impaired loans
were sold in accordance with contractual terms.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Balance outstanding:
|
|
|
|
|
|
|
|
|
Student
|
|
$
|
364,121
|
|
|
$
|
358,556
|
|
Residential mortgage
|
|
|
24,585
|
|
|
|
2,742
|
|
|
|
Total loans held for sale balance
|
|
$
|
388,706
|
|
|
$
|
361,298
|
|
|
|
Decline in fair value below cost
|
|
$
|
(7,849
|
)
|
|
$
|
(9,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
|
Ended June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Net gains on sales:
|
|
|
|
|
|
|
|
|
Student
|
|
$
|
3,221
|
|
|
$
|
1,149
|
|
Residential mortgage
|
|
|
1,379
|
|
|
|
522
|
|
|
|
Total gains on sales of loans held for sale, net
|
|
$
|
4,600
|
|
|
$
|
1,671
|
|
|
|
8
The following is a summary of the allowance for loan losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30
|
|
|
Ended June 30
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Balance, beginning of period
|
|
$
|
180,868
|
|
|
$
|
141,689
|
|
|
$
|
172,619
|
|
|
$
|
133,586
|
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
41,166
|
|
|
|
18,000
|
|
|
|
84,334
|
|
|
|
38,000
|
|
|
|
Total additions
|
|
|
41,166
|
|
|
|
18,000
|
|
|
|
84,334
|
|
|
|
38,000
|
|
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan losses
|
|
|
39,489
|
|
|
|
17,842
|
|
|
|
77,909
|
|
|
|
34,822
|
|
Less recoveries on loans
|
|
|
3,456
|
|
|
|
3,351
|
|
|
|
6,957
|
|
|
|
8,434
|
|
|
|
Net loan losses
|
|
|
36,033
|
|
|
|
14,491
|
|
|
|
70,952
|
|
|
|
26,388
|
|
|
|
Balance, June 30
|
|
$
|
186,001
|
|
|
$
|
145,198
|
|
|
$
|
186,001
|
|
|
$
|
145,198
|
|
|
|
Investment securities, at fair value, consisted of the following
at June 30, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
11,972
|
|
|
$
|
11,594
|
|
Government-sponsored enterprise obligations
|
|
|
144,028
|
|
|
|
141,957
|
|
State and municipal obligations
|
|
|
920,337
|
|
|
|
719,752
|
|
Agency mortgage-backed securities
|
|
|
2,254,467
|
|
|
|
1,711,404
|
|
Non-agency mortgage-backed securities
|
|
|
549,615
|
|
|
|
620,479
|
|
Other asset-backed securities
|
|
|
932,837
|
|
|
|
253,756
|
|
Other debt securities
|
|
|
191,778
|
|
|
|
121,861
|
|
Equity securities*
|
|
|
151,309
|
|
|
|
49,950
|
|
|
|
Total available for sale
|
|
|
5,156,343
|
|
|
|
3,630,753
|
|
|
|
Trading
|
|
|
17,259
|
|
|
|
9,463
|
|
Non-marketable
|
|
|
133,925
|
|
|
|
139,900
|
|
|
|
Total investment securities
|
|
$
|
5,307,527
|
|
|
$
|
3,780,116
|
|
|
|
* Includes
$109.9 million in
short-term
investments in mutual funds
Most of the Companys investment securities are classified
as available for sale, and this portfolio is discussed in more
detail below. Securities which are classified as non-marketable
include Federal Home Loan Bank (FHLB) stock and Federal Reserve
Bank (FRB) stock held for debt and regulatory purposes, which
totaled $85.9 million and $84.4 million at
June 30, 2009 and December 31, 2008, respectively.
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. Non-marketable securities
also include private equity investments, which amounted to
$48.0 million and $55.4 million at June 30, 2009
and December 31, 2008, respectively.
9
A summary of the available for sale investment securities by
maturity groupings as of June 30, 2009 is shown below. The
investment portfolio includes agency mortgage-backed securities,
which are guaranteed by government-sponsored agencies such as
the FHLMC, FNMA and GNMA, and non-agency mortgage-backed
securities which have no guarantee but are collateralized by
residential mortgages. Also included are certain other
asset-backed securities, which are primarily collateralized by
credit cards, automobiles, and commercial loans. These
securities differ from traditional debt securities primarily in
that they may have uncertain maturity dates and are priced based
on estimated prepayment rates on the underlying collateral. The
Company does not have exposure to subprime originated
mortgage-backed or collateralized debt obligation instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Value
|
|
|
|
|
U.S. government and federal agency obligations:
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
699
|
|
|
$
|
705
|
|
After 1 but within 5 years
|
|
|
10,424
|
|
|
|
11,267
|
|
|
|
Total U.S. government and federal agency obligations
|
|
|
11,123
|
|
|
|
11,972
|
|
|
|
Government-sponsored enterprise obligations:
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
|
6,604
|
|
|
|
6,781
|
|
After 1 but within 5 years
|
|
|
133,433
|
|
|
|
137,247
|
|
|
|
Total government-sponsored enterprise obligations
|
|
|
140,037
|
|
|
|
144,028
|
|
|
|
State and municipal obligations:
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
|
130,193
|
|
|
|
131,400
|
|
After 1 but within 5 years
|
|
|
348,167
|
|
|
|
357,837
|
|
After 5 but within 10 years
|
|
|
159,681
|
|
|
|
159,964
|
|
After 10 years
|
|
|
272,291
|
|
|
|
271,136
|
|
|
|
Total state and municipal obligations
|
|
|
910,332
|
|
|
|
920,337
|
|
|
|
Mortgage and asset-backed securities:
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
|
2,205,931
|
|
|
|
2,254,467
|
|
Non-agency mortgage-backed securities
|
|
|
649,151
|
|
|
|
549,615
|
|
Other asset-backed securities
|
|
|
927,366
|
|
|
|
932,837
|
|
|
|
Total mortgage and asset-backed securities
|
|
|
3,782,448
|
|
|
|
3,736,919
|
|
|
|
Other debt securities:
|
|
|
|
|
|
|
|
|
After 1 but within 5 years
|
|
|
172,506
|
|
|
|
183,034
|
|
After 5 but within 10 years
|
|
|
6,683
|
|
|
|
8,744
|
|
|
|
Total other debt securities
|
|
|
179,189
|
|
|
|
191,778
|
|
|
|
Equity securities
|
|
|
114,602
|
|
|
|
151,309
|
|
|
|
Total available for sale investment securities
|
|
$
|
5,137,731
|
|
|
$
|
5,156,343
|
|
|
|
Included in state and municipal obligations are
$170.3 million, at fair value, of auction rate securities
(ARS), which were purchased from bank customers in the third
quarter of 2008. These bonds are normally traded in a
competitive bidding process at weekly/monthly auctions. These
auctions have not performed since early 2008, and this market
has not recovered. Interest is currently being paid at the
maximum failed auction rates. Included in equity securities are
short-term investments in mutual funds of $109.9 million
and common stock of $41.4 million, at fair value. These are
held primarily by the holding company, Commerce Bancshares, Inc.
(the Parent).
10
For securities classified as available for sale, the following
table shows the unrealized gains and losses (pre-tax) in
accumulated other comprehensive income, by security type.
Included in gross unrealized losses are
other-than-temporary
impairment (OTTI) losses of $30.6 million relating to
certain non-agency mortgage-backed securities, which represent
the noncredit-related portion of the overall impairment amount.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
11,123
|
|
|
$
|
854
|
|
|
$
|
(5
|
)
|
|
$
|
11,972
|
|
Government-sponsored enterprise obligations
|
|
|
140,037
|
|
|
|
3,996
|
|
|
|
(5
|
)
|
|
|
144,028
|
|
State and municipal obligations
|
|
|
910,332
|
|
|
|
15,196
|
|
|
|
(5,191
|
)
|
|
|
920,337
|
|
Mortgage and asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
|
2,205,931
|
|
|
|
53,458
|
|
|
|
(4,922
|
)
|
|
|
2,254,467
|
|
Non-agency mortgage-backed securities
|
|
|
649,151
|
|
|
|
1,770
|
|
|
|
(101,306
|
)
|
|
|
549,615
|
|
Other asset-backed securities
|
|
|
927,366
|
|
|
|
11,517
|
|
|
|
(6,046
|
)
|
|
|
932,837
|
|
|
|
Total mortgage and asset-backed securities
|
|
|
3,782,448
|
|
|
|
66,745
|
|
|
|
(112,274
|
)
|
|
|
3,736,919
|
|
|
|
Other debt securities
|
|
|
179,189
|
|
|
|
12,589
|
|
|
|
|
|
|
|
191,778
|
|
Equity securities
|
|
|
114,602
|
|
|
|
36,707
|
|
|
|
|
|
|
|
151,309
|
|
|
|
Total
|
|
$
|
5,137,731
|
|
|
$
|
136,087
|
|
|
$
|
(117,475
|
)
|
|
$
|
5,156,343
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
10,478
|
|
|
$
|
1,116
|
|
|
$
|
|
|
|
$
|
11,594
|
|
Government-sponsored enterprise obligations
|
|
|
135,825
|
|
|
|
6,132
|
|
|
|
|
|
|
|
141,957
|
|
State and municipal obligations
|
|
|
715,421
|
|
|
|
10,794
|
|
|
|
(6,463
|
)
|
|
|
719,752
|
|
Mortgage and asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
|
1,685,821
|
|
|
|
26,609
|
|
|
|
(1,026
|
)
|
|
|
1,711,404
|
|
Non-agency mortgage-backed securities
|
|
|
742,090
|
|
|
|
816
|
|
|
|
(122,427
|
)
|
|
|
620,479
|
|
Other asset-backed securities
|
|
|
275,641
|
|
|
|
113
|
|
|
|
(21,998
|
)
|
|
|
253,756
|
|
|
|
Total mortgage and asset-backed securities
|
|
|
2,703,552
|
|
|
|
27,538
|
|
|
|
(145,451
|
)
|
|
|
2,585,639
|
|
|
|
Other debt securities
|
|
|
116,527
|
|
|
|
5,404
|
|
|
|
(70
|
)
|
|
|
121,861
|
|
Equity securities
|
|
|
7,680
|
|
|
|
42,270
|
|
|
|
|
|
|
|
49,950
|
|
|
|
Total
|
|
$
|
3,689,483
|
|
|
$
|
93,254
|
|
|
$
|
(151,984
|
)
|
|
$
|
3,630,753
|
|
|
|
The Companys impairment policy requires a review of all
securities for which fair value is less than amortized cost.
Special emphasis and analysis is placed on securities whose
credit rating has fallen below
A3/A-, whose
fair values have fallen more than 20% below purchase price for
an extended period of time, or have been identified based on
managements judgment. These securities are placed on a
watch list, and for all such securities, detailed cash flow
models are prepared which use inputs specific to each security.
Inputs to these models include factors such as cash flow
received, contractual payments required, and various other
information related to the underlying collateral (including
current delinquencies), collateral loss severity rates
(including loan to values), expected delinquency rates, credit
support from other tranches, and prepayment speeds. Stress tests
are performed at varying levels of delinquency rates, prepayment
speeds and loss severities in order to gauge probable ranges of
credit loss. At June 30, 2009, the par value of
11
securities on this watch list were $321.8 million. Prior to
March 2009, the Company had not incurred OTTI on its debt
securities.
As of June 30, 2009, the Company had recorded OTTI on five
non-agency mortgage-backed securities, having an aggregate par
value of $102.3 million. The credit portion of the
impairment totaled $1.3 million and was recorded in current
earnings. The noncredit-related portion of the impairment
totaled $30.6 million on a pre-tax basis, and has been
recognized in other comprehensive income. The Company does not
intend to sell these securities and believes it is not more
likely than not that it will be required to sell the securities
before the recovery of their amortized cost.
The credit portion of the loss on these securities was based on
the cash flows projected to be received over the estimated life
of the securities, discounted at present value, and compared to
the current amortized cost bases of the securities. Significant
inputs to the cash flow models used to calculate the credit
losses on these securities included the following:
|
|
|
|
Significant Inputs
|
|
Range
|
|
|
Prepayment CPR
|
|
14% - 25%
|
Projected cumulative default
|
|
8% - 30%
|
Credit support
|
|
4% - 12%
|
Loss severity
|
|
40% - 59%
|
|
|
The following table shows changes in the credit losses recorded
in current earnings, for which a portion of an OTTI was
recognized in other comprehensive income.
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Three Months
|
|
|
|
Ended June 30
|
|
(In thousands)
|
|
2009
|
|
|
|
|
Balance, beginning of period
|
|
$
|
553
|
|
Credit losses on debt securities for which impairment was not
previously recognized
|
|
|
357
|
|
Credit losses on debt securities for which impairment was
previously recognized
|
|
|
437
|
|
|
|
Balance, June 30
|
|
$
|
1,347
|
|
|
|
Additional OTTI on these and other securities may arise in
future periods due to further deterioration in the general
economy and national housing markets, which contribute to
changing cash flows, loss severities and delinquency levels of
the securities underlying collateral, which would
negatively affect the Companys financial results.
12
Securities with unrealized losses recorded in accumulated other
comprehensive income are shown in the table below, along with
the length of the impairment period. The table includes the five
securities for which a portion of an
other-than-temporary
impairment has been recognized in other comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
(In thousands)
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
|
At June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
1,577
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,577
|
|
|
$
|
5
|
|
Government-sponsored enterprise obligations
|
|
|
5,298
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5,298
|
|
|
|
5
|
|
State and municipal obligations
|
|
|
297,367
|
|
|
|
4,898
|
|
|
|
5,718
|
|
|
|
293
|
|
|
|
303,085
|
|
|
|
5,191
|
|
Mortgage and asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
|
282,522
|
|
|
|
4,921
|
|
|
|
129
|
|
|
|
1
|
|
|
|
282,651
|
|
|
|
4,922
|
|
Non-agency mortgage-backed securities
|
|
|
175,725
|
|
|
|
38,507
|
|
|
|
301,256
|
|
|
|
62,799
|
|
|
|
476,981
|
|
|
|
101,306
|
|
Other asset-backed securities
|
|
|
103,693
|
|
|
|
2,427
|
|
|
|
23,972
|
|
|
|
3,619
|
|
|
|
127,665
|
|
|
|
6,046
|
|
|
|
Total mortgage and asset-backed securities
|
|
|
561,940
|
|
|
|
45,855
|
|
|
|
325,357
|
|
|
|
66,419
|
|
|
|
887,297
|
|
|
|
112,274
|
|
|
|
Total
|
|
$
|
866,182
|
|
|
$
|
50,763
|
|
|
$
|
331,075
|
|
|
$
|
66,712
|
|
|
$
|
1,197,257
|
|
|
$
|
117,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
(In thousands)
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
|
At December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
|
$
|
175,770
|
|
|
$
|
6,457
|
|
|
$
|
369
|
|
|
$
|
6
|
|
|
$
|
176,139
|
|
|
$
|
6,463
|
|
Mortgage and asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
|
183,577
|
|
|
|
1,003
|
|
|
|
4,664
|
|
|
|
23
|
|
|
|
188,241
|
|
|
|
1,026
|
|
Non-agency mortgage-backed securities
|
|
|
412,002
|
|
|
|
95,153
|
|
|
|
176,013
|
|
|
|
27,274
|
|
|
|
588,015
|
|
|
|
122,427
|
|
Other asset-backed securities
|
|
|
216,187
|
|
|
|
16,696
|
|
|
|
22,514
|
|
|
|
5,302
|
|
|
|
238,701
|
|
|
|
21,998
|
|
|
|
Total mortgage and asset-backed securities
|
|
|
811,766
|
|
|
|
112,852
|
|
|
|
203,191
|
|
|
|
32,599
|
|
|
|
1,014,957
|
|
|
|
145,451
|
|
|
|
Other debt securities
|
|
|
2,691
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
2,691
|
|
|
|
70
|
|
|
|
Total
|
|
$
|
990,227
|
|
|
$
|
119,379
|
|
|
$
|
203,560
|
|
|
$
|
32,605
|
|
|
$
|
1,193,787
|
|
|
$
|
151,984
|
|
|
|
Out of the total available for sale portfolio, consisting of
approximately 1,100 individual securities at June 30, 2009,
213 securities were temporarily impaired, of which 48
securities, or 6% of the portfolio value, have been in a loss
position for 12 months or longer.
The unrealized losses on the Companys investments, as
shown in the preceding tables, are largely contained in the
portfolio of non-agency mortgage-backed securities. These
securities are not guaranteed by an outside agency and are
dependent on payments received from the underlying mortgage
collateral. While all of these securities, at purchase date,
were comprised of senior tranches and were highly rated by
various rating agencies, the adverse housing market, liquidity
pressures and overall economic climate has resulted in low fair
values for these securities. Also, as mentioned above, the
Company maintains a watch list comprised mostly of these
securities, and has recorded OTTI losses on five of these
securities. The Company continues to closely monitor the
performance of these securities. State and municipal obligations
and agency mortgage-backed securities have smaller unrealized
losses, due to the nature of the bonds and the guarantee
provided to agency mortgage-backed securities, while the fair
values of other asset-backed securities have been depressed to
some degree by the current economic recession and its impact to
the consumer. Most of the ARS held by the Company, which are
included in state and municipal obligations, have Moodys
credit ratings of A3 or higher and Fitch ratings of A or higher.
The Company does not intend to sell these investments and it is
not more likely than not that the Company will be required to
sell the investments before recovery of their amortized cost
bases, which may be maturity.
13
The following table presents proceeds from sales of securities
and the components of investment securities gains and losses
which have been recognized in earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
|
June 30
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Proceeds from sales of available for sale securities
|
|
$
|
23,220
|
|
|
$
|
105,961
|
|
Proceeds from sales/redemption of non-marketable securities
|
|
|
4,239
|
|
|
|
22,196
|
|
|
|
Total proceeds
|
|
$
|
27,459
|
|
|
$
|
128,157
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
Gains realized on sales
|
|
$
|
82
|
|
|
$
|
462
|
|
Losses realized on sales
|
|
|
(18
|
)
|
|
|
(888
|
)
|
Other-than-temporary
impairment recognized
|
|
|
(1,347
|
)
|
|
|
(1,939
|
)
|
Non-marketable:
|
|
|
|
|
|
|
|
|
Gains realized on sales/redemption
|
|
|
205
|
|
|
|
22,196
|
|
Losses realized on sales
|
|
|
(170
|
)
|
|
|
|
|
Fair value adjustments, net
|
|
|
(3,677
|
)
|
|
|
4,500
|
|
|
|
Investment securities gains (losses), net
|
|
$
|
(4,925
|
)
|
|
$
|
24,331
|
|
|
|
At June 30, 2009, securities carried at $2.7 billion
were pledged to secure public fund deposits, securities sold
under agreements to repurchase, trust funds, and borrowing
capacity at the Federal Reserve Bank. Securities pledged under
agreements pursuant to which the collateral may be sold or
re-pledged by the secured parties approximated
$539.6 million, while securities pledged under agreements
pursuant to which the secured parties may not sell or re-pledge
the collateral approximated $2.1 billion at June 30,
2009.
|
|
5.
|
Goodwill
and Other Intangible Assets
|
The following table presents information about the
Companys intangible assets which have estimable useful
lives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Valuation
|
|
|
Net
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Valuation
|
|
|
Net
|
|
(In thousands)
|
|
Amount
|
|
|
Amortization
|
|
|
Allowance
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Allowance
|
|
|
Amount
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit premium
|
|
$
|
25,720
|
|
|
$
|
(11,236
|
)
|
|
$
|
|
|
|
$
|
14,484
|
|
|
$
|
25,720
|
|
|
$
|
(9,324
|
)
|
|
$
|
|
|
|
$
|
16,396
|
|
Mortgage servicing rights
|
|
|
2,523
|
|
|
|
(1,015
|
)
|
|
|
(143
|
)
|
|
|
1,365
|
|
|
|
1,816
|
|
|
|
(871
|
)
|
|
|
(150
|
)
|
|
|
795
|
|
|
|
Total
|
|
$
|
28,243
|
|
|
$
|
(12,251
|
)
|
|
$
|
(143
|
)
|
|
$
|
15,849
|
|
|
$
|
27,536
|
|
|
$
|
(10,195
|
)
|
|
$
|
(150
|
)
|
|
$
|
17,191
|
|
|
|
Aggregate amortization expense on intangible assets was
$1.0 million and $1.1 million, respectively, for the
three month periods ended June 30, 2009 and 2008, and
$2.1 million and $2.3 million for the six month
periods ended June 30, 2009 and 2008, respectively. The
following table shows the estimated annual amortization expense
for the next five fiscal years. This expense is based on
existing asset balances and the interest rate environment as of
June 30, 2009. The Companys 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)
|
|
|
|
|
|
|
2009
|
|
$
|
3,990
|
|
2010
|
|
|
3,425
|
|
2011
|
|
|
2,822
|
|
2012
|
|
|
2,271
|
|
2013
|
|
|
1,750
|
|
|
|
14
Changes in the carrying amount of goodwill and net other
intangible assets for the six month period ended June 30,
2009 is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
Core Deposit
|
|
|
Servicing
|
|
(In thousands)
|
|
Goodwill
|
|
|
Premium
|
|
|
Rights
|
|
|
|
|
Balance at January 1, 2009
|
|
$
|
125,585
|
|
|
$
|
16,396
|
|
|
$
|
795
|
|
Originations
|
|
|
|
|
|
|
|
|
|
|
707
|
|
Amortization
|
|
|
|
|
|
|
(1,912
|
)
|
|
|
(144
|
)
|
Impairment
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
Balance at June 30, 2009
|
|
$
|
125,585
|
|
|
$
|
14,484
|
|
|
$
|
1,365
|
|
|
|
Goodwill allocated to the Companys operating segments at
June 30, 2009 and December 31, 2008 is shown below.
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Consumer segment
|
|
$
|
67,765
|
|
Commercial segment
|
|
|
57,074
|
|
Money Management segment
|
|
|
746
|
|
|
|
Total goodwill
|
|
$
|
125,585
|
|
|
|
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 the customers, the Company has rights to the
underlying collateral, which could include commercial real
estate, physical plant and property, inventory, receivables,
cash and marketable securities.
Upon issuance of standby letters of credit, the Company
recognizes a liability for the fair value of the obligation
undertaken, which is estimated to be equivalent to the amount of
fees received from the customer over the life of the agreement.
At June 30, 2009 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 $351.3 million at
June 30, 2009.
The Company guarantees payments to holders of certain trust
preferred securities issued by two wholly owned grantor trusts.
At June 30, 2009, the Company had a recorded liability of
$14.2 million in principal and accrued interest to date,
representing amounts owed to the security holders. Preferred
securities issued by Breckenridge Capital Trust I,
amounting to $4.0 million, are due in 2030 and may be
redeemed beginning in 2010. These securities have a 10.875%
interest rate throughout their term. Securities issued by West
Pointe Statutory Trust I, amounting to $10.0 million,
are due in 2034 and may be redeemed beginning in 2009. These
securities have a variable interest rate, which was 2.88% at
June 30, 2009. The rate is based on LIBOR, and resets on a
quarterly basis. The maximum potential future payments
guaranteed by the Company on both issues, which includes future
interest and principal payments through maturity, was estimated
to be approximately $30.4 million at June 30, 2009.
The Company periodically enters into risk participation
agreements (RPAs) as a guarantor to other financial
institutions, in order to mitigate those institutions
credit risk associated with interest rate swaps
15
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 Companys RPAs. The third parties
usually have other borrowing relationships with the Company. The
Company monitors overall borrower collateral, and at
June 30, 2009, believes sufficient collateral is available
to cover potential swap losses. The Company receives a fee from
the institution at the inception of the contract, which is
recorded as a liability representing the fair value of the RPA.
Any future changes in fair value, including those due to a
change in the third partys creditworthiness, are recorded
in current earnings. The terms of the RPAs, which correspond to
the terms of the underlying swaps, range from 5 to
10 years. At June 30, 2009, the liability recorded for
guarantor RPAs was $262 thousand, and the notional amount of the
underlying swaps was $35.2 million. The maximum potential
future payment guaranteed by the Company cannot be readily
estimated, but is dependent upon the fair value of the interest
rate swaps at the time of default. If an event of default on all
contracts had occurred at June 30, 2009, the Company would
have been required to make payments of approximately
$2.9 million.
At June 30, 2009 the Company had recorded a liability of
$11.3 million representing its obligation to share certain
estimated litigation costs of Visa, Inc. (Visa). This obligation
resulted from revisions in October 2007 to Visas by-laws
affecting all member banks, as part of an overall reorganization
in which the member banks indemnified Visa on certain covered
litigation. The covered litigation related mainly to American
Express and Discover suits, which are now settled, and other
interchange litigation, which has not yet been settled. As part
of the reorganization, Visa held an initial public offering in
March 2008. An escrow account was established in conjunction
with the offering, and is being used to fund actual litigation
settlements as they occur. The escrow account was funded
initially with proceeds from the offering, and subsequently with
contributions by Visa. The Companys indemnification
obligation is periodically adjusted to reflect changes in
estimates of litigation costs, and is reduced as funding occurs
in the escrow account. The Company currently anticipates that
its proportional share of eventual escrow funding will more than
offset its liability related to the Visa litigation.
The amount of net pension cost (income) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended June 30
|
|
|
Ended June 30
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Service cost benefits earned during the period
|
|
$
|
268
|
|
|
$
|
253
|
|
|
$
|
536
|
|
|
$
|
506
|
|
Interest cost on projected benefit obligation
|
|
|
1,363
|
|
|
|
1,294
|
|
|
|
2,726
|
|
|
|
2,588
|
|
Expected return on plan assets
|
|
|
(1,599
|
)
|
|
|
(2,000
|
)
|
|
|
(3,197
|
)
|
|
|
(4,000
|
)
|
Amortization of unrecognized net loss
|
|
|
675
|
|
|
|
|
|
|
|
1,350
|
|
|
|
|
|
|
|
Net periodic pension cost (income)
|
|
$
|
707
|
|
|
$
|
(453
|
)
|
|
$
|
1,415
|
|
|
$
|
(906
|
)
|
|
|
Substantially all benefits under the Companys defined
benefit pension plan were frozen effective January 1, 2005.
During the first six months of 2009, the Company made no funding
contributions to its defined benefit pension plan, and made
minimal funding contributions to a supplemental executive
retirement plan (the CERP), which carries no segregated assets.
The Company has no plans to make any further contributions,
other than those related to the CERP, during the remainder of
2009. The Company recognized expense for the defined benefit
pension plan for the first six months of 2009 compared to income
in prior periods. This occurred because of lower fair values of
plan assets at the measurement date, a decline in the
anticipated rate of return on plan assets in 2009, and
amortization of prior year differences between actual and
anticipated returns on plan assets. The Company expects to
recognize additional expense during the remainder of 2009.
New guidance for pension accounting required measurement of plan
assets and benefit obligations as of fiscal year end, beginning
in 2008. Accordingly, the Company changed its 2008 measurement
date from September 30 to December 31. It recorded an
adjustment to reflect this change on December 31, 2008,
which reduced the accrued benefit liability and increased
retained earnings by $561 thousand on a pre-tax basis.
16
Presented below is a summary of the components used to calculate
basic and diluted earnings per share. On January 1, 2009,
the Company adopted new accounting guidance which requires
application of the two-class method of computing earnings per
share. Under this guidance, unvested share-based awards that
contain nonforfeitable rights to dividends are considered
securities which participate in undistributed earnings with
common stock. The two-class method requires the calculation of
separate earnings per share amounts for the unvested share-based
awards and for common stock. Earnings per share attributable to
common stock is shown in the table below. Prior period earnings
per share data has been retroactively adjusted to conform to the
pronouncement. Unvested share-based awards are further discussed
in Note 13 below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
(In thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Commerce Bancshares, Inc.
|
|
$
|
36,968
|
|
|
$
|
55,979
|
|
|
$
|
67,804
|
|
|
$
|
120,146
|
|
Less earnings allocated to unvested restricted stockholders
|
|
|
168
|
|
|
|
177
|
|
|
|
302
|
|
|
|
389
|
|
|
|
Net income available to common stockholders
|
|
$
|
36,800
|
|
|
$
|
55,802
|
|
|
$
|
67,502
|
|
|
$
|
119,757
|
|
|
|
Distributed earnings
|
|
$
|
18,429
|
|
|
$
|
17,943
|
|
|
$
|
36,603
|
|
|
$
|
35,869
|
|
Undistributed earnings
|
|
$
|
18,371
|
|
|
$
|
37,859
|
|
|
$
|
30,899
|
|
|
$
|
83,888
|
|
|
|
Weighted average common shares outstanding
|
|
|
76,430
|
|
|
|
75,352
|
|
|
|
76,068
|
|
|
|
75,308
|
|
|
|
Distributed earnings per share
|
|
$
|
.24
|
|
|
$
|
.24
|
|
|
$
|
.48
|
|
|
$
|
.48
|
|
Undistributed earnings per share
|
|
|
.24
|
|
|
|
.50
|
|
|
|
.41
|
|
|
|
1.11
|
|
|
|
Basic earnings per common share
|
|
$
|
.48
|
|
|
$
|
.74
|
|
|
$
|
.89
|
|
|
$
|
1.59
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Commerce Bancshares, Inc.
|
|
$
|
36,968
|
|
|
$
|
55,979
|
|
|
$
|
67,804
|
|
|
$
|
120,146
|
|
Less earnings allocated to unvested restricted stockholders
|
|
|
167
|
|
|
|
177
|
|
|
|
301
|
|
|
|
387
|
|
|
|
Net income available to common stockholders
|
|
$
|
36,801
|
|
|
$
|
55,802
|
|
|
$
|
67,503
|
|
|
$
|
119,759
|
|
|
|
Distributed earnings
|
|
$
|
18,429
|
|
|
$
|
17,943
|
|
|
$
|
36,603
|
|
|
$
|
35,869
|
|
Undistributed earnings
|
|
$
|
18,372
|
|
|
$
|
37,859
|
|
|
$
|
30,900
|
|
|
$
|
83,890
|
|
|
|
Weighted average common shares outstanding
|
|
|
76,430
|
|
|
|
75,352
|
|
|
|
76,068
|
|
|
|
75,308
|
|
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
|
|
|
260
|
|
|
|
604
|
|
|
|
282
|
|
|
|
623
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
76,690
|
|
|
|
75,956
|
|
|
|
76,350
|
|
|
|
75,931
|
|
|
|
Distributed earnings per share
|
|
$
|
.24
|
|
|
$
|
.24
|
|
|
$
|
.48
|
|
|
$
|
.47
|
|
Undistributed earnings per share
|
|
|
.24
|
|
|
|
.50
|
|
|
|
.40
|
|
|
|
1.11
|
|
|
|
Diluted earnings per common share
|
|
$
|
.48
|
|
|
$
|
.74
|
|
|
$
|
.88
|
|
|
$
|
1.58
|
|
|
|
On February 27, 2009, the Company initiated an
at-the-market
offering of its common stock, which was terminated on
July 31, 2009. Pursuant to this offering, the Company
issued a total of 2,894,773 shares for gross proceeds of
$100.0 million, which are to be used for general corporate
purposes.
17
|
|
9.
|
Other
Comprehensive Income (Loss)
|
The Company adopted new accounting guidance on
other-than-temporary
impairment on debt securities in March 2009. Under this
guidance, credit-related losses on debt securities with
other-than-temporary
impairment are recorded in current earnings, while the
noncredit-related portion of the overall loss in fair value is
recorded in other comprehensive income (loss). The Company
recorded
other-than-temporary
impairments on certain debt securities in the first and second
quarters of 2009. Changes in the noncredit-related loss in fair
value of these securities, after
other-than-temporary
impairment (OTTI) was initially recognized, are shown separately
in the table below.
The Companys other components of other comprehensive
income (loss) consist of the unrealized holding gains and losses
on available for sale investment securities for which OTTI has
not been recorded (and also includes holding gains and losses on
certain securities prior to the recognition of OTTI), and the
amortization of accumulated pension loss which has been
recognized in net periodic benefit cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Available for sale debt securities for which OTTI has been
recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains subsequent to initial OTTI recognition
|
|
$
|
1,603
|
|
|
$
|
|
|
|
$
|
2,381
|
|
|
$
|
|
|
Income tax expense
|
|
|
610
|
|
|
|
|
|
|
|
905
|
|
|
|
|
|
|
|
Net unrealized gains
|
|
|
993
|
|
|
|
|
|
|
|
1,476
|
|
|
|
|
|
|
|
Other available for sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses)
|
|
|
50,981
|
|
|
|
(21,903
|
)
|
|
|
75,024
|
|
|
|
(19,312
|
)
|
Reclassification adjustment for (gains) losses included in net
income
|
|
|
(56
|
)
|
|
|
143
|
|
|
|
(64
|
)
|
|
|
2,365
|
|
|
|
Net unrealized gains (losses) on securities
|
|
|
50,925
|
|
|
|
(21,760
|
)
|
|
|
74,960
|
|
|
|
(16,947
|
)
|
Income tax expense
|
|
|
19,351
|
|
|
|
(8,269
|
)
|
|
|
28,485
|
|
|
|
(6,440
|
)
|
|
|
Net unrealized gains (losses)
|
|
|
31,574
|
|
|
|
(13,491
|
)
|
|
|
46,475
|
|
|
|
(10,507
|
)
|
|
|
Prepaid pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of accumulated pension loss
|
|
|
675
|
|
|
|
|
|
|
|
1,350
|
|
|
|
|
|
Income tax benefit
|
|
|
(250
|
)
|
|
|
|
|
|
|
(500
|
)
|
|
|
|
|
|
|
Accumulated pension loss
|
|
|
425
|
|
|
|
|
|
|
|
850
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
32,992
|
|
|
$
|
(13,491
|
)
|
|
$
|
48,801
|
|
|
$
|
(10,507
|
)
|
|
|
At June 30, 2009, accumulated other comprehensive loss was
$7.9 million, net of tax. It was comprised of
$19.1 million in unrealized holding losses on available for
sale debt securities for which OTTI has been recorded,
$30.6 million in unrealized holding gains on other
available for sale securities, and $19.5 million in
accumulated pension loss.
The Company segregates financial information for use in
assessing its performance and allocating resources among three
reportable business segments: Commercial, Consumer and Money
Management. The Consumer segment includes the consumer portion
of the retail branch network (loans, deposits, and other
personal banking services), indirect and other consumer
financing, consumer debit and credit bank cards, and student
lending. The Commercial segment provides corporate lending
(including the Small Business Banking product line within the
branch network), leasing, international services, and business,
government deposit, and related commercial cash management
services, as well as Merchant and Commercial bank card products.
The Money Management segment provides traditional trust and
estate tax planning, advisory and discretionary investment
management, as well as brokerage services, and the Private
Banking product portfolio.
18
As products or business units grow or diminish, or processing
channels are refined, or as periodic changes in organizational
structure are made, management may decide that associated
business activities should also be rearranged between reportable
segments. In the first quarter of 2009, selected business units
were realigned between reportable segments so that brokerage
services and Private Banking accounts were moved from Consumer
to Money Management, while portions of indirect lending were
moved from Commercial to the Consumer segment. The figures
presented below for 2008 have been revised to incorporate these
changes in order to provide comparable data.
The following table presents selected financial information by
segment and reconciliations of combined segment totals to
consolidated totals. There were no material intersegment
revenues among the three segments. Management periodically makes
changes to methods of assigning costs and income to its business
segments to better reflect operating results. If appropriate,
these changes are reflected in prior year information presented
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
|
|
|
Segment
|
|
|
Other/
|
|
|
Consolidated
|
|
(In thousands)
|
|
Consumer
|
|
|
Commercial
|
|
|
Management
|
|
|
Totals
|
|
|
Elimination
|
|
|
Totals
|
|
|
|
|
Three Months Ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
86,929
|
|
|
$
|
64,327
|
|
|
$
|
10,670
|
|
|
$
|
161,926
|
|
|
$
|
(4,481
|
)
|
|
$
|
157,445
|
|
Provision for loan losses
|
|
|
(21,801
|
)
|
|
|
(14,089
|
)
|
|
|
(4
|
)
|
|
|
(35,894
|
)
|
|
|
(5,272
|
)
|
|
|
(41,166
|
)
|
Non-interest income
|
|
|
40,726
|
|
|
|
27,174
|
|
|
|
29,953
|
|
|
|
97,853
|
|
|
|
709
|
|
|
|
98,562
|
|
Investment securities losses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,753
|
)
|
|
|
(2,753
|
)
|
Non-interest expense
|
|
|
(80,144
|
)
|
|
|
(49,449
|
)
|
|
|
(27,686
|
)
|
|
|
(157,279
|
)
|
|
|
(2,732
|
)
|
|
|
(160,011
|
)
|
|
|
Income before income taxes
|
|
$
|
25,710
|
|
|
$
|
27,963
|
|
|
$
|
12,933
|
|
|
$
|
66,606
|
|
|
$
|
(14,529
|
)
|
|
$
|
52,077
|
|
|
|
Three Months Ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
80,336
|
|
|
$
|
50,741
|
|
|
$
|
8,850
|
|
|
$
|
139,927
|
|
|
$
|
4,852
|
|
|
$
|
144,779
|
|
Provision for loan losses
|
|
|
(13,319
|
)
|
|
|
(1,132
|
)
|
|
|
(8
|
)
|
|
|
(14,459
|
)
|
|
|
(3,541
|
)
|
|
|
(18,000
|
)
|
Non-interest income
|
|
|
38,762
|
|
|
|
27,725
|
|
|
|
28,501
|
|
|
|
94,988
|
|
|
|
7,745
|
|
|
|
102,733
|
|
Investment securities gains, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,008
|
|
|
|
1,008
|
|
Non-interest expense
|
|
|
(71,583
|
)
|
|
|
(45,014
|
)
|
|
|
(24,341
|
)
|
|
|
(140,938
|
)
|
|
|
(6,127
|
)
|
|
|
(147,065
|
)
|
|
|
Income before income taxes
|
|
$
|
34,196
|
|
|
$
|
32,320
|
|
|
$
|
13,002
|
|
|
$
|
79,518
|
|
|
$
|
3,937
|
|
|
$
|
83,455
|
|
|
|
Six Months Ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
174,745
|
|
|
$
|
120,472
|
|
|
$
|
20,648
|
|
|
$
|
315,865
|
|
|
$
|
(8,405
|
)
|
|
$
|
307,460
|
|
Provision for loan losses
|
|
|
(42,420
|
)
|
|
|
(28,262
|
)
|
|
|
(275
|
)
|
|
|
(70,957
|
)
|
|
|
(13,377
|
)
|
|
|
(84,334
|
)
|
Non-interest income
|
|
|
76,150
|
|
|
|
53,713
|
|
|
|
58,877
|
|
|
|
188,740
|
|
|
|
2,253
|
|
|
|
190,993
|
|
Investment securities losses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,925
|
)
|
|
|
(4,925
|
)
|
Non-interest expense
|
|
|
(152,956
|
)
|
|
|
(96,547
|
)
|
|
|
(53,881
|
)
|
|
|
(303,384
|
)
|
|
|
(9,513
|
)
|
|
|
(312,897
|
)
|
|
|
Income before income taxes
|
|
$
|
55,519
|
|
|
$
|
49,376
|
|
|
$
|
25,369
|
|
|
$
|
130,264
|
|
|
$
|
(33,967
|
)
|
|
$
|
96,297
|
|
|
|
Six Months Ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
160,432
|
|
|
$
|
99,475
|
|
|
$
|
18,117
|
|
|
$
|
278,024
|
|
|
$
|
6,862
|
|
|
$
|
284,886
|
|
Provision for loan losses
|
|
|
(24,289
|
)
|
|
|
(2,343
|
)
|
|
|
(15
|
)
|
|
|
(26,647
|
)
|
|
|
(11,353
|
)
|
|
|
(38,000
|
)
|
Non-interest income
|
|
|
76,327
|
|
|
|
53,479
|
|
|
|
57,843
|
|
|
|
187,649
|
|
|
|
7,244
|
|
|
|
194,893
|
|
Investment securities gains, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,331
|
|
|
|
24,331
|
|
Non-interest expense
|
|
|
(141,771
|
)
|
|
|
(89,987
|
)
|
|
|
(48,930
|
)
|
|
|
(280,688
|
)
|
|
|
(6,558
|
)
|
|
|
(287,246
|
)
|
|
|
Income before income taxes
|
|
$
|
70,699
|
|
|
$
|
60,624
|
|
|
$
|
27,015
|
|
|
$
|
158,338
|
|
|
$
|
20,526
|
|
|
$
|
178,864
|
|
|
|
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 policies,
which have been developed to reflect the underlying economics of
the businesses. The policies address the methodologies 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
19
administrative functions, the investment securities portfolio,
and the effect of certain expense allocations to the segments.
The provision for loan losses in this category contains the
difference between loan charge-offs and recoveries assigned
directly to the segments and the recorded provision for loan
loss expense. Included in this categorys net interest
income are earnings of the investment portfolio, which are not
allocated to a segment. Investment securities gains and
non-interest expense for this category during the first six
months of 2008 included stock redemption gains and litigation
accrual adjustments related to the bank subsidiarys
membership in Visa.
The performance measurement of the business 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.
|
|
11.
|
Derivative
Instruments
|
The notional amounts of the Companys 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. The largest group of
notional amounts relate to interest rate swaps, which are
discussed in more detail below. Through its International
Department, the Company enters into foreign exchange contracts
consisting mainly of contracts to purchase or deliver foreign
currencies for customers at specific future dates. Also,
mortgage loan commitments and forward sales contracts result
from the Companys mortgage banking operation, in which
fixed rate personal real estate loans are originated and sold to
other institutions. The Company also contracts with other
financial institutions, as a guarantor or beneficiary, to share
credit risk associated with certain interest rate swaps. The
Companys risks and responsibilities as guarantor are
further discussed in Note 6 on Guarantees.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Interest rate swaps
|
|
$
|
507,118
|
|
|
$
|
492,111
|
|
Interest rate caps
|
|
|
16,236
|
|
|
|
|
|
Credit risk participation agreements
|
|
|
55,122
|
|
|
|
47,750
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
|
14,839
|
|
|
|
6,226
|
|
Option contracts
|
|
|
3,400
|
|
|
|
3,300
|
|
Mortgage loan commitments
|
|
|
13,023
|
|
|
|
23,784
|
|
Mortgage loan forward sale contracts
|
|
|
38,277
|
|
|
|
26,996
|
|
|
|
Total notional amount
|
|
$
|
648,015
|
|
|
$
|
600,167
|
|
|
|
20
The Companys interest rate risk management strategy
includes the ability to modify the repricing characteristics of
certain assets and liabilities so that changes in interest rate
do not adversely affect the net interest margin and cash flows.
Interest rate swaps are used on a limited basis as part of this
strategy. At June 30, 2009, the Company had entered into
three interest rate swaps with a notional amount of
$17.5 million, which are designated as fair value hedges of
certain fixed rate loans. Gains and losses on these derivative
instruments, as well as the offsetting loss or gain on the
hedged loans attributable to the hedged risk, are recognized in
current earnings. These gains and losses are reported in
interest and fees on loans in the accompanying statements of
income. The table below shows gains and losses related to fair
value hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Gain (loss) on interest rate swaps
|
|
$
|
558
|
|
|
$
|
487
|
|
|
$
|
633
|
|
|
$
|
19
|
|
Gain (loss) on loans
|
|
|
(530
|
)
|
|
|
(489
|
)
|
|
|
(625
|
)
|
|
|
(21
|
)
|
|
|
Amount of hedge ineffectiveness
|
|
$
|
28
|
|
|
$
|
(2
|
)
|
|
$
|
8
|
|
|
$
|
(2
|
)
|
|
|
The Companys other derivative instruments are accounted
for as free-standing derivatives, and changes in their fair
value are recorded in current earnings. These instruments
include interest rate swap contracts sold to customers who wish
to modify their interest rate sensitivity. These swaps are
offset by matching contracts purchased by the Company from other
financial institutions. 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. The notional amount of these types of swaps at
June 30, 2009 was $489.7 million. The Company is party
to master netting arrangements with its institutional
counterparties; however, the effect of offsetting assets and
liabilities under these arrangements is not significant.
Collateral exchanges typically involve marketable securities.
The Companys interest rate swap arrangements with other
financial institutions contain contingent features relating to
debt ratings or capitalization levels. Under these provisions,
if the Companys debt rating falls below investment grade
or if the Company ceases to be well-capitalized
under risk-based capital guidelines, the counterparties can
request immediate and ongoing collateralization on derivative
instruments in net liability positions. The aggregate fair value
of interest rate swap contracts with credit risk-related
contingent features that were in a liability position on
June 30, 2009 was $17.9 million, for which the Company
had posted collateral of $12.7 million. If the credit
risk-related contingent features underlying these agreements
were triggered on June 30, 2009, the Company would be
required to post an additional $7.2 million of collateral
to its counterparties. The banking customer counterparties are
engaged in a variety of businesses, including real estate,
building materials, communications, consumer products, and
manufacturing. The manufacturing group is the largest, with a
combined notional amount of 35.7% of the total customer swap
portfolio. If this group of manufacturing counterparties failed
to perform, and if the underlying collateral proved to be of no
value, the Company would incur a loss of $4.9 million,
based on amounts at June 30, 2009.
Effective January 1, 2008, the Company adopted new
accounting guidance which modified the accounting for initial
recognition of fair value for certain interest rate swap
contracts held by the Company. Former accounting guidance
precluded immediate recognition in earnings of an unrealized
gain or loss, measured as the difference between the transaction
price and fair value of these instruments at initial
recognition. Under the new guidance, the immediate recognition
of a gain or loss is appropriate under certain circumstances
and, in accordance with transition provisions, the Company
increased equity by $903 thousand on January 1, 2008 to
reflect interest rate swaps at fair value.
21
The fair values of the Companys derivative instruments are
shown in the table below. Information about the valuation
methods used to measure fair value is provided in Note 14
on Fair Value Measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
June 30
|
|
|
Dec. 31
|
|
|
|
|
June 30
|
|
|
Dec. 31
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Sheet
|
|
|
|
|
|
|
|
Sheet
|
|
|
|
|
|
|
(In thousands)
|
|
Location
|
|
Fair Value
|
|
|
Location
|
|
Fair Value
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other assets
|
|
$
|
137
|
|
|
$
|
|
|
|
Other liabilities
|
|
$
|
(931
|
)
|
|
$
|
(1,413
|
)
|
|
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
137
|
|
|
$
|
|
|
|
|
|
$
|
(931
|
)
|
|
$
|
(1,413
|
)
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other assets
|
|
$
|
17,306
|
|
|
$
|
25,274
|
|
|
Other liabilities
|
|
$
|
(17,159
|
)
|
|
$
|
(25,155
|
)
|
Interest rate caps
|
|
Other assets
|
|
|
255
|
|
|
|
|
|
|
Other liabilities
|
|
|
(261
|
)
|
|
|
|
|
Credit risk participation agreements
|
|
Other assets
|
|
|
106
|
|
|
|
117
|
|
|
Other liabilities
|
|
|
(262
|
)
|
|
|
(178
|
)
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
Other assets
|
|
|
306
|
|
|
|
207
|
|
|
Other liabilities
|
|
|
(328
|
)
|
|
|
(217
|
)
|
Option contracts
|
|
Other assets
|
|
|
4
|
|
|
|
18
|
|
|
Other liabilities
|
|
|
(4
|
)
|
|
|
(18
|
)
|
Mortgage loan commitments
|
|
Other assets
|
|
|
125
|
|
|
|
198
|
|
|
Other liabilities
|
|
|
(11
|
)
|
|
|
(6
|
)
|
Mortgage loan forward sale contracts
|
|
Other assets
|
|
|
368
|
|
|
|
21
|
|
|
Other liabilities
|
|
|
(79
|
)
|
|
|
(88
|
)
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
$
|
18,470
|
|
|
$
|
25,835
|
|
|
|
|
$
|
(18,104
|
)
|
|
$
|
(25,662
|
)
|
|
|
Total derivatives
|
|
|
|
$
|
18,607
|
|
|
$
|
25,835
|
|
|
|
|
$
|
(19,035
|
)
|
|
$
|
(27,075
|
)
|
|
|
The effects of derivative instruments on the consolidated
statements of income are shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or (Loss)
|
|
Amount of Gain or (Loss)
|
|
|
|
Recognized in Income on
|
|
Recognized in Income on
|
|
|
|
Derivative
|
|
Derivative
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
|
|
June 30
|
|
|
June 30
|
|
(In thousands)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Derivatives in fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest and fees on loans
|
|
$
|
558
|
|
|
$
|
487
|
|
|
$
|
633
|
|
|
$
|
19
|
|
|
|
Total
|
|
|
|
$
|
558
|
|
|
$
|
487
|
|
|
$
|
633
|
|
|
$
|
19
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other non-interest income
|
|
$
|
(88
|
)
|
|
$
|
186
|
|
|
$
|
124
|
|
|
$
|
402
|
|
Interest rate caps
|
|
Other non-interest income
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
Credit risk participation agreements
|
|
Other non-interest income
|
|
|
4
|
|
|
|
6
|
|
|
|
9
|
|
|
|
13
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
Other non-interest income
|
|
|
29
|
|
|
|
34
|
|
|
|
(12
|
)
|
|
|
117
|
|
Option contracts
|
|
Other non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan commitments
|
|
Loan fees and sales
|
|
|
(377
|
)
|
|
|
(28
|
)
|
|
|
(77
|
)
|
|
|
31
|
|
Mortgage loan forward sale contracts
|
|
Loan fees and sales
|
|
|
562
|
|
|
|
92
|
|
|
|
356
|
|
|
|
143
|
|
|
|
Total
|
|
|
|
$
|
135
|
|
|
$
|
290
|
|
|
$
|
405
|
|
|
$
|
706
|
|
|
|
22
For the second quarter of 2009, income tax expense amounted to
$15.3 million compared to $27.1 million in the second
quarter of 2008. The effective income tax rate for the Company,
including the effect of non-controlling interest, was 29.2% in
the current quarter compared to 32.6% in the same quarter last
year. For the six months ended June 30, 2009 and 2008,
income tax expense amounted to $28.8 million and
$57.8 million, resulting in effective income tax rates of
29.8% and 32.5%, respectively. Effective tax rates were lower in
2009 compared to 2008 mainly due to changes in the mix of
taxable and non-taxable income on lower pre-tax income.
|
|
13.
|
Stock-Based
Compensation
|
In previous years, the Company has issued stock-based
compensation in the form of stock options, stock appreciation
rights (SARs) and nonvested stock. During the first six months
of 2009, stock-based compensation has been issued solely in the
form of nonvested stock awards. The stock-based compensation
expense that has been charged against income was
$1.6 million and $1.5 million in the three months
ended June 30, 2009 and 2008, respectively, and
$3.2 million and $3.3 million in the six months ended
June 30, 2009 and 2008, respectively.
The 2009 stock awards generally vest in 5 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 Companys nonvested share awards, as
of June 30, 2009, and changes during the six month period
then ended is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
Nonvested at January 1, 2009
|
|
|
227,986
|
|
|
$
|
41.81
|
|
Granted
|
|
|
164,524
|
|
|
|
35.64
|
|
Vested
|
|
|
(36,832
|
)
|
|
|
40.01
|
|
Forfeited
|
|
|
(1,969
|
)
|
|
|
41.26
|
|
|
|
Nonvested at June 30, 2009
|
|
|
353,709
|
|
|
$
|
39.13
|
|
|
|
SARs and stock options are granted with an exercise price equal
to the market price of the Companys stock at the date of
grant and have
10-year
contractual terms. SARs, which the Company granted in 2006, 2007
and 2008, vest on a graded basis over 4 years of continuous
service. All SARs must be settled in stock under provisions of
the plan. Stock options, which were granted in 2005 and previous
years, vest on a graded basis over 3 years of continuous
service. In determining compensation cost, the Black-Scholes
option-pricing model is used to estimate the fair value of SARs
and options on date of grant.
A summary of option activity during the first six months of 2009
is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
(Dollars in thousands, except per share data)
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
Outstanding at January 1, 2009
|
|
|
2,395,333
|
|
|
$
|
32.05
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2,551
|
)
|
|
|
39.12
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(59,282
|
)
|
|
|
23.94
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009
|
|
|
2,333,500
|
|
|
$
|
32.25
|
|
|
|
3.6 years
|
|
|
$
|
6,177
|
|
|
|
23
A summary of SAR activity during the first six months of 2009 is
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
(Dollars in thousands, except per share data)
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
Outstanding at January 1, 2009
|
|
|
1,600,228
|
|
|
$
|
43.83
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,811
|
)
|
|
|
42.75
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2,619
|
)
|
|
|
43.95
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009
|
|
|
1,594,798
|
|
|
$
|
43.83
|
|
|
|
7.7 years
|
|
|
$
|
|
|
|
|
|
|
14.
|
Fair
Value Measurements
|
The Company uses fair value measurements to record fair value
adjustments to certain financial and nonfinancial assets and
liabilities and to determine fair value disclosures. Various
financial instruments such as available for sale and trading
securities, certain non-marketable securities 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 loans held for
sale, 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 Companys best information
and assumptions that a market participant would consider.
|
When determining the fair value measurements for assets and
liabilities required or permitted to be recorded or disclosed at
fair value, the Company considers the principal or most
advantageous market in which it would transact and considers
assumptions that market participants would use when pricing the
asset or liability. When possible, the Company looks to active
and observable markets to price identical assets or liabilities.
When identical assets and liabilities are not traded in active
markets, the Company looks to market observable data for similar
assets and liabilities. Nevertheless, certain assets and
liabilities are not actively traded in observable markets and
the Company must use alternative valuation techniques to derive
an estimated fair value measurement. The Company adopted new
guidance in March 2009 for estimating fair values for securities
where the market volume and level of activity have significantly
decreased. The application of the new guidance did not result in
a change in valuation technique or related inputs.
24
Valuation
methods for instruments measured at fair value on a recurring
basis
Following is a description of the Companys valuation
methodologies used for instruments measured at fair value on a
recurring basis:
Available
for sale investment securities
For available for sale securities, changes in fair value,
including that portion of
other-than-temporary
impairment unrelated to credit loss, are recorded in other
comprehensive income. As mentioned in Note 4 on Investment
Securities, the Company records the credit-related portion of
other-than-temporary
impairment in current earnings. This portfolio comprises the
majority of the assets which the Company records at fair value.
Most of the portfolio, which includes government-sponsored
enterprise, mortgage-backed and asset-backed securities, are
priced utilizing industry-standard models that consider various
assumptions, including time value, yield curves, volatility
factors, prepayment speeds, default rates, loss severity,
current market and contractual prices for the underlying
financial instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable
in the marketplace, can be derived from observable data, or are
supported by observable levels at which transactions are
executed in the marketplace. These measurements are classified
as Level 2 in the fair value hierarchy. Where quoted prices
are available in an active market, the measurements are
classified as Level 1. Most of the Level 1
measurements apply to common stock and U.S. treasury
obligations.
Valuation methods and inputs, by major security type:
|
|
|
|
|
U.S. government and federal agency obligations
These securities are valued using live data from active
market makers and inter-dealer brokers.
|
|
|
|
Government-sponsored enterprise obligations
Government-sponsored enterprise obligations are evaluated
using cash flow valuation models. Inputs used are live market
data, cash settlements, Treasury market yields, and floating
rate indices such as LIBOR, CMT, and Prime.
|
|
|
|
State and municipal obligations, excluding auction rate
securities
A yield curve is generated and applied to bond sectors, and
individual bond valuations are extrapolated. Inputs used to
generate the yield curve are bellwether issue levels,
established trading spreads between similar issuers or credits,
historical trading spreads over widely accepted market
benchmarks, new issue scales, and verified bid information. Bid
information is verified by corroborating the data against
external sources such as broker-dealers, trustees/paying agents,
issuers, or non-affiliated bondholders.
|
|
|
|
Mortgage and asset-backed securities
All mortgage-backed securities (agency and non-agency) and
other asset-backed securities are valued at the tranche level.
For each tranche valuation, the process generates predicted cash
flows for the tranche and determines a benchmark yield. The
final price is determined by inputting the predicted cash flows
into a model that will determine principal and interest payments
along with an average life. The yield from the model is used to
discount the predicted cash flows to generate an evaluated
price. Inputs for the model include swap curve or a Treasury
benchmark curve, as well as a spread that is generated based on
average life, type, volatility, ratings, collateral and
collateral performance.
|
|
|
|
Other debt securities
Other debt securities are valued using active markets and
inter-dealer brokers as well as bullet spread scales and option
adjusted spreads. The spreads and models use yield curves, terms
and conditions of the bonds, and any special features (i.e.,
call or put options, redemption features, etc.).
|
|
|
|
Equity securities
Equity securities are priced using the market prices for
each security from the major stock exchanges or other electronic
quotation systems.
|
25
At June 30, 2009, the Company held certain auction rate
securities (ARS) in its available for sale portfolio, totaling
$170.3 million. Nearly all of these securities were
purchased from customers during the third quarter of 2008. The
auction process by which the ARS are normally priced has failed
since the first quarter of 2008, and the fair value of these
securities cannot be based on observable market prices due to
the illiquidity in the market. The fair values of the ARS are
currently estimated using a discounted cash flows analysis. The
analysis compares the present value of cash flows based on
mandatory rates paid under failing auctions with the present
value of estimated cash flows for similar securities, after
adjustment for liquidity premium and nonperformance risk. The
cash flows were projected over an estimated market recovery
period, or in some cases, a shorter period if refinancing by
specific issuers is expected. The discount rate was based on the
published Treasury rate for the period commensurate with the
estimated holding period. In developing the inputs, discussions
were held with traders, both internal and external to the
Company, who are familiar with the ARS markets. Because many of
the inputs significant to the measurement are not observable,
these measurements are classified as Level 3 measurements.
Trading
securities
The securities in the Companys trading portfolio are
priced by averaging several broker quotes for identical
instruments, and are classified as Level 2 measurements.
Private
equity investments
These securities are held by the Companys venture capital
subsidiaries and are included in non-marketable investment
securities in the consolidated balance sheets. Valuation of
these nonpublic investments requires significant management
judgment due to the absence of quoted market prices. Each
quarter, valuations are performed utilizing available market
data and other factors. Market data includes published trading
multiples for private equity investments of similar size. The
multiples are considered in conjunction with current operating
performance, future expectations, financing and sales
transactions, and other investment-specific issues. The Company
applies its valuation methodology consistently from period to
period, and believes that its methodology is similar to that
used by other market participants. These fair value measurements
are classified as Level 3.
Derivatives
The Companys derivative instruments include interest rate
swaps, foreign exchange forward contracts, commitments and sales
contracts related to personal mortgage loan origination
activity, and certain credit risk guarantee agreements. When
appropriate, the impact of credit standing as well as any
potential credit enhancements, such as collateral, has been
considered in the fair value measurement.
|
|
|
|
|
Valuations for interest rate swaps are derived from proprietary
models whose significant inputs are readily observable market
parameters, primarily yield curves. The results of the models
are constantly validated through comparison to active trading in
the marketplace. These fair value measurements are classified as
Level 2.
|
|
|
|
Fair value measurements for foreign exchange contracts are
derived from a model whose primary inputs are quotations from
global market makers, and are classified as Level 2.
|
|
|
|
The fair values of mortgage loan commitments and forward sales
contracts on the associated loans are based on quoted prices for
similar loans in the secondary market. However, these prices are
adjusted by a factor which considers the likelihood that a
commitment will ultimately result in a closed loan. This
estimate is based on the Companys historical data and its
judgment about future economic trends. Based on the unobservable
nature of this adjustment, these measurements are classified as
Level 3.
|
|
|
|
The Companys contracts related to credit risk guarantees
are valued under an internally developed methodology which uses
significant unobservable inputs and assumptions about the
creditworthiness of the counterparty to the guaranteed interest
rate swap contract. Consequently, these measurements are
classified as Level 3.
|
26
Assets
held in trust
Assets held in an outside trust for the Companys deferred
compensation plan consist of investments in mutual funds. The
fair value measurements are based on quoted prices in active
markets and classified as Level 1. The Company has recorded
an asset representing the total investment amount. The Company
has also recorded a corresponding nonfinancial liability,
representing the Companys liability to the plan
participants.
The table below presents the June 30, 2009 carrying values
of assets and liabilities measured at fair value on a recurring
basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(In thousands)
|
|
6/30/09
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
11,972
|
|
|
$
|
11,972
|
|
|
$
|
|
|
|
$
|
|
|
Government-sponsored enterprise obligations
|
|
|
144,028
|
|
|
|
|
|
|
|
144,028
|
|
|
|
|
|
State and municipal obligations
|
|
|
920,337
|
|
|
|
|
|
|
|
750,074
|
|
|
|
170,263
|
|
Agency mortgage-backed securities
|
|
|
2,254,467
|
|
|
|
|
|
|
|
2,254,467
|
|
|
|
|
|
Non-agency mortgage-backed securities
|
|
|
549,615
|
|
|
|
|
|
|
|
549,615
|
|
|
|
|
|
Other asset-backed securities
|
|
|
932,837
|
|
|
|
|
|
|
|
932,837
|
|
|
|
|
|
Other debt securities
|
|
|
191,778
|
|
|
|
|
|
|
|
191,778
|
|
|
|
|
|
Equity securities
|
|
|
151,309
|
|
|
|
133,992
|
|
|
|
17,317
|
|
|
|
|
|
Trading securities
|
|
|
17,259
|
|
|
|
|
|
|
|
17,259
|
|
|
|
|
|
Private equity investments
|
|
|
43,020
|
|
|
|
|
|
|
|
|
|
|
|
43,020
|
|
Derivatives
|
|
|
18,607
|
|
|
|
|
|
|
|
18,008
|
|
|
|
599
|
|
Assets held in trust
|
|
|
2,871
|
|
|
|
2,871
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
5,238,100
|
|
|
|
148,835
|
|
|
|
4,875,383
|
|
|
|
213,882
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
19,035
|
|
|
|
|
|
|
|
18,683
|
|
|
|
352
|
|
|
|
Total liabilities
|
|
$
|
19,035
|
|
|
$
|
|
|
|
$
|
18,683
|
|
|
$
|
352
|
|
|
|
27
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)
|
|
|
|
State and
|
|
|
Private
|
|
|
|
|
|
|
|
|
|
Municipal
|
|
|
Equity
|
|
|
|
|
|
|
|
(In thousands)
|
|
Obligations
|
|
|
Investments
|
|
|
Derivatives
|
|
|
Total
|
|
|
|
|
For the three months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
171,413
|
|
|
$
|
48,284
|
|
|
$
|
58
|
|
|
$
|
219,755
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
|
|
|
|
(1,325
|
)
|
|
|
189
|
|
|
|
(1,136
|
)
|
Included in other comprehensive income
|
|
|
(808
|
)
|
|
|
|
|
|
|
|
|
|
|
(808
|
)
|
Purchases, issuances, and settlements, net
|
|
|
(342
|
)
|
|
|
(3,939
|
)
|
|
|
|
|
|
|
(4,281
|
)
|
|
|
Balance at June 30, 2009
|
|
$
|
170,263
|
|
|
$
|
43,020
|
|
|
$
|
247
|
|
|
$
|
213,530
|
|
|
|
Total gains or losses for the three months included in earnings
attributable to the change in unrealized gains or losses
relating to assets still held at June 30, 2009
|
|
$
|
|
|
|
$
|
(1,325
|
)
|
|
$
|
407
|
|
|
$
|
(918
|
)
|
|
|
For the six months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2009
|
|
$
|
167,996
|
|
|
$
|
49,494
|
|
|
$
|
64
|
|
|
$
|
217,554
|
|
Total gains or losses (realized /unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
|
|
|
|
(2,877
|
)
|
|
|
288
|
|
|
|
(2,589
|
)
|
Included in other comprehensive income
|
|
|
2,553
|
|
|
|
|
|
|
|
|
|
|
|
2,553
|
|
Purchases, issuances, and settlements, net
|
|
|
(286
|
)
|
|
|
(3,597
|
)
|
|
|
(105
|
)
|
|
|
(3,988
|
)
|
|
|
Balance at June 30, 2009
|
|
$
|
170,263
|
|
|
$
|
43,020
|
|
|
$
|
247
|
|
|
$
|
213,530
|
|
|
|
Total gains or losses for the six months included in earnings
attributable to the change in unrealized gains or losses
relating to assets still held at June 30, 2009
|
|
$
|
|
|
|
$
|
(2,877
|
)
|
|
$
|
412
|
|
|
$
|
(2,465
|
)
|
|
|
Gains and losses on the Level 3 assets and liabilities in
the table above are reported in the following income categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Other Non-
|
|
|
Gains
|
|
|
|
|
|
|
Loan Fees
|
|
|
Interest
|
|
|
(Losses),
|
|
|
|
|
(In thousands)
|
|
and Sales
|
|
|
Income
|
|
|
Net
|
|
|
Total
|
|
|
|
|
For the three months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses included in earnings
|
|
$
|
185
|
|
|
$
|
4
|
|
|
$
|
(1,325
|
)
|
|
$
|
(1,136
|
)
|
|
|
Change in unrealized gains or losses relating to assets still
held at June 30, 2009
|
|
$
|
403
|
|
|
$
|
4
|
|
|
$
|
(1,325
|
)
|
|
$
|
(918
|
)
|
|
|
For the six months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses included in earnings
|
|
$
|
279
|
|
|
$
|
9
|
|
|
$
|
(2,877
|
)
|
|
$
|
(2,589
|
)
|
|
|
Change in unrealized gains or losses relating to assets still
held at June 30, 2009
|
|
$
|
403
|
|
|
$
|
9
|
|
|
$
|
(2,877
|
)
|
|
$
|
(2,465
|
)
|
|
|
28
Valuation
methods for instruments measured at fair value on a nonrecurring
basis
Following is a description of the Companys valuation
methodologies used for other financial instruments measured at
fair value on a nonrecurring basis.
Collateral
dependent impaired loans
While the overall loan portfolio is not carried at fair value,
adjustments are recorded on certain loans to reflect partial
write-downs that are based on the value of the underlying
collateral. In determining the value of real estate collateral,
the Company relies on external appraisals and assessment of
property values by its internal staff. In the case of non-real
estate collateral, reliance is placed on a variety of sources,
including external estimates of value and judgments based on the
experience and expertise of internal specialists. Because many
of these inputs are not observable, the measurements are
classified as Level 3. The carrying value of these impaired
loans was $62.4 million at June 30, 2009, and
charge-offs of $22.7 million related to these loans were
recorded during the first six months of 2009.
Loans
held for sale
Loans held for sale are carried at the lower of cost or fair
value. The portfolio consists primarily of student loans, and to
a lesser extent, residential real estate loans. The
Companys student loans are contracted for sale with the
Federal Department of Education and various investors in the
secondary market. Since 2008, the secondary market for student
loans has been disrupted by liquidity concerns. Consequently,
several investors are currently unable to consistently purchase
loans under existing contractual terms. Loans under contract to
these investors, in addition to other investors whose future
liquidity is of concern, have been identified for evaluation.
Such loans are carried at $165.8 million at June 30,
2009. They were evaluated using a fair value measurement method
based on a discounted cash flows analysis, which was classified
as Level 3. Previously recorded impairment losses of
$1.5 million were reversed during the first six months of
2009, as certain of the related loans were sold in accordance
with their contract terms. The measurement of fair value for the
remaining student loans is based on the specific prices mandated
in the underlying sale contracts, the estimated exit price, and
is classified as Level 2. Fair value measurements on
mortgage loans held for sale are based on quoted market prices
for similar loans in the secondary market and are classified as
Level 2.
Private
equity investments and restricted stock
These assets are included in non-marketable investment
securities in the consolidated balance sheets. They include
private equity investments held by the Parent company which are
carried at cost, reduced by
other-than-temporary
impairment. These investments are periodically evaluated for
impairment based on their estimated fair value. The valuation
methodology is described above under the recurring measurements
for Private equity investments. Also included is
stock issued by the Federal Reserve Bank and FHLB which is held
by the bank subsidiary as required for regulatory purposes.
Generally, there are restrictions on the sale
and/or
liquidation of these investments, and they are carried at cost.
Fair value measurements for these securities are classified as
Level 3.
Mortgage
servicing rights
The Company initially measures its mortgage servicing rights at
fair value, and amortizes them over the period of estimated net
servicing income. They are periodically assessed for impairment
based on fair value at the reporting date. Mortgage servicing
rights do not trade in an active market with readily observable
prices. Accordingly, the fair value is estimated based on a
valuation model which calculates the present value of estimated
future net servicing income. The model incorporates assumptions
that market participants use in estimating future net servicing
income, including estimates of prepayment speeds, market
discount rates, cost to service, float earnings rates, and other
ancillary income, including late fees. The fair value
measurements are classified as Level 3.
29
Goodwill
and core deposit premium
Valuation of goodwill to determine impairment is performed on an
annual basis, or more frequently if there is an event or
circumstance that would indicate impairment may have occurred.
The process involves calculations to determine the fair value of
each reporting unit on a stand-alone basis. A combination of
formulas using current market multiples, based on recent sales
of financial institutions within the Companys geographic
marketplace, is used to estimate the fair value of each
reporting unit. That fair value is compared to the carrying
amount of the reporting unit, including its recorded goodwill.
Impairment is considered to have occurred if the fair value of
the reporting unit is lower than the carrying amount of the
reporting unit.
Core deposit premiums are recognized at the time a portfolio of
deposits is acquired, using valuation techniques which calculate
the present value of the estimated net cost savings attributable
to the core deposit base, relative to alternative costs of funds
and tax benefits, if applicable, over the expected remaining
economic life of the depositors. Subsequent evaluations are made
when facts or circumstances indicate potential impairment may
have occurred. The Company uses estimates of discounted future
cash flows, comparisons with alternative sources for deposits,
consideration of income potential generated in other product
lines by current customers, geographic parameters, and other
demographics to estimate a current fair value of a specific
deposit base. If the calculated fair value is less than the
carrying value, impairment is considered to have occurred.
Foreclosed
assets
Foreclosed assets consist of loan collateral which has been
repossessed through foreclosure. This collateral is comprised of
commercial and residential real estate and other non-real estate
property, including auto, recreational and marine vehicles.
Foreclosed assets are recorded as held for sale initially at the
lower of the loan balance or fair value of the collateral less
estimated selling costs. Subsequent to foreclosure, valuations
are updated periodically, and the assets may be marked down
further, reflecting a new cost basis. Fair value measurements
may be based upon appraisals or third-party price opinions and,
accordingly, those measurements are classified as Level 2.
Other fair value measurements may be based on internally
developed pricing methods, and those measurements are classified
as Level 3.
For assets measured at fair value on a nonrecurring basis during
the first six months of 2009, and still held as of June 30,
2009, the following table provides the adjustments to fair value
recognized that period, the level of valuation assumptions used
to determine each adjustment, and the carrying value of the
related individual assets or portfolios at June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total Gains
|
|
(In thousands)
|
|
6/30/09
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Losses)
|
|
|
|
|
Loans
|
|
$
|
62,442
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
62,442
|
|
|
$
|
(22,675
|
)
|
Private equity investments
|
|
|
2,250
|
|
|
|
|
|
|
|
|
|
|
|
2,250
|
|
|
|
(800
|
)
|
Mortgage servicing rights
|
|
|
1,365
|
|
|
|
|
|
|
|
|
|
|
|
1,365
|
|
|
|
7
|
|
Foreclosed assets
|
|
|
1,440
|
|
|
|
|
|
|
|
1,440
|
|
|
|
|
|
|
|
(376
|
)
|
|
|
30
|
|
15.
|
Fair
Value of Financial Instruments
|
The carrying amounts and estimated fair values of financial
instruments held by the Company, in addition to a discussion of
the methods used and assumptions made in computing those
estimates, are set forth below.
Loans
Fair values are estimated for various groups of loans segregated
by 1) type of loan, 2) fixed/adjustable interest terms
and 3) performing/non-performing status. The fair value of
performing loans is calculated by discounting all simulated cash
flows. Cash flows include all principal and interest to be
received, taking embedded optionality such as the
customers right to prepay into account. Discount rates are
computed for each loan category using implied forward market
rates adjusted to recognize each loans approximate credit
risk. Fair value of impaired loans approximates their carrying
value because such loans are recorded at the appraised or
estimated recoverable value of the collateral or the underlying
cash flow.
Investment
Securities
A detailed description of the fair value measurement of the debt
and equity instruments in the available for sale and trading
sections of the investment security portfolio is provided in
Note 14 on Fair Value Measurements. In general, these fair
values are based on prices obtained from stock exchanges,
pricing models, or bid quotations received from securities
dealers. Fair values are estimated for those investments for
which a market source is not readily available.
A schedule of investment securities by category and maturity is
provided in Note 4 on Investment Securities. Fair value
estimates are based on the value of one unit without regard to
any premium or discount that may result from concentrations of
ownership, possible tax ramifications or estimated transaction
costs.
Federal
Funds Sold and Securities Purchased under Agreements to Resell,
Interest Earning Deposits With Banks and Cash and Due From
Banks
The carrying amounts of federal funds sold and securities
purchased under agreements to resell, interest earning deposits
with banks, and cash and due from banks approximate fair value.
Federal funds sold and securities purchased under agreements to
resell generally mature in 90 days or less.
Accrued
Interest Receivable/Payable
The carrying amounts of accrued interest receivable and accrued
interest payable approximate their fair values because of the
relatively short time period between the accrual period and the
expected receipt or payment due date.
Derivative
Instruments
A detailed description of the fair value measurement of
derivative instruments is provided in Note 14 on Fair Value
Measurements. Fair values are generally estimated using
observable market prices or pricing models.
Deposits
The fair value of deposits with no stated maturity is equal to
the amount payable on demand. Such deposits include savings and
interest and non-interest bearing demand deposits. These fair
value estimates do not recognize any benefit the Company
receives as a result of being able to administer, or control,
the pricing of these accounts. The fair value of certificates of
deposit is based on the discounted value of cash flows, taking
early withdrawal optionality into account. Discount rates are
based on the Companys approximate cost of obtaining
similar maturity funding in the market.
31
Borrowings
The fair value of short-term borrowings such as federal funds
purchased, securities sold under agreements to repurchase, and
borrowings under the Federal Reserves Term Auction
Facility, which mature or reprice within 90 days,
approximates their carrying value. The fair value of long-term
debt is estimated by discounting contractual maturities using an
estimate of the current market rate for similar instruments.
The estimated fair values of the Companys financial
instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
(In thousands)
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
Loans, including held for sale
|
|
$
|
11,088,380
|
|
|
$
|
11,346,875
|
|
Available for sale investment securities
|
|
|
5,156,343
|
|
|
|
5,156,343
|
|
Trading securities
|
|
|
17,259
|
|
|
|
17,259
|
|
Non-marketable securities
|
|
|
133,925
|
|
|
|
133,925
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
40,155
|
|
|
|
40,155
|
|
Accrued interest receivable
|
|
|
77,193
|
|
|
|
77,193
|
|
Derivative instruments
|
|
|
18,607
|
|
|
|
18,607
|
|
Cash and due from banks
|
|
|
376,051
|
|
|
|
376,051
|
|
Interest earning deposits with banks
|
|
|
8,318
|
|
|
|
8,318
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
$
|
1,517,398
|
|
|
$
|
1,517,398
|
|
Savings, interest checking and money market deposits
|
|
|
8,281,652
|
|
|
|
8,281,652
|
|
Time open and C.D.s
|
|
|
3,907,292
|
|
|
|
3,975,975
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
1,174,121
|
|
|
|
1,171,564
|
|
Other borrowings
|
|
|
847,108
|
|
|
|
882,865
|
|
Accrued interest payable
|
|
|
43,864
|
|
|
|
43,864
|
|
Derivative instruments
|
|
|
19,035
|
|
|
|
19,035
|
|
|
|
Off-Balance
Sheet Financial Instruments
The fair value of letters of credit and commitments to extend
credit is based on the fees currently charged to enter into
similar agreements. The aggregate of these fees is not material.
Limitations
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 Companys entire holdings of a particular financial
instrument. Because no market exists for many of the
Companys 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.
32
Item 2. MANAGEMENTS
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 Companys 2008
Annual Report on
Form 10-K.
Results of operations for the six month period ended
June 30, 2009 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
Companys market area, changes in policies by regulatory
agencies, governmental legislation and regulation, fluctuations
in interest rates, changes in liquidity requirements, demand for
loans in the Companys market area, and competition with
other entities that offer financial services.
Critical
Accounting Policies
The Companys consolidated financial statements are
prepared based on the application of certain accounting
policies, some of which require numerous estimates and strategic
or economic assumptions that may prove inaccurate or be subject
to variations which may significantly affect the Companys
reported results and financial position for the current period
or future periods. The use of estimates, assumptions, and
judgments are necessary when financial assets and liabilities
are required to be recorded at, or adjusted to reflect, fair
value. Current economic conditions may require the use of
additional estimates, and some estimates may be subject to a
greater degree of uncertainty due to the current instability of
the economy. The Company has identified several policies as
being critical because they require management to make
particularly difficult, subjective
and/or
complex judgments about matters that are inherently uncertain
and because of the likelihood that materially different amounts
would be reported under different conditions or using different
assumptions. These policies relate to the allowance for loan
losses, the valuation of investment securities, and accounting
for income taxes.
Allowance
for Loan Losses
The Company performs periodic and systematic detailed reviews of
its loan portfolio to assess overall collectability. The level
of the allowance for loan losses reflects the Companys
estimate of the losses inherent in the loan portfolio at any
point in time. While these estimates are based on substantive
methods for determining allowance requirements, actual outcomes
may differ significantly from estimated results, especially when
determining allowances for business, lease, construction and
business real estate loans. These loans are normally larger and
more complex, and their collection rates are harder to predict.
Personal loans, including personal mortgage, credit card and
consumer loans, are individually smaller and perform in a more
homogenous manner, making loss estimates more predictable.
Further discussion of the methodologies used in establishing the
allowance is provided in the Provision and Allowance for Loan
Losses section of this discussion.
33
Valuation
of Investment Securities
The Company carries its investment securities at fair value, and
employs valuation techniques which utilize observable inputs
when those inputs are available. These observable inputs reflect
assumptions market participants would use in pricing the
security, developed based on market data obtained from sources
independent of the Company. When such information is not
available, the Company employs valuation techniques which
utilize unobservable inputs, or those which reflect the
Companys own assumptions about market participants, based
on the best information available in the circumstances. These
valuation methods typically involve cash flow and other
financial modeling techniques. Changes in underlying factors,
assumptions, estimates, or other inputs to the valuation
techniques could have a material impact on the Companys
future financial condition and results of operations. Assets and
liabilities carried at fair value inherently result in more
financial statement volatility. Under the fair value measurement
hierarchy, fair value measurements are classified as
Level 1 (quoted prices), Level 2 (based on observable
inputs) or Level 3 (based on unobservable,
internally-derived inputs), as discussed in more detail in
Note 14 to the consolidated financial statements. Most of
the available for sale investment portfolio is priced utilizing
industry-standard models that consider various assumptions which
are observable in the marketplace, or can be derived from
observable data. Such securities totaled approximately
$4.8 billion, or 93.9% of the available for sale portfolio
at June 30, 2009, and were classified as Level 2
measurements. The Company also holds $170.3 million in
auction rate securities. These were classified as Level 3
measurements, as no market currently exists for these
securities, and fair values were derived from internally
generated cash flow valuation models which used unobservable
inputs which were significant to the overall measurement.
Changes in the fair value of available for sale securities,
excluding credit losses relating to
other-than-temporary
impairment, are reported in other comprehensive income. The
Company periodically evaluates the available for sale portfolio
for
other-than-temporary
impairment. Evaluation for
other-than-temporary
impairment is based on the Companys intent to sell the
security and whether it is likely that it will be required to
sell the security before the anticipated recovery of its
amortized cost basis. If either of these conditions is met, the
entire loss (the amount by which the amortized cost exceeds the
fair value) must be recognized in current earnings. If neither
condition is met, but the Company does not expect to recover the
amortized cost basis, the Company must determine whether a
credit loss has occurred. This credit loss is the amount by
which the amortized cost basis exceeds the present value of cash
flows expected to be collected from the security. The credit
loss, if any, must be recognized in current earnings, while the
remainder of the loss, related to all other factors, is
recognized in other comprehensive income.
The estimation of whether a credit loss exists and the period
over which the security is expected to recover requires
significant judgment. The Company must consider available
information about the collectability of the security, including
information about past events, current conditions, and
reasonable forecasts, which includes payment structure,
prepayment speeds, expected defaults, and collateral values.
Changes in these factors could result in additional impairment,
recorded in current earnings, in future periods.
In 2009, non-agency guaranteed mortgage-backed securities with a
par value of $102.3 million were identified as other than
temporarily impaired. The credit-related impairment loss on
these securities amounted to $1.3 million which was
recorded in the consolidated income statement in investment
securities gains (losses), net. The noncredit-related loss on
these securities, which was recorded in other comprehensive
income, was $30.6 million on a pre-tax basis.
The Company, through its direct holdings and its Small Business
Investment subsidiaries, has numerous private equity
investments, categorized as non-marketable securities in the
accompanying consolidated balance sheets. These investments are
reported at fair value, and totaled $48.0 million at
June 30, 2009. Changes in fair value are reflected in
current earnings, and reported in investment securities gains
(losses), net in the consolidated statements of income. Because
there is no observable market data for these securities, their
fair values are internally developed using available information
and managements judgment and are classified as
Level 3 measurements. Although management believes its
estimates of fair value reasonably reflect the fair value of
these securities, key assumptions regarding the projected
financial
34
performance of these companies, the evaluation of the investee
companys management team, and other economic and market
factors may affect the amounts that will ultimately be realized
from these investments.
Accounting
for Income Taxes
Accrued income taxes represent the net amount of current income
taxes which are expected to be paid attributable to operations
as of the balance sheet date. Deferred income taxes represent
the expected future tax consequences of events that have been
recognized in the financial statements or income tax returns.
Current and deferred income taxes are reported as either a
component of other assets or other liabilities in the
consolidated balance sheets, depending on whether the balances
are assets or liabilities. Judgment is required in applying
generally accepted accounting principles in accounting for
income taxes. The Company regularly monitors taxing authorities
for changes in laws and regulations and their interpretations by
the judicial systems. The aforementioned changes, and changes
that may result from the resolution of income tax examinations
by federal and state taxing authorities, may impact the estimate
of accrued income taxes and could materially impact the
Companys financial position and results of operations.
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$
|
.48
|
|
|
$
|
.74
|
|
|
$
|
.89
|
|
|
$
|
1.59
|
|
Net income per common share diluted
|
|
|
.48
|
|
|
|
.74
|
|
|
|
.88
|
|
|
|
1.58
|
|
Cash dividends
|
|
|
.240
|
|
|
|
.238
|
|
|
|
.480
|
|
|
|
.476
|
|
Book value
|
|
|
|
|
|
|
|
|
|
|
22.04
|
|
|
|
21.30
|
|
Market price
|
|
|
|
|
|
|
|
|
|
|
31.83
|
|
|
|
37.77
|
|
Selected Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Based on average balance sheets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to
deposits(1)
|
|
|
81.58
|
%
|
|
|
92.30
|
%
|
|
|
84.32
|
%
|
|
|
92.04
|
%
|
Non-interest bearing deposits to total deposits
|
|
|
6.19
|
|
|
|
5.39
|
|
|
|
6.01
|
|
|
|
5.42
|
|
Equity to
loans(1)
|
|
|
14.67
|
|
|
|
14.12
|
|
|
|
14.25
|
|
|
|
14.08
|
|
Equity to deposits
|
|
|
11.97
|
|
|
|
13.03
|
|
|
|
12.01
|
|
|
|
12.96
|
|
Equity to total assets
|
|
|
9.47
|
|
|
|
9.73
|
|
|
|
9.39
|
|
|
|
9.68
|
|
Return on total assets
|
|
|
.84
|
|
|
|
1.37
|
|
|
|
.79
|
|
|
|
1.48
|
|
Return on total equity
|
|
|
8.91
|
|
|
|
14.10
|
|
|
|
8.38
|
|
|
|
15.30
|
|
(Based on
end-of-period
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income to
revenue(2)
|
|
|
38.50
|
|
|
|
41.51
|
|
|
|
38.32
|
|
|
|
40.62
|
|
Efficiency
ratio(3)
|
|
|
62.15
|
|
|
|
58.96
|
|
|
|
62.36
|
|
|
|
59.40
|
|
Tier I risk-based capital ratio
|
|
|
|
|
|
|
|
|
|
|
11.44
|
|
|
|
10.65
|
|
Total risk-based capital ratio
|
|
|
|
|
|
|
|
|
|
|
12.81
|
|
|
|
11.87
|
|
Tangible equity to assets
ratio(4)
|
|
|
|
|
|
|
|
|
|
|
8.85
|
|
|
|
8.66
|
|
Tier I leverage ratio
|
|
|
|
|
|
|
|
|
|
|
9.08
|
|
|
|
9.03
|
|
|
|
|
|
(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 equity ratio is
calculated as stockholders equity reduced by goodwill and
other intangible assets (excluding mortgage servicing rights)
divided by total assets reduced by goodwill and other intangible
assets (excluding mortgage servicing rights).
|
35
Results
of Operations
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
|
Net interest income
|
|
$
|
157,445
|
|
|
$
|
144,779
|
|
|
|
8.7
|
%
|
|
$
|
307,460
|
|
|
$
|
284,886
|
|
|
|
7.9
|
%
|
Provision for loan losses
|
|
|
(41,166
|
)
|
|
|
(18,000
|
)
|
|
|
128.7
|
|
|
|
(84,334
|
)
|
|
|
(38,000
|
)
|
|
|
121.9
|
|
Non-interest income
|
|
|
98,562
|
|
|
|
102,733
|
|
|
|
(4.1
|
)
|
|
|
190,993
|
|
|
|
194,893
|
|
|
|
(2.0
|
)
|
Investment securities gains (losses), net
|
|
|
(2,753
|
)
|
|
|
1,008
|
|
|
|
N.M.
|
|
|
|
(4,925
|
)
|
|
|
24,331
|
|
|
|
N.M.
|
|
Non-interest expense
|
|
|
(160,011
|
)
|
|
|
(147,065
|
)
|
|
|
8.8
|
|
|
|
(312,897
|
)
|
|
|
(287,246
|
)
|
|
|
8.9
|
|
Income taxes
|
|
|
(15,257
|
)
|
|
|
(27,118
|
)
|
|
|
(43.7
|
)
|
|
|
(28,849
|
)
|
|
|
(57,786
|
)
|
|
|
(50.1
|
)
|
Non-controlling interest (expense) income
|
|
|
148
|
|
|
|
(358
|
)
|
|
|
N.M.
|
|
|
|
356
|
|
|
|
(932
|
)
|
|
|
N.M.
|
|
|
|
Net income
|
|
$
|
36,968
|
|
|
$
|
55,979
|
|
|
|
(34.0
|
)%
|
|
$
|
67,804
|
|
|
$
|
120,146
|
|
|
|
(43.6
|
)%
|
|
|
For the quarter ended June 30, 2009, net income amounted to
$37.0 million, a decrease of $19.0 million, or 34.0%,
from the second quarter of the previous year. For the current
quarter, the annualized return on average assets was .84%, the
annualized return on average equity was 8.91%, and the
efficiency ratio was 62.15%. Diluted earnings per share was
$.48, a decline of 35.1% from $.74 per share in the second
quarter of 2008. Compared to the second quarter of last year,
net interest income increased $12.7 million, or 8.7%,
resulting from the rate environment and growth in interest
earning assets. Non-interest income decreased $4.2 million,
or 4.1%, partly because of a $6.9 million gain on the sale
of a Kansas banking branch recorded in 2008. The provision for
loan losses was $41.2 million in the current quarter, a
$23.2 million increase over the second quarter of last
year. Non-interest expense grew by $12.9 million, or 8.8%,
due to an FDIC special assessment of $8.0 million, coupled
with higher salaries and employee benefits expense of
$3.0 million.
Net income for the first six months of 2009 was
$67.8 million, a $52.3 million, or 43.6%, decrease
from the first six months of 2008. For the first six months of
2009, the annualized return on average assets was .79%, the
annualized return on average equity was 8.38%, and the
efficiency ratio was 62.36%. Diluted earnings per share was
$.88, a decrease of 44.3% from $1.58 per share during the first
six months of 2008. Compared to the first six months of 2008,
net interest income increased $22.6 million, or 7.9%.
Investment securities gains declined $29.3 million due to a
$22.2 million gain on the redemption of Visa, Inc. (Visa)
common stock in the first quarter of 2008. The provision for
loan losses totaled $84.3 million for the first six months
of 2009, representing growth of $46.3 million over the same
period in 2008. Non-interest expense grew $25.7 million,
largely due to increases of $16.1 million in FDIC insurance
expense and $6.8 million in salaries and benefits expense
in 2009, and the reversal of certain Visa litigation charges of
$8.8 million in 2008.
The Company continually evaluates the profitability of its
network of bank branches throughout its markets. As a result of
this evaluation process, the Company may periodically sell the
assets and liabilities of certain branches, or may sell the
premises of specific banking facilities. In February 2009, the
Company sold its branch in Lakin, Kansas. In this transaction,
the Company sold the bank facility and certain deposits of
approximately $4.7 million, and recorded a pre-tax gain of
$644 thousand. In May 2008, the Company sold its banking branch,
including the facility, in Independence, Kansas. In this
transaction, approximately $23.3 million in loans,
$85.0 million in deposits, and various other assets and
liabilities were sold, and the Company recorded a pre-tax gain
of $6.9 million.
36
Net
Interest Income
The following table summarizes the changes in net interest
income on a fully taxable equivalent basis, by major category of
interest earning assets and interest bearing liabilities,
identifying changes related to volumes and rates. Changes not
solely due to volume or rate changes are allocated to rate.
Analysis
of Changes in Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2009 vs. 2008
|
|
|
June 30, 2009 vs. 2008
|
|
|
|
Change due to
|
|
|
|
|
|
Change due to
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
(In thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
|
Interest income, fully taxable equivalent basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(5,779
|
)
|
|
$
|
(13,697
|
)
|
|
$
|
(19,476
|
)
|
|
$
|
(4,378
|
)
|
|
$
|
(46,955
|
)
|
|
$
|
(51,333
|
)
|
Loans held for sale
|
|
|
2,001
|
|
|
|
(3,661
|
)
|
|
|
(1,660
|
)
|
|
|
3,896
|
|
|
|
(6,041
|
)
|
|
|
(2,145
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency securities
|
|
|
(414
|
)
|
|
|
(411
|
)
|
|
|
(825
|
)
|
|
|
(2,143
|
)
|
|
|
(598
|
)
|
|
|
(2,741
|
)
|
State and municipal obligations
|
|
|
4,749
|
|
|
|
(826
|
)
|
|
|
3,923
|
|
|
|
8,140
|
|
|
|
(1,890
|
)
|
|
|
6,250
|
|
Mortgage and asset-backed securities
|
|
|
13,867
|
|
|
|
(2,746
|
)
|
|
|
11,121
|
|
|
|
19,525
|
|
|
|
(1,839
|
)
|
|
|
17,686
|
|
Other securities
|
|
|
333
|
|
|
|
749
|
|
|
|
1,082
|
|
|
|
467
|
|
|
|
477
|
|
|
|
944
|
|
|
|
Total interest on investment securities
|
|
|
18,535
|
|
|
|
(3,234
|
)
|
|
|
15,301
|
|
|
|
25,989
|
|
|
|
(3,850
|
)
|
|
|
22,139
|
|
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
(2,123
|
)
|
|
|
(105
|
)
|
|
|
(2,228
|
)
|
|
|
(4,778
|
)
|
|
|
(737
|
)
|
|
|
(5,515
|
)
|
Interest earning deposits with banks
|
|
|
53
|
|
|
|
|
|
|
|
53
|
|
|
|
502
|
|
|
|
|
|
|
|
502
|
|
|
|
Total interest income
|
|
|
12,687
|
|
|
|
(20,697
|
)
|
|
|
(8,010
|
)
|
|
|
21,231
|
|
|
|
(57,583
|
)
|
|
|
(36,352
|
)
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
33
|
|
|
|
(182
|
)
|
|
|
(149
|
)
|
|
|
66
|
|
|
|
(420
|
)
|
|
|
(354
|
)
|
Interest checking and money market
|
|
|
822
|
|
|
|
(7,048
|
)
|
|
|
(6,226
|
)
|
|
|
1,769
|
|
|
|
(20,351
|
)
|
|
|
(18,582
|
)
|
Time open & C.D.s of less than $100,000
|
|
|
(497
|
)
|
|
|
(5,426
|
)
|
|
|
(5,923
|
)
|
|
|
(3,031
|
)
|
|
|
(13,404
|
)
|
|
|
(16,435
|
)
|
Time open & C.D.s of $100,000 and over
|
|
|
3,979
|
|
|
|
(7,950
|
)
|
|
|
(3,971
|
)
|
|
|
9,387
|
|
|
|
(19,358
|
)
|
|
|
(9,971
|
)
|
|
|
Total interest on deposits
|
|
|
4,337
|
|
|
|
(20,606
|
)
|
|
|
(16,269
|
)
|
|
|
8,191
|
|
|
|
(53,533
|
)
|
|
|
(45,342
|
)
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
(2,062
|
)
|
|
|
(2,971
|
)
|
|
|
(5,033
|
)
|
|
|
(6,854
|
)
|
|
|
(8,701
|
)
|
|
|
(15,555
|
)
|
Other borrowings
|
|
|
(692
|
)
|
|
|
116
|
|
|
|
(576
|
)
|
|
|
3,248
|
|
|
|
(2,816
|
)
|
|
|
432
|
|
|
|
Total interest expense
|
|
|
1,583
|
|
|
|
(23,461
|
)
|
|
|
(21,878
|
)
|
|
|
4,585
|
|
|
|
(65,050
|
)
|
|
|
(60,465
|
)
|
|
|
Net interest income, fully taxable equivalent basis
|
|
$
|
11,104
|
|
|
$
|
2,764
|
|
|
$
|
13,868
|
|
|
$
|
16,646
|
|
|
$
|
7,467
|
|
|
$
|
24,113
|
|
|
|
Net interest income for the second quarter of 2009 was
$157.4 million, a $12.7 million, or 8.7%, increase
over the second quarter of 2008. The increase in net interest
income was primarily the result of lower rates paid on interest
bearing deposits and higher average balances of investment
securities, partly offset by lower loan yields. The decline in
rates on interest earning assets and interest bearing
liabilities resulted from actions taken by the Federal Reserve
Bank in 2008 to reduce interest rate levels, which caused
earning assets and interest bearing liabilities to re-price
downward. The Companys net interest rate margin was 3.91%
in the second quarter of 2009, compared to 3.90% in the second
quarter of 2008.
37
Interest income, on a tax equivalent basis (T/E), decreased
$8.0 million, or 3.8%, in the second quarter of 2009
compared to the same quarter in 2008. Interest income on loans
(T/E) declined $19.5 million, or 12.0%, as the result
of a 66 basis point decrease in rates earned on the loan
portfolio coupled with a decrease in average loan balances of
1.4%. Average rates earned on business loans in the second
quarter of 2009 decreased 99 basis points from the same
quarter in 2008, resulting in an $8.1 million decrease in
interest income. Average quarterly rates earned on business real
estate loans decreased 93 basis points and rates earned on
construction and land loans decreased 135 basis points,
resulting in declines in interest income of $5.0 million
and $2.5 million, respectively. Rates earned on consumer
credit card loans during the second quarter of 2009 increased
255 basis points over the second quarter of 2008 as a
result of certain promotional rates offered in 2008 expiring and
not offered again in 2009. Contributing to the income reduction
in the current quarter compared to the same quarter in 2008 was
a decrease in the average balances of business and business real
estate loans of $397.8 million, or 6.8%, which was
reflective of lower customer line of credit usage and continued
balance reductions. Also, quarterly average consumer loan
balances decreased 10.6% and consumer credit card loans
decreased 11.2% as loan pay-downs continued to exceed new loan
originations for these products. During the second quarter of
2009, interest income on investment securities
(T/E) increased $15.3 million, as average balances
increased $1.5 billion, or 42.0%, with most of the growth
in mortgage and asset-backed securities. This effect was
partially offset by a decrease of 27 basis points in
average rates earned on the total portfolio, compared to the
second quarter of 2008. Interest income on overnight investments
in federal funds sold and securities purchased under agreements
to resell decreased $2.2 million, primarily due to a
decrease in average balances of $395.7 million coupled with
a decline of 160 basis points in rates earned. The average
tax equivalent yield on total interest earning assets was 4.91%
in the second quarter of 2009 compared to 5.57% in the second
quarter of 2008.
Interest expense in the second quarter of 2009 decreased
$21.9 million, or 34.5%, compared to the second quarter of
2008, primarily due to a $16.3 million decrease in interest
expense incurred on interest bearing deposits, coupled with a
$5.0 million decrease in interest expense incurred on
federal funds purchased and securities sold under agreements to
repurchase. The decrease in expense incurred on interest bearing
deposits resulted from a 69 basis point decrease in average
rates paid, offset slightly by a $1.5 billion, or 12.5%,
increase in average balances. Average rates paid on interest
checking and money market accounts decreased 39 basis
points, while average balances increased $1.0 billion, or
14.1%, resulting in a net decrease in interest expense of
$6.2 million. Additionally, interest expense incurred on
certificates of deposit decreased $9.9 million as a result
of a 129 basis point decline in average rates paid, partly
offset by a $361.3 million increase in average balances.
Interest expense on federal funds purchased and securities sold
under agreements to repurchase decreased $5.0 million
compared to the second quarter of 2008 as a result of a decrease
in average balances of $456.7 million, or 32.2%, coupled
with a 132 basis point decrease in average rates paid. The
overall average rate incurred on all interest bearing
liabilities decreased to 1.12% in the second quarter of 2009
compared to 1.82% in the second quarter of 2008.
Net interest income for the first six months of 2009 was
$307.5 million compared to $284.9 million for the same
period in 2008, an increase of $22.6 million, or 7.9%. For
the first six months of 2009, the net yield on total interest
earning assets on a tax equivalent basis was 3.87%, unchanged
from the net yield in the first six months of 2008. The increase
in net interest income for the first six months in 2009 compared
to the same period in 2008 reflected trends similar to the
quarterly discussion above. Lower rates paid on interest bearing
liabilities, coupled with growth in average balances of
investment securities, contributed to higher net interest
income, which was partially offset by lower average rates earned
on loans.
For the first six months of 2009, total interest income
(T/E) decreased $36.4 million, or 8.3%, mainly due to
lower interest earned on loans, partially offset by higher
interest earned on investment securities. The average rate
earned on the loan portfolio for the first six months of 2009
decreased 96 basis points, lowering interest income by
$47.0 million compared to 2008. Additional declines
resulted from lower average loan balances and lower rates earned
on investment securities. These effects were partly offset by a
$1.0 billion, or 29.2%, increase in average balances of
investment securities, resulting in an increase in interest
income
(T/E) of
$26.0 million compared to the first six months of 2008.
Beginning October 1, 2008, amounts held with the Federal
Reserve Bank began earning interest, which contributed $502
thousand to interest income in the first six months of 2009,
most of which was earned in the first quarter of 2009.
38
Total interest expense decreased $60.5 million, or 41.5%,
in the first six months of 2009 compared to the same period in
the prior year. Interest expense on deposits decreased
$45.3 million compared to the first six months of 2008,
mainly due to a 90 basis point decrease in average rates
paid, slightly offset by an increase of $1.2 billion, or
10.7%, in average interest bearing deposits. Additionally,
interest expense incurred on federal funds purchased and
securities sold under agreements to repurchase decreased
$15.6 million during the first six months of 2009 compared
to the same period in 2008 as a result of a $545.2 million
decline in average balances and a 190 basis point decrease
in average rates paid. For the first six months of 2009, the
overall tax equivalent yield on earning assets declined
88 basis points to 4.92%, while the overall cost of
interest bearing liabilities also decreased 95 basis points
to 1.16%.
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
|
|
|
Six Months
|
|
|
|
Ended June 30
|
|
|
Ended June 30
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
|
Deposit account charges and other fees
|
|
$
|
26,935
|
|
|
$
|
28,260
|
|
|
|
(4.7
|
)%
|
|
$
|
52,527
|
|
|
$
|
55,335
|
|
|
|
(5.1
|
)%
|
Bank card transaction fees
|
|
|
30,105
|
|
|
|
29,394
|
|
|
|
2.4
|
|
|
|
57,273
|
|
|
|
55,702
|
|
|
|
2.8
|
|
Trust fees
|
|
|
19,355
|
|
|
|
20,286
|
|
|
|
(4.6
|
)
|
|
|
38,228
|
|
|
|
40,399
|
|
|
|
(5.4
|
)
|
Bond trading income
|
|
|
6,151
|
|
|
|
3,183
|
|
|
|
93.2
|
|
|
|
11,547
|
|
|
|
7,347
|
|
|
|
57.2
|
|
Consumer brokerage services
|
|
|
3,213
|
|
|
|
3,411
|
|
|
|
(5.8
|
)
|
|
|
6,521
|
|
|
|
6,820
|
|
|
|
(4.4
|
)
|
Loan fees and sales
|
|
|
3,733
|
|
|
|
1,150
|
|
|
|
224.6
|
|
|
|
6,694
|
|
|
|
3,290
|
|
|
|
103.5
|
|
Other
|
|
|
9,070
|
|
|
|
17,049
|
|
|
|
(46.8
|
)
|
|
|
18,203
|
|
|
|
26,000
|
|
|
|
(30.0
|
)
|
|
|
Total non-interest income
|
|
$
|
98,562
|
|
|
$
|
102,733
|
|
|
|
(4.1
|
)%
|
|
$
|
190,993
|
|
|
$
|
194,893
|
|
|
|
(2.0
|
)%
|
|
|
Non-interest income as a % of total revenue*
|
|
|
38.5
|
%
|
|
|
41.5
|
%
|
|
|
|
|
|
|
38.3
|
%
|
|
|
40.6
|
%
|
|
|
|
|
|
|
|
|
|
* |
|
Total revenue includes net
interest income and non-interest income. |
For the second quarter of 2009, total non-interest income
amounted to $98.6 million, a decrease of $4.2 million,
or 4.1%, compared with $102.7 million in the same quarter
last year. This decrease was largely due to a gain of
$6.9 million recorded in the second quarter of 2008 on the
sale of a banking branch in Kansas, mentioned previously. In
addition, declines were recorded in deposit account and trust
fees, while bank card fees, bond trading income, and loan fees
and sales increased over the prior period. Deposit account fees
for the quarter declined $1.3 million, or 4.7%, from the
second quarter of last year as a result of a 7.2% decline in
overdraft fee income. Bank card fees increased $711 thousand, or
2.4%, over the same period last year, primarily due to continued
growth in transaction fees earned on corporate cards and debit
cards, which grew by 18.4% and 1.6%, respectively, but continued
to be negatively impacted by lower retail sales affecting both
merchant and credit card fees. Trust fees for the quarter
decreased $931 thousand, or 4.6%, from the same quarter last
year and reflected the impact that lower markets have had on
trust asset values. Bond trading income for the current quarter
totaled $6.2 million, an increase of $3.0 million, or
93.2%, due to higher sales of fixed income securities to
correspondent banks and corporate customers. Consumer brokerage
services revenue decreased by $198 thousand, or 5.8%, mainly due
to lower sales and commissions on variable annuity products.
Loan fees and sales revenue increased $2.6 million as a
result of the sale of $154.2 million in student loans
during the current quarter, which resulted in a pre-tax gain of
$2.1 million. Other non-interest income for the current
quarter decreased $8.0 million, or 46.8%, from the same
quarter last year. Most of this decrease was due to the
$6.9 million gain on the 2008 branch sale mentioned
previously. Smaller declines also occurred in cash sweep
commissions, equipment rental income and tax credit sales income.
Non-interest income for the six months ended June 30, 2009
was $191.0 million compared to $194.9 million in the
first six months of 2008, resulting in a $3.9 million, or
2.0%, decrease. Deposit
39
account fees declined $2.8 million, or 5.1%, as a result of
lower overdraft fee revenue, which fell $3.3 million, or
9.4%. Bank card fees rose $1.6 million, or 2.8% overall,
due to increases of 19.0% and 2.3%, respectively, in corporate
and debit card transaction fees. Trust fees decreased
$2.2 million, or 5.4%, mainly in institutional and
corporate fees. Bond trading income rose $4.2 million due
to increased sales activity, while consumer brokerage income
declined $299 thousand, mainly as a result of lower mutual fund
fees and variable annuity commissions. Loan fees and sales
increased by $3.4 million, as gains on student loans sales
increased $2.1 million and mortgage banking revenue grew
$1.2 million, due to refinancing activity. The decrease in
other non-interest income of $7.8 million in the first six
months of 2009 compared to 2008 was mainly due to the gain on
the branch sale in 2008, as mentioned earlier. Other declines
were reported in cash sweep commissions, tax credit sales income
and equipment rental income. Additionally, an impairment charge
of $1.1 million was recorded in the first quarter of 2008
on an office building held for sale, which formerly housed the
Companys check processing operations.
Investment
Securities Gains (Losses), Net
Net gains and losses on investment securities recognized in
earnings during the three and six month periods ended
June 30, 2009 and 2008 are shown in the table below. Net
securities losses were $2.8 million and $4.9 million
in the three and six month periods ended June 30, 2009,
respectively. Included in these losses were credit-related
impairment losses of $794 thousand and $1.3 million for the
three and six month periods, respectively, on certain non-agency
mortgage-backed securities identified as other than temporarily
impaired. The total noncredit-related loss on these securities,
which was recorded in other comprehensive income, was
$30.6 million. The combined par value of these securities
was $102.3 million at June 30, 2009. Also shown below
are net gains and losses relating to non-marketable private
equity investments, which are primarily held by the Parent and
its majority-owned venture capital subsidiaries. These include
fair value adjustments, in addition to gains and losses realized
upon disposition. The portion of this activity attributable to
minority interests is reported as non-controlling interest in
the consolidated income statement and resulted in income of $609
thousand during the first six months of 2009 and expense of $710
thousand during the same period last year. Most of the net gain
in the first six months of 2008 resulted from the redemption of
Visa common stock, amounting to $22.2 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended June 30
|
|
|
Ended June 30
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred equity securities
|
|
$
|
|
|
|
$
|
(143
|
)
|
|
$
|
|
|
|
$
|
(3,504
|
)
|
Other bonds
|
|
|
(738
|
)
|
|
|
|
|
|
|
(1,283
|
)
|
|
|
1,139
|
|
Non-marketable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity investments
|
|
|
(2,015
|
)
|
|
|
1,151
|
|
|
|
(3,642
|
)
|
|
|
4,500
|
|
Visa Class B stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,196
|
|
|
|
Total investment securities gains (losses), net
|
|
$
|
(2,753
|
)
|
|
$
|
1,008
|
|
|
$
|
(4,925
|
)
|
|
$
|
24,331
|
|
|
|
40
Non-Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended June 30
|
|
|
Ended June 30
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
86,279
|
|
|
$
|
83,247
|
|
|
|
3.6
|
%
|
|
$
|
173,032
|
|
|
$
|
166,257
|
|
|
|
4.1
|
%
|
Net occupancy
|
|
|
11,088
|
|
|
|
10,805
|
|
|
|
2.6
|
|
|
|
22,900
|
|
|
|
22,874
|
|
|
|
.1
|
|
Equipment
|
|
|
6,255
|
|
|
|
6,244
|
|
|
|
.2
|
|
|
|
12,577
|
|
|
|
12,151
|
|
|
|
3.5
|
|
Supplies and communication
|
|
|
8,249
|
|
|
|
8,545
|
|
|
|
(3.5
|
)
|
|
|
16,933
|
|
|
|
17,269
|
|
|
|
(1.9
|
)
|
Data processing and software
|
|
|
15,007
|
|
|
|
14,159
|
|
|
|
6.0
|
|
|
|
29,354
|
|
|
|
27,722
|
|
|
|
5.9
|
|
Marketing
|
|
|
4,906
|
|
|
|
5,447
|
|
|
|
(9.9
|
)
|
|
|
9,253
|
|
|
|
10,734
|
|
|
|
(13.8
|
)
|
Deposit insurance
|
|
|
12,969
|
|
|
|
522
|
|
|
|
N.M.
|
|
|
|
17,075
|
|
|
|
1,025
|
|
|
|
N.M.
|
|
Indemnification obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,808
|
)
|
|
|
N.M.
|
|
Other
|
|
|
15,258
|
|
|
|
18,096
|
|
|
|
(15.7
|
)
|
|
|
31,773
|
|
|
|
38,022
|
|
|
|
(16.4
|
)
|
|
|
Total non-interest expense
|
|
$
|
160,011
|
|
|
$
|
147,065
|
|
|
|
8.8
|
%
|
|
$
|
312,897
|
|
|
$
|
287,246
|
|
|
|
8.9
|
%
|
|
|
Non-interest expense for the second quarter of 2009 amounted to
$160.0 million, an increase of $12.9 million, or 8.8%,
compared with $147.1 million recorded in the second quarter
of last year. Included in non-interest expense in the current
quarter were costs for a special FDIC deposit insurance premium,
assessed on the banking industry, amounting to
$8.0 million. Exclusive of this item, non-interest expense
would have increased 3.3% over the same quarter last year.
Compared with the second quarter of last year, salaries and
benefits expense increased $3.0 million, or 3.6%, resulting
mainly from increased staffing, related to several growth
initiatives in previous years, and higher pension costs.
Occupancy costs increased $283 thousand, or 2.6%, over the same
quarter last year, primarily due to higher depreciation expense
and lower net rent income, partly offset by lower outside
services expense. Equipment expense was flat compared to the
same quarter in the previous year, while marketing costs
decreased $541 thousand, or 9.9%. Supplies and communication
expense declined $296 thousand, or 3.5%, mainly due to lower
costs for supplies and courier services. Data processing and
software costs increased $848 thousand, or 6.0%, mainly as a
result of higher costs for several new software and servicing
systems put in place this year. FDIC insurance expense increased
$12.4 million over the same quarter last year as a result
of higher insurance rates and the special assessment mentioned
earlier. Other non-interest expense decreased $2.8 million,
or 15.7%, from the same quarter last year primarily as a result
of declines in travel, recruiting, professional fees and leased
equipment depreciation.
For the first six months of 2009, non-interest expense increased
$25.7 million, or 8.9%, compared to the same period in the
previous year. Salaries and benefits expense grew
$6.8 million, or 4.1%, due to higher salary and pension
costs, partly offset by lower incentive payments. Full-time
equivalent employees totaled 5,181 at both June 30, 2009
and 2008. Occupancy expense increased slightly, while equipment
expense increased $426 thousand, or 3.5%, mainly due to higher
data processing equipment depreciation expense. Supplies and
communication expense decreased $336 thousand, or 1.9%, as a
result of lower courier service and supplies expense, partly
offset by higher data network expense. Data processing and
software costs grew $1.6 million, or 5.9%, due to several
new software and servicing systems. Marketing expense decreased
$1.5 million, or 13.8%, while deposit insurance increased
$16.1 million due to reasons mentioned above. In the first
quarter of 2008, the Company reduced its indemnification
obligation relating to Visa litigation costs by
$8.8 million, which did not reoccur in the current period.
Other non-interest expense decreased $6.2 million, or
16.4%, partly due to an impairment charge of $2.5 million
related to foreclosed land which was recorded in the first
quarter of 2008. Other decreases also occurred in the same
expense categories as mentioned in the quarterly discussion.
Costs for FDIC deposit insurance have risen substantially in the
first six months of 2009. The Company expects this trend to
continue as the banking industry is assessed higher costs to
replenish the FDIC insurance fund as the result of recent high
levels of bank failures across the country. The Company expects
to incur total annual expense of more than $30 million
during 2009 as a result of normal deposit premiums and
41
special assessments. Also, the Visa-related indemnification
obligation, which is an estimate of the Companys share of
certain litigation expenses incurred by Visa, is expected to be
reduced in the third quarter of 2009. In July 2009, Visa
contributed $700 million to the escrow account established
to provide payment of these expenses. The Companys
proportionate share of the escrow funding, and the expected
reduction in its obligation, is approximately $2.5 million.
Provision
and Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Three Months Ended
|
|
|
June 30
|
|
|
|
June 30
|
|
|
March 31
|
|
|
June 30
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Provision for loan losses
|
|
$
|
41,166
|
|
|
$
|
43,168
|
|
|
$
|
18,000
|
|
|
$
|
84,334
|
|
|
$
|
38,000
|
|
|
|
Net loan charge-offs (recoveries):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
2,378
|
|
|
|
3,842
|
|
|
|
1,049
|
|
|
|
6,220
|
|
|
|
540
|
|
Real estate-construction and land
|
|
|
10,373
|
|
|
|
9,226
|
|
|
|
203
|
|
|
|
19,599
|
|
|
|
977
|
|
Real estate-business
|
|
|
1,033
|
|
|
|
776
|
|
|
|
39
|
|
|
|
1,809
|
|
|
|
941
|
|
Consumer credit card
|
|
|
13,214
|
|
|
|
10,763
|
|
|
|
7,935
|
|
|
|
23,977
|
|
|
|
14,528
|
|
Consumer
|
|
|
8,476
|
|
|
|
9,333
|
|
|
|
4,530
|
|
|
|
17,809
|
|
|
|
8,486
|
|
Home equity
|
|
|
96
|
|
|
|
300
|
|
|
|
136
|
|
|
|
396
|
|
|
|
130
|
|
Student
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Real estate-personal
|
|
|
215
|
|
|
|
545
|
|
|
|
73
|
|
|
|
760
|
|
|
|
174
|
|
Overdrafts
|
|
|
246
|
|
|
|
134
|
|
|
|
526
|
|
|
|
380
|
|
|
|
612
|
|
|
|
Total net loan charge-offs
|
|
$
|
36,033
|
|
|
$
|
34,919
|
|
|
$
|
14,491
|
|
|
$
|
70,952
|
|
|
$
|
26,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Three Months Ended
|
|
|
June 30
|
|
|
|
June 30
|
|
|
March 31
|
|
|
June 30
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Annualized net loan charge-offs*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
.29
|
%
|
|
|
.47
|
%
|
|
|
.12
|
%
|
|
|
.38
|
%
|
|
|
.03
|
%
|
Real estate-construction and land
|
|
|
5.54
|
|
|
|
4.58
|
|
|
|
.12
|
|
|
|
5.04
|
|
|
|
.28
|
|
Real estate-business
|
|
|
.19
|
|
|
|
.15
|
|
|
|
.01
|
|
|
|
.17
|
|
|
|
.08
|
|
Consumer credit card
|
|
|
7.60
|
|
|
|
5.94
|
|
|
|
4.06
|
|
|
|
6.75
|
|
|
|
3.78
|
|
Consumer
|
|
|
2.27
|
|
|
|
2.40
|
|
|
|
1.09
|
|
|
|
2.33
|
|
|
|
1.03
|
|
Home equity
|
|
|
.08
|
|
|
|
.24
|
|
|
|
.12
|
|
|
|
.16
|
|
|
|
.06
|
|
Real estate-personal
|
|
|
.05
|
|
|
|
.14
|
|
|
|
.02
|
|
|
|
.10
|
|
|
|
.02
|
|
Overdrafts
|
|
|
11.47
|
|
|
|
6.48
|
|
|
|
19.84
|
|
|
|
9.02
|
|
|
|
9.93
|
|
|
|
Total annualized net loan charge-offs
|
|
|
1.33
|
%
|
|
|
1.28
|
%
|
|
|
.53
|
%
|
|
|
1.30
|
%
|
|
|
.49
|
%
|
|
|
|
|
|
* |
|
as a percentage of average loans
(excluding loans held for sale) |
The Company has an established process to determine the amount
of the allowance for loan losses, which assesses the risks and
losses inherent in its portfolio. This process provides an
allowance consisting of a specific allowance component based on
certain individually evaluated loans and a general component
based on estimates of reserves needed for pools of loans with
similar risk characteristics.
Loans subject to individual evaluation are defined by the
Company as impaired, and generally consist of business,
construction, business real estate and personal real estate
loans on non-accrual status. These loans are evaluated
individually for the impairment of repayment potential and
collateral adequacy, and in conjunction with current economic
conditions and loss experience, allowances are estimated. Loans
not
42
individually evaluated are aggregated and reserves are recorded
using a consistent methodology that considers historical loan
loss experience by loan type, delinquencies, current economic
factors, loan risk ratings and industry concentrations.
In using this process and the information available, management
must consider various assumptions and exercise considerable
judgment to determine the overall level of the allowance for
loan losses. Because of these subjective factors, actual
outcomes of inherent losses can differ from original estimates.
The process of determining adequate levels of the allowance for
loan losses is subject to regular review by the Companys
Credit Administration personnel and outside regulators.
Net loan charge-offs for the second quarter of 2009 amounted to
$36.0 million, compared with $34.9 million in the
prior quarter and $14.5 million in the second quarter of
last year. The increase in net charge-offs in the second quarter
of 2009 compared to the previous quarter was mainly due to
increased losses of $2.5 million in consumer credit card
loans and $1.1 million in construction and land real estate
loans, partially offset by lower losses in the business,
consumer, home equity and personal real estate portfolios. Net
loan charge-offs on construction and land loans totaled
$10.4 million during the second quarter of 2009 and
included a $5.0 million charge-off of one construction loan
on a retirement housing project. Consumer credit card net
charge-offs totaled $13.2 million during the second quarter
2009 compared to $10.8 million in the previous quarter and
$7.9 million in the second quarter of 2008. Consumer loan
net charge-offs totaled $8.5 million in the current quarter
compared to $9.3 million in the previous quarter and
$4.5 million in the second quarter of 2008. Included in the
consumer net charge-offs were marine and RV loan losses of
$5.7 million in the second quarter of 2009,
$6.4 million in the first quarter 2009 and
$3.0 million in the second quarter of 2008. Combined net
loan charge-offs for business, business real estate and
construction loans totaled $13.8 million in both the first
and second quarters of 2009.
The ratio of annualized total net loan charge-offs to total
average loans was 1.33%, compared to 1.28% in the previous
quarter and .53% in the second quarter of last year. For the
second quarter of 2009, annualized net charge-offs on average
construction and land loans were 5.54% compared with 4.58% in
the previous quarter and .12% in the same period last year.
Additionally, annualized net charge-offs on average consumer
credit card loans were 7.60%, compared with 5.94% in the
previous quarter and 4.06% in the same period last year.
Consumer loan annualized net charge-offs for the quarter
amounted to 2.27% of average consumer loans, compared to 2.40%
in the previous quarter and 1.09% in the same quarter last year.
The provision for loan losses for the second quarter of 2009
totaled $41.2 million, which was a $2.0 million
decrease compared to the previous quarter and a
$23.2 million increase compared to the second quarter of
2008. The amount of the provision in each quarter was determined
by managements review and analysis of the adequacy of the
allowance for loan losses, involving all the activities and
factors described above regarding that process. The provision in
the current quarter was influenced by higher incurred losses
within the loan portfolio and an increase in classified loans
(mainly non-accrual loans) stemming from increasing risk in the
broader economy, but partly offset by lower overall loan
balances.
Net charge-offs during the first six months of 2009 were
$71.0 million compared to $26.4 million in the same
period of 2008. The increase occurred because of higher losses
in most loan categories. The provision for loan losses was
$84.3 million in the first six months of 2009 compared to
$38.0 million in the same period in 2008. The provision for
loan losses in the first six months exceeded net loan
charge-offs in the same period by $13.4 million, which
resulted in a corresponding increase in the allowance for loan
losses.
The allowance for loan losses at June 30, 2009 amounted to
$186.0 million, or 1.74% of total loans (excluding loans
held for sale) compared to $172.6 million, or 1.53%, at
December 31, 2008 and $145.2 million, or 1.31%, at
June 30, 2008. The increase in the allowance compared to
previous periods resulted primarily from provisions exceeding
net charge-offs. Higher levels of consumer credit card losses,
coupled with growth in the watch list were the main reasons for
the increase in the balance of the allowance for loan losses.
The Company considers the allowance for loan losses adequate to
cover losses inherent in the loan portfolio at June 30,
2009.
43
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 consumer loans that are exempt under regulatory rules
from being classified as non-accrual.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Business
|
|
$
|
18,369
|
|
|
$
|
4,007
|
|
Real estate construction and land
|
|
|
75,579
|
|
|
|
48,871
|
|
Real estate business
|
|
|
20,948
|
|
|
|
13,137
|
|
Real estate personal
|
|
|
7,634
|
|
|
|
6,794
|
|
Consumer
|
|
|
118
|
|
|
|
87
|
|
|
|
Total non-accrual loans
|
|
|
122,648
|
|
|
|
72,896
|
|
|
|
Foreclosed real estate
|
|
|
9,039
|
|
|
|
6,181
|
|
|
|
Total non-performing assets
|
|
$
|
131,687
|
|
|
$
|
79,077
|
|
|
|
Non-performing assets as a percentage of total loans
|
|
|
1.23
|
%
|
|
|
.70
|
%
|
Non-performing assets as a percentage of total assets
|
|
|
.74
|
%
|
|
|
.45
|
%
|
|
|
Loans past due 90 days and still accruing interest:
|
|
|
|
|
|
|
|
|
Business
|
|
$
|
1,534
|
|
|
$
|
1,459
|
|
Real estate construction and land
|
|
|
138
|
|
|
|
466
|
|
Real estate business
|
|
|
|
|
|
|
1,472
|
|
Real estate personal
|
|
|
4,964
|
|
|
|
4,717
|
|
Consumer
|
|
|
1,422
|
|
|
|
3,478
|
|
Home equity
|
|
|
535
|
|
|
|
440
|
|
Student
|
|
|
16,652
|
|
|
|
14,018
|
|
Consumer credit card
|
|
|
14,723
|
|
|
|
13,914
|
|
|
|
Total loans past due 90 days and still accruing
interest
|
|
$
|
39,968
|
|
|
$
|
39,964
|
|
|
|
Non-accrual loans, which are also considered impaired, totaled
$122.6 million at June 30, 2009, and increased
$49.8 million over amounts recorded at December 31,
2008. The increase over December 31, 2008 occurred mainly
in construction and land real estate non-accrual loans, which
increased $26.7 million, and in business non-accrual loans,
which increased $14.4 million. At June 30, 2009,
non-accrual loans were comprised mainly of construction and land
real estate loans (61.6%), business real estate loans (17.1%)
and business loans (15.0%). At June 30, 2009, foreclosed
real estate totaled $9.0 million, an increase of
$2.9 million over the balance at December 31, 2008.
The increase was mainly due to the acquisition of one property
with a carrying value of $2.4 million during the first
quarter of 2009.
Loans whose terms have been modified in a troubled debt
restructuring are generally placed on non-accrual status until a
six-month payment history is sustained. Non-accrual loan
balances at June 30, 2009 included $282 thousand of such
loans.
Total loans past due 90 days or more and still accruing
interest amounted to $40.0 million as of June 30,
2009, which included $16.0 million in guaranteed student
loans that the Company intends to hold to
44
maturity. The balance of loans 90 days past due or more
increased slightly at June 30, 2009 compared to the balance
at December 31, 2008, due to increases in student and
consumer credit card loan delinquencies, partly offset by
declines in business real estate and consumer loan delinquencies.
In addition to the non-accrual 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 primarily classified as substandard
under the Companys 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 $313.7 million at June 30, 2009
compared with $338.7 million at December 31, 2008,
resulting in a decrease of $25.1 million. Most of the
decrease occurred in business loans (including lease and
floorplan loans) and construction and land loans, partly offset
by an increase in business real estate loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Potential problem loans:
|
|
|
|
|
|
|
|
|
Business
|
|
$
|
84,870
|
|
|
$
|
125,618
|
|
Real estate construction and land
|
|
|
120,409
|
|
|
|
135,324
|
|
Real estate business
|
|
|
69,199
|
|
|
|
41,821
|
|
Real estate personal
|
|
|
21,273
|
|
|
|
18,641
|
|
Consumer
|
|
|
1,696
|
|
|
|
2,208
|
|
Home equity
|
|
|
536
|
|
|
|
440
|
|
Consumer credit card
|
|
|
15,684
|
|
|
|
14,666
|
|
|
|
Total potential problem loans
|
|
$
|
313,667
|
|
|
$
|
338,718
|
|
|
|
Income
Taxes
Income tax expense was $15.3 million in the second quarter
of 2009, compared to $13.6 million in the first quarter of
2009 and $27.1 million in the second quarter of 2008. The
Companys effective income tax rate, including the effect
of non-controlling interest, was 29.2% in the second quarter of
2009, compared with 30.6% in the first quarter of 2009 and 32.6%
in the second quarter of 2008. Additionally, income tax expense
was $28.8 million in the first six months of 2009 compared
to $57.8 million in the previous year, resulting in
effective income tax rates, including the effect of
non-controlling interest, of 29.8% and 32.5%, respectively.
Effective tax rates were lower in 2009 compared to 2008 mainly
due to changes in the mix of taxable and non-taxable income on
lower pre-tax income.
45
Financial
Condition
Balance
Sheet
Total assets of the Company were $17.7 billion at
June 30, 2009 compared to $17.5 billion at
December 31, 2008. Earning assets (excluding fair value
adjustments on investment securities) amounted to
$16.4 billion at June 30, 2009, consisting of 67.5% in
loans and 32.2% in investment securities, compared to
$16.2 billion at December 31, 2008.
At June 30, 2009, total loans, excluding loans held for
sale, decreased $583.6 million, or 5.2%, compared with
balances at December 31, 2008. The decrease occurred
primarily in business, construction and consumer loans. Business
loans declined $217.9 million as customers have reacted to
the difficult economy by reducing line of credit usage or
overall debt levels. Construction loans declined
$105.3 million as a result of a decline in both commercial
and residential construction lending. Consumer loans declined
$153.1 million as principal loan pay-downs exceeded new
loan originations for these products. Also, the Company has
ceased most marine and recreational vehicle lending. Personal
real estate loan totals declined $47.5 million due to lower
origination activity, while consumer credit card loan balances
declined $71.8 million due to reduced marketing efforts for
new card balances, coupled with reductions in debt loads by
consumers in reaction to the current economic situation. Home
equity and student loans reflected smaller balance declines,
while business real estate loan balances increased
$19.0 million due to new loan business activity.
Available for sale investment securities, excluding fair value
adjustments, increased $1.4 billion at June 30, 2009
compared to December 31, 2008. This increase mainly
resulted from investing the proceeds of both deposit growth and
reductions in loans during the first six months of 2009 in fixed
income securities. For the first six months of 2009, total
purchases of available for sale securities were
$2.0 billion, and included purchases of $828.4 million
of agency mortgage-backed securities, $742.5 million of
other asset-backed securities and $228.7 million of state
and municipal securities.
Federal funds sold and securities purchased under agreements to
resell decreased $129.3 million, or 76.3%, from
December 31, 2008. The six month average balance of federal
funds sold and securities purchased under agreements to resell
decreased $388.7 million, or 85.2%, from the first six
months of 2008. Approximately 80.1% of this reduction was due to
a decrease in securities purchased under agreements to resell.
Interest earning deposits with banks, representing balances with
the Federal Reserve Bank, totaled $8.3 million at
June 30, 2009, representing a decline of
$629.8 million, or 98.7%, from amounts recorded at
December 31, 2008. The decline in balances was part of the
Companys plan to reinvest such balances in its investment
securities portfolio to improve earning asset yields.
Deposits at June 30, 2009 totaled $13.7 billion, an
$811.6 million, or 6.3%, increase compared to
$12.9 billion at December 31, 2008. This increase was
due to higher non-interest bearing demand deposits, which
increased $142.4 million, or 10.4%, and growth in interest
bearing demand deposits (savings, interest checking and money
market accounts), which increased $671.3 million, or 8.8%.
Also, certificates of deposit decreased slightly from balances
at the previous year end.
At June 30, 2009, the Companys total borrowings
decreased $753.1 million, or 27.1%, from December 31,
2008. The decrease was mainly the result of a decline of
$200.6 million in advances from the FHLB, coupled with a
decline of $700.0 million in borrowings under the Federal
Reserves Term Auction Facility (TAF) which was not renewed
when it expired in the first quarter of 2009.
46
Liquidity
and Capital Resources
Liquidity
Management
The Companys most liquid assets are comprised of available
for sale investment securities, federal funds sold, securities
purchased under agreements to resell, and balances at the
Federal Reserve Bank, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
March 31
|
|
|
December 31
|
|
(In thousands)
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Liquid assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
30,155
|
|
|
$
|
33,050
|
|
|
$
|
59,475
|
|
Securities purchased under agreements to resell
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
110,000
|
|
Available for sale investment securities
|
|
|
5,156,343
|
|
|
|
4,550,908
|
|
|
|
3,630,753
|
|
Balances at the Federal Reserve Bank
|
|
|
8,318
|
|
|
|
592,162
|
|
|
|
638,158
|
|
|
|
Total
|
|
$
|
5,204,816
|
|
|
$
|
5,186,120
|
|
|
$
|
4,438,386
|
|
|
|
Federal funds sold and securities purchased under agreements to
resell totaled $40.2 million at June 30, 2009. These
investments normally have overnight maturities and are used for
general daily liquidity purposes. Balances at the Federal
Reserve Bank totaled $8.3 million at June 30, 2009,
down substantially from previous quarters. The Federal Reserve
Bank began paying interest on these balances in the fourth
quarter of 2008, but interest rates were generally in the range
of 0 25 basis points during 2009. The decline
in balances occurred as the Company reinvested amounts at the
Federal Reserve Bank in higher earning investment securities.
The fair value of the available for sale investment portfolio
was $5.2 billion at June 30, 2009, and included an
unrealized net gain of $18.6 million. The overall net gain
includes a $36.7 million unrealized gain on common stock
held by the Parent and additional gains in state and municipal
and corporate debt securities held by the bank subsidiary,
partly offset by a $45.5 million unrealized loss on
mortgage and asset-backed securities. The portfolio includes
maturities of approximately $922 million over the next
12 months, which offer substantial resources to meet either
new loan demand or reductions in the Companys 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. At June 30, 2009, total investment securities
pledged for these purposes were as follows:
|
|
|
|
|
|
|
|
|
June 30
|
|
(In thousands)
|
|
2009
|
|
|
|
|
Investment securities pledged for the purpose of securing:
|
|
|
|
|
Federal Reserve Bank borrowings
|
|
$
|
311,596
|
|
FHLB borrowings and letters of credit
|
|
|
373,341
|
|
Securities sold under agreements to repurchase
|
|
|
1,292,263
|
|
Other deposits
|
|
|
691,698
|
|
|
|
Total pledged, at fair value
|
|
$
|
2,668,898
|
|
|
|
Liquidity is also available from the Companys large base
of core customer deposits, defined as demand, interest checking,
savings, and money market deposit accounts. At June 30,
2009, such deposits totaled $9.8 billion and represented
71.5% of the Companys total deposits. These core deposits
are normally less volatile, often with customer relationships
tied to other products offered by the Company, promoting long
lasting relationships and stable funding sources. Time open and
certificates of deposit of $100,000 and over totaled
$1.8 billion at June 30, 2009. These accounts are
normally considered more volatile and higher costing, and
comprised 12.9% of total deposits at June 30, 2009.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
March 31
|
|
|
December 31
|
|
(In thousands)
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|