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merce Bancshares(CBSH) - 2019 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements The unaudited statements detail the company's financial position, performance, and cash flows for Q1 2019 Consolidated Balance Sheets Consolidated Balance Sheet Highlights (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :---------------------- | :------------ | :------------ | | Total Assets | $25,033,471 | $25,463,842 | | Net Loans | $13,960,040 | $13,980,366 | | Total Investment Securities | $8,792,515 | $8,698,666 | | Total Deposits | $19,974,353 | $20,323,659 | | Total Liabilities | $21,990,258 | $22,526,693 | | Total Equity | $3,043,213 | $2,937,149 | Consolidated Statements of Income Consolidated Statements of Income Highlights (Three Months Ended March 31, In thousands, except per share data) | Metric | 2019 | 2018 | Change (YoY) | % Change (YoY) | | :----------------------------------------- | :------------ | :------------ | :----------- | :------------- | | Total Interest Income | $227,865 | $205,995 | $21,870 | 10.6% | | Total Interest Expense | $24,377 | $13,103 | $11,274 | 86.0% | | Net Interest Income | $203,488 | $192,892 | $10,596 | 5.5% | | Provision for Loan Losses | $12,463 | $10,396 | $2,067 | 19.9% | | Total Non-Interest Income | $121,240 | $119,690 | $1,550 | 1.3% | | Investment Securities Gains (Losses), Net | $(925) | $5,410 | $(6,335) | N.M. | | Total Non-Interest Expense | $191,425 | $182,277 | $9,148 | 5.0% | | Net Income Attributable to Commerce Bancshares, Inc. | $97,138 | $100,984 | $(3,846) | (3.8)% | | Net Income Available to Common Shareholders | $94,888 | $98,734 | $(3,846) | (3.9)% | | Net Income Per Common Share — Basic | $0.85 | $0.88 | $(0.03) | (3.4)% | | Net Income Per Common Share — Diluted | $0.85 | $0.88 | $(0.03) | (3.4)% | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income Highlights (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | Change (YoY) | % Change (YoY) | | :--------------------------------------------- | :--------- | :--------- | :----------- | :------------- | | Net Income | $97,055 | $102,061 | $(5,006) | (4.9)% | | Net Unrealized Gains (Losses) on Other Securities | $73,441 | $(73,721) | $147,162 | N.M. | | Other Comprehensive Income (Loss) | $76,650 | $(73,283) | $149,933 | N.M. | | Comprehensive Income Attributable to Commerce Bancshares, Inc. | $173,788 | $27,701 | $146,087 | 527.4% | Consolidated Statements of Changes in Equity Consolidated Statements of Changes in Equity Highlights (Three Months Ended March 31, In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :--------------------------------------------- | :------------ | :------------ | | Total Commerce Bancshares, Inc. Stockholders' Equity | $3,037,755 | $2,931,298 | | Net Income | $97,138 | N/A | | Other Comprehensive Income | $76,650 | N/A | | Purchases of Treasury Stock | $(39,699) | N/A | | Cash Dividends on Common Stock | $(28,858) | N/A | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Three Months Ended March 31, In thousands) | Activity | 2019 | 2018 | Change (YoY) | | :------------------------------------------- | :------------ | :------------ | :----------- | | Net Cash Provided by Operating Activities | $142,181 | $143,989 | $(1,808) | | Net Cash Provided by (Used in) Investing Activities | $(31,322) | $283,362 | $(314,684) | | Net Cash Used in Financing Activities | $(713,667) | $(366,757) | $(346,910) | | Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | $(602,808) | $60,594 | $(663,402) | | Cash, Cash Equivalents and Restricted Cash at March 31 | $606,432 | $584,946 | $21,486 | Notes to Consolidated Financial Statements Detailed disclosures explain accounting principles and provide further context for the consolidated financial statements Note 1. Principles of Consolidation and Presentation - The consolidated financial statements are unaudited and prepared in accordance with GAAP for interim financial information, requiring management estimates and assumptions2728 Note 2. Loans and Allowance for Loan Losses The loan portfolio totaled $14.12 billion with an allowance for loan losses of $160.7 million at March 31, 2019 Major Classifications of Loan Portfolio Major Loan Classifications (In thousands) | Loan Type | Mar. 31, 2019 | Dec. 31, 2018 | | :-------------------------- | :------------ | :------------ | | Commercial: Business | $5,175,541 | $5,106,427 | | Real estate – business | $2,859,614 | $2,875,788 | | Personal Banking: Real estate – personal | $2,125,087 | $2,127,083 | | Consumer | $1,893,212 | $1,955,572 | | Total Loans | $14,120,722 | $14,140,298 | - At March 31, 2019, $3.8 billion in loans were pledged at the Federal Home Loan Bank and $1.6 billion at the Federal Reserve Bank as collateral29 Allowance for Loan Losses Activity Allowance for Loan Losses Activity (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :-------------------------- | :------------ | :------------ | | Balance at January 1 | $159,932 | $159,532 | | Provision | $12,463 | $10,396 | | Net Loan Charge-offs | $11,713 | $10,396 | | Balance at March 31 | $160,682 | $159,532 | Impaired Loans Impaired Loans (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :---------------------- | :------------ | :------------ | | Non-accrual loans | $12,167 | $12,536 | | Restructured loans (accruing) | $72,005 | $66,080 | | Total Impaired Loans | $84,172 | $78,616 | Interest Income Recognized on Impaired Loans (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :----- | :------- | :------- | | Total | $1,427 | $1,218 | Delinquent and Non-Accrual Loans Delinquent and Non-Accrual Loans (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------- | :------------ | :------------ | | 30 – 89 Days Past Due | $70,732 | $72,687 | | 90 Days Past Due and Accruing | $16,655 | $16,658 | | Non-accrual | $12,167 | $12,536 | | Total Loans | $14,120,722 | $14,140,298 | Credit Quality - Commercial loan portfolio credit quality is categorized into Pass ($8.59 billion), Special Mention ($216.1 million), Substandard ($141.7 million), and Non-accrual ($10.3 million) at March 31, 201950 Personal Banking Loans by FICO Score (% of Loan Category) - March 31, 2019 | FICO Score | Real Estate - Personal | Consumer | Revolving Home Equity | Consumer Credit Card | | :----------- | :--------------------- | :------- | :-------------------- | :------------------- | | Under 600 | 1.1% | 3.4% | 1.2% | 5.4% | | 600 - 659 | 1.7% | 5.3% | 1.9% | 14.0% | | 660 - 719 | 9.9% | 18.0% | 9.5% | 35.6% | | 720 - 779 | 25.3% | 24.3% | 22.8% | 26.3% | | 780 and over | 62.0% | 49.0% | 64.6% | 18.7% | Troubled Debt Restructurings Troubled Debt Restructurings (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------- | :------------ | :------------ | | Accruing restructured loans: Commercial | $56,524 | $50,904 | | Accruing restructured loans: Assistance programs | $7,960 | $7,410 | | Non-accrual loans | $9,352 | $9,759 | | Total Troubled Debt Restructurings | $81,357 | $75,839 | - Modifications to loans under debt management and assistance programs are estimated to decrease interest income by approximately $1.0 million annually, pre-tax56 Loans Held for Sale - Loans held for sale include $8.9 million in residential mortgage loans (fair value) and $11.2 million in student loan originations (lower of cost or fair value) at March 31, 20196364 - None of the loans held for sale were on non-accrual status or 90 days past due at March 31, 201965 Foreclosed Real Estate/Repossessed Assets Foreclosed Real Estate and Repossessed Assets (In thousands) | Asset Type | Mar. 31, 2019 | Dec. 31, 2018 | | :------------------------- | :------------ | :------------ | | Foreclosed Real Estate | $737 | $1,400 | | Repossessed Personal Property | $2,600 | $2,000 | Note 3. Investment Securities Total investment securities increased to $8.79 billion, primarily driven by available for sale debt securities Investment Securities Composition Investment Securities Composition (In thousands) | Security Type | Mar. 31, 2019 | Dec. 31, 2018 | | :-------------------------------- | :------------ | :------------ | | Available for sale debt securities | $8,627,890 | $8,538,041 | | Trading debt securities | $30,427 | $27,059 | | Equity securities | $4,694 | $4,409 | | Other (FRB, FHLB, Private Equity) | $129,504 | $129,157 | | Total Investment Securities | $8,792,515 | $8,698,666 | Available for Sale Debt Securities by Maturity - Mortgage and asset-backed securities constitute the largest portion of available for sale debt securities, totaling $5.94 billion at March 31, 201973 - The portfolio includes $446.9 million in U.S. Treasury inflation-protected securities (TIPS) and $14.5 million in auction rate securities73 Unrealized Gains and Losses on AFS Debt Securities Unrealized Gains and Losses on AFS Debt Securities (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------- | :------------ | :------------ | | Gross Unrealized Gains | $74,578 | $35,266 | | Gross Unrealized Losses | $(41,161) | $(99,824) | | Net Unrealized Gain (Loss) | $33,417 | $(64,558) | - The total amount of unrealized loss on available for sale securities decreased by $58.7 million from December 31, 2018, mainly due to a declining interest rate environment82 Other-Than-Temporary Impairment (OTTI) - Cumulative credit-related OTTI on non-agency mortgage-backed securities totaled $14.1 million at March 31, 201977 - No impairment losses on these securities were recognized in the first three months of 2019, compared to $68 thousand in the same period last year242 Proceeds from Sales & Gains/Losses Investment Securities Gains (Losses), Net (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :---------------------------------------- | :-------- | :-------- | | Gains realized on sales (AFS debt securities) | $1,386 | $212 | | Losses realized on sales (AFS debt securities) | $(692) | $0 | | Fair value adjustments, net (Private equity) | $(1,842) | $4,305 | | Total Investment Securities Gains (Losses), Net | $(925) | $5,410 | Pledged Securities - At March 31, 2019, $4.0 billion in fair value of securities were pledged to secure public fund deposits, repurchase agreements, trust funds, and borrowings at the FRB and FHLB87 Note 4. Goodwill and Other Intangible Assets Net other intangible assets decreased slightly to $8.5 million due to amortization, while goodwill remained stable at $138.9 million Goodwill and Other Intangible Assets (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :-------------------------- | :------------ | :------------ | | Goodwill | $138,921 | $138,921 | | Core deposit premium (net) | $2,170 | $2,316 | | Mortgage servicing rights (net) | $6,341 | $6,478 | | Total Other Intangible Assets, Net | $8,511 | $8,794 | - Aggregate amortization expense on intangible assets was $342 thousand for Q1 2019, with estimated annual amortization for 2019 at $1.38 million9192 Note 5. Guarantees The Company's maximum potential future payment for financial guarantees, primarily standby letters of credit, was $325.6 million - Contractual amount of standby letters of credit, representing maximum potential future payments, was $325.6 million at March 31, 201995 - The fair value of guarantee liabilities for credit risk participation agreements (RPAs) was $110 thousand at March 31, 2019, with a notional amount of underlying swaps at $86.6 million98 Note 6. Leases The adoption of a new lease standard resulted in recognizing $27.1 million in right-of-use assets and $27.8 million in lease liabilities Lessee Information Lessee Operating Lease Information (March 31, 2019, In thousands) | Metric | Amount | | :----------------------------------- | :---------- | | Right-of-use asset | $27,100 | | Lease liability | $27,800 | | Total lease cost (Q1 2019) | $1,800 | | Weighted-average remaining lease term | 12.1 years | | Weighted-average discount rate | 3.76% | Lessor Information Lessor Lease Income (Three Months Ended March 31, 2019, In thousands) | Lease Type | Income | | :----------------------------- | :-------- | | Direct financing and sales-type leases | $5,862 | | Operating leases | $1,906 | | Total Lease Income | $7,768 | - Net investments in direct financing and sales-type leases totaled $765.5 million at March 31, 2019111 Note 7. Pension Net periodic pension cost increased to $546 thousand for Q1 2019 from $190 thousand in Q1 2018 Net Periodic Pension Cost (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :--------------------------- | :----- | :----- | | Net periodic pension cost | $546 | $190 | - All benefits under the defined benefit pension plan have been frozen since January 1, 2011, and no funding contributions were made in Q1 2019116 Note 8. Common Stock Basic and diluted EPS were $0.85 for Q1 2019, and authorized common shares increased from 120 million to 140 million Income Per Common Share (Three Months Ended March 31, In thousands, except per share data) | Metric | 2019 | 2018 | | :----------------------------------- | :------ | :------ | | Basic income per common share | $0.85 | $0.88 | | Diluted income per common share | $0.85 | $0.88 | | Weighted average common shares outstanding | 110,011 | 110,916 | - Authorized common stock shares increased from 120 million to 140 million in April 2019121 Note 9. Accumulated Other Comprehensive Income AOCI shifted from a loss of $64.7 million to a gain of $12.0 million, driven by unrealized gains on securities Accumulated Other Comprehensive Income (Loss) (In thousands) | Metric | Jan. 1, 2019 | Mar. 31, 2019 | | :--------------------------------------------- | :----------- | :------------ | | Balance Accumulated Other Comprehensive Income (Loss) | $(64,669) | $11,981 | | Current period other comprehensive income, net of tax | N/A | $76,650 | - The reclassification of tax rate changes (ASU 2018-02) and unrealized gains on equity securities (ASU 2016-01) impacted AOCI in prior periods126127 Note 10. Segments The Wealth segment reported the strongest pre-tax income growth (16.1%), while the Commercial segment's income declined - The Consumer segment offers various consumer loan and deposit products, including indirect and other consumer loan financing, and debit/credit card services130 - The Commercial segment provides corporate lending, leasing, international services, business/governmental deposit products, and commercial cash management130 - The Wealth segment offers trust and estate planning, investment management, and brokerage services, along with private banking130 Note 11. Derivative Instruments The fair value of derivative assets increased to $51.7 million, primarily from interest rate swaps and floors Notional Amounts Derivative Instruments Notional Amounts (In thousands) | Instrument Type | Mar. 31, 2019 | Dec. 31, 2018 | | :------------------------------- | :------------ | :------------ | | Interest rate swaps | $2,006,280 | $2,006,280 | | Interest rate floors | $1,000,000 | $1,000,000 | | Credit risk participation agreements | $86,600 | $143,460 | | Total Notional Amount | $3,254,921 | $3,254,921 | Fair Values Fair Values of Derivative Instruments (In thousands) | Metric | Mar. 31, 2019 (Asset) | Dec. 31, 2018 (Asset) | Mar. 31, 2019 (Liability) | Dec. 31, 2018 (Liability) | | :----------------------------------- | :-------------------- | :-------------------- | :------------------------ | :------------------------ | | Derivatives designated as hedging instruments: Interest rate floors | $32,058 | $29,031 | $0 | $0 | | Derivatives not designated as hedging instruments: Interest rate swaps | $18,641 | $11,537 | $(9,970) | $(13,110) | | Total Derivatives | $51,691 | $41,210 | $(10,300) | $(13,421) | Effects on Income Statement - Interest rate floors, designated as cash flow hedges, recognized $3.0 million in OCI for Q1 2019151 - Derivatives not designated as hedging instruments generated a net gain of $384 thousand in income for Q1 2019, down from $1.2 million in Q1 2018151 Balance Sheet Offsetting - At March 31, 2019, positive fair values of cleared swaps were reduced by $3.8 million and negative fair values by $12.4 million due to collateral offsetting147 Note 12. Resale and Repurchase Agreements Net resale agreements were $700.0 million and net repurchase agreements were $1.46 billion at March 31, 2019 Resale and Repurchase Agreements (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------------- | :------------ | :------------ | | Total resale agreements, net | $700,000 | $700,000 | | Total repurchase agreements, net | $1,460,376 | $1,943,219 | | Collateral swaps (offset in balance sheet) | $300,000 | $450,000 | - Repurchase agreements are primarily secured by agency mortgage-backed securities ($990.0 million) and U.S. government and federal agency obligations ($382.6 million) at March 31, 2019161 Note 13. Stock-Based Compensation Stock-based compensation expense was $3.5 million for Q1 2019, with 1.06 million nonvested stock awards outstanding - Stock-based compensation expense was $3.5 million for Q1 2019164 Nonvested Share Awards Activity (Three Months Ended March 31, 2019) | Metric | Shares | Weighted Average Grant Date Fair Value | | :-------------------------- | :---------- | :------------------------------------- | | Nonvested at January 1, 2019 | 1,180,940 | $43.24 | | Granted | 178,446 | $61.87 | | Vested | (291,519) | $32.68 | | Nonvested at March 31, 2019 | 1,064,621 | $49.23 | - SARs outstanding at March 31, 2019, totaled 1.16 million with a weighted average exercise price of $44.19 and an aggregate intrinsic value of $16.7 million168 Note 14. Revenue from Contracts with Customers Non-interest income from customer contracts totaled $112.0 million for Q1 2019, led by bank card and trust fees - Approximately 63% of the Company's total revenue for Q1 2019 was net interest income, not subject to ASU 2014-09169 Non-Interest Income from Contracts with Customers (Three Months Ended March 31, In thousands) | Revenue Category | 2019 | 2018 | | :------------------------------- | :--------- | :--------- | | Bank card transaction fees | $39,644 | $41,453 | | Trust fees | $37,256 | $36,062 | | Deposit account charges and other fees | $23,018 | $22,982 | | Total non-interest income from contracts with customers | $112,037 | $111,576 | Note 15. Fair Value Measurements Assets measured at fair value on a recurring basis totaled $8.82 billion, with the majority classified as Level 2 Recurring Fair Value Measurements Assets Measured at Fair Value on a Recurring Basis (March 31, 2019, In thousands) | Asset Type | Total Fair Value | Level 1 | Level 2 | Level 3 | | :--------------------------------------- | :--------------- | :--------- | :----------- | :--------- | | Residential mortgage loans held for sale | $8,908 | $0 | $8,908 | $0 | | Available for sale debt securities | $8,627,890 | $877,921 | $7,735,441 | $14,529 | | Private equity investments | $85,877 | $0 | $0 | $85,877 | | Derivatives | $51,691 | $0 | $50,776 | $915 | | Total Assets | $8,822,498 | $895,626 | $7,825,551 | $101,321 | Level 3 Inputs - Auction rate securities ($14.5 million) and private equity investments ($85.9 million) are significant Level 3 measurements191 Quantitative Information about Level 3 Fair Value Measurements - Unobservable Inputs | Valuation Technique | Unobservable Input | Range | Weighted Average | | :------------------ | :--------------------------- | :---------- | :--------------- | | Auction rate securities (Discounted cash flow) | Estimated market recovery period | 4 - 5 years | N/A | | Auction rate securities (Discounted cash flow) | Estimated market rate | 3.4% - 4.3% | N/A | | Private equity investments (Market comparable companies) | EBITDA multiple | 4.0 - 6.0 | N/A | | Mortgage loan commitments (Discounted cash flow) | Probability of funding | 50.8% - 99.1% | 79.3% | Nonrecurring Fair Value Measurements Nonrecurring Fair Value Adjustments (Three Months Ended March 31, 2019, In thousands) | Asset Type | Fair Value | Total Gains (Losses) Recognized | | :------------------------------ | :--------- | :------------------------------ | | Collateral dependent impaired loans | $129 | $170 | | Mortgage servicing rights | $6,341 | $(260) | | Long-lived assets | $134 | $(14) | Note 16. Fair Value of Financial Instruments The estimated fair value of total financial assets was $24.07 billion against a carrying amount of $24.29 billion Fair Value of Financial Instruments (March 31, 2019, In thousands) | Metric | Carrying Amount | Estimated Fair Value | | :----------------------------------- | :-------------- | :------------------- | | Total Financial Assets | $24,294,255 | $24,067,093 | | Total Financial Liabilities | $21,724,233 | $21,736,020 | Note 17. Legal and Regulatory Proceedings The Company is involved in various legal proceedings and accrues for losses when probable and estimable - The Company records a loss accrual for legal and regulatory matters when a loss is probable and can be reasonably estimated204 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 2019 financial condition, operational results, and risk factors Overview and Forward-Looking Information - Forward-looking statements are subject to risks and uncertainties, including changes in economic conditions, regulatory policies, interest rates, and competition208 Critical Accounting Policies - Critical accounting policies include the allowance for loan losses, valuation of certain investment securities, and accounting for income taxes, which require subjective judgments209 Selected Financial Data and Ratios Selected Financial Data and Ratios (Three Months Ended March 31) | Metric | 2019 | 2018 | | :----------------------------------- | :-------- | :-------- | | Net income per common share — basic | $0.85 | $0.88 | | Cash dividends on common stock | $0.260 | $0.224 | | Book value per common share | $26.18 | $22.88 | | Return on total assets | 1.58% | 1.66% | | Return on common equity | 13.64% | 15.58% | | Efficiency ratio | 58.76% | 58.21% | | Tier I common risk-based capital ratio | 14.39% | 13.26% | | Tangible common equity to tangible assets ratio | 11.06% | 9.88% | Results of Operations Net income decreased 3.8% year-over-year to $97.1 million due to higher loan loss provisions and expenses Summary of Results Summary of Results (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :----------------------------------------- | :------------ | :------------ | :------------- | | Net interest income | $203,488 | $192,892 | 5.5% | | Provision for loan losses | $(12,463) | $(10,396) | 19.9% | | Non-interest income | $121,240 | $119,690 | 1.3% | | Investment securities gains (losses), net | $(925) | $5,410 | N.M. | | Non-interest expense | $(191,425) | $(182,277) | 5.0% | | Net income attributable to Commerce Bancshares, Inc. | $97,138 | $100,984 | (3.8)% | | Diluted earnings per common share | $0.85 | $0.88 | (3.4)% | Net Interest Income - Net interest income (T/E basis) increased $10.5 million YoY to $207.1 million in Q1 2019223 - Loan interest income (T/E) increased $19.6 million (13.2%) YoY, driven by a 52 basis point increase in average rates earned and 1.1% growth in average loan balances227 - Total interest expense increased $11.3 million YoY, with a $7.8 million increase in interest on interest-bearing deposits and a $3.5 million increase in interest on borrowings231 Non-Interest Income Non-Interest Income (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :-------------------------------- | :--------- | :--------- | :------------- | | Bank card transaction fees | $39,644 | $41,453 | (4.4)% | | Trust fees | $37,256 | $36,062 | 3.3% | | Loan fees and sales | $3,309 | $2,862 | 15.6% | | Other non-interest income | $12,387 | $10,272 | 20.6% | | Total Non-Interest Income | $121,240 | $119,690 | 1.3% | - Bank card transaction fees decreased $1.8 million (4.4%) YoY, primarily due to declines in corporate card fees, debit card fees, and merchant income236 - Other non-interest income increased $2.1 million YoY, mainly driven by a $1.3 million increase in cash sweep fees and $1.4 million in fair value adjustments on deferred compensation plan assets237 Investment Securities Gains (Losses), Net Investment Securities Gains (Losses), Net (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :---------------------------------------- | :-------- | :-------- | | Net gains (losses) on sales of AFS debt securities | $694 | $212 | | Fair value adjustments of private equity investments, net | $(1,842) | $4,305 | | Fair value adjustments on equity securities, net | $223 | $947 | | Total Investment Securities Gains (Losses), Net | $(925) | $5,410 | Non-Interest Expense Non-Interest Expense (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :-------------------------------- | :--------- | :--------- | :------------- | | Salaries and employee benefits | $122,128 | $115,894 | 5.4% | | Data processing and software | $22,260 | $20,690 | 7.6% | | Marketing | $5,900 | $4,805 | 22.8% | | Deposit insurance | $1,710 | $3,457 | (50.5)% | | Other non-interest expense | $17,490 | $15,374 | 13.8% | | Total Non-Interest Expense | $191,425 | $182,277 | 5.0% | - Salaries expense increased $5.0 million (5.3%) due to higher full-time salary costs, and employee benefits increased $1.2 million (5.8%) due to higher medical costs244 - Deposit insurance expense declined $1.7 million (50.5%) due to reduced FDIC insurance rates244 Provision and Allowance for Loan Losses Provision for Loan Losses and Net Loan Charge-offs (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | | :----------------------------------- | :--------- | :--------- | | Provision for loan losses | $12,463 | $10,396 | | Total net loan charge-offs | $11,713 | $10,396 | | Annualized net loan charge-offs (total) | 0.34% | 0.30% | | Annualized net loan charge-offs (Consumer credit card) | 4.65% | 4.05% | - The allowance for loan losses was $160.7 million (1.14% of total loans) at March 31, 2019, considered adequate by management254 Risk Elements of Loan Portfolio Non-performing assets and potential problem loans both decreased, indicating stable credit quality Non-Performing Assets and Delinquent Loans Non-Performing Assets (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------- | :------------ | :------------ | | Non-accrual loans | $12,167 | $12,536 | | Foreclosed real estate | $737 | $1,413 | | Total Non-Performing Assets | $12,904 | $13,949 | | Non-performing assets as % of total loans | 0.09% | 0.10% | Potential Problem Loans Potential Problem Loans (In thousands) | Loan Type | Mar. 31, 2019 | Dec. 31, 2018 | | :---------------------------------- | :------------ | :------------ | | Business | $92,993 | $98,009 | | Real estate – business | $47,502 | $44,854 | | Total Potential Problem Loans | $142,295 | $145,660 | - Troubled debt restructurings totaled $81.4 million at March 31, 2019, including $56.5 million in substandard commercial loans260 Loans with Special Risk Characteristics Real Estate – Construction and Land Loans Real Estate – Construction and Land Loans (March 31, 2019, In thousands) | Loan Type | Amount | % of Total | % of Total Loans | | :---------------------------- | :-------- | :--------- | :--------------- | | Commercial construction | $667,037 | 72.1% | 4.7% | | Residential construction | $133,505 | 14.4% | 1.0% | | Total | $925,269 | 100.0% | 6.6% | Real Estate – Business Loans - Business real estate loans comprised 20.3% of the total loan portfolio at March 31, 2019, with 36.6% for owner-occupied properties267 Revolving Home Equity Loans - Revolving home equity loans totaled $364.0 million at March 31, 2019, with a weighted average FICO score of 792269 Other Consumer Loans - Auto loans outstanding were $887.2 million at March 31, 2019, with a weighted average FICO score of 754270 - Approximately $175.2 million (23%) of consumer credit card loans carried a low promotional rate at March 31, 2019273 Energy Lending Energy Lending Portfolio (March 31, 2019, In thousands) | Sector | Amount | Unfunded Commitments | | :--------------------------- | :-------- | :------------------- | | Extraction | $111,255 | $60,316 | | Total Energy Lending Portfolio | $129,014 | $174,203 | Shared National Credits - SNC loans totaled $848.5 million at March 31, 2019, with $1.3 billion in additional unfunded commitments278 Income Taxes Income Tax Expense and Effective Tax Rate (In thousands) | Metric | Q1 2019 | Q4 2018 | Q1 2018 | | :----------------------------------- | :--------- | :--------- | :--------- | | Income tax expense | $22,860 | $26,500 | $23,258 | | Effective tax rate (including non-controlling interest) | 19.1% | 19.5% | 18.7% | Financial Condition Total assets were $25.0 billion at March 31, 2019, with earning assets of $23.8 billion Balance Sheet Overview - Total assets were $25.0 billion at March 31, 2019, and earning assets were $23.8 billion, consisting of 60% loans and 37% investment securities282 Loans and Investment Securities - Average loans totaled $14.1 billion in Q1 2019, an increase of $68.9 million QoQ and $150.6 million YoY283 - Average available for sale debt securities decreased $6.7 million QoQ to $8.6 billion284 Deposits and Borrowings - Total average deposits decreased $211.6 million QoQ, primarily from lower business demand deposits and money market accounts285 - Average borrowings increased $115.5 million QoQ to $1.8 billion285 Liquidity and Capital Resources The Company maintains strong liquidity through core deposits and liquid assets, with capital levels exceeding regulatory requirements Liquidity Management Liquid Assets (In thousands) | Metric | Mar. 31, 2019 | Dec. 31, 2018 | | :----------------------------------------- | :------------ | :------------ | | Available for sale debt securities | $8,627,890 | $8,538,041 | | Long-term securities purchased under agreements to resell | $700,000 | $700,000 | | Balances at the Federal Reserve Bank | $166,077 | $689,876 | | Total Liquid Assets | $9,494,217 | $9,931,237 | - Core customer deposits totaled $18.1 billion at March 31, 2019, representing 90.6% of total deposits290 - The Company has $3.63 billion in estimated future funding capacity available from the FHLB and Federal Reserve Bank295 Capital Management Capital Adequacy Ratios (March 31, 2019) | Metric | Company Ratio | Minimum for Well-Capitalized Banks | | :----------------------------------- | :------------ | :--------------------------------- | | Tier I common risk-based capital ratio | 14.39% | 6.50% | | Tier I risk-based capital ratio | 15.15% | 8.00% | | Total risk-based capital ratio | 16.00% | 10.00% | | Tier I leverage ratio | 11.67% | 5.00% | - The Company purchased 647,054 shares of common stock in Q1 2019, with 1,602,509 shares remaining available under Board authorization298 - The common stock cash dividend increased by 16.1% YoY to $0.26 per share in Q1 2019299 Commitments, Off-Balance Sheet Arrangements and Contingencies - Loan commitments totaled $10.9 billion at March 31, 2019, including $5.1 billion in unused approved credit card lines300 - Standby and commercial letters of credit totaled $325.6 million and $3.9 million, respectively, at March 31, 2019300 - The Company expects to fund $157.9 million in outstanding state tax credit purchase commitments during the remainder of 2019301 Segment Results The Wealth segment showed strong pre-tax income growth (16.1%), while the Commercial segment's income declined (4.9%) Consumer Segment Consumer Segment Income Before Income Taxes (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :------------------------- | :--------- | :--------- | :------------- | | Net interest income | $76,897 | $71,021 | 8.3% | | Non-interest income | $29,171 | $30,216 | (3.5)% | | Non-interest expense | $(73,508) | $(69,919) | 5.1% | | Income before income taxes | $21,511 | $20,945 | 2.7% | Commercial Segment Commercial Segment Income Before Income Taxes (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :------------------------- | :--------- | :--------- | :------------- | | Net interest income | $85,848 | $82,584 | 4.0% | | Non-interest income | $47,915 | $49,209 | (2.6)% | | Non-interest expense | $(76,838) | $(72,778) | 5.6% | | Income before income taxes | $56,307 | $59,195 | (4.9)% | Wealth Segment Wealth Segment Income Before Income Taxes (Three Months Ended March 31, In thousands) | Metric | 2019 | 2018 | % Change (YoY) | | :------------------------- | :--------- | :--------- | :------------- | | Net interest income | $11,676 | $11,445 | 2.0% | | Non-interest income | $44,332 | $42,103 | 5.3% | | Non-interest expense | $(30,892) | $(31,825) | (2.9)% | | Income before income taxes | $25,149 | $21,659 | 16.1% | Other/Elimination Category - Unallocated securities losses were $925 thousand in Q1 2019, compared to gains of $5.4 million in Q1 2018314 Impact of Recently Issued Accounting Standards - Adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing $27.5 million ROU assets and $28.1 million lease liabilities315 - The Company is implementing ASU 2016-13 (CECL) and expects preliminary model review and testing in Q2 2019317318 - ASU 2017-08 (Premium Amortization) and ASU 2017-04 (Goodwill Impairment) are not expected to have a significant effect316319 Average Balance Sheets — Average Rates and Yields Average Balance Sheets — Average Rates and Yields (Three Months Ended March 31, In thousands) | Metric | 2019 Average Balance | 2019 Avg. Rates Earned/Paid | 2018 Average Balance | 2018 Avg. Rates Earned/Paid | | :----------------------------------- | :------------------- | :-------------------------- | :------------------- | :-------------------------- | | Total interest earning assets | $23,874,861 | 3.93% | $23,693,350 | 3.59% | | Total interest bearing deposits | $13,516,645 | 0.51% | $13,336,242 | 0.28% | | Total borrowings | $1,772,782 | 1.72% | $1,562,486 | 1.04% | | Total interest bearing liabilities | $15,289,427 | 0.65% | $14,898,728 | 0.36% | | Net yield on interest earning assets | N/A | 3.52% | N/A | 3.37% | Item 3. Quantitative and Qualitative Disclosures about Market Risk Net interest income is sensitive to interest rate changes, with potential increases in rising rate scenarios and decreases in falling rate scenarios - The Company uses earnings simulation models to analyze net interest income sensitivity to interest rate movements, performing monthly simulations331 Net Interest Income Sensitivity to Interest Rate Shifts (March 31, 2019, In millions) | Scenario (Simulation A) | Net Change in Interest Income | % Change in Net Interest Income | Assumed Deposit Attrition | | :---------------------- | :---------------------------- | :------------------------------ | :------------------------ | | 200 bps rising | $5.5 | 0.66% | $(247.3) | | 100 bps rising | $3.7 | 0.44% | $(128.0) | | 100 bps falling | $(9.7) | (1.16)% | $137.5 | Net Interest Income Sensitivity to Interest Rate Shifts (Simulation B - Higher Deposit Attrition, March 31, 2019, In millions) | Scenario | Net Change in Interest Income | % Change in Net Interest Income | Assumed Deposit Attrition | | :---------------------- | :---------------------------- | :------------------------------ | :------------------------ | | 200 bps rising | $(10.7) | (1.29)% | $(725.2) | | 100 bps rising | $(10.7) | (1.28)% | $(609.8) | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal controls during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of March 31, 2019339 - No material changes in internal control over financial reporting occurred during the last fiscal quarter339 PART II OTHER INFORMATION Item 1. Legal Proceedings Information on legal proceedings is incorporated by reference from Note 17 of the consolidated financial statements - Legal proceedings information is detailed in Note 17 of the consolidated financial statements342 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company purchased 647,054 shares of its common stock in Q1 2019 at an average price of $61.35 per share Common Stock Purchases (Three Months Ended March 31, 2019) | Period | Total Shares Purchased | Average Price Paid per Share | Maximum Shares Remaining Under Program | | :-------------------- | :--------------------- | :--------------------------- | :------------------------------------- | | January 1 — 31, 2019 | 173,686 | $60.67 | 2,075,877 | | February 1 — 28, 2019 | 289,943 | $61.59 | 1,785,934 | | March 1 — 31, 2019 | 183,425 | $61.63 | 1,602,509 | | Total | 647,054 | $61.35 | 1,602,509 | Item 6. Exhibits This section lists the exhibits filed with the 10-Q report, including certifications and interactive data files - Exhibits include CEO and CFO certifications (31.1, 31.2, 32) and interactive data files (101) for financial statements346 Signatures The report was signed by the Vice President & Secretary and the Controller on May 7, 2019 - The report was signed by Thomas J. Noack (Vice President & Secretary) and Paul A. Steiner (Controller) on May 7, 2019352353354