(Exact name of registrant as specified in its charter)
Missouri
43-0889454
(State of Incorporation)
(IRS Employer Identification No.)
1000 Walnut
Kansas City,
MO
64106
(Address of principal executive offices)
(Zip Code)
(816) 234-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of class
Trading symbol(s)
Name of exchange on which registered
$5 Par Value Common Stock
CBSH
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesþ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerþ Accelerated filer o Non-accelerated filer o Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of May 2, 2023, the registrant had outstanding 124,717,779 shares of its $5 par value common stock, registrant’s only class of common stock.
Loans held for sale (including $684,000 and $— of residential mortgage loans carried at fair value at March 31, 2023 and December 31, 2022, respectively)
6,162
4,964
Investment securities:
Available for sale debt, at fair value (amortized cost of $12,538,550,000 and $13,738,206,000 at
March 31, 2023 and December 31, 2022, respectively, and allowance for credit losses of $—
at both March 31, 2023 and December 31, 2022)
11,228,616
12,238,316
Trading debt
41,584
43,523
Equity
12,528
12,304
Other
268,417
225,034
Total investment securities
11,551,145
12,519,177
Federal funds sold
27,060
49,505
Securities purchased under agreements to resell
825,000
825,000
Interest earning deposits with banks
1,341,854
389,140
Cash and due from banks
351,210
452,496
Premises and equipment – net
428,169
418,909
Goodwill
138,921
138,921
Other intangible assets – net
14,918
15,234
Other assets
944,212
909,590
Total assets
$
32,004,856
$
31,875,931
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing
$
8,685,234
$
10,066,356
Savings, interest checking and money market
14,419,741
15,126,981
Certificates of deposit of less than $100,000
468,667
387,336
Certificates of deposit of $100,000 and over
1,109,818
606,767
Total deposits
24,683,460
26,187,440
Federal funds purchased and securities sold under agreements to repurchase
2,784,559
2,841,734
Other borrowings
1,507,776
9,672
Other liabilities
346,649
355,508
Total liabilities
29,322,444
29,394,354
Commerce Bancshares, Inc. stockholders’ equity:
Common stock, $5 par value
Authorized 140,000,000; issued 125,863,879 shares at March 31, 2023 and December 31, 2022
629,319
629,319
Capital surplus
2,919,060
2,932,959
Retained earnings
117,313
31,620
Treasury stock of 883,736 shares at March 31, 2023
and 605,142 shares at December 31, 2022, at cost
(59,670)
(41,743)
Accumulated other comprehensive income (loss)
(940,498)
(1,086,864)
Total Commerce Bancshares, Inc. stockholders' equity
2,665,524
2,465,291
Non-controlling interest
16,888
16,286
Total equity
2,682,412
2,481,577
Total liabilities and equity
$
32,004,856
$
31,875,931
See accompanying notes to consolidated financial statements.
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
11,456
(9,858)
Provision for depreciation and amortization
11,565
11,811
Amortization of investment security premiums, net
7,654
4,932
Investment securities (gains) losses, net (A)
306
(7,163)
Net (gains) losses on sales of loans held for sale
(137)
(1,302)
Originations of loans held for sale
(9,931)
(57,580)
Proceeds from sales of loans held for sale
8,850
57,789
Net (increase) decrease in trading debt securities, excluding unsettled transactions
11,548
9,798
Purchase of interest rate floor
(25,900)
—
Stock-based compensation
4,373
4,218
(Increase) decrease in interest receivable
(1,005)
(7,972)
Increase (decrease) in interest payable
10,025
273
Increase (decrease) in income taxes payable
26,970
28,657
Other changes, net
(60,270)
(29,115)
Net cash provided by operating activities
116,057
124,514
INVESTING ACTIVITIES:
Distributions received from equity-method investment
1,434
400
Proceeds from sales of investment securities (A)
840,435
1,745
Proceeds from maturities/pay downs of investment securities (A)
474,220
805,355
Purchases of investment securities (A)
(168,584)
(1,812,434)
Net (increase) decrease in loans
(239,230)
(287,328)
Securities purchased under agreements to resell
—
(200,000)
Purchases of premises and equipment
(20,044)
(15,597)
Sales of premises and equipment
6
175
Net cash provided by (used in) investing activities
888,237
(1,507,684)
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits
(2,137,278)
(208,358)
Net increase (decrease) in certificates of deposit
584,382
(303,277)
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase
(57,175)
(705,506)
Net increase (decrease) in other borrowings
1,498,104
(3,503)
Purchases of treasury stock
(36,245)
(55,855)
Issuance of stock under equity compensation plans
—
448
Cash dividends paid on common stock
(33,759)
(32,143)
Net cash used in financing activities
(181,971)
(1,308,194)
Increase (decrease) in cash, cash equivalents and restricted cash
822,323
(2,691,364)
Cash, cash equivalents and restricted cash at beginning of year
897,801
4,296,954
Cash, cash equivalents and restricted cash at March 31
$
1,720,124
$
1,605,590
Income tax payments, net
$
3,857
$
1,640
Interest paid on deposits and borrowings
$
47,209
$
2,723
Loans transferred to foreclosed real estate
$
72
$
25
(A) Available for sale debt securities, equity securities, and other securities.
See accompanying notes to consolidated financial statements.
Restricted cash is comprised of cash collateral posted by the Company to secure interest rate swap agreements. This balance is included in other assets in the consolidated balance sheets and totaled $18.2 million at March 31, 2022. The Company had no restricted cash at March 31, 2023.
The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2022 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and revenues and expenses for the periods. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of results to be attained for the full year or any other interim period.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company's most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto.
The Company adopted ASU 2022-02 Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023, using the prospective transition method. This ASU eliminates the troubled debt restructuring recognition and measurement guidance and requires an entity to present gross write-offs by year of origination. The amendments also enhance disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. With the exception of enhanced disclosures, there was no material impact to the consolidated financial statements from adoption of this ASU. As of the Company's adoption date, all restructurings are evaluated to determine whether they are modifications to a borrower experiencing financial difficulty. Loans that were accounted for under the troubled debt restructuring method as of December 31, 2022 will continue to be accounted for under that method until they are paid off or modified.
The following significant accounting policies have been updated since the Company's 2022 Annual Report on Form 10-K to reflect the adoption of ASU 2022-02.
Troubled Debt Restructurings
Prior to the Company's adoption of ASU 2022-02, a loan was accounted for as a troubled debt restructuring if the Company, for economic or legal reasons related to the borrower's financial difficulties, granted a concession to the borrower that it would not otherwise consider. A troubled debt restructuring typically involves (1) modification of terms such as a reduction of the stated interest rate, loan principal, or accrued interest, (2) a loan renewal at a stated interest rate lower than the current market rate for a new loan with similar risk, or (3) debt that was not reaffirmed in bankruptcy. Business, business real estate, construction and land real estate and personal real estate troubled debt restructurings with impairment charges are placed on non-accrual status. The Company measures the impairment loss of a troubled debt restructuring at the time of modification based on the present value of expected future cash flows. Subsequent to modification, troubled debt restructurings are subject to the Company’s allowance for credit loss model, which is discussed below and in Note 2, Loans and Allowance for Credit Losses. Troubled debt restructurings that are performing under their contractual terms continue to accrue interest, which is recognized in current earnings. Loans that were accounted as troubled debt restructurings at of December 31, 2022 will continue to be accounted for under that method until they are either paid off or modified.
Modifications for Borrowers Experiencing Financial Difficulty
The Company may renegotiate the terms of existing loans for a variety of reasons. When refinancing or restructuring a loan, the Company evaluates where the borrower is experiencing financial difficulty. In making this determination, the Company considers whether the borrower is currently in default on any of its debt. In addition, the Company evaluates whether it is probable that the borrower would be in payment default on any of its debt in the foreseeable future without the modification and if the borrower (without the current modification) could obtain equivalent financing from another creditor at a market rate for
similar debt. Modifications of loans to borrowers in these situations may indicate that the borrower is facing financial difficulty.
Modifications of loans to borrowers experiencing financial difficulty that are in the form of principal forgiveness, interest rate reductions, other-than-insignificant payment delays, or a term extension (or a combination thereof) require disclosure. The Company's disclosures are included in Note 2, Loans and Allowance for Credit Losses.
2. Loans and Allowance for Credit Losses
Major classifications within the Company’s held for investment loan portfolio at March 31, 2023 and December 31, 2022 are as follows:
(In thousands)
March 31, 2023
December 31, 2022
Commercial:
Business
$
5,704,467
$
5,661,725
Real estate – construction and land
1,437,419
1,361,095
Real estate – business
3,486,543
3,406,981
Personal Banking:
Real estate – personal
2,952,042
2,918,078
Consumer
2,094,389
2,059,088
Revolving home equity
295,478
297,207
Consumer credit card
558,669
584,000
Overdrafts
6,515
14,957
Total loans
$
16,535,522
$
16,303,131
Accrued interest receivable totaled $61.9 million and $55.5 million at March 31, 2023 and December 31, 2022, respectively, and was included within other assets on the consolidated balance sheets. For the three months ended March 31, 2023, the Company wrote-off accrued interest by reversing interest income of $34 thousand and $1.1 million in the Commercial and Personal Banking portfolios, respectively. Similarly, for the three months ended March 31, 2022, the Company wrote-off accrued interest of $29 thousand and $899 thousand in the Commercial and Personal Banking portfolios, respectively.
At March 31, 2023, loans of $3.3 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.
Allowance for credit losses
The allowance for credit losses is measured using an average historical loss model which incorporates relevant information about past events (including historical credit loss experience on loans with similar risk characteristics), current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily large loans on non-accrual status, are evaluated on an individual basis.
For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using the Company’s historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and outstanding loan balances during a lookback period. Lookback periods can be different based on the individual pool and represent management’s credit expectations for the pool of loans over the remaining contractual life. In certain loan pools, if the Company’s own historical loss rate is not reflective of the loss expectations, the historical loss rate is augmented by industry and peer data. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given a single path economic forecast of key macroeconomic variables including GDP, disposable income, various interest rates, unemployment rate, consumer price index (CPI) inflation rate, housing price index (HPI), commercial real estate price index (CREPI) and market volatility. The adjustments are based on results from various regression models projecting the impact of the macroeconomic variables to loss rates. The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method. The forecast adjusted loss rate is applied to the amortized cost of loans over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions (except for contractual extensions at the option of the customer), renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring will be executed. Credit cards and certain similar consumer lines of credit do not have stated
maturities and therefore, for these loan classes, remaining contractual lives are determined by estimating future cash flows expected to be received from customers until payments have been fully allocated to outstanding balances. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.
Key assumptions in the Company’s allowance for credit loss model include the economic forecast, the reasonable and supportable period, forecasted macro-economic variables, prepayment assumptions and qualitative factors applied for portfolio composition changes, underwriting practices, or significant unique events or conditions. The assumptions utilized in estimating the Company’s allowance for credit losses at March 31, 2023 and December 31, 2022 are discussed below.
Key Assumption
March 31, 2023
December 31, 2022
Overall economic forecast
•Mild recession to start 3rd quarter of 2023
•Assume the Federal Reserve will continue raising interest rates
•Mild recession is expected to weaken employment
•Continued high inflation and higher cost of borrowing create a mild recession in 2023 with stalled job growth and possible job losses
•Assumes interest rates hikes will taper
Reasonable and supportable period and related reversion period
•Reasonable and supportable period of one year
•Reversion to historical average loss within 2 quarters using straight-line method
•Reasonable and supportable period of one year
•Reversion to historical average loss within 2 quarters using straight-line method
Forecasted macro-economic variables
•Unemployment rate ranges from 3.7% to 5.3% during the supportable forecast period
•Real GDP growth ranges from (.5)% to 2.0%
•BBB corporate yield from 5.3% to 5.8%
•House Price Index from 280.2 to 282.0
•Unemployment rate ranges from 3.8% to 4.7% during the supportable forecast period
•Real GDP growth ranging from (.9)% to 1.3%
•BBB corporate yield from 5.1% to 5.8%
•House Price Index from 280.9 to 284.6
Prepayment assumptions
Commercial loans
•5% for most loan pools
Personal banking loans
•Ranging from 6.45% to 22.4% for most loan pools
•Consumer credit cards 67.5%
Commercial loans
•5% for most loan pools
Personal banking loans
•Ranging from 8.3% to 24.8% for most loan pools
•Consumer credit cards 67.9%
Qualitative factors
Added qualitative factors related to:
•Changes in the composition of the loan portfolios
•Certain portfolios sensitive to pandemic economic uncertainties
•Certain portfolios sensitive to unusually high rate of inflation and supply chain issues
•Loans downgraded to special mention, substandard, or non-accrual status
Added qualitative factors related to:
•Changes in the composition of the loan portfolios
•Certain portfolios sensitive to pandemic economic uncertainties
•Certain portfolios sensitive to unusually high rate of inflation and supply chain issues
•Loans downgraded to special mention, substandard, or non-accrual status
The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans, however, the liability for unfunded lending commitments incorporates an assumption for the portion of unfunded commitments that are expected to be funded.
Sensitivity in the Allowance for Credit Loss model
The allowance for credit losses is an estimate that requires significant judgment including projections of the macro-economic environment. The forecasted macro-economic environment continuously changes which can cause fluctuations in estimated expected credit losses.
The current forecast projects a mild recession to start in the third quarter of 2023 as the economy continues to face high inflation, higher interest rates and a weaker job market. The impacts of the market's response to unusual events or trends including high inflation, supply chain stresses, trends in health conditions and changes in the geopolitical environment could significantly modify economic projections used in the estimation of the ACL.
A summary of the activity in the allowance for credit losses on loans and the liability for unfunded lending commitments during the three months ended March 31, 2023 and 2022, respectively, follows:
For the Three Months Ended March 31, 2023
(In thousands)
Commercial
Personal Banking
Total
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period
$
103,293
$
46,843
$
150,136
Provision for credit losses on loans
5,548
10,400
15,948
Deductions:
Loans charged off
292
8,756
9,048
Less recoveries on loans
66
2,215
2,281
Net loan charge-offs (recoveries)
226
6,541
6,767
Balance March 31, 2023
$
108,615
$
50,702
$
159,317
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at beginning of period
$
31,743
$
1,377
$
33,120
Provision for credit losses on unfunded lending commitments
(4,638)
146
(4,492)
Balance March 31, 2023
$
27,105
$
1,523
$
28,628
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS
$
135,720
$
52,225
$
187,945
For the Three Months Ended March 31, 2022
(In thousands)
Commercial
Personal Banking
Total
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period
$
97,776
$
52,268
$
150,044
Provision for credit losses on loans
(2,879)
(7,807)
(10,686)
Deductions:
Loans charged off
177
7,285
7,462
Less recoveries on loans
107
2,707
2,814
Net loan charge-offs (recoveries)
70
4,578
4,648
Balance March 31, 2022
$
94,827
$
39,883
$
134,710
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at beginning of period
$
23,271
$
933
$
24,204
Provision for credit losses on unfunded lending commitments
509
319
828
Balance March 31, 2022
$
23,780
$
1,252
$
25,032
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS
The Company considers loans past due on the day following the contractual repayment date, if the contractual repayment was not received by the Company as of the end of the business day. The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at March 31, 2023 and December 31, 2022.
(In thousands)
Current or Less Than 30 Days Past Due
30 – 89
Days Past Due
90 Days Past Due and Still Accruing
Non-accrual
Total
March 31, 2023
Commercial:
Business
$
5,692,966
$
4,644
$
496
$
6,361
$
5,704,467
Real estate – construction and land
1,432,344
4,646
429
—
1,437,419
Real estate – business
3,483,425
2,947
—
171
3,486,543
Personal Banking:
Real estate – personal
2,937,474
8,375
4,924
1,269
2,952,042
Consumer
2,067,340
25,134
1,915
—
2,094,389
Revolving home equity
293,783
846
849
—
295,478
Consumer credit card
547,228
5,254
6,187
—
558,669
Overdrafts
6,189
326
—
—
6,515
Total
$
16,460,749
$
52,172
$
14,800
$
7,801
$
16,535,522
December 31, 2022
Commercial:
Business
$
5,652,710
$
1,759
$
505
$
6,751
$
5,661,725
Real estate – construction and land
1,361,095
—
—
—
1,361,095
Real estate – business
3,406,207
585
—
189
3,406,981
Personal Banking:
Real estate – personal
2,895,742
14,289
6,681
1,366
2,918,078
Consumer
2,031,827
25,089
2,172
—
2,059,088
Revolving home equity
295,303
1,201
703
—
297,207
Consumer credit card
572,213
6,238
5,549
—
584,000
Overdrafts
14,090
647
220
—
14,957
Total
$
16,229,187
$
49,808
$
15,830
$
8,306
$
16,303,131
At March 31, 2023, the Company had $3.5 million in non-accrual business loans that had no allowance for credit loss, compared to $3.8 million in non-accrual business loans that had no allowance for credit loss at December 31, 2022. The Company did not record any interest income on non-accrual loans during the three months ended March 31, 2023 and 2022, respectively.
Credit quality indicators
The following table provides information about the credit quality of the Commercial loan portfolio. The Company utilizes an internal risk rating system comprised of a series of grades to categorize loans according to perceived risk associated with the expectation of debt repayment based on borrower specific information including, but not limited to, current financial information, historical payment experience, industry information, collateral levels and collateral types. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. A loan is assigned the risk rating at origination and then monitored throughout the contractual term for possible risk rating changes. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.
All loans are analyzed for risk rating updates annually. For larger loans, rating assessments may be more frequent if relevant information is obtained earlier through debt covenant monitoring or overall relationship management. Smaller loans
are monitored as identified by the loan officer based on the risk profile of the individual borrower or if the loan becomes past due related to credit issues. Loans rated Special Mention, Substandard or Non-accrual are subject to quarterly review and monitoring processes. In addition to the regular monitoring performed by the lending personnel and credit committees, loans are subject to review by a credit review department which verifies the appropriateness of the risk ratings for the loans chosen as part of its risk-based review plan.
The risk category of loans in the Commercial portfolio as of March 31, 2023 and December 31, 2022 are as follows:
Term Loans Amortized Cost Basis by Origination Year
(In thousands)
2023
2022
2021
2020
2019
Prior
Revolving Loans Amortized Cost Basis
Total
March 31, 2023
Business
Risk Rating:
Pass
$
526,988
$
1,268,330
$
716,669
$
374,953
$
334,438
$
369,983
$
2,008,711
$
5,600,072
Special mention
14,056
1,606
4,460
7,330
513
1,643
676
30,284
Substandard
1,127
6,188
10,059
17,261
503
10,732
21,880
67,750
Non-accrual
—
158
1,818
33
1
4,280
71
6,361
Total Business:
$
542,171
$
1,276,282
$
733,006
$
399,577
$
335,455
$
386,638
$
2,031,338
$
5,704,467
Gross write-offs for the three months ended March 31, 2023
$
—
$
—
$
—
$
—
$
—
$
—
$
292
$
292
Real estate-construction
Risk Rating:
Pass
$
156,801
$
552,570
$
549,106
$
83,653
$
27,431
$
3,235
$
27,547
$
1,400,343
Special mention
7,115
207
—
—
—
—
—
7,322
Substandard
—
2,016
—
—
—
27,738
—
29,754
Total Real estate-construction:
$
163,916
$
554,793
$
549,106
$
83,653
$
27,431
$
30,973
$
27,547
$
1,437,419
Gross write-offs for the three months ended March 31, 2023
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Real estate-business
Risk Rating:
Pass
$
229,043
$
1,136,589
$
573,233
$
495,078
$
388,892
$
401,324
$
109,489
$
3,333,648
Special mention
—
4,555
—
605
9,616
1,235
—
16,011
Substandard
—
2,811
30,886
16,416
11,924
74,676
—
136,713
Non-accrual
—
14
45
—
—
112
—
171
Total Real estate-business:
$
229,043
$
1,143,969
$
604,164
$
512,099
$
410,432
$
477,347
$
109,489
$
3,486,543
Gross write-offs for the three months ended March 31, 2023
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Commercial loans
Risk Rating:
Pass
$
912,832
$
2,957,489
$
1,839,008
$
953,684
$
750,761
$
774,542
$
2,145,747
$
10,334,063
Special mention
21,171
6,368
4,460
7,935
10,129
2,878
676
53,617
Substandard
1,127
11,015
40,945
33,677
12,427
113,146
21,880
234,217
Non-accrual
—
172
1,863
33
1
4,392
71
6,532
Total Commercial loans:
$
935,130
$
2,975,044
$
1,886,276
$
995,329
$
773,318
$
894,958
$
2,168,374
$
10,628,429
Gross write-offs for the three months ended March 31, 2023
The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided as of March 31, 2023 and December 31, 2022 below.
Term Loans Amortized Cost Basis by Origination Year
(In thousands)
2023
2022
2021
2020
2019
Prior
Revolving Loans Amortized Cost Basis
Total
March 31, 2023
Real estate-personal
Current to 90 days past due
$
113,590
$
512,841
$
578,969
$
769,804
$
284,835
$
675,601
$
10,209
$
2,945,849
Over 90 days past due
—
394
946
1,372
—
2,212
—
4,924
Non-accrual
—
—
—
—
167
1,102
—
1,269
Total Real estate-personal:
$
113,590
$
513,235
$
579,915
$
771,176
$
285,002
$
678,915
$
10,209
$
2,952,042
Gross write-offs for the three months ended March 31, 2023
$
—
$
—
$
—
$
—
$
—
$
18
$
—
$
18
Consumer
Current to 90 days past due
$
158,392
$
430,621
$
345,779
$
183,261
$
91,521
$
82,898
$
800,002
$
2,092,474
Over 90 days past due
—
343
310
115
62
443
642
1,915
Total Consumer:
$
158,392
$
430,964
$
346,089
$
183,376
$
91,583
$
83,341
$
800,644
$
2,094,389
Gross write-offs for the three months ended March 31, 2023
$
—
$
519
$
505
$
279
$
127
$
159
$
270
$
1,859
Revolving home equity
Current to 90 days past due
$
—
$
—
$
—
$
—
$
—
$
—
$
294,629
$
294,629
Over 90 days past due
—
—
—
—
—
—
849
849
Total Revolving home equity:
$
—
$
—
$
—
$
—
$
—
$
—
$
295,478
$
295,478
Gross write-offs for the three months ended March 31, 2023
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Consumer credit card
Current to 90 days past due
$
—
$
—
$
—
$
—
$
—
$
—
$
552,482
$
552,482
Over 90 days past due
—
—
—
—
—
—
6,187
6,187
Total Consumer credit card:
$
—
$
—
$
—
$
—
$
—
$
—
$
558,669
$
558,669
Gross write-offs for the three months ended March 31, 2023
$
—
$
—
$
—
$
—
$
—
$
—
$
5,684
$
5,684
Overdrafts
Current to 90 days past due
$
6,515
$
—
$
—
$
—
$
—
$
—
$
—
$
6,515
Over 90 days past due
—
—
—
—
—
—
—
—
Total Overdrafts:
$
6,515
$
—
$
—
$
—
$
—
$
—
$
—
$
6,515
Gross write-offs for the three months ended March 31, 2023
$
1,195
$
—
$
—
$
—
$
—
$
—
$
—
$
1,195
Personal banking loans
Current to 90 days past due
$
278,497
$
943,462
$
924,748
$
953,065
$
376,356
$
758,499
$
1,657,322
$
5,891,949
Over 90 days past due
—
737
1,256
1,487
62
2,655
7,678
13,875
Non-accrual
—
—
—
—
167
1,102
—
1,269
Total Personal banking loans:
$
278,497
$
944,199
$
926,004
$
954,552
$
376,585
$
762,256
$
1,665,000
$
5,907,093
Gross write-offs for the three months ended March 31, 2023
Term Loans Amortized Cost Basis by Origination Year
(In thousands)
2022
2021
2020
2019
2018
Prior
Revolving Loans Amortized Cost Basis
Total
December 31, 2022
Real estate-personal
Current to 90 days past due
$
535,283
$
589,658
$
783,651
$
290,580
$
132,305
$
568,380
$
10,174
$
2,910,031
Over 90 days past due
514
967
1,338
81
1,388
2,393
—
6,681
Non-accrual
—
—
52
169
102
1,043
—
1,366
Total Real estate-personal:
$
535,797
$
590,625
$
785,041
$
290,830
$
133,795
$
571,816
$
10,174
$
2,918,078
Consumer
Current to 90 days past due
$
536,429
$
378,118
$
205,849
$
106,733
$
36,096
$
62,255
$
731,436
$
2,056,916
Over 90 days past due
326
251
203
58
267
228
839
2,172
Total Consumer:
$
536,755
$
378,369
$
206,052
$
106,791
$
36,363
$
62,483
$
732,275
$
2,059,088
Revolving home equity
Current to 90 days past due
$
—
$
—
$
—
$
—
$
—
$
—
$
296,504
$
296,504
Over 90 days past due
—
—
—
—
—
—
703
703
Total Revolving home equity:
$
—
$
—
$
—
$
—
$
—
$
—
$
297,207
$
297,207
Consumer credit card
Current to 90 days past due
$
—
$
—
$
—
$
—
$
—
$
—
$
578,451
$
578,451
Over 90 days past due
—
—
—
—
—
—
5,549
5,549
Total Consumer credit card:
$
—
$
—
$
—
$
—
$
—
$
—
$
584,000
$
584,000
Overdrafts
Current to 90 days past due
$
14,737
$
—
$
—
$
—
$
—
$
—
$
—
$
14,737
Over 90 days past due
220
—
—
—
—
—
—
220
Total Overdrafts:
$
14,957
$
—
$
—
$
—
$
—
$
—
$
—
$
14,957
Personal banking loans
Current to 90 days past due
$
1,086,449
$
967,776
$
989,500
$
397,313
$
168,401
$
630,635
$
1,616,565
$
5,856,639
Over 90 days past due
1,060
1,218
1,541
139
1,655
2,621
7,091
15,325
Non-accrual
—
—
52
169
102
1,043
—
1,366
Total Personal banking loans:
$
1,087,509
$
968,994
$
991,093
$
397,621
$
170,158
$
634,299
$
1,623,656
$
5,873,330
Collateral-dependent loans
The Company's collateral-dependent loans are comprised of large loans on non-accrual status. The Company requires that collateral-dependent loans are either over-collateralized or carry collateral equal to the amortized cost of the loan. The following table presents the amortized cost basis of collateral-dependent loans as of March 31, 2023 and December 31, 2022.
(In thousands)
Business Assets
Oil & Gas Assets
Total
March 31, 2023
Commercial:
Business
$
2,611
$
1,671
$
4,282
Total
$
2,611
$
1,671
$
4,282
December 31, 2022
Commercial:
Business
$
2,778
$
1,824
$
4,602
Total
$
2,778
$
1,824
$
4,602
Other Personal Banking loan information
As noted above, the credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above section on "Credit quality indicators." In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history and is considered supplementary information utilized by the Company, as management does not consider this information in evaluating the allowance for credit losses on loans. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain personal real estate
loans for which FICO scores are not obtained because the loans generally pertain to commercial customer activities and are often underwritten with other collateral considerations. These loans totaled $178.1 million at March 31, 2023 and $179.2 million at December 31, 2022. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $195.5 million at March 31, 2023 and $197.5 million at December 31, 2022. As the healthcare loans are guaranteed by the hospital, customer FICO scores are not obtained for these loans. The personal real estate loans and consumer loans excluded below totaled less than 7% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at March 31, 2023 and December 31, 2022 by FICO score.
Personal Banking Loans
% of Loan Category
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
March 31, 2023
FICO score:
Under 600
1.8
%
2.6
%
1.8
%
4.2
%
600 - 659
2.5
4.0
3.3
11.9
660 - 719
9.2
13.6
9.8
30.9
720 - 779
21.8
29.2
21.7
27.5
780 and over
64.7
50.6
63.4
25.5
Total
100.0
%
100.0
%
100.0
%
100.0
%
December 31, 2022
FICO score:
Under 600
1.4
%
2.2
%
1.5
%
3.4
%
600 - 659
2.2
4.2
2.8
11.4
660 - 719
8.1
14.5
9.7
30.8
720 - 779
23.7
26.7
21.4
27.1
780 and over
64.6
52.4
64.6
27.3
Total
100.0
%
100.0
%
100.0
%
100.0
%
Modifications for borrowers experiencing financial difficulty
When borrowers are experiencing financial difficulty, the Company may agree to modify the contractual terms of a loan to a borrower in order to assist the borrower in repaying principal and interest owed to the Company.
The Company's modifications of loans to borrowers experiencing financial difficulty are generally in the form of term extensions, repayment plans, payment deferrals, forbearance agreements, interest rate reductions, forgiveness of interest and/or fees, or any combination thereof. Commercial loans modified to borrowers experiencing financial difficulty are primarily loans that are substandard or non-accrual, where the maturity date was extended. Modifications on personal real estate loans are primarily those placed on forbearance plans, repayment plans, or deferral plans where monthly payments are suspended for a period of time or past due amounts are paid off over a certain period of time in the future or set up as a balloon payment at maturity. Modifications to certain credit card and other small consumer loans are often modified under debt counseling programs that can reduce the contractual rate or, in certain instances, forgive certain fees and interest charges. Other consumer loans modified to borrowers experiencing financial difficulty consist of various other workout arrangements with consumer customers.
The following table presents the amortized cost at March 31, 2023 of loans that were modified during the three months ended March 31, 2023.
Three Months Ended March 31, 2023
(Dollars in thousands)
Term Extension
Payment Delay
Interest Rate Reduction
Interest/Fees Forgiven
Other
Total
% of Total Loan Category
March 31, 2023
Commercial:
Business
$
3,104
$
—
$
—
$
—
$
—
$
3,104
0.1
%
Real estate – business
23,039
—
—
—
—
23,039
0.7
Personal Banking:
Real estate – personal
—
1,666
—
—
—
1,666
0.1
Consumer
—
58
16
—
55
129
—
Consumer credit card
—
—
618
275
—
893
0.2
Total
$
26,143
$
1,724
$
634
$
275
$
55
$
28,831
0.2
%
The estimate of lifetime expected losses utilized in the allowance for credit losses model is developed using average historical experience on loans with similar risk characteristics, which includes losses from modifications of loans to borrowers experiencing financial difficulty. As a result, a change to the allowance for credit losses is generally not recorded upon modification. For modifications to loans made to borrowers experiencing financial difficulty that are placed on non-accrual status, the Company determines the allowance for credit losses on an individual evaluation, using the same process that it utilizes for other loans on non-accrual status. Modifications made to commercial loans which are not on non-accrual status for borrowers experiencing financial difficulty are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience, and current economic factors. Modifications made to borrowers experiencing financial difficulty for personal banking loans which are not on non-accrual status are collectively evaluated based on loan type, delinquency, historical experience, and current economic factors.
If a loan to a borrower experiencing financial difficulty is modified and subsequently deemed uncollectible, the allowance for credit losses continues to be based on individual evaluation, if that loan is already on non-accrual status. For those loans, the allowance for credit losses is estimated using discounted expected cash flows or the fair value of collateral. If an accruing loan made to a borrower experiencing financial difficulty is modified and subsequently deemed uncollectible, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for credit losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begin.
The following table summarizes the financial impact of loan modifications and payment deferrals during the three months ended March 31, 2023. The qualitative impact of forbearance and repayment plans is the deferral of payments for 3 months up to 30 years, and therefore, those modifications are excluded from the table below.
Term Extension
Three Months Ended March 31, 2023
Commercial:
Business
Added a weighted-average of 12 months to the life of loans.
Real estate – business
Added a weighted-average of 17 months to the life of loans.
Payment Delay
Three Months Ended March 31, 2023
Personal Banking:
Real estate – personal
Deferred past due monthly payments to maturity as a balloon payment. Deferral delayed payments a weighted average of 27 years.
Consumer
Deferred past due monthly payments to maturity as a balloon payment. Deferral delayed payments a weighted average of 11 years.
Reduced weighted-average contractual interest by 14%.
Consumer credit card
Reduced weighted-average contractual interest by 14%.
Forgiveness of Interest/Fees
Three Months Ended March 31, 2023
Personal Banking:
Consumer credit card
Approximately $14 thousand of interest and fees forgiven.
The Company had commitments of $532 thousand at March 31, 2023 to lend additional funds to borrowers with restructured loans.
The following table provides the amortized cost basis of loans to borrowers experiencing financial difficulty that had a payment default during the three months ended March 31, 2023 and were modifiedon or after January 1, 2023 (the date we adopted ASU 2022-02) through March 31, 2023. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal. In addition to the loans below, the Company charged off $25 thousand of consumer credit card loans during the three months ended March 31, 2023 that were modified during the period.
(Dollars in thousands)
Interest Rate Reduction
Interest/Fees Forgiven
Total
March 31, 2023
Personal Banking:
Consumer
$
8
$
—
$
8
Consumer credit card
63
12
75
Total
$
71
$
12
$
83
The following table presents the amortized cost basis at March 31, 2023 of loans that have been modified on or after January 1, 2023 (the date we adopted ASU 2022-02) through March 31, 2023.
(In thousands)
Current
30-89 Days Past Due
90 Days Past Due
Total
March 31, 2023
Commercial:
Business
$
3,104
$
—
$
—
$
3,104
Real estate – business
23,039
—
—
23,039
Personal Banking:
Real estate – personal
1,061
605
—
1,666
Consumer
75
46
8
129
Consumer credit card
645
173
75
893
Total
$
27,924
$
824
$
83
$
28,831
Troubled debt restructuring disclosures prior to the Company's adoption of ASU 2022-02
Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected. Commercial performing restructured loans are primarily comprised of certain
business, construction and business real estate loans classified as substandard but renewed at rates judged to be non-market. These loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card and other small consumer loans under various debt management and assistance programs. Modifications to these loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. Certain personal real estate, revolving home equity, and consumer loans were classified as consumer bankruptcy troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments. Other consumer loans classified as troubled debt restructurings consist of various other workout arrangements with consumer customers.
(In thousands)
December 31, 2022
Accruing restructured loans:
Commercial
$
184,388
Assistance programs
5,156
Other consumer
4,049
Non-accrual loans
5,078
Total troubled debt restructurings
$
198,671
Section 4013 of the CARES Act was signed into law on March 27, 2020, and included a provision that short-term modifications are not troubled debt restructurings, if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to December 31, 2019. The Company elected such option under the CARES Act when determining if a customer’s modification is subject to troubled debt restructuring classification. The initial guidance issued under the CARES Act was due to expire on December 31, 2020. During January 2021, the Consolidated Appropriations Act, 2021 was enacted and extended through the end of 2021 the relief offered under the CARES Act related to the accounting and disclosure requirements for troubled debt restructurings as a result of COVID-19. The Company elected to extend its application of this guidance through December 31, 2021. During the period covered by the CARES Act, if it was deemed that the loan modification was not short-term, not COVID-19 related or the customer does not meet the criteria under the guidance to be scoped out of troubled debt restructuring classification, the Company evaluated the loan modifications under its existing framework and accounted for the modification as a troubled debt restructuring.
The table below shows the balance of troubled debt restructurings by loan classification at December 31, 2022, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.
(In thousands)
December 31, 2022
Balance at December 31, 2022 that was 90 days past due at any time during previous 12 months
Commercial:
Business
$
12,311
$
—
Real estate - construction and land
57,547
—
Real estate - business
118,654
—
Personal Banking:
Real estate - personal
2,809
419
Consumer
2,250
268
Revolving home equity
17
—
Consumer credit card
5,083
452
Total troubled debt restructurings
$
198,671
$
1,139
For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. However, the effects of modifications to loans under various debt management and assistance programs at December 31, 2022 were estimated to decrease interest income by approximately $661 thousand on an annual, pre-tax basis, compared to amounts contractually owed. Other modifications to consumer loans mainly involve extensions and other small modifications that did not include the forgiveness of principal or interest.
The allowance for credit losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms. Performing commercial loans having no other concessions granted other than being renewed at non-market interest rates are judged to have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.
If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for credit losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing troubled debt restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for credit losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begin.
The Company had commitments of $12.6 million at December 31, 2022 to lend additional funds to borrowers with restructured loans.
Loans held for sale
The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 11. The loans are primarily sold to Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA). At March 31, 2023, the fair value of these loans was $684 thousand, and the unpaid principal balance was $666 thousand.
The Company also designates certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which at March 31, 2023 totaled $5.3 million.
At March 31, 2023, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing interest.
Foreclosed real estate/repossessed assets
The Company’s holdings of foreclosed real estate totaled $167 thousand and $96 thousand at March 31, 2023 and December 31, 2022, respectively, and included in those amounts were $167 thousand and $96 thousand at March 31, 2023 and December 31, 2022, respectively, of foreclosed residential real estate properties held as a result of obtaining physical possession. Personal property acquired in repossession, generally autos, totaled $1.4 million and $1.6 million at March 31, 2023 and December 31, 2022, respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.
Investment securities consisted of the following at March 31, 2023 and December 31, 2022.
(In thousands)
March 31, 2023
December 31, 2022
Available for sale debt securities
$
11,228,616
$
12,238,316
Trading debt securities
41,584
43,523
Equity securities:
Readily determinable fair value
6,083
6,210
No readily determinable fair value
6,445
6,094
Other:
Federal Reserve Bank stock
34,887
34,795
Federal Home Loan Bank stock
70,112
10,678
Equity method investments
—
1,434
Private equity investments
163,418
178,127
Total investment securities (1)
$
11,551,145
$
12,519,177
(1)Accrued interest receivable totaled $32.7 million and $38.8 million at March 31, 2023 and December 31, 2022, respectively,and was included within other assets on the consolidated balance sheets.
The Company has elected to measure equity securities with no readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. This portfolio includes the Company's holdings of Visa Class B shares, which have a carrying value of zero, as there have not been observable price changes in orderly transactions for identical or similar investments of the same issuer. During the three months ended March 31, 2023, the Company did not record any impairment or other adjustments to the carrying amount of its portfolio of equity securities with no readily determinable fair value.
Other investment securities include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, equity method investments, and investments in portfolio concerns held by the Company's private equity subsidiary. FRB stock and FHLB stock are held for debt and regulatory purposes. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the asset size of the borrowing bank and the level of borrowings from the FHLB. These holdings are carried at cost. Additionally, the Company's equity method investments are carried at cost, adjusted to reflect the Company's portion of income, loss, or dividends of the investee. These adjustments are included in non-interest income on the Company's consolidated statements of income. The Company's private equity investments are carried at estimated fair value.
The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in accumulated other comprehensive income (AOCI). A summary of the available for sale debt securities by maturity groupings as of March 31, 2023 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as FHLMC, FNMA, and Government National Mortgage Association (GNMA), in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.
Total U.S. government and federal agency obligations
1,048,755
1,020,223
Government-sponsored enterprise obligations:
After 5 but within 10 years
4,955
4,631
After 10 years
50,734
39,783
Total government-sponsored enterprise obligations
55,689
44,414
State and municipal obligations:
Within 1 year
98,381
97,510
After 1 but within 5 years
465,196
442,933
After 5 but within 10 years
887,757
771,946
After 10 years
163,836
141,425
Total state and municipal obligations
1,615,170
1,453,814
Mortgage and asset-backed securities:
Agency mortgage-backed securities
4,975,242
4,271,563
Non-agency mortgage-backed securities
1,403,543
1,207,969
Asset-backed securities
2,918,160
2,763,578
Total mortgage and asset-backed securities
9,296,945
8,243,110
Other debt securities:
Within 1 year
14,040
13,572
After 1 but within 5 years
246,688
230,527
After 5 but within 10 years
245,003
209,285
After 10 years
16,260
13,671
Total other debt securities
521,991
467,055
Total available for sale debt securities
$
12,538,550
$
11,228,616
Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $402.3 million, at fair value, at March 31, 2023. Interest earned on these securities increases with inflation and decreases with deflation, as measured by the non-seasonally adjusted Consumer Price Index (CPI-U). At maturity, the principal paid is the greater of an inflation-adjusted principal or the original principal.
Allowance for credit losses on available for sale debt securities
Securities for which fair value is less than amortized cost are reviewed for impairment. Special emphasis is placed on securities whose credit rating has fallen below Baa3 (Moody's) or BBB- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price, or which have been identified based on management’s judgment. These securities are placed on a watch list and cash flow analyses are prepared on an individual security basis. Certain securities are analyzed using a projected cash flow model, discounted to present value, and compared to the current amortized cost bases of the securities. The model uses input factors such as cash flow projections, contractual payments required, expected delinquency rates, credit support from other tranches, prepayment speeds, collateral loss severity rates (including loan to values), and various other information related to the underlying collateral. Securities not analyzed using the cash flow model are analyzed by reviewing risk ratings, credit support agreements, and industry knowledge to project future cash flows and any possible credit impairment.
At March 31, 2023, the fair value of securities on this watch list was $676.0 million compared to $1.3 billion at December 31, 2022. The majority of the securities included on the Company's watch list in the current quarter were experiencing unrealized loss positions due to the significant increase in interest rates and were analyzed outside of the cash flow model. At March 31, 2023, the securities on the Company's watch list that were not deemed to be solely related to increasing interest rates were securities backed by government-guaranteed student loans and are expected to perform as contractually required. As of March 31, 2023, the Company did not identify any securities for which a credit loss exists, and for the three months ended March 31, 2023 and 2022, the Company did not recognize a credit loss expense on any available for sale debt securities.
The table below summarizes debt securities available for sale in an unrealized loss position, aggregated by length of loss period, for which an allowance for credit losses has not been recorded at March 31, 2023 and December 31, 2022. Unrealized losses on these available for sale securities have not been recognized into income because after review, the securities were deemed not to be impaired. The unrealized losses on these securities are primarily attributable to changes in interest rates and current market conditions. At March 31, 2023, the Company does not intend to sell the securities, nor is it anticipated that it would be required to sell any of these securities at a loss.
Less than 12 months
12 months or longer
Total
(In thousands)
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
March 31, 2023
U.S. government and federal agency obligations
$
532,588
$
9,565
$
386,394
$
20,444
$
918,982
$
30,009
Government-sponsored enterprise obligations
4,631
324
39,783
10,951
44,414
11,275
State and municipal obligations
188,055
2,025
1,200,901
159,549
1,388,956
161,574
Mortgage and asset-backed securities:
Agency mortgage-backed securities
159,424
4,610
4,091,658
699,252
4,251,082
703,862
Non-agency mortgage-backed securities
648
12
1,199,354
195,665
1,200,002
195,677
Asset-backed securities
131,679
2,523
2,631,899
152,059
2,763,578
154,582
Total mortgage and asset-backed securities
291,751
7,145
7,922,911
1,046,976
8,214,662
1,054,121
Other debt securities
7,843
201
459,212
54,735
467,055
54,936
Total
$
1,024,868
$
19,260
$
10,009,201
$
1,292,655
$
11,034,069
$
1,311,915
December 31, 2022
U.S. government and federal agency obligations
$
605,840
$
17,490
$
380,573
$
25,940
$
986,413
$
43,430
Government-sponsored enterprise obligations
25,068
4,650
18,040
7,971
43,108
12,621
State and municipal obligations
814,799
26,708
875,329
171,385
1,690,128
198,093
Mortgage and asset-backed securities:
Agency mortgage-backed securities
1,323,938
125,330
2,966,851
654,327
4,290,789
779,657
Non-agency mortgage-backed securities
135,984
16,736
1,069,222
195,218
1,205,206
211,954
Asset-backed securities
1,331,055
50,056
2,006,188
140,424
3,337,243
190,480
Total mortgage and asset-backed securities
2,790,977
192,122
6,042,261
989,969
8,833,238
1,182,091
Other debt securities
166,040
9,690
308,818
54,707
474,858
64,397
Total
$
4,402,724
$
250,660
$
7,625,021
$
1,249,972
$
12,027,745
$
1,500,632
Theentireavailable for sale debt portfolio included $11.0 billion of securities that were in a loss position at March 31, 2023, compared to $12.0 billion at December 31, 2022. The total amount of unrealized loss on these securities was $1.3 billion at March 31, 2023, a decrease of $188.7 million compared to the unrealized loss at December 31, 2022. Securities with significant unrealized losses are discussed in the "Allowance for credit losses on available for sale debt securities" section above.
For debt securities classified as available for sale, the following table shows the amortized cost, fair value, and allowance for credit losses of securities available for sale at March 31, 2023 and December 31, 2022, and the corresponding amounts of gross unrealized gains and losses (pre-tax) in AOCI, by security type.
(In thousands)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Allowance for Credit Losses
Fair Value
March 31, 2023
U.S. government and federal agency obligations
$
1,048,755
$
1,477
$
(30,009)
$
—
$
1,020,223
Government-sponsored enterprise obligations
55,689
—
(11,275)
—
44,414
State and municipal obligations
1,615,170
218
(161,574)
—
1,453,814
Mortgage and asset-backed securities:
Agency mortgage-backed securities
4,975,242
183
(703,862)
—
4,271,563
Non-agency mortgage-backed securities
1,403,543
103
(195,677)
—
1,207,969
Asset-backed securities
2,918,160
—
(154,582)
—
2,763,578
Total mortgage and asset-backed securities
9,296,945
286
(1,054,121)
—
8,243,110
Other debt securities
521,991
—
(54,936)
—
467,055
Total
$
12,538,550
$
1,981
$
(1,311,915)
$
—
$
11,228,616
December 31, 2022
U.S. government and federal agency obligations
$
1,078,807
$
29
$
(43,430)
$
—
$
1,035,406
Government-sponsored enterprise obligations
55,729
—
(12,621)
—
43,108
State and municipal obligations
1,965,028
174
(198,093)
—
1,767,109
Mortgage and asset-backed securities:
Agency mortgage-backed securities
5,087,893
191
(779,657)
—
4,308,427
Non-agency mortgage-backed securities
1,423,469
92
(211,954)
—
1,211,607
Asset-backed securities
3,588,025
256
(190,480)
—
3,397,801
Total mortgage and asset-backed securities
10,099,387
539
(1,182,091)
—
8,917,835
Other debt securities
539,255
—
(64,397)
—
474,858
Total
$
13,738,206
$
742
$
(1,500,632)
$
—
$
12,238,316
The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.
For the Three Months Ended March 31
(In thousands)
2023
2022
Proceeds from sales of securities:
Available for sale debt securities
$
812,176
$
—
Other investments
28,259
1,745
Total proceeds
$
840,435
$
1,745
Investment securities gains (losses), net:
Available for sale debt securities:
Losses realized on sales
$
(3,088)
$
—
Equity securities:
Fair value adjustments, net
(127)
(287)
Other:
Gains realized on sales
658
—
Fair value adjustments, net
2,251
7,450
Total investment securities gains (losses), net
$
(306)
$
7,163
Net losses on investment securities for the three months ended March 31, 2023 were mainly comprised of losses of $3.1 million on sales of available for sale securities, and net losses in fair value of $127 thousand on equity investments, offset by net gains in private equity securities due to sales and fair value adjustments of $658 thousand and $2.3 million, respectively.
At March 31, 2023, securities totaling $8.1 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB, compared to $4.7 billion at December 31, 2022. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $211.5 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of the U.S. Treasury and various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.
4. Goodwill and Other Intangible Assets
The following table presents information about the Company's intangible assets which have estimable useful lives.
March 31, 2023
December 31, 2022
(In thousands)
Gross Carrying Amount
Accumulated Amortization
Valuation Allowance
Net Amount
Gross Carrying Amount
Accumulated Amortization
Valuation Allowance
Net Amount
Amortizable intangible assets:
Core deposit premium
$
5,550
$
(4,911)
$
—
$
639
$
31,270
$
(30,565)
$
—
$
705
Mortgage servicing rights
22,227
(11,548)
—
10,679
22,187
(11,258)
—
10,929
Total
$
27,777
$
(16,459)
$
—
$
11,318
$
53,457
$
(41,823)
$
—
$
11,634
Aggregate amortization expense on intangible assets was $356 thousand and $609 thousand for the three month periods ended March 31, 2023 and 2022, respectively. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of March 31, 2023. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.
(In thousands)
2023
$
1,396
2024
1,260
2025
1,117
2026
977
2027
841
During the first quarter of 2023, the Company wrote off $25.7 million of core deposit intangible assets that were fully amortized. Other changes in the carrying amount of goodwill and other intangible assets for the three month period ended March 31, 2023 are as follows:
(In thousands)
Goodwill
Easement
Core Deposit Premium
Mortgage Servicing Rights
Balance January 1, 2023
$
138,921
$
3,600
$
705
$
10,929
Originations, net of disposals
—
—
—
40
Amortization
—
—
(66)
(290)
Balance March 31, 2023
$
138,921
$
3,600
$
639
$
10,679
Goodwill allocated to the Company’s operating segments at March 31, 2023 and December 31, 2022 is shown below.
The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured, and in the event of nonperformance by customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.
Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At March 31, 2023, that net liability was $4.9 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 $625.9 million at March 31, 2023. A portion of this amount has been conveyed to others.
The Company periodically enters into credit risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral and at March 31, 2023, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 2 years to 15 years. At March 31, 2023, the fair value of the Company's guarantee liabilities for RPAs was $148 thousand, and the notional amount of the underlying swaps was $419.9 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default.
The Company has net investments in direct financing and sales-type leases to commercial, industrial, and tax-exempt entities. These leases are included within business loans on the Company's consolidated balance sheets. The Company primarily leases various types of equipment, trucks and trailers, and office furniture and fixtures. Lease agreements may include options for the lessee to renew or purchase the leased equipment at the end of the lease term. The Company has elected to adopt the lease component expedient in which the lease and nonlease components are combined into the total lease receivable. The Company also leases office space to third parties, and these leases are classified as operating leases. The leases may include options to renew or expand the leased space, and currently the leases have remaining terms of 3 months to 16 years.
The following table provides the components of lease income.
For the Three Months Ended March 31
(in thousands)
2023
2022
Direct financing and sales-type leases
$
6,755
$
5,247
Operating leases(a)
2,334
2,184
Total lease income
$
9,089
$
7,431
(a) Includes rent from Tower Properties Company, a related party, of $19 thousand for the three month periods ended March 31, 2023 and 2022.
7. Pension
The amount of net pension cost is shown in the table below:
For the Three Months Ended March 31
(In thousands)
2023
2022
Service cost
$
116
$
132
Interest cost on projected benefit obligation
1,158
665
Expected return on plan assets
(1,001)
(1,126)
Amortization of prior service cost
(67)
(68)
Amortization of unrecognized net loss
427
498
Net periodic pension cost
$
633
$
101
All benefits accrued under the Company’s defined benefit pension plan have been frozen since January 1, 2011. During the first three months of 2023, the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets.
Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that pay nonforfeitable common stock dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 13.
For the Three Months Ended March 31
(In thousands, except per share data)
2023
2022
Basic income per common share:
Net income attributable to Commerce Bancshares, Inc.
$
119,452
$
118,154
Less income allocated to nonvested restricted stock
1,056
1,070
Net income allocated to common stock
$
118,396
$
117,084
Weighted average common shares outstanding
124,004
126,341
Basic income per common share
$
.95
$
.92
Diluted income per common share:
Net income attributable to Commerce Bancshares, Inc.
$
119,452
$
118,154
Less income allocated to nonvested restricted stock
1,054
1,068
Net income allocated to common stock
$
118,398
$
117,086
Weighted average common shares outstanding
124,004
126,341
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
255
306
Weighted average diluted common shares outstanding
124,259
126,647
Diluted income per common share
$
.95
$
.92
Unexercised stock appreciation rights of 216 thousand and 125 thousand for the three month periods ended March 31, 2023 and 2022, respectively, were excluded from the computation of diluted income per common share because their inclusion would have been anti-dilutive.
In the Annual Meeting of the Shareholders, held on April 19, 2023, a proposal to increase the shares of the Company's common stock authorized for issuance under its articles of incorporation was approved. This approval increased the authorized shares from 140,000,000 to 190,000,000.
* All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December 2022.
The table below shows the activity and accumulated balances for components of other comprehensive income. Information about unrealized gains and losses on securities can be found in Note 3, and information about unrealized gains and losses on cash flow hedge derivatives is located in Note 11.
Unrealized Gains (Losses) on Securities (1)
Pension Loss
Unrealized Gains (Losses) on Cash Flow Hedge Derivatives (2)
Total Accumulated Other Comprehensive Income (Loss)
(In thousands)
Balance January 1, 2023
$
(1,124,915)
$
(17,186)
$
55,237
$
(1,086,864)
Other comprehensive income (loss) before reclassifications to current earnings
186,868
—
9,225
196,093
Amounts reclassified to current earnings from accumulated other comprehensive income
3,088
360
(4,385)
(937)
Current period other comprehensive income (loss), before tax
189,956
360
4,840
195,156
Income tax (expense) benefit
(47,490)
(90)
(1,210)
(48,790)
Current period other comprehensive income (loss), net of tax
142,466
270
3,630
146,366
Balance March 31, 2023
$
(982,449)
$
(16,916)
$
58,867
$
(940,498)
Balance January 1, 2022
$
23,174
$
(20,668)
$
74,574
$
77,080
Other comprehensive income (loss) before reclassifications to current earnings
(676,353)
—
—
(676,353)
Amounts reclassified to current earnings from accumulated other comprehensive income
—
430
(6,050)
(5,620)
Current period other comprehensive income (loss), before tax
(676,353)
430
(6,050)
(681,973)
Income tax (expense) benefit
169,088
(107)
1,512
170,493
Current period other comprehensive income (loss), net of tax
(507,265)
323
(4,538)
(511,480)
Balance March 31, 2022
$
(484,091)
$
(20,345)
$
70,036
$
(434,400)
(1) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "investment securities gains (losses), net" in the consolidated statements of income.
(2) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "interest and fees on loans" in the consolidated statements of income.
10. Segments
The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial and Wealth. The Consumer segment consists of various consumer loan and deposit products offered through its retail branch network of approximately 145 locations. This segment also includes indirect and other consumer loan financing businesses, along with debit and credit card loan and fee businesses. In order to reflect a change in the Company's management of its portfolio of residential mortgage loans that it retains, the Company began including those loans in the Consumer segment on January 1, 2023. These loans had previously been included in the Other/Elimination column. As a result of this change, approximately $1.9 billion of loans were reclassified from the Other/Elimination column into the Consumer segment, and prior periods presented below were restated to also reflect this change. The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, and international services, along with business and governmental deposit products and commercial cash management services. This segment also includes both merchant and commercial bank card products as well as the Capital Markets Group, which sells fixed income securities and provides securities safekeeping and accounting services to its business and correspondent bank customers. The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management, and brokerage services. This segment also provides various loan and deposit related services to its private banking customers.
The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues between the three segments. Management periodically makes changes to methods of assigning costs and income to its business segments to better reflect operating results. If appropriate, these changes are reflected in prior year information presented below.
(In thousands)
Consumer
Commercial
Wealth
Segment Totals
Other/Elimination
Consolidated Totals
Three Months Ended March 31, 2023
Net interest income
$
96,854
$
116,166
$
17,540
$
230,560
$
21,063
$
251,623
Provision for credit losses
(6,306)
(393)
(13)
(6,712)
(4,744)
(11,456)
Non-interest income
24,303
58,324
52,944
135,571
2,041
137,612
Investment securities gains (losses), net
—
—
—
—
(306)
(306)
Non-interest expense
(77,326)
(93,623)
(39,636)
(210,585)
(13,522)
(224,107)
Income before income taxes
$
37,525
$
80,474
$
30,835
$
148,834
$
4,532
$
153,366
Three Months Ended March 31, 2022
Net interest income
$
86,818
$
108,953
$
18,869
$
214,640
$
(5,854)
$
208,786
Provision for credit losses
(4,504)
(82)
(26)
(4,612)
14,470
9,858
Non-interest income
26,415
53,651
53,206
133,272
(1,503)
131,769
Investment securities gains (losses), net
—
—
—
—
7,163
7,163
Non-interest expense
(74,823)
(89,506)
(36,288)
(200,617)
(5,031)
(205,648)
Income before income taxes
$
33,906
$
73,016
$
35,761
$
142,683
$
9,245
$
151,928
The information presented above was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting procedures and methods, which have been developed to reflect the underlying economics of the businesses. The methodologies are applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided by) assets and liabilities based on their maturity, prepayment and/or repricing characteristics.
The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column include activity not related to the segments, such as that relating to administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. The provision for credit losses in this category contains the difference between net loan charge-offs assigned directly to the segments and the recorded provision for credit loss expense. Included in this category’s net interest income are earnings of the investment portfolio, which are not allocated to a segment.
The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities.
The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. With the exception of the interest rate floors (discussed below), the Company's derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings.
(In thousands)
March 31, 2023
December 31, 2022
Interest rate swaps
$
1,987,051
$
1,981,821
Interest rate floors
1,500,000
1,000,000
Interest rate caps
152,784
152,784
Credit risk participation agreements
577,922
579,925
Foreign exchange contracts
15,335
27,991
Mortgage loan commitments
362
—
Mortgage loan forward sale contracts
3,290
—
Forward TBA contracts
3,500
—
Total notional amount
$
4,240,244
$
3,742,521
The largest group of notional amounts relate to interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. The customers are engaged in a variety of businesses, including real estate, manufacturing, retail product distribution, education, and retirement communities. These interest rate swap contracts with customers are offset by matching interest rate swap contracts purchased by the Company from other financial institutions (dealers). Contracts with dealers that require central clearing are novated to a clearing agency who becomes the Company's counterparty. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings.
Many of the Company’s interest rate swap contracts with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions or instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.
As of March 31, 2023, the Company holds three interest rate floors with a combined notional value of $1.5 billion to hedge the risk of declining interest rates on certain floating rate commercial loans. The first floor was purchased during the third quarter of 2022, has a purchased strike rate of 2.50%, is forward-starting beginning on January 1, 2024 and matures on January 1, 2030. In the event that the index rate falls below zero, the maximum rate spread the Company can earn on the notional amount is limited to 2.50%.The second floor was purchased during the fourth quarter of 2022, has a purchased strike rate of 3.00%, is forward-starting beginning on April 1, 2024 and matures on April 1, 2030. In the event that the index rate falls below zero, the maximum rate the Company can earn on the notional amount is limited to 3.00%.The third floor was purchased during the first quarter of 2023, has a purchased strike rate of 3.50%, is forward-starting beginning on July 1, 2024 and matures on July 1, 2030. In the event that the index rate falls below zero, the maximum rate the Company can earn on the notional amount is limited to 3.50%. The premium paid for these floors totaled $61.7 million. As of March 31, 2023, the maximum length of time over which the Company is hedging its exposure to lower rates is approximately 6 years. These interest rate floors qualified and were designated as cash flow hedges and were assessed for effectiveness using regression analysis. The change in the fair value of these interest rate floors is recorded in AOCI, net of the amortization of the premiums paid, which are recorded against interest and fees on loans in the consolidated statements of income. As of March 31, 2023, net deferred gains on the interest rate floors totaled $6.8 million (pre-tax) and were recorded in AOCI in the consolidated balance sheet. As of March 31, 2023, it is expected that $7.3 million (pre-tax) interest rate floor premium amortization will be reclassified from AOCI into earnings over the next 12 months.
During the year ended December 31, 2020, the Company monetized three interest rate floors that were previously classified as cash flow hedges with a combined notional balance of $1.5 billion and an asset fair value of $163.2 million. As of March 31, 2023, the total realized gains on the monetized cash flow hedges remaining in AOCI was $69.0 million (pre-tax), which will be reclassified into interest income over the next 3.7 years. The estimated amount of net gains related to the cash flow hedges remaining in AOCI at March 31, 2023 that is expected to be reclassified into income within the next 12 months is $23.3 million.
The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further discussed in Note 5 on Guarantees. In addition, the Company enters into foreign exchange contracts, which are mainly comprised of contracts with customers to purchase or deliver specific foreign currencies at specific future dates.
Under its program to sell residential mortgage loans in the secondary market, the Company designates certain newly-originated residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments and forward loan sale contracts. Changes in the fair values of the loan commitments and funded loans prior to sale that are due to changes in interest rates are economically hedged with forward contracts to sell residential mortgage-backed securities in the to-be-announced (TBA) market. These forward TBA contracts are also considered to be derivatives and are settled in cash at the security settlement date. In late 2022, the Company temporarily paused sales of these loans and halted entering into the forward contracts, as lower demand for mortgage loans coupled with volatility in the TBA market made it difficult to effectively hedge the Company's mortgage loan production. The Company resumed sales during the first quarter of 2023.
The fair values of the Company's derivative instruments, whose notional amounts are listed above, are shown in the table below. Information about the valuation methods used to determine fair value is provided in Note 15 on Fair Value Measurements.
The Company's policy is to present its derivative assets and derivative liabilities on a gross basis in its consolidated balance sheets, and these are reported in other assets and other liabilities. Certain collateral posted to and from the Company's clearing counterparty has been applied to the fair values of the cleared swaps, such that at March 31, 2023 in the table below, the positive fair values of cleared swaps were reduced by $11.4 million. At December 31, 2022, positive fair values of cleared swaps were reduced by $27.8 million.
Asset Derivatives
Liability Derivatives
Mar. 31, 2023
Dec. 31, 2022
Mar. 31, 2023
Dec. 31, 2022
(In thousands)
Fair Value
Fair Value
Derivatives designated as hedging instruments:
Interest rate floors
$
68,495
$
33,371
$
—
$
—
Total derivatives designated as hedging instruments
$
68,495
$
33,371
$
—
$
—
Derivative instruments not designated as hedging instruments:
Interest rate swaps
$
28,960
$
23,894
$
(40,352)
$
(51,742)
Interest rate caps
2,222
2,705
(2,222)
(2,705)
Credit risk participation agreements
44
34
(148)
(119)
Foreign exchange contracts
359
488
(310)
(418)
Mortgage loan commitments
77
—
—
—
Mortgage loan forward sale contracts
—
—
(1)
—
Forward TBA contracts
—
—
(35)
—
Total derivatives not designated as hedging instruments
The Company made an election to exclude the initial premiums paid on the interest rate floors from the hedge effectiveness measurement. Those initial premiums are amortized over the periods between the premium payment month and the contract maturity month. The pre-tax effects of the gains and losses (both the included and excluded amounts for hedge effectiveness assessment) recognized in the other comprehensive income from the cash flow hedging instruments and the amounts reclassified from accumulated other comprehensive income into income (both included and excluded amounts for hedge effectiveness measurement) are shown in the table below.
Amount of Gain or (Loss) Recognized in OCI
Location of Gain (Loss) Reclassified from AOCI into Income
Amount of Gain (Loss) Reclassified from AOCI into Income
(In thousands)
Total
Included Component
Excluded Component
Total
Included Component
Excluded Component
For the Three Months Ended March 31, 2023
Derivatives in cash flow hedging relationships:
Interest rate floors
$
9,225
$
—
$
9,225
Interest and fees on loans
$
4,385
$
7,444
$
(3,059)
Total
$
9,225
$
—
$
9,225
Total
$
4,385
$
7,444
$
(3,059)
For the Three Months Ended March 31, 2022
Derivatives in cash flow hedging relationships:
Interest rate floors
$
—
$
—
$
—
Interest and fees on loans
$
6,050
$
7,566
$
(1,516)
Total
$
—
$
—
$
—
Total
$
6,050
$
7,566
$
(1,516)
The gain and loss recognized through various derivative instruments on the consolidated statements of income are shown in the table below.
Location of Gain or (Loss) Recognized in Consolidated Statements of Income
Amount of Gain or (Loss) Recognized in Income on Derivatives
For the Three Months Ended March 31
(In thousands)
2023
2022
Derivative instruments:
Interest rate swaps
Other non-interest income
$
623
$
812
Interest rate caps
Other non-interest income
—
16
Credit risk participation agreements
Other non-interest income
(19)
(10)
Foreign exchange contracts
Other non-interest income
(20)
(14)
Mortgage loan commitments
Loan fees and sales
77
(485)
Mortgage loan forward sale contracts
Loan fees and sales
(1)
—
Forward TBA contracts
Loan fees and sales
1
1,243
Total
$
661
$
1,562
The following table shows the extent to which assets and liabilities relating to derivative instruments have been offset in the consolidated balance sheets. It also provides information about these instruments which are subject to an enforceable master netting arrangement, irrespective of whether they are offset, and the extent to which the instruments could potentially be offset. Also shown is collateral received or pledged in the form of other financial instruments, which is generally cash or marketable securities. The collateral amounts in this table are limited to the outstanding balances of the related asset or liability (after netting is applied); thus, amounts of excess collateral are not shown. Most of the derivatives in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.
While the Company is party to master netting arrangements with most of its swap derivative counterparties, the Company does not offset derivative assets and liabilities under these agreements on its consolidated balance sheets. Collateral exchanged between the Company and dealer bank counterparties is generally subject to thresholds and transfer minimums, and usually consists of marketable securities. By contract, these may be sold or re-pledged by the secured party until recalled at a subsequent valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash or securities to its clearing agent. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative
transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below.
Gross Amounts Not Offset in the Balance Sheet
(In thousands)
Gross Amount Recognized
Gross Amounts Offset in the Balance Sheet
Net Amounts Presented in the Balance Sheet
Financial Instruments Available for Offset
Collateral Received/ Pledged
Net Amount
March 31, 2023
Assets:
Derivatives subject to master netting agreements
$
100,005
$
—
$
100,005
$
(2,255)
$
(93,822)
$
3,928
Derivatives not subject to master netting agreements
152
—
152
Total derivatives
$
100,157
$
—
$
100,157
Liabilities:
Derivatives subject to master netting agreements
$
42,694
$
—
$
42,694
$
(2,255)
$
—
$
40,439
Derivatives not subject to master netting agreements
374
—
374
Total derivatives
$
43,068
$
—
$
43,068
December 31, 2022
Assets:
Derivatives subject to master netting agreements
$
60,270
$
—
$
60,270
$
(1,007)
$
(56,816)
$
2,447
Derivatives not subject to master netting agreements
222
—
222
Total derivatives
$
60,492
$
—
$
60,492
Liabilities:
Derivatives subject to master netting agreements
$
54,609
$
—
$
54,609
$
(1,007)
$
—
$
53,602
Derivatives not subject to master netting agreements
375
—
375
Total derivatives
$
54,984
$
—
$
54,984
12. Resale and Repurchase Agreements
The Company regularly enters into resale and repurchase agreement transactions with other financial institutions and with its own customers. Resale and repurchase agreements are agreements to purchase/sell securities subject to an obligation to resell/repurchase the same or similar securities. They are accounted for as secured lending and collateralized borrowing (e.g. financing transactions), not as true sales and purchases of the underlying collateral securities. Some of the resale and repurchase agreements were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default. The security collateral accepted or pledged in resale and repurchase agreements with other financial institutions may be sold or re-pledged by the secured party, but is usually delivered to and held by third party trustees. The Company generally retains custody of securities pledged for repurchase agreements with its customers.
The Company is party to agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase and resale agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the consolidated balance sheets, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $200.0 million at March 31, 2023 and December 31, 2022.
The following table shows the extent to which resale agreement assets and repurchase agreement liabilities with the same counterparty have been offset on the consolidated balance sheets, in addition to the extent to which they could potentially be offset. Also shown is collateral received or pledged, which consists of marketable securities. The collateral amounts in the table are limited to the outstanding balances of the related asset or liability (after offsetting is applied); thus amounts of excess collateral are not shown.
Gross Amounts Not Offset in the Balance Sheet
(In thousands)
Gross Amount Recognized
Gross Amounts Offset in the Balance Sheet
Net Amounts Presented in the Balance Sheet
Financial Instruments Available for Offset
Securities Collateral Received/Pledged
Unsecured Amount
March 31, 2023
Total resale agreements, subject to master netting arrangements
$
1,025,000
$
(200,000)
$
825,000
$
—
$
(825,000)
$
—
Total repurchase agreements, subject to master netting arrangements
2,228,089
(200,000)
2,028,089
—
(2,028,089)
—
December 31, 2022
Total resale agreements, subject to master netting arrangements
$
1,025,000
$
(200,000)
$
825,000
$
—
$
(825,000)
$
—
Total repurchase agreements, subject to master netting arrangements
2,881,874
(200,000)
2,681,874
—
(2,681,874)
—
The table below shows the remaining contractual maturities of repurchase agreements outstanding at March 31, 2023 and December 31, 2022, in addition to the various types of marketable securities that have been pledged by the Company as collateral for these borrowings.
Remaining Contractual Maturity of the Agreements
(In thousands)
Overnight and continuous
Up to 90 days
Greater than 90 days
Total
March 31, 2023
Repurchase agreements, secured by:
U.S. government and federal agency obligations
$
194,757
$
13,602
$
19,278
$
227,637
Agency mortgage-backed securities
1,472,769
14,743
205,000
1,692,512
Non-agency mortgage-backed securities
11,818
—
—
11,818
Asset-backed securities
294,161
—
—
294,161
Other debt securities
1,961
—
—
1,961
Total repurchase agreements, gross amount recognized
$
1,975,466
$
28,345
$
224,278
$
2,228,089
December 31, 2022
Repurchase agreements, secured by:
U.S. government and federal agency obligations
$
488,053
$
26,928
$
12,460
$
527,441
Agency mortgage-backed securities
1,792,314
21,744
204,500
2,018,558
Non-agency mortgage-backed securities
40,950
—
—
40,950
Asset-backed securities
293,001
—
—
293,001
Other debt securities
1,924
—
—
1,924
Total repurchase agreements, gross amount recognized
The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights (SARs). Historically, most of the awards have been issued during the first quarter of each year. The stock-based compensation expense charged against income was $4.4 million and $4.2 million in the three months ended March 31, 2023 and 2022, respectively.
Nonvested stock awards granted generally vest in 4 to 7 years and contain restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant. A summary of the status of the Company’s nonvested share awards as of March 31, 2023, and changes during the three month period then ended, is presented below.
Shares
Weighted Average Grant Date Fair Value
Nonvested at January 1, 2023
1,148,873
$58.20
Granted
247,082
65.63
Vested
(284,800)
50.62
Forfeited
(2,238)
61.82
Nonvested at March 31, 2023
1,108,917
$61.79
SARs are granted with exercise prices equal to the market price of the Company’s stock at the date of grant. SARs vest ratably over 4 years of continuous service and have contractual terms of 10 years. All SARs must be settled in stock under provisions of the plan. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs on date of grant. The current year per share average fair value and the model assumptions are shown in the table below.
Weighted per share average fair value at grant date
$18.65
Assumptions:
Dividend yield
1.6
%
Volatility
27.9
%
Risk-free interest rate
3.9
%
Expected term
5.8 years
A summary of SAR activity during the first three months of 2023 is presented below.
Revenue from contracts with customers, Accounting Standard Codification 606 ("ASC 606"), requires revenue recognition for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For the three months ended March 31, 2023, approximately 65% of the Company’s total revenue was comprised of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services.
The following table disaggregates revenue from contracts with customers by major product line.
Three Months Ended March 31
(In thousands)
2023
2022
Bank card transaction fees
$
46,654
$
42,045
Trust fees
45,328
47,811
Deposit account charges and other fees
21,752
22,307
Consumer brokerage services
5,085
4,446
Other non-interest income
8,339
4,495
Total non-interest income from contracts with customers
127,158
121,104
Other non-interest income (1)
10,454
10,665
Total non-interest income
$
137,612
$
131,769
(1) This revenue is not within the scope of ASC 606, and includes fees relating to capital market activities, loan fees and sales, derivative instruments, standby letters of credit and various other transactions.
For bank card transaction fees, nearly all of debit and credit card fees are earned in the Consumer segment, while corporate card and merchant fees are earned in the Commercial segment. The Consumer and Commercial segments contribute approximately 34% and 66%, respectively, of the Company's deposit account charge revenue. All trust fees and nearly all consumer brokerage services income are earned in the Wealth segment.
The following table presents the opening and closing receivable balances for the three month periods ended March 31, 2023 and 2022 for the Company’s significant revenue from contracts with customers.
(In thousands)
March 31, 2023
December 31, 2022
March 31, 2022
December 31, 2021
Bank card transaction fees
$
15,585
$
17,254
$
14,171
$
16,424
Trust fees
2,098
2,038
2,094
2,222
Deposit account charges and other fees
5,398
6,631
5,452
6,702
Consumer brokerage services
773
949
324
391
For these revenue categories, none of the transaction price has been allocated to performance obligations that are unsatisfied as of the end of a reporting period.
The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale debt securities, equity securities, trading debt securities, certain investments relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or fair value accounting or write-downs of individual assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
•Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
•Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).
•Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.
The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value Measurements note in the Company's 2022 Annual Report on Form 10-K. There have been no significant changes in these methodologies since then.
Instruments Measured at Fair Value on a Recurring Basis
The table below presents the March 31, 2023 and December 31, 2022 carrying values of assets and liabilities measured at fair value on a recurring basis. There were no transfers among levels during the first three months of 2023 or the year ended December 31, 2022.
Fair Value Measurements Using
(In thousands)
Total Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
March 31, 2023
Assets:
Residential mortgage loans held for sale
$
684
$
—
$
684
$
—
Available for sale debt securities:
U.S. government and federal agency obligations
1,020,223
1,020,223
—
—
Government-sponsored enterprise obligations
44,414
—
44,414
—
State and municipal obligations
1,453,814
—
1,452,900
914
Agency mortgage-backed securities
4,271,563
—
4,271,563
—
Non-agency mortgage-backed securities
1,207,969
—
1,207,969
—
Asset-backed securities
2,763,578
—
2,763,578
—
Other debt securities
467,055
—
467,055
—
Trading debt securities
41,584
500
41,084
—
Equity securities
6,083
6,083
—
—
Private equity investments
163,418
—
—
163,418
Derivatives *
100,157
—
100,036
121
Assets held in trust for deferred compensation plan
18,656
18,656
—
—
Total assets
11,559,198
1,045,462
10,349,283
164,453
Liabilities:
Derivatives *
43,068
—
42,920
148
Liabilities held in trust for deferred compensation plan
18,656
18,656
—
—
Total liabilities
$
61,724
$
18,656
$
42,920
$
148
December 31, 2022
Assets:
Residential mortgage loans held for sale
$
—
$
—
$
—
$
—
Available for sale debt securities:
U.S. government and federal agency obligations
1,035,406
1,035,406
—
—
Government-sponsored enterprise obligations
43,108
—
43,108
—
State and municipal obligations
1,767,109
—
1,765,268
1,841
Agency mortgage-backed securities
4,308,427
—
4,308,427
—
Non-agency mortgage-backed securities
1,211,607
—
1,211,607
—
Asset-backed securities
3,397,801
—
3,397,801
—
Other debt securities
474,858
—
474,858
—
Trading debt securities
43,523
—
43,523
—
Equity securities
6,210
6,210
—
—
Private equity investments
178,127
—
—
178,127
Derivatives *
60,492
—
60,458
34
Assets held in trust for deferred compensation plan
17,856
17,856
—
—
Total assets
12,544,524
1,059,472
11,305,050
180,002
Liabilities:
Derivatives *
54,984
—
54,865
119
Liabilities held in trust for deferred compensation plan
17,856
17,856
—
—
Total liabilities
$
72,840
$
17,856
$
54,865
$
119
* The fair value of each class of derivative is shown in Note 11.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
(In thousands)
State and Municipal Obligations
Private Equity
Investments
Derivatives
Total
For the three months ended March 31, 2023
Balance January 1, 2023
$
1,841
$
178,127
$
(85)
$
179,883
Total gains or losses (realized/unrealized):
Included in earnings
—
2,251
58
2,309
Included in other comprehensive income *
26
—
—
26
Investment securities called
(1,000)
—
—
(1,000)
Discount accretion
47
—
—
47
Purchases of private equity investments
—
10,532
—
10,532
Sale/pay down of private equity investments
—
(27,492)
—
(27,492)
Balance March 31, 2023
$
914
$
163,418
$
(27)
$
164,305
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2023
$
—
$
2,251
$
58
$
2,309
*Total gains or losses for the three months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2023
$
4
$
—
$
—
$
4
For the three months ended March 31, 2022
Balance January 1, 2022
$
1,984
$
147,406
$
571
$
149,961
Total gains or losses (realized/unrealized):
Included in earnings
—
7,450
(495)
6,955
Included in other comprehensive income *
(83)
—
—
(83)
Discount accretion
1
—
—
1
Purchases of private equity investments
—
300
—
300
Sale/pay down of private equity investments
—
(1,745)
—
(1,745)
Purchase of risk participation agreement
—
—
145
145
Balance March 31, 2022
$
1,902
$
153,411
$
221
$
155,534
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2022
$
—
$
7,450
$
267
$
7,717
*Total gains or losses for the three months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2022
$
(83)
$
—
$
—
$
(83)
* Included in "net unrealized gains (losses) on available for sale debt securities" in the consolidated statements of comprehensive income.
Gains and losses included in earnings for the Level 3 assets and liabilities in the previous table are reported in the following line items in the consolidated statements of income:
(In thousands)
Loan Fees and Sales
Other Non-Interest Income
Investment Securities Gains (Losses), Net
Total
For the three months ended March 31, 2023
Total gains or losses included in earnings
$
77
$
(19)
$
2,251
$
2,309
Change in unrealized gains or losses relating to assets still held at March 31, 2023
$
77
$
(19)
$
2,251
$
2,309
For the three months ended March 31, 2022
Total gains or losses included in earnings
$
(485)
$
(10)
$
7,450
$
6,955
Change in unrealized gains or losses relating to assets still held at March 31, 2022
The Company's significant Level 3 measurements, which employ unobservable inputs that are readily quantifiable, pertain to investments in portfolio concerns held by the Company's private equity subsidiaries and held for sale residential mortgage loan commitments. Information about these inputs is presented in the table below.
Quantitative Information about Level 3 Fair Value Measurements
Weighted
Valuation Technique
Unobservable Input
Range
Average*
Private equity investments
Market comparable companies
EBITDA multiple
4.0
-
6.0
5.2
Mortgage loan commitments
Discounted cash flow
Probability of funding
62.6%
-
100.0%
78.3%
Embedded servicing value
.7%
-
1.6%
1.2%
* Unobservable inputs were weighted by the relative fair value of the instruments.
Instruments Measured at Fair Value on a Nonrecurring Basis
For assets measured at fair value on a nonrecurring basis during the first three months of 2023 and 2022, and still held as of March 31, 2023 and 2022, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation inputs used to determine each adjustment, and the carrying value of the related individual assets or portfolios at March 31, 2023 and 2022.
Fair Value Measurements Using
(In thousands)
Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total Gains (Losses) Recognized During the Three Months Ended March 31
March 31, 2023
Collateral dependent loans
$
1,819
$
—
$
—
$
1,819
$
425
March 31, 2022
Mortgage servicing rights
$
11,360
$
—
$
—
$
11,360
$
304
Long- lived assets
497
—
—
497
(965)
The Company's significant Level 3 measurements that are measured on a nonrecurring basis pertain to the Company's mortgage servicing rights retained on certain fixed rate personal real estate loan originations. Mortgage servicing rights are included in other intangible assets-net on the consolidated balance sheets, and information about these inputs at March 31, 2023 is presented in the table below.
Quantitative Information about Level 3 Fair Value Measurements
Weighted
Valuation Technique
Unobservable Input
Range
Average*
Mortgage servicing rights
Discounted cash flow
Discount rate
9.51
%
-
9.71
%
9.58
%
Prepayment speeds (CPR)*
6.33
%
-
7.47
%
6.53
%
Loan servicing costs - annually per loan
Performing loans
$
70
-
$
72
$
71
Delinquent loans
$
200
-
$
750
Loans in foreclosure
$
1,000
*Ranges and weighted averages based on interest rate tranches.
The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are updated periodically for changes in market conditions. Actual rates may differ from our estimates. Increases in prepayment speed and discount rates negatively impact the fair value of our mortgage servicing rights.
The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as follows at March 31, 2023 and December 31, 2022:
Carrying Amount
Estimated Fair Value at March 31, 2023
(In thousands)
Level 1
Level 2
Level 3
Total
Financial Assets
Loans:
Business
$
5,704,467
$
—
$
—
$
5,577,723
$
5,577,723
Real estate - construction and land
1,437,419
—
—
1,407,614
1,407,614
Real estate - business
3,486,543
—
—
3,383,813
3,383,813
Real estate - personal
2,952,042
—
—
2,700,721
2,700,721
Consumer
2,094,389
—
—
2,033,884
2,033,884
Revolving home equity
295,478
—
—
296,436
296,436
Consumer credit card
558,669
—
—
530,987
530,987
Overdrafts
6,515
—
—
6,372
6,372
Total loans
16,535,522
—
—
15,937,550
15,937,550
Loans held for sale
6,162
—
6,162
—
6,162
Investment securities
11,544,700
1,026,806
10,248,563
269,331
11,544,700
Federal funds sold
27,060
27,060
—
—
27,060
Securities purchased under agreements to resell
825,000
—
—
804,959
804,959
Interest earning deposits with banks
1,341,854
1,341,854
—
—
1,341,854
Cash and due from banks
351,210
351,210
—
—
351,210
Derivative instruments
100,157
—
100,036
121
100,157
Assets held in trust for deferred compensation plan
18,656
18,656
—
—
18,656
Total
$
30,750,321
$
2,765,586
$
10,354,761
$
17,011,961
$
30,132,308
Financial Liabilities
Non-interest bearing deposits
$
8,685,234
$
8,685,234
$
—
$
—
$
8,685,234
Savings, interest checking and money market deposits
14,419,741
14,419,741
—
—
14,419,741
Certificates of deposit
1,578,485
—
—
1,577,207
1,577,207
Federal funds purchased
756,470
756,470
—
—
756,470
Securities sold under agreements to repurchase
2,028,089
—
—
2,030,615
2,030,615
Other borrowings
1,506,817
2,930
3,887
1,500,000
1,506,817
Derivative instruments
43,068
—
42,920
148
43,068
Liabilities held in trust for deferred compensation plan
Assets held in trust for deferred compensation plan
17,856
17,856
—
—
17,856
Total
$
30,614,233
$
1,950,613
$
11,310,014
$
16,666,310
$
29,926,937
Financial Liabilities
Non-interest bearing deposits
$
10,066,356
$
10,066,356
$
—
$
—
$
10,066,356
Savings, interest checking and money market deposits
15,126,981
15,126,981
—
—
15,126,981
Certificates of deposit
994,103
—
—
982,613
982,613
Federal funds purchased
159,860
159,860
—
—
159,860
Securities sold under agreements to repurchase
2,681,874
—
—
2,684,471
2,684,471
Other borrowings
8,831
—
8,831
—
8,831
Derivative instruments
54,984
—
54,865
119
54,984
Liabilities held in trust for deferred compensation plan
17,856
17,856
—
—
17,856
Total
$
29,110,845
$
25,371,053
$
63,696
$
3,667,203
$
29,101,952
17. Legal and Regulatory Proceedings
The Company has various legal proceedings pending at March 31, 2023, arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at early stages of the legal process. The Company records a loss accrual for all legal and regulatory matters for which it deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet progressed to the point where a loss amount can be determined to be probable and estimable.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2022 Annual Report on Form 10-K. Results of operations for the three month periods ended March 31, 2023 are not necessarily indicative of results to be attained for any other period.
Forward-Looking Information
This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, the effects of the COVID-19 pandemic, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2022 Annual Report on Form 10-K. During the quarter ended March 31, 2023, there were no material changes to the Risk Factors disclosed in the Company's 2022 Annual Report on Form 10-K.
Critical Accounting Estimates and Related Policies
The Company has identified certain 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 estimates and related policies are the Company's allowance for credit losses and fair value measurement policies. A discussion of these estimates and related policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2022 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2022.
Tangible common equity to tangible assets ratio (4)
7.92
8.09
Tier I leverage ratio
10.61
9.07
* Restated for the 5% stock dividend distributed in December 2022.
(1) Includes loans held for sale.
(2) Revenue includes net interest income and non-interest income.
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization.
It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP.
The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets.
March 31
(Dollars in thousands)
2023
2022
Total equity
$
2,682,412
$
2,973,402
Less non-controlling interest
16,888
12,762
Less goodwill
138,921
138,921
Less intangible assets*
4,239
4,525
Total tangible common equity (a)
$
2,522,364
$
2,817,194
Total assets
$
32,004,856
$
34,986,793
Less goodwill
138,921
138,921
Less intangible assets*
4,239
4,525
Total tangible assets (b)
$
31,861,696
$
34,843,347
Tangible common equity to tangible assets ratio (a)/(b)
7.92
%
8.09
%
* Intangible assets other than mortgage servicing rights.
Net income attributable to Commerce Bancshares, Inc.
$
119,452
$
118,154
1,298
1.1
%
For the quarter ended March 31, 2023, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $119.5 million, an increase of $1.3 million, or 1.1%, compared to the first quarter of the previous year. For the current quarter, the annualized return on average assets was 1.54%, the annualized return on average equity was 18.75%, and the efficiency ratio was 57.49%. Diluted earnings per common share was $.95, an increase of 3.3% compared to $.92 per share in the first quarter of 2022, and decreased 8.7% compared to $1.04 per share in the previous quarter.
Compared to the first quarter of last year, net interest income increased $42.8 million, or 20.5%, mainly due to an increase of $91.7 million in interest income on loans, partly offset by an increase in deposits and borrowings interest expense of $54.2 million. The provision for credit losses increased $21.3 million mainly due to an increase in the estimate of the allowance for credit losses on loans and higher net loan charge-offs, partly offset by a decrease in the liability for unfunded lending commitments. Non-interest income increased $5.8 million, or 4.4%, compared to the first quarter of 2022, mainly due to increases in net bank card fees and cash sweep commissions, partly offset by lower trust fees and loan fees and sales. Net losses on investment securities totaled $306 thousand in the current quarter compared to net gains of $7.2 million in the same quarter of last year. Net securities losses in the current quarter primarily resulted from losses of $3.1 million realized on the sales of available for sale debt securities, mostly offset by net fair value gains of $2.3 million and a gain of $653 thousand on the sale of an investment, both in the Company's private equity investment portfolio. Non-interest expense increased $18.5 million, or 9.0%, over the first quarter of 2022 mainly due to higher salaries and employee benefits expense, data processing and software expense, miscellaneous losses and travel and entertainment expense.
The following table summarizes the changes in net interest income on a fully taxable-equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.
Analysis of Changes in Net Interest Income
Three Months Ended March 31, 2023 vs. 2022
Change due to
(In thousands)
Average Volume
Average Rate
Total
Interest income, fully taxable equivalent basis:
Loans:
Business
$
2,575
$
33,046
$
35,621
Real estate - construction and land
2,558
12,402
14,960
Real estate - business
3,195
19,448
22,643
Real estate - personal
1,009
2,381
3,390
Consumer
241
8,735
8,976
Revolving home equity
196
2,603
2,799
Consumer credit card
430
3,197
3,627
Overdrafts
—
—
—
Total interest on loans
10,204
81,812
92,016
Loans held for sale
(26)
21
(5)
Investment securities:
U.S. government and federal agency securities
(39)
(4,140)
(4,179)
Government-sponsored enterprise obligations
204
188
392
State and municipal obligations
(1,600)
(114)
(1,714)
Mortgage-backed securities
(4,209)
1,269
(2,940)
Asset-backed securities
(1,948)
7,005
5,057
Other securities
231
823
1,054
Total interest on investment securities
(7,361)
5,031
(2,330)
Federal funds sold
51
437
488
Securities purchased under agreements to resell
(2,779)
1,431
(1,348)
Interest earning deposits with banks
(798)
8,983
8,185
Total interest income
(709)
97,715
97,006
Interest expense:
Deposits:
Savings
(2)
17
15
Interest checking and money market
(98)
18,474
18,376
Certificates of deposit of less than $100,000
(7)
1,293
1,286
Certificates of deposit of $100,000 and over
(37)
6,237
6,200
Total interest on deposits
(144)
26,021
25,877
Federal funds purchased
151
5428
5579
Securities sold under agreements to repurchase
(72)
16,885
16,813
Other borrowings
6,713
6
6,719
Total interest expense
6,648
48,340
54,988
Net interest income, tax equivalent basis
$
(7,357)
$
49,375
$
42,018
Net interest income in the first quarter of 2023 was $251.6 million, an increase of $42.8 million over the first quarter of 2022. On a fully taxable-equivalent (FTE) basis, net interest income totaled $253.4 million in the first quarter of 2023, up $42.0 million over the same period last year and down $3.3 million from the previous quarter. The increase in net interest
income compared to the first quarter of 2022 was mainly due to higher interest income earned on loans (FTE) of $92.0 million, partly offset by higher interest expense on deposits and borrowings of $55.0 million. The increase in total interest earned on loans (FTE) was the result of higher loan yields on all loan products, especially commercial loans, many of which have variable rates, coupled with higher average balances, while the increase in interest expense was due to higher rates paid on deposits and borrowings. The Company's net yield on earning assets (FTE) was 3.26% in the current quarter compared to 2.45% in the first quarter of 2022.
Total interest income (FTE) increased $97.0 million over the first quarter of 2022. Interest income on loans (FTE) was $225.0 million during the first quarter of 2023, an increase of $92.0 million, or 69.2%, over the same quarter last year. The increase in interest income over the same quarter of last year was primarily due to an increase of 202 basis points in the average rate earned and growth of $1.2 billion, or 7.8%, in average loan balances. Most of the increase in interest income occurred in the business, business real estate and construction loan categories. The largest increase to interest income occurred in business loan interest, which grew $35.6 million due to a 238 basis point increase in the average rate earned, coupled with growth in average balances of $331.9 million, or 6.2%. Business real estate loan interest income increased $22.6 million due to an increase of 227 basis points in the average rate earned and higher average balances of $383.3 million. Construction and land loan interest grew $15.0 million due to a 357 basis point increase in the average rate earned and growth of $275.9 million, or 24.3%, in average loan balances. In addition, consumer loan interest increased $9.0 million due to an increase of 172 basis points in the average rate earned, while consumer credit card loan increased $3.6 million mainly due to a 233 basis point increase in the average rate earned. Personal real estate loan interest income grew $3.4 million due to a 33 basis point increase in the average rate earned and growth of $124.8 million, or 4.4%, in average loan balances.
Interest income on investment securities (FTE) was $72.5 million during the first quarter of 2023, which was a decrease of $2.3 million from the same quarter last year. The decrease in interest income occurred mainly in interest earned on U.S. government and federal agency obligations, which declined $4.2 million due to a decrease in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS). Interest income related to TIPS, which is tied to the non-seasonally adjusted Consumer Price Index (CPI-U), decreased $4.2 million from the same quarter last year. Interest income earned on mortgage-backed securities decreased $2.9 million mainly due to a decline of $862.2 million, or 11.8%, in the average balance. In addition, an $802 thousand increase in premium amortization, reflecting slower forward prepayment speed estimates was recorded in the current quarter, compared to a premium amortization adjustment increase of $7.5 million in the prior year. These decreases were partly offset by an increase of eight basis points in the average rate earned. Interest income earned on state and municipal securities declined $1.7 million mainly due to a $283.8 million, or 13.7%, decrease in average balances. These decreases to interest income were partly offset by growth of $5.1 million in interest earned on asset-backed securities, due to an increase of 88 basis points in the average rate earned, partly offset by lower average balances of $699.3 million, or 17.8%. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $13.5 billion in the first quarter of 2023, compared to $15.4 billion in the first quarter of 2022.
Interest income on securities purchased under agreements to resell decreased $1.3 million from the same quarter last year, due to a decline of $908.9 million in the average balance, partly offset by an increase of 70 basis points in the average rate earned. Interest income on balances at the Federal Reserve grew $8.2 million due to an increase of 449 basis points in the average rate earned, partly offset by a decrease of $1.8 billion in the average balance invested.
The average fully taxable-equivalent yield on total interest earning assets was 4.00% in the first quarter of 2023, up from 2.49% in the first quarter of 2022.
Total interest expense increased $55.0 million compared to the first quarter of 2022 due to increases in interest expense of $25.9 million on interest bearing deposits and $29.1 million on borrowings. The increase in deposit interest expense resulted mainly from an increase of $18.4 million in interest expense on interest checking and money market deposit accounts due to a 57 basis point increase in the average rate paid. In addition, interest expense on certificates of deposit increased $7.5 million, due to an increase of 230 basis points in the average rate paid. Interest expense on borrowings was higher due to an increase of $16.8 million in interest expense on customer repurchase agreements resulting from an increase of 283 basis points in the average rate paid. Interest expense on Federal funds purchased increased $5.6 million mainly due to a 447 basis point increase in the average rate paid, while Federal Home Loan Bank (FHLB) borrowings increased $550.0 million and resulted in an increase of $6.7 million in interest expense. The overall average rate incurred on all interest bearing liabilities was 1.20% and .06% in the first quarters of 2023 and 2022, respectively.
Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.
* Total revenueincludes net interest income and non-interest income.
The table below is a summary of net bank card transaction fees for the three month periods ended March 31, 2023 and 2022.
Three Months Ended March 31
(Dollars in thousands)
2023
2022
$ change
% change
Net debit card fees
$
10,287
$
9,552
$
735
7.7
%
Net credit card fees
3,674
3,722
(48)
(1.3)
Net merchant fees
5,351
4,980
371
7.4
Net corporate card fees
27,342
23,791
3,551
14.9
Total bank card transaction fees
$
46,654
$
42,045
$
4,609
11.0
%
For the first quarter of 2023, total non-interest income amounted to $137.6 million compared to $131.8 million in the same quarter last year, which was an increase of $5.8 million, or 4.4%. The increase was mainly due to higher net bank card fees and cash sweep commissions, partly offset by lower trust fees and loan fees and sales. Trust fees for the quarter decreased $2.5 million, or 5.2%, from the same quarter last year, as a result of lower private client fees (down 4.8%) and institutional trust fees (down 6.0%). Bank card transaction fees for the current quarter grew $4.6 million, or 11.0%, over the same period last year, mainly due to growth of $3.6 million in net corporate card fees. The growth in net corporate card fees was mainly due to higher interchange income. Compared to the first quarter of last year, deposit account fees decreased $555 thousand, or 2.5%, mainly due to lower overdraft and return item fees of $2.7 million, partly offset by higher personal deposit account fees and corporate cash management fees of $1.0 million and $959 thousand, respectively. Consumer brokerage service fees increased $639 thousand, or 14.4%, due to growth in annuity fees, partly offset by lower advisory fees. Capital market fees decreased $763 thousand, or 18.5%, while loan fees and sales decreased $1.6 million, or 38.9%, due to a decline in mortgage banking revenue. Other non-interest income increased $6.0 million, or 88.9%, mainly due to higher cash sweep commissions of $2.6 million, a write down on a branch location of $965 thousand recorded in the first quarter of 2022 and income of $524 thousand from a life insurance death benefit. In addition, a $2.0 million increase in fair value adjustments was recorded on the Company's deferred compensation plan assets, which are held in a trust, recorded as both an asset and liability, and affect both other income and other expense.
Net gains (losses) on sales of available for sale debt securities
$
(3,088)
$
—
Fair value adjustments on equity securities, net
(127)
(287)
Net gains (losses) on sales of private equity investments
658
—
Fair value adjustments on private equity investments
2,251
7,450
Total investment securities gains (losses), net
$
(306)
$
7,163
Net gains on investment securities, which were recognized in earnings during the three months ended March 31, 2023 and 2022, are shown in the table above. Net securities losses of $306 thousand were reported in the first quarter of 2023, compared to net gains of $7.2 million in the same period last year. The net losses in the first quarter of 2023 were primarily comprised of net losses of $3.1 million on the sale of available for sale securities, mostly offset by net gains in fair value of $2.3 million and a gain of $653 thousand on the sale of an investment, both in the Company’s private equity investment portfolio. The net gains on investment securities for the same quarter last year were mainly comprised of $7.5 million of net gains in fair value on the Company’s private equity investments. The portion of private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in expense of $582 thousand during the first three months of 2023 and expense of $1.5 million during the first three months of 2022.
Non-Interest Expense
Three Months Ended March 31
Increase (Decrease)
(Dollars in thousands)
2023
2022
Amount
% change
Salaries and employee benefits
$
144,373
$
135,953
$
8,420
6.2
%
Data processing and software
28,154
27,016
1,138
4.2
Net occupancy
12,759
12,296
463
3.8
Equipment
4,850
4,568
282
6.2
Supplies and communication
4,590
4,713
(123)
(2.6)
Marketing
5,471
6,344
(873)
(13.8)
Other
23,910
14,758
9,152
62.0
Total non-interest expense
$
224,107
$
205,648
$
18,459
9.0
%
Non-interest expense for the first quarter of 2023 amounted to $224.1 million, an increase of $18.5 million, or 9.0%, compared to expense of $205.6 million in the first quarter of last year. The increase in expense over the same period last year was mainly due to higher salaries and employee benefits expense, data processing and software expense and other non-interest expense. Salaries and benefits expense increased $8.4 million, or 6.2%, due to higher full-time salaries expense of $7.6 million, or 8.9%, and employee benefits expense of $1.4 million, or 5.9%, partly offset by lower incentive compensation expense of $957 thousand. Full-time equivalent employees totaled 4,636 at March 31, 2023, compared to 4,563 at March 31, 2022. Data processing and software expense increased $1.1 million, or 4.2%, due to higher bank card processing fees and increased costs for service providers. Occupancy expense increased $463 thousand, or 3.8%, mainly due to higher depreciation and utilities expense, while marketing expense decreased $873 thousand, or 13.8%. Other non-interest expense increased $9.2 million, or 62.0%, mainly due to higher FDIC insurance, deferred compensation (previously mentioned), miscellaneous losses and travel and entertainment expense of $2.3 million, $2.0 million, $1.3 million and $1.1 million, respectively.
To determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, the Company has an established process which assesses the risks and losses expected in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded lending commitments, as well as a second, smaller component based on certain individually evaluated loans and unfunded lending commitments. The Company's policies and processes for determining the allowance for credit losses on loans and the liability for unfunded lending commitments are discussed in Note 1 to the consolidated financial statements and in the "Allowance for Credit Losses" discussion within Critical Accounting Estimates and Related Policies in Item 7 of the 2022 Annual Report on Form 10-K.
Net loan charge-offs in the first quarter of 2023 amounted to $6.8 million, compared to $5.6 million in the prior quarter and $4.6 million in the first quarter of last year. During the first quarter of 2023, the Company recorded net charge-offs on commercial loans of $226 thousand, compared to net charge-offs of $492 thousand in the prior quarter and $70 thousand in the first quarter of 2022. Compared to the same period last year, total net loan charge-offs in the first quarter of 2023 increased $2.1 million and increased $1.1 million over the previous quarter. The increase over the prior year was mainly driven by increases in net charge-offs on consumer credit cards, overdrafts, and consumer loans of $953 thousand, $620 thousand, and $467 thousand, respectively. The increase over the previous quarter was driven by increases in net charge-offs on consumer credit card loans and overdrafts, party offset by decreases in net charge-offs on business and consumer loans.
For the three months ended March 31, 2023, annualized net charge-offs on average consumer credit card loans totaled 3.15%, compared to 2.46% in the previous quarter and 2.53% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .25%, compared to .29% in the prior quarter and .16% in the same period last year. In the first quarter of 2023, total annualized net loan charge-offs were .17%, compared to .14% in the previous quarter and .12% in the same period last year.
The provision for credit losses on loans was $15.9 million in the current quarter, which was a $3.5 million increase over the $12.4 million provision recorded in the prior quarter and a $26.6 million increase over the $10.7 million benefit recorded for the three months ended March 31,2022. The increase in the provision from the prior quarter was due to a slightly less optimistic forecast, which includes a mild recession in the first half of 2023. The provision for credit losses on loans for the first quarter of the prior year reflected lower than projected net charge-offs and an improved forecast at that point in time, resulting in the release of reserves established for uncertainties related to the pandemic during that quarter.
For the three months ended March 31, 2023, the allowance for credit losses on loans increased $9.2 million, compared to December 31, 2022. The increase was primarily the result of applying a slightly more pessimistic forecast compared to the forecast used at December 31, 2022. The allowance for credit losses on commercial loans increased by $5.3 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, increased $3.9 million. Compared to March 31, 2022, the allowance for credit losses on loans increased $24.6 million, mainly due to a slightly less optimistic forecast, as described above. The allowance for credit losses on loans was $159.3 million at March 31, 2023 and was .96%, .92% and .87% of total loans at March 31, 2023, December 31, 2022 and March 31, 2022, respectively.
In the current quarter, the provision for credit losses on unfunded lending commitments was a benefit of $4.5 million, compared to a provision of $3.1 million in the prior quarter and $828 thousand in the first quarter of 2022. At March 31, 2023, the liability for unfunded lending commitments was $28.6 million, compared to $33.1 million at December 31, 2022 and $25.0 million at March 31, 2022. The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans. See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses.
The Company considers the allowance for credit losses on loans and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at March 31, 2023.
The allowance for credit losses on loans and the liability for unfunded lending commitments are estimates that require significant judgment including projections of the macro-economic environment. The Company utilizes a third-party macro-economic forecast that continuously changes due to economic conditions and events. These changes in the forecast cause fluctuations in the allowance for credit losses on loans and the liability for unfunded lending commitments. The Company uses judgment to assess the macro-economic forecast and internal loss data in estimating the allowance for credit losses on loans and the liability for unfunded lending commitments. These estimates are subject to periodic refinement based on changes in the underlying external and internal data.
The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual.
(Dollars in thousands)
March 31, 2023
December 31, 2022
Non-accrual loans
$
7,801
$
8,306
Foreclosed real estate
167
96
Total non-performing assets
$
7,968
$
8,402
Non-performing assets as a percentage of total loans
.05
%
.05
%
Non-performing assets as a percentage of total assets
.02
%
.03
%
Total loans past due 90 days and still accruing interest
$
14,800
$
15,830
Non-accrual loans totaled $7.8 million at March 31, 2023, a decrease of $505 thousand from the balance at December 31, 2022. The decrease occurred mainly in business loans which decreased $390 thousand. At March 31, 2023, non-accrual loans were comprised of business (81.5%), personal real estate (16.3%), and business real estate (2.2%) loans. Foreclosed real estate totaled $167 thousand at March 31, 2023, an increase of $71 thousand when compared to December 31, 2022. Total loans past due 90 days or more and still accruing interest were $14.8 million as of March 31, 2023, a decrease of $1.0 million from December 31, 2022. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements.
In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $234.8 million at March 31, 2023 compared with $259.7 million at December 31, 2022, resulting in a decrease of $24.9 million, or 9.6%.
(In thousands)
March 31, 2023
December 31, 2022
Potential problem loans:
Business
$
67,828
$
29,455
Real estate – construction and land
29,849
47,493
Real estate – business
136,878
182,526
Real estate – personal
247
250
Total potential problem loans
$
234,802
$
259,724
At March 31, 2023, the Company had $28.8 million of loans modified to a borrower experiencing financial difficulty and are further discussed in the "Modifications for borrowers experiencing financial difficulty" section in Note 2 to the consolidated financial statements.
Loans with Special Risk Characteristics
Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon.
The Company's portfolio of construction and land loans, as shown in the table below, amounted to 8.7% of total loans outstanding at March 31, 2023. The largest component of construction and land loans was commercial construction, which increased $81.3 million during the three months ended March 31, 2023. At March 31, 2023, multi-family residential construction loans totaled approximately $330.5 million, or 27.5%, of the commercial construction loan portfolio, compared to $303.5 million, or 27.0%, at December 31, 2022.
(Dollars in thousands)
March 31, 2023
% of Total
% of
Total
Loans
December 31, 2022
% of Total
% of
Total
Loans
Commercial construction
$
1,203,399
83.7
%
7.3
%
$
1,122,105
82.4
%
6.9
%
Residential construction
130,136
9.1
.8
138,311
10.2
.8
Residential land and land development
52,595
3.6
.3
50,012
3.7
.3
Commercial land and land development
51,289
3.6
.3
50,667
3.7
.3
Total real estate - construction and land loans
$
1,437,419
100.0
%
8.7
%
$
1,361,095
100.0
%
8.3
%
Real Estate – Business Loans
Total business real estate loans were $3.5 billion at March 31, 2023 and comprised 21.1% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At March 31, 2023, 33.2% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans.
Information about the credit quality of the Company's business real estate loan portfolio as of March 31, 2023 and December 31, 2022 is provided in the table below.
(Dollars in thousands)
Pass
Special Mention
Substandard
Non-Accrual
Total
March 31, 2023
Owner-occupied
$
1,148,677
$
615
$
7,469
$
112
$
1,156,873
Office
497,137
3,387
—
—
500,524
Industrial
482,093
—
—
—
482,093
Retail
352,694
—
1,898
—
354,592
Multi-family
283,119
1,958
4,623
—
289,700
Hotels
241,194
9,606
1,663
—
252,463
Farm
194,488
177
—
58
194,723
Senior living
23,212
—
121,060
1
144,273
Other
111,034
268
—
—
111,302
Total
$
3,333,648
$
16,011
$
136,713
$
171
$
3,486,543
December 31, 2022
Owner-occupied
$
1,129,343
$
632
$
6,084
$
130
$
1,136,189
Office
494,169
3,432
—
—
497,601
Industrial
478,534
—
—
—
478,534
Retail
321,041
—
1,930
—
322,971
Multi-family
286,202
1,975
19,979
—
308,156
Hotels
174,558
9,725
46,689
—
230,972
Farm
195,685
177
—
58
195,920
Senior living
23,514
—
107,702
1
131,217
Other
105,144
277
—
—
105,421
Total
$
3,208,190
$
16,218
$
182,384
$
189
$
3,406,981
Revolving Home Equity Loans
The Company had $295.5 million in revolving home equity loans at March 31, 2023 that were generally collateralized by residential real estate. Most of these loans (91.8%) are written with terms requiring interest-only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of March 31, 2023, the outstanding principal of loans with an original LTV higher than 80% was $32.8 million, or 11.1% of the portfolio, compared to $32.4 million as of December 31, 2022. Total revolving home equity loan balances over 30 days past due were $1.7 million at March 31, 2023 and $1.9 million at December 31, 2022, and there were no revolving home equity loans on non-accrual status at March 31, 2023 or December 31, 2022. The weighted average FICO score for the total current portfolio balance is 787. At maturity, the accounts are re-underwritten, and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of 2023 through 2025, approximately 18% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 88% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels.
Consumer Loans
Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs. Auto loans comprised 39.8% of the consumer loan portfolio at March 31, 2023, and outstanding balances for auto loans were $832.8 million and $798.6 million at March 31, 2023 and December 31, 2022, respectively. The balances over 30 days past due amounted to $8.3 million at March 31, 2023 and $9.9 million at December 31, 2022, respectively and comprised 1.0% of the outstanding balances of these loans at March 31, 2023 and 1.2% at December 31, 2022, respectively. For the three months ended March 31, 2023, $120.0 million of new auto loans were originated, compared to $84.7 million during the first three months of 2022. At March 31, 2023, the automobile loan portfolio had a weighted average FICO score of 756, and net charge-offs on auto loans were .3% of average auto loans.
The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 11.2% of the consumer loan portfolio at March 31, 2023. Losses on these loans have historically been low, and the Company saw net recoveries of $22 thousand for the first three months of 2023. Private banking loans comprised 31.7% of the consumer loan portfolio at March 31, 2023. The Company's private banking loans are generally well-collateralized, and at March 31, 2023 were secured primarily by assets held by the Company's trust department. The remaining portion of the Company's consumer loan portfolio is comprised of health services financing, motorcycles, marine and RV loans. Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $610 thousand in the first three months of 2023 and were .2% of the average balances of these loans at March 31, 2023.
Consumer Credit Card Loans
The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at March 31, 2023 of $558.7 million in consumer credit card loans outstanding, approximately $103.2 million, or 18.5%, carried a low promotional rate. Within the next six months, $42.5 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters.
Oil and Gas Energy Lending
The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $285.1 million, or 1.7% of total loans at March 31, 2023, a decrease of $11.3 million from year end 2022, as shown in the table below.
(In thousands)
March 31, 2023
December 31, 2022
Unfunded commitments at March 31, 2023
Extraction
$
233,670
$
235,933
$
150,203
Mid-stream shipping and storage
27,520
43,432
107,637
Downstream distribution and refining
14,934
7,675
8,433
Support activities
9,017
9,387
7,532
Total energy lending portfolio
$
285,141
$
296,427
$
273,805
Shared National Credits
The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled $1.5 billion at March 31, 2023, compared to $1.4 billion at December 31, 2022. Additional unfunded commitments at March 31, 2023 totaled $2.0 billion.
Income Taxes
Income tax expense was $32.8 million in the first quarter of 2023, compared to $34.5 million in the fourth quarter of 2022 and $31.9 million in the first quarter of 2022. The Company's effective tax rate, including the effect of non-controlling interest, was 21.6% in the first quarter of 2023, compared to 20.8% in the fourth quarter of 2022 and 21.3% in the first quarter of 2022.
Total assets of the Company were $32.0 billion at March 31, 2023 and $31.9 billion at December 31, 2022. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $31.6 billion at March 31, 2023 and at December 31, 2022, and consisted of 52% in loans and 41% in investment securities at March 31, 2023.
During the first quarter of 2023, average loans totaled $16.4 billion, an increase of $518.9 million over the prior quarter, and $1.2 billion, or 7.8%, over the same quarter last year. Compared to the previous quarter, average balances of business, business real estate, and construction loans grew $177.9 million, $177.7 million, and $141.9, respectively. Personal real estate loans also increased $47.1 million, while consumer loans declined $22.5 million. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $3.2 million, compared to $2.4 million in the prior quarter.
Total average available for sale debt securities decreased $591.1 million compared to the previous quarter to $11.8 billion, at fair value. The decrease in investment securities was mainly the result of lower balances of mortgage-backed, other asset-backed, and state and municipal securities. During the first quarter of 2023, the unrealized loss on available for sale securities decreased $190.0 million to $1.3 billion and sales, maturities and pay downs were $1.3 billion at period end. At March 31, 2023, the duration of the available for sale investment portfolio was 3.9 years and maturities and pay downs of approximately $2.0 billion are expected to occur during the next 12 months. The Company does not have any investment securities classified as held-to-maturity.
Total average deposits decreased $1.4 billion this quarter compared to the previous quarter. The decrease in deposits mostly resulted from lower demand deposits and interest checking and money market deposits of $1.2 billion and $428.5 million, respectively, partly offset by higher certificate of deposit balances of $333.8 million. Compared to the previous quarter, total average commercial and consumer deposits declined $868.9 million and $530.1 million, respectively, while average wealth deposits increased $39.8 million. The average loans to deposits ratio was 65.0% in the current quarter and 59.7% in the prior quarter. The Company’s average borrowings, which included customer repurchase agreements of $2.4 million, were $3.5 billion in the first quarter of 2023 and $2.6 billion in the prior quarter.
Liquidity and Capital Resources
Liquidity Management
The Company’s most liquid assets are comprised of available for sale debt securities, federal funds sold, securities purchased under agreements to resell (resale agreements), and balances at the Federal Reserve Bank, as follows:
(In thousands)
March 31, 2023
March 31, 2022
December 31, 2022
Liquid assets:
Available for sale debt securities
$
11,228,616
$
14,780,494
$
12,238,316
Federal funds sold
27,060
—
49,505
Securities purchased under agreements to resell
825,000
1,825,000
825,000
Balances at the Federal Reserve Bank
1,341,854
1,260,813
389,140
Total
$
13,422,530
$
17,866,307
$
13,501,961
Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $27.1 million as of March 31, 2023. Resale agreements, maturing through 2025, totaled $825.0 million at March 31, 2023. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral, and this collateral totaled $870.8 million in fair value at March 31, 2023. $700.0 million of the Company's resale agreements will mature in the next 12 months. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $1.3 billion at March 31, 2023 and increased $952.7 million over December 31, 2022 balances. The fair value of the available for sale debt portfolio was $11.2 billion at March 31, 2023 and included an unrealized net loss of $1.3 billion.
Approximately $2.0 billion of the Company's available for sale debt portfolio is expected to mature or pay down during the next 12 months, and at March 31, 2023, the duration of the Company's available for sale debt securities portfolio was 3.9 years. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows:
(In thousands)
March 31, 2023
March 31, 2022
December 31, 2022
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings
$
3,145,959
$
16,260
$
11,469
FHLB borrowings and letters of credit
294,025
2,798
1,817
Securities sold under agreements to repurchase *
2,290,546
2,575,444
2,950,240
Other deposits and swaps
2,409,058
2,606,141
1,772,974
Total pledged securities
8,139,588
5,200,643
4,736,500
Unpledged and available for pledging
3,070,590
8,426,648
6,545,695
Ineligible for pledging
18,438
1,153,203
956,121
Total available for sale debt securities, at fair value
$
11,228,616
$
14,780,494
$
12,238,316
* Includes securities pledged for collateral swaps, as discussed in Note 12 to the consolidated financial statements.
Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At March 31, 2023, such deposits totaled $23.1 billion and represented 93.6% of total deposits. These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources. Certificates of deposit of $100,000 and over totaled $1.1 billion at March 31, 2023. These accounts are normally considered more volatile with higher cost and comprised 4.5% of total deposits at March 31, 2023.
(In thousands)
March 31, 2023
March 31, 2022
December 31, 2022
Core deposit base:
Non-interest bearing
$
8,685,234
$
11,428,372
$
10,066,356
Interest checking
6,464,948
3,301,315
1,854,336
Savings and money market
7,954,793
13,450,317
13,272,645
Total
$
23,104,975
$
28,180,004
$
25,193,337
During January 2023, the Company's deposit portfolio declined $964.6 million. At March 31, 2023, the Company's deposit portfolio was $24.7 billion, compared to $26.2 billion at December 31, 2022. The Company's uninsured deposits were $9.8 billion, or 39.7% of total deposits at March 31, 2023. The Company's uninsured deposits include $2.0 billion of affiliate deposits and collateralized deposits. Excluding those affiliate and collateralized deposits, the Company's uninsured deposits at March 31, 2023 were $7.8 billion, or 31.6% of total deposits.
Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company's outside borrowings are mainly comprised of federal funds purchased and repurchase agreements, as follows:
(In thousands)
March 31, 2023
March 31, 2022
December 31, 2022
Borrowings:
Federal funds purchased
$
756,470
$
17,315
$
159,860
Securities sold under agreements to repurchase
2,028,089
2,300,146
2,681,874
FHLB advances
1,500,000
—
—
Other debt
7,776
9,057
9,672
Total
$
4,292,335
$
2,326,518
$
2,851,406
Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. In addition to the amount accessed as of March 31, 2023, the Company had access to an additional $3.9 billion of overnight, approved Federal funds as of that date. Repurchase agreements are borrowings by the Company from its customers in the form of securities sold under agreements to repurchase. These repurchase agreements, which generally mature overnight, are comprised of non-insured customer funds totaling $2.0 billion at March 31, 2023 and are collateralized by securities in the Company's investment portfolio. At March 31, 2023, the value of the
collateral pledged for the benefit of customers was $2.1 billion. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were $1.5 billion advances outstanding from the FHLB at March 31, 2023.
The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank (FRB) and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral and enables the FHLB to issue letters of credit in favor of public fund depositors of the Company. The FRB also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at March 31, 2023.
March 31, 2023
(In thousands)
FHLB
Federal Reserve
Total
Total collateral value established by FHLB and FRB
$
2,165,815
$
3,829,015
$
5,994,830
Advances outstanding
(1,500,000)
—
(1,500,000)
Letters of credit issued
(111,515)
—
(111,515)
Available for future advances
$
554,300
$
3,829,015
$
4,383,315
In addition to those mentioned above, several other sources of liquidity are available. No commercial paper has been issued or outstanding during the past ten years. The Company has no subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that through its Capital Markets Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit or privately placed corporate notes or other forms of debt. The Company receives strong outside rankings from both Standard & Poor's and Moody's on both the consolidated company level and its subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise. These ratings are as follows:
Standard & Poor’s
Moody’s
Commerce Bancshares, Inc.
Issuer rating
A-
Rating outlook
Stable
Commerce Bank
Issuer rating
A
A2
Baseline credit assessment
a1
Short-term rating
A-1
P-1
Rating outlook
Stable
Stable
The cash flows from the operating, investing and financing activities of the Company resulted in a net increase in cash, cash equivalents and restricted cash of $822.3 million during the first three months of 2023, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $116.1 million and has historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, provided cash of $888.2 million. Activity in the investment securities portfolio provided cash of $1.1 billion from sales, maturities, and pay downs (net of purchases), but this increase in investing cash flows was partially offset by growth in the loan portfolio, which used cash of $239.2 million. Financing activities used cash of $182.0 million, largely resulting from a decrease in deposits of $1.6 billion, paired with a decrease in federal funds purchased and securities sold under agreements to repurchase of $57.2 million. Borrowings, including FHLB advances during the first three months of 2023, increased financing cash flows by $1.5 billion.
The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at March 31, 2023 and December 31, 2022, as shown in the following table.
(Dollars in thousands)
March 31, 2023
December 31, 2022
Minimum Ratios under Capital Adequacy Guidelines
Minimum Ratios for Well-Capitalized Banks *
Risk-adjusted assets
$
23,928,212
$
24,178,423
Tier I common risk-based capital
3,463,319
3,417,223
Tier I risk-based capital
3,463,319
3,417,223
Total risk-based capital
3,651,557
3,600,920
Tier I common risk-based capital ratio
14.47
%
14.13
%
7.00
%
6.50
%
Tier I risk-based capital ratio
14.47
14.13
8.50
8.00
Total risk-based capital ratio
15.26
14.89
10.50
10.00
Tier I leverage ratio
10.61
10.34
4.00
5.00
*Under Prompt Corrective Action requirements
The Company is subject to a 2.5% capital conservation buffer, which is an amount above the minimum ratios under capital adequacy guidelines, and is required under Basel III. The capital conservation buffer is intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, share repurchases, and executive compensation.
In the first quarter of 2020, the interim final rule of the Federal Reserve Bank and other U.S. banking agencies became effective, providing banks that adopt CECL (ASU 2016-13) during the 2020 calendar year the option to delay recognizing the estimated impact on regulatory capital until after a two year deferral period, followed by a three year transition period. In connection with the adoption of CECL on January 1, 2020, the Company elected to utilize this option. As a result, the two year deferral period for the Company extended through December 31, 2021. Beginning on January 1, 2022, the Company began to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025.
The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and normally purchases stock in the open market. During the three months ended March 31, 2023, the Company purchased 547,381 shares at an average price of $65.93 in open market purchases and through stock-based compensation transactions. At March 31, 2023, 2,564,677 shares remained available for purchase under the current Board authorization.
The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.270 per share cash dividend on its common stock in the first quarter of 2023, which was a 7.1% increase compared to its 2022 quarterly dividend.
Material Cash Requirements, Commitments, Off-Balance Sheet Arrangements and Contingencies
The Company's material cash requirements include commitments for contractual obligations (both short-term and long-term), commitments to extend credit, and off-balance sheet arrangements. The Company's material cash requirements for the next 12 months are primarily to fund loan commitments, deposit maturities and deposit withdrawals that may occur; repay borrowings; and fund loan growth. Other contractual obligations, purchase commitments, lease obligations, and unfunded commitments may require cash payments by the Company, and these are further discussed in the Company's 2022 Annual Report on Form 10-K. Further discussion of the Company's longer-term material cash obligations and sources for fulfilling those obligations is below.
Events impacting the banking industry during the first few months of 2023, including the failure of Silicon Valley Bank and Signature Bank, have resulted in decreased confidence in banks among consumer and commercial customers, investors, and other counterparties. Additionally, rapidly rising interest rates have resulted in unrealized losses in the Company's available for sale debt securities portfolio. In response to these industry events, the Company sought additional borrowings during the first quarter of 2023, and as a result, the Company’s borrowings increased by $1.4 billion. Other than the repayment of these additional borrowings, the Company’s material cash requirements have not changed significantly since December 31, 2022. Further discussion of the Company's longer-term material cash obligations and sources for fulfilling those obligations is below.
In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at March 31, 2023 totaled $14.2 billion (including $5.2 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $588.8 million (net of conveyances to other institutions) and $4.8 million, respectively, at March 31, 2023. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to $4.9 million at March 31, 2023. The allowance for these commitments is recorded in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheets. At March 31, 2023, the liability for unfunded commitments totaled $28.6 million. See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements.
During the third quarter of 2020, the Company signed a $106.7 million agreement with U.S. Capital Development to develop a 280,000 square foot commercial office building in a two building complex in Clayton, Missouri, which was placed in service at the beginning of March 2023. As of March 31, 2023, the Company has made payments totaling $105.7 million. While the Company intends to occupy a portion of the office building for executive offices, a 15 year lease agreement has been signed by an anchor tenant to lease approximately 50% of the office building.
The Company regularly purchases various state tax credits arising from third party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first three months of 2023, purchases and sales of tax credits amounted to $22.2 million and $6.7 million, respectively. Fees from sales of tax credits were $561 thousand for the three months ended March 31, 2023, compared to $783 thousand in the same period last year. At March 31, 2023, the Company expected to fund outstanding purchase commitments of $93.1 million during the remainder of 2023.
The Company continued to maintain a strong liquidity position throughout the first three months of 2023. Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations.
Segment Results
The table below is a summary of segment pre-tax income results for the first three months of 2023 and 2022.
(Dollars in thousands)
Consumer
Commercial
Wealth
Segment
Totals
Other/ Elimination
Consolidated Totals
Three Months Ended March 31, 2023
Net interest income
$
96,854
$
116,166
$
17,540
$
230,560
$
21,063
$
251,623
Provision for credit losses
(6,306)
(393)
(13)
(6,712)
(4,744)
(11,456)
Non-interest income
24,303
58,324
52,944
135,571
2,041
137,612
Investment securities gains (losses), net
—
—
—
—
(306)
(306)
Non-interest expense
(77,326)
(93,623)
(39,636)
(210,585)
(13,522)
(224,107)
Income before income taxes
$
37,525
$
80,474
$
30,835
$
148,834
$
4,532
$
153,366
Three Months Ended March 31, 2022
Net interest income
$
86,818
$
108,953
$
18,869
$
214,640
$
(5,854)
$
208,786
Provision for credit losses
(4,504)
(82)
(26)
(4,612)
14,470
9,858
Non-interest income
26,415
53,651
53,206
133,272
(1,503)
131,769
Investment securities gains (losses), net
—
—
—
—
7,163
7,163
Non-interest expense
(74,823)
(89,506)
(36,288)
(200,617)
(5,031)
(205,648)
Income before income taxes
$
33,906
$
73,016
$
35,761
$
142,683
$
9,245
$
151,928
Increase (decrease) in income before income taxes:
Amount
$
3,619
$
7,458
$
(4,926)
$
6,151
$
(4,713)
$
1,438
Percent
10.7
%
10.2
%
(13.8
%)
4.3
%
(51.0)
%
.9
%
Consumer
For the three months ended March 31, 2023, income before income taxes for the Consumer segment increased $3.6 million, or 10.7%, compared to the first three months of 2022. The increase in income before income taxes was mainly due to an increase in net interest income of $10.0 million, or 11.6%, partly offset by a decrease in non-interest income of $2.1 million, or
8.0%, and higher non-interest expense of $2.5 million, or 3.3%. Net interest income increased due to a $4.8 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and a $9.2 million increase in loan interest income. These increases were partly offset by higher deposit interest expense of $4.0 million. Non-interest income decreased mainly due to lower mortgage banking revenue and deposit account fees, partly offset by growth in debit card fees. Deposit account fees decreased due to lower overdraft and return item fees, partly offset by higher personal deposit account fees. Non-interest expense increased over the same period in the previous year mainly due to higher salaries and benefits expense, FDIC insurance expense and occupancy expense, partly offset by lower marketing expense and allocated support costs for information technology. The provision for credit losses totaled $6.3 million, a $1.8 million increase over the first three months of 2022, mainly due to higher credit card, overdraft and personal loan net charge-offs.
Commercial
For the three months ended March 31, 2023, income before income taxes for the Commercial segment increased $7.5 million, or 10.2%, compared to the same period in the previous year. This increase was mainly due to growth in non-interest income and net interest income, partly offset by higher non-interest expense. Net interest income increased $7.2 million, or 6.6%, mainly due to higher loan interest income of $74.6 million. This increase was partly offset by lower net allocated funding credits of $32.0 million and increases of $19.0 million in deposit interest expense and $16.8 million in interest expense on customer repurchase agreements. Non-interest income increased $4.7 million, or 8.7%, over the previous year mainly due to growth in net bank card fees (mainly corporate card fees), deposit account fees (mainly corporate cash management fees) and cash sweep commissions, partly offset by a decline capital market fees. Non-interest expense increased $4.1 million, or 4.6%, mainly due to higher data processing expense, FDIC insurance expense and allocated service and support costs (mainly bank operations and commercial products and payments). These increases were partly offset by lower allocated support costs for information technology. The provision for credit losses increased $311 thousand over the same period last year, mainly due to higher overdraft and commercial credit card loan net charge-offs.
Wealth
Wealth segment pre-tax profitability for the three months ended March 31, 2023 decreased $4.9 million, or 13.8%, from the same period in the previous year. Net interest income decreased $1.3 million, or 7.0%, mainly due to an $8.0 million decline in net allocated funding credits and a $2.9 million increase in deposit interest expense, partly offset by a $9.6 million increase in loan interest income. Non-interest income decreased $262 thousand, or .5%, from the prior year largely due lower private client and institutional trust fees, partly offset by higher cash sweep commissions and consumer brokerage service fees. Non-interest expense increased $3.3 million, or 9.2%, mainly due to higher salaries and benefits expense and miscellaneous losses. The provision for credit losses decreased $13 thousand from the same period last year, due to lower personal real estate loan net charge-offs.
The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was $4.7 million lower than in the same period last year. Unallocated securities losses were $306 thousand in the first three months of 2023 compared to gains of $7.2 million in 2022. Also, the unallocated provision for credit losses increased $19.2 million, primarily driven by an increase in the provision for credit losses on loans, partly offset by a decrease in the liability for unfunded lending commitments, which are both not allocated to the segments for management reporting purposes. Net charge-offs are allocated to the segments when incurred for management reporting purposes. The provision for credit losses on loans was $9.2 million higher than net charge-offs in 2023, while the provision was $15.3 million lower than net charge-offs, as the provision was a benefit in 2022. For the three months ended March 31, 2023, the Company's provision on unfunded lending commitments was a benefit of $4.5 million. Additionally, non-interest expense decreased $8.5 million. These decreases to pre-tax profitability were partly offset by higher net interest income of $26.9 million, and non-interest income of $3.5 million.
Reference Rate Reform The Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting", in March 2020, and has been followed by additional clarifying guidance related to derivatives that are modified as a result of reference rate reform. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if they reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Further, the guidance applies to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The expedients and exceptions provided by the new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated for effectiveness after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which extended the sunset date under Topic 848 to December 31, 2024. The change is to align the temporary accounting relief guidance with the expected cessation date of LIBOR, which was postponed by administrators in 2021 to June 2023, a year after the current sunset date of ASU 2020-04.
In order to assess the impact of transition and ensure a successful transition process, the Company established a LIBOR Transition Program led by the LIBOR Transition Steering Committee (the Committee), which is an internal, cross-functional team with representatives from all relevant business lines, support functions and legal counsel. A LIBOR impact and risk assessment was performed, and the Committee developed and prioritized action items. All LIBOR-based loans must be converted to an alternative index by June 30, 2023, as LIBOR will no longer be published after June 30, 2023. All of the Company's financial contracts that reference LIBOR have been identified, and LIBOR fallback language has been included in key loan provisions of new and renewed loans in preparation of the transition from LIBOR. The Company ceased originating new loans with LIBOR as a reference rate at the end of 2021 and is actively working with customers to modify existing loans that reference LIBOR to a new reference rate. The Company is nearly finished transitioning the impacted loans.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest income sensitivity to movement in interest rates. The Company performs monthly simulations that model interest rate movements and risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2022 Annual Report on Form 10-K.
The tables below show the effects of gradual shifts in interest rates over a twelve month period on the Company’s net interest income versus the Company's net interest income in a flat rate scenario. Simulation A presents three rising rate scenarios and three falling rate scenarios, and in each scenario, rates are assumed to change evenly over 12 months. In these scenarios, the balance sheet remains flat.
Because the future effects of changes in rates on deposit balances cannot be known with certainty, the Company conservatively models alternate scenarios with deposit attrition as rates rise. Simulation B illustrates results from these higher attrition scenarios to provide added perspective on potential effects of higher rates.
The Company utilizes these simulations both for monitoring interest rate risk and for liquidity planning purposes. While the future effects of rising and falling rates on deposit balances cannot be known, the Company maintains a practice of running multiple rate scenarios to better understand interest rate risk and its effect on the Company’s performance.
Simulation A
March 31, 2023
December 31, 2022
(Dollars in millions)
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
300 basis points rising
$
(7.6)
(.75)
%
$
—
$
(.5)
(.05)
%
$
—
200 basis points rising
(6.5)
(.63)
—
2.0
.19
—
100 basis points rising
(1.3)
(.13)
—
4.1
.38
—
100 basis points falling
(16.0)
(1.56)
—
(24.0)
(2.20)
—
200 basis points falling
(40.1)
(3.92)
—
(52.6)
(4.82)
—
300 basis points falling
(66.5)
(6.49)
—
(84.9)
(7.78)
—
Simulation B
March 31, 2023
December 31, 2022
(Dollars in millions)
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
300 basis points rising
$
(15.1)
(1.50)
%
$
(49.4)
$
(17.9)
(1.71)
%
$
(216.7)
200 basis points rising
(11.5)
(1.14)
(36.2)
(11.4)
(1.09)
(180.4)
100 basis points rising
(3.9)
(.39)
(20.0)
(5.0)
(.48)
(136.6)
100 basis points falling
$
(10.9)
(1.08)
$
74.7
3.6
.34
539.3
200 basis points falling
(29.1)
(2.89)
189.6
(15.2)
(1.45)
761.0
300 basis points falling
(52.4)
(5.21)
257.1
(45.6)
(4.36)
792.0
Under Simulation A, in the three rising rate scenarios and three falling rate scenarios, interest rate risk is more negative in the up scenarios and less negative in the down scenarios than the previous quarter. This was primarily due to a decrease in non-maturity deposits and an increase in short-term borrowings, partly offset by a decrease in investment securities and an increase in deposits at the Federal Reserve. Deposit attrition was removed from the simulation in both the current and previous quarters.
In Simulation B, the assumed levels of deposit attrition were modeled to capture the results of a shrinking balance sheet. Under this Simulation, in the three rising rate scenarios and three falling rate scenarios, interest rate risk is less negative in the up scenarios and more negative in the down scenarios than in the previous quarter, primarily due to a decrease in surge deposits.
The comparisons above provide insight into potential effects of changes in rates and deposit levels on net interest income. The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of interest rate risk.
Item 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2023. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
The information required by this item is set forth in Part I, Item 1 under Note 17, Legal and Regulatory Proceedings.
Item 1A. RISK FACTORS
Liquidity and Capital Risks
Adverse developments affecting the banking industry, such as recent bank failures or concerns involving liquidity, may have material adverse effects on the Company’s operations.
Events impacting the banking industry during the first few months of 2023, including the failure of Silicon Valley Bank in March, have resulted in decreased confidence in regional banks among deposit customers, investors, and other counterparties. Additionally, these events have caused significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events occurred during a period of rapidly rising interest rates, which, among other things, has resulted in unrealized losses in the Company's available for sale debt securities portfolio and increased competition for bank deposits. These events have, and could continue to have, adverse impacts on the market price and volatility of the Company’s stock. These events could also lead to increases in the Company’s interest expense, as it has raised and may continue to raise interest rates paid to depositors in order to compete with other banks, and in an effort to replace deposits, seek borrowings which carry higher interest rates.
Recent bank failures have caused concern and uncertainty regarding the liquidity adequacy of the banking sector as a whole and resulted in some regional bank customers choosing to maintain deposits with larger financial institutions. A significant reduction in the Company’s deposits could materially, adversely impact the Company’s liquidity, ability to fund loans, and results of operations. In addition to customer deposits, the Company borrows on an overnight and short-term basis from third parties in the form of federal funds purchased and repurchase agreements and through lines of credit and borrowings from the FHLB and FRB. If the Company is not able to access borrowings through those facilities due to an increase in demand from other banks or due to insufficient levels of pledgeable assets, its ability to borrow funds may be materially adversely impacted.
The Company could recognize losses on securities held in its securities portfolio, particularly if it were to sell a significant portion of its investments prior to maturity.
The Company maintains a portfolio of investments, which includes available for sale debt securities, trading securities, equity securities, and other investments. At March 31, 2023, the Company did not hold any investments classified as held-to-maturity. The Company's available for sale debt securities portfolio is carried at fair value, with unrealized gains and losses carried in accumulated other comprehensive income (loss) within shareholder's equity. The fair value of investments, including available for sale debt investments, may change with changes in interest rates, credit concerns, or other economic factors. Due to the rapid rise of interest rates during the previous 13 months, the fair value of the Company's available of sale debt securities included a net unrealized loss of $1.3 billion at March 31, 2023. Although as of March 31, 2023, the Company has the intent and ability to maintain its available for sale debt investments until maturity, if in the future the Company were to elect to sell or needed to sell the investments before their maturity, the Company could realize significant losses in its income statement.
Any changes to regulations, regulatory policies, laws, or supervisory or enforcement activities arising from the recent events in the banking industry could increase the Company’s expenses and adversely impact the Company’s operations.
In addition to operational impacts to the Company, the recent events in the banking industry may also result in changes to the laws and regulations governing banks and bank holding companies. As part of the financial services industry, the Company is subject to extensive federal and state regulation and supervision. Changes to regulations, regulatory policies, laws, or supervisory or enforcement activities could affect the Company in substantial and adverse ways, including limiting the services and products the Company may offer, restrict the Company’s ability to pay dividends, result in the Company incurring higher costs, or subject the Company to higher capital requirements. Inability to access short-term funding, loss of client deposits or changes in our credit ratings could increase the cost of funding, limit access to capital markets or negatively impact the Company’s overall liquidity or capitalization. The Company may be impacted by concerns regarding the soundness or creditworthiness of other financial institutions, which can cause disruption within the financial markets and increased expenses. The cost of resolving the recent bank failures may also prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments, which would likely increase expenses and negatively impact net income.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information about the Company's purchases of its $5 par value common stock, its only class of common stock registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as part of Publicly Announced Program
Maximum Number that May Yet Be Purchased Under the Program
January 1 - 31, 2023
124,045
$
65.85
124,045
2,988,013
February 1 - 28, 2023
270,152
$
66.76
270,152
2,717,861
March 1 - 31, 2023
153,184
$
64.51
153,184
2,564,677
Total
547,381
$
65.93
547,381
2,564,677
The Company's stock purchases shown above were made under authorizations by the Board of Directors. Under the most recent authorization in April 2022 of 5,000,000 shares, 2,564,677 shares remained available for purchase at March 31, 2023.
101 — Interactive data files in Inline XBRL pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
104 — Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
