COMMERCE BANCSHARES, INC. 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 endedMarch 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 endedMarch 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 sinceDecember 31, 2022 . 45 --------------------------------------------------------------------------------
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Selected Financial Data
Three Months
Ended March 31
2023 2022
Per Share DataNet income per common share - basic$ .95 $ .92 * Net income per common share - diluted .95 .92 * Cash dividends on common stock .270 .252 * Book value per common share 21.51 23.43 * Market price 58.35 68.18 * Selected Ratios (Based on average balance sheets) Loans to deposits (1) 64.99 % 51.90 % Non-interest bearing deposits to total deposits 36.10 39.34 Equity to loans (1) 15.74 21.83 Equity to deposits 10.23 11.33 Equity to total assets 8.22 9.26 Return on total assets 1.54 1.33 Return on equity 18.75 14.41
(Based on end-of-period data)
Non-interest income to revenue (2) 35.35 38.69 Efficiency ratio (3) 57.49 60.29 Tier I common risk-based capital ratio 14.47 13.92 Tier I risk-based capital ratio 14.47 13.92 Total risk-based capital ratio 15.26 14.61 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 inDecember 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.
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Results of Operations
Summary
Increase
Three Months Ended March 31 (Decrease)
(Dollars in thousands) 2023 2022 Amount % change
Net interest income $ 251,623 $ 208,786 $ 42,837 20.5 %
Provision for credit losses (11,456) 9,858 21,314 (216.2)
Non-interest income 137,612 131,769 5,843 4.4
Investment securities gains (losses), net (306) 7,163 (7,469) (104.3)
Non-interest expense (224,107) (205,648) 18,459 9.0
Income taxes (32,813) (31,902) 911 2.9
Non-controlling interest income (expense) (1,101) (1,872) (771) (41.2)
Net income attributable to
$ 118,154 1,298 1.1 % For the quarter endedMarch 31, 2023 , net income attributable toCommerce 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. 47 -------------------------------------------------------------------------------- Table of
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Net Interest Income
The following table summarizes the changes in net interest income on a fully taxable-equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.
Analysis of Changes in Net Interest Income
Three Months Ended March 31, 2023
vs. 2022
Change due to
Average Average
(In thousands) Volume Rate Total
Interest income, fully taxable equivalent basis:
Loans:
Business 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
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 48 -------------------------------------------------------------------------------- Table of
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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 onU.S. government and federal agency obligations, which declined$4.2 million due to a decrease in inflation income on the Company'sU.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 theFederal 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, whileFederal 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.
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Non-Interest Income
Three Months Ended March 31 Increase (Decrease)
(Dollars in thousands) 2023 2022 Amount % change
Trust fees $ 45,328 $ 47,811 $ (2,483) (5.2) %
Bank card transaction fees 46,654 42,045 4,609 11.0
Deposit account charges and other fees 21,752 22,307 (555) (2.5)
Consumer brokerage services 5,085 4,446 639 14.4
Capital market fees 3,362 4,125 (763) (18.5)
Loan fees and sales 2,589 4,235 (1,646) (38.9)
Other 12,842 6,800 6,042 88.9
Total non-interest income $ 137,612 $ 131,769 $ 5,843 4.4 %
Non-interest income as a % of total revenue* 35.4 % 38.7 %
* Total revenue includes 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
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
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. 50
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Investment Securities Gains (Losses), Net
Three Months Ended March 31
(In thousands) 2023 2022
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)
Net gains on investment securities, which were recognized in earnings during the three months endedMarch 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 atMarch 31, 2023 , compared to 4,563 atMarch 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 higherFDIC 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. 51
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Provision and Allowance for Credit Losses on Loans and Liability for Unfunded
Lending Commitments
Three Months Ended
Mar. 31, 2023 Dec. 31, 2022 Mar. 31, 2022
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period $
150,136
Provision for credit losses on loans 15,948 12,404 (10,686)
Net loan charge-offs (recoveries):
Commercial:
Business 230 496 77
Real estate-construction and land - - -
Real estate-business (4) (4) (7)
Commercial net loan charge-offs (recoveries) 226 492 70
Personal Banking:
Real estate-personal (11) (40) 22
Consumer 1,275 1,522 808
Revolving home equity (26) (26) 18
Consumer credit card 4,325 3,467 3,372
Overdrafts 978 230 358
Personal banking net loan charge-offs (recoveries) 6,541 5,153 4,578
Total net loan charge-offs (recoveries) 6,767 5,645 4,648
Balance at end of period $ 159,317 $ 150,136 $ 134,710
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at beginning of period 33,120 30,047 24,204
Provision for credit losses on unfunded lending commitments (4,492) 3,073 828
Balance at end of period 28,628 33,120 25,032
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED
LENDING COMMITMENTS $ 187,945 $ 183,256 $ 159,742
Three Months Ended
Mar. 31, 2023 Dec. 31, 2022 Mar. 31, 2022
Annualized net loan charge-offs (recoveries)*:
Commercial:
Business .02 % .04 % .01 %
Real estate-construction and land - - -
Real estate-business - - -
Commercial net loan charge-offs (recoveries) .01 .02 -
Personal Banking:
Real estate-personal - (.01) -
Consumer .25 .29 .16
Revolving home equity (.04) (.04) .03
Consumer credit card 3.15 2.46 2.53
Overdrafts 89.15 12.28 28.04
Personal banking net loan charge-offs (recoveries) .45 .35 .33
Total annualized net loan charge-offs (recoveries) .17 % .14 % .12 %
* as a percentage of average loans (excluding loans held for sale)
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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 endedMarch 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 endedMarch 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 endedMarch 31, 2023 , the allowance for credit losses on loans increased$9.2 million , compared toDecember 31, 2022 . The increase was primarily the result of applying a slightly more pessimistic forecast compared to the forecast used atDecember 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 toMarch 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 atMarch 31, 2023 and was .96%, .92% and .87% of total loans atMarch 31, 2023 ,December 31, 2022 andMarch 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. AtMarch 31, 2023 , the liability for unfunded lending commitments was$28.6 million , compared to$33.1 million atDecember 31, 2022 and$25.0 million atMarch 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
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.
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Risk Elements of Loan Portfolio
The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual. (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 atMarch 31, 2023 , a decrease of$505 thousand from the balance atDecember 31, 2022 . The decrease occurred mainly in business loans which decreased$390 thousand . AtMarch 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 atMarch 31, 2023 , an increase of$71 thousand when compared toDecember 31, 2022 . Total loans past due 90 days or more and still accruing interest were$14.8 million as ofMarch 31, 2023 , a decrease of$1.0 million fromDecember 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 atMarch 31, 2023 compared with$259.7 million atDecember 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
AtMarch 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.
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Real Estate - Construction and Land Loans
The Company's portfolio of construction and land loans, as shown in the table below, amounted to 8.7% of total loans outstanding atMarch 31, 2023 . The largest component of construction and land loans was commercial construction, which increased$81.3 million during the three months endedMarch 31, 2023 . AtMarch 31, 2023 , multi-family residential construction loans totaled approximately$330.5 million , or 27.5%, of the commercial construction loan portfolio, compared to$303.5 million , or 27.0%, atDecember 31, 2022 . % of % of March 31, Total December 31, Total (Dollars in thousands) 2023 % of Total Loans 2022 % of Total Loans Commercial construction$ 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$3.5 billion atMarch 31, 2023 and comprised 21.1% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. AtMarch 31, 2023 , 33.2% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans. % of % of March 31, Total December 31, Total (Dollars in thousands) 2023 % of Total Loans 2022 % of Total Loans Owner-occupied$ 1,156,873 33.2 % 7.0 %$ 1,136,189 33.3 % 7.0 % Office 500,524 14.4 3.0 497,601 14.6 3.1 Industrial 482,093 13.8 2.9 478,534 14.0 2.9 Retail 354,592 10.2 2.1 322,971 9.5 2.0 Multi-family 289,700 8.3 1.8 308,156 9.0 1.9 Hotels 252,463 7.2 1.5 230,972 6.8 1.4 Farm 194,723 5.6 1.2 195,920 5.8 1.2 Senior living 144,273 4.1 .9 131,217 3.9 .8 Other 111,302 3.2 .7 105,421 3.1 .6 Total real estate - business loans$ 3,486,543 100.0 % 21.1 %$ 3,406,981 100.0 % 20.9 % 55 -------------------------------------------------------------------------------- Table of
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Information about the credit quality of the Company's business real estate loan portfolio as ofMarch 31, 2023 andDecember 31, 2022 is provided in the table below. (Dollars in thousands) Pass Special Mention Substandard Non-Accrual TotalMarch 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 atMarch 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 ofMarch 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 ofDecember 31, 2022 . Total revolving home equity loan balances over 30 days past due were$1.7 million atMarch 31, 2023 and$1.9 million atDecember 31, 2022 , and there were no revolving home equity loans on non-accrual status atMarch 31, 2023 orDecember 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 atMarch 31, 2023 , and outstanding balances for auto loans were$832.8 million and$798.6 million atMarch 31, 2023 andDecember 31, 2022 , respectively. The balances over 30 days past due amounted to$8.3 million atMarch 31, 2023 and$9.9 million atDecember 31, 2022 , respectively and comprised 1.0% of the outstanding balances of these loans atMarch 31, 2023 and 1.2% atDecember 31, 2022 , respectively. For the three months endedMarch 31, 2023 ,$120.0 million of new auto loans were originated, compared to$84.7 million during the first three months of 2022. AtMarch 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. 56 -------------------------------------------------------------------------------- Table of
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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 atMarch 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 atMarch 31, 2023 . The Company's private banking loans are generally well-collateralized, and atMarch 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 atMarch 31, 2023 . Consumer Credit Card Loans The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio atMarch 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 atMarch 31, 2023 , a decrease of$11.3 million from year end 2022, as shown in the table below. Unfunded December 31, commitments at (In thousands) March 31, 2023 2022 March 31, 2023 Extraction$ 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 atMarch 31, 2023 , compared to$1.4 billion atDecember 31, 2022 . Additional unfunded commitments atMarch 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. 57 --------------------------------------------------------------------------------
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Financial Condition
Balance Sheet
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
$2.6 billion in the prior quarter.
Liquidity and Capital Resources
Liquidity Management
The Company's most liquid assets are comprised of available for sale debt
securities, federal funds sold, securities purchased under agreements to resell
(resale agreements), and balances at the
(In thousands) March 31, 2023 March 31, 2022 December 31, 2022
Liquid assets:
Available for sale debt securities$ 11,228,616
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 ofMarch 31, 2023 . Resale agreements, maturing through 2025, totaled$825.0 million atMarch 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 atMarch 31, 2023 .$700.0 million of the Company's resale agreements will mature in the next 12 months. Interest earning balances at theFederal Reserve Bank , which have overnight maturities and are used for general liquidity purposes, totaled$1.3 billion atMarch 31, 2023 and increased$952.7 million overDecember 31, 2022 balances. The fair value of the available for sale debt portfolio was$11.2 billion atMarch 31, 2023 and included an unrealized net loss of$1.3 billion . 58 -------------------------------------------------------------------------------- Table of
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Approximately$2.0 billion of the Company's available for sale debt portfolio is expected to mature or pay down during the next 12 months, and atMarch 31, 2023 , the duration of the Company's available for sale debt securities portfolio was 3.9 years. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at theFederal Reserve Bank . Total investment securities pledged for these purposes were as follows: (In thousands) March 31, 2023 March 31, 2022 December 31, 2022 Investment securities pledged for the purpose of securing: Federal Reserve Bank borrowings$ 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
* 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. AtMarch 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$1.1 billion atMarch 31, 2023 . These accounts are normally considered more volatile with higher cost and comprised 4.5% of total deposits atMarch 31, 2023 . (In thousands) March 31, 2023 March 31, 2022 December 31, 2022 Core deposit base: Non-interest bearing$ 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 DuringJanuary 2023 , the Company's deposit portfolio declined$964.6 million . AtMarch 31, 2023 , the Company's deposit portfolio was$24.7 billion , compared to$26.2 billion atDecember 31, 2022 . The Company's uninsured deposits were$9.8 billion , or 39.7% of total deposits atMarch 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 atMarch 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 ofMarch 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 atMarch 31, 2023 and are collateralized by securities in the Company's investment portfolio. AtMarch 31, 2023 , the value of the 59 -------------------------------------------------------------------------------- Table of
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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$1.5 billion advances outstanding from the FHLB atMarch 31, 2023 . The Company pledges certain assets, including loans and investment securities, to both theFederal Reserve Bank (FRB) and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral and enables the FHLB to issue letters of credit in favor of public fund depositors of the Company. The FRB also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company atMarch 31, 2023 . March 31, 2023 (In thousands) FHLB Federal Reserve Total Total collateral value established by FHLB and FRB$ 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
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 itsCapital 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 bothStandard & 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$1.5 billion . 60 -------------------------------------------------------------------------------- Table of
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Capital Management
The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions atMarch 31, 2023 andDecember 31, 2022 , as shown in the following table. Minimum Ratios Minimum Ratios under for Capital Adequacy Well-Capitalized (Dollars in thousands) March 31, 2023 December 31, 2022 Guidelines Banks * Risk-adjusted assets$ 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 theFederal Reserve Bank and otherU.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 onJanuary 1, 2020 , the Company elected to utilize this option. As a result, the two year deferral period for the Company extended throughDecember 31, 2021 . Beginning onJanuary 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
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 ofSilicon 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 sinceDecember 31, 2022 . Further discussion of the Company's longer-term material cash obligations and sources for fulfilling those obligations is below. 61 -------------------------------------------------------------------------------- Table of
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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 atMarch 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, atMarch 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 atMarch 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. AtMarch 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 withU.S. Capital Development to develop a 280,000 square foot commercial office building in a two building complex inClayton, Missouri , which was placed in service at the beginning ofMarch 2023 . As ofMarch 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 endedMarch 31, 2023 , compared to$783 thousand in the same period last year. AtMarch 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.
Segment Consolidated
(Dollars in thousands) Consumer Commercial Wealth Totals Other/ Elimination 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
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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 endedMarch 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 endedMarch 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 endedMarch 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 . 63
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Impact of Recently Issued Accounting Standards
Reference Rate Reform TheFinancial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting", inMarch 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 afterDecember 31, 2022 , except for certain hedging relationships existing as ofDecember 31, 2022 . InDecember 2022 , the FASB issued ASU 2022-06 which extended the sunset date under Topic 848 toDecember 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 toJune 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 theLIBOR 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 byJune 30, 2023 , as LIBOR will no longer be published afterJune 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. 64 -------------------------------------------------------------------------------- Table of
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AVERAGE BALANCE SHEETS - AVERAGE RATES AND YIELDS Three Months EndedMarch 31, 2023 and 2022 First Quarter 2023 First Quarter 2022 Interest Avg. Rates Interest Avg. Rates (Dollars in thousands) Average Balance Income/Expense Earned/Paid Average Balance Income/Expense Earned/Paid ASSETS: Loans: Business(A)$ 5,656,104 $ 74,037 5.31 %$ 5,324,172 $ 38,416 2.93 % Real estate - construction and land 1,410,835 25,486 7.33 1,134,902 10,526 3.76 Real estate - business 3,478,382 48,444 5.65 3,095,068 25,801 3.38 Real estate - personal 2,933,750 26,086 3.61 2,808,980 22,696 3.28 Consumer 2,067,385 27,060 5.31 2,040,200 18,084 3.59
Revolving home equity 296,748 5,146 7.03 273,859 2,347 3.48 Consumer credit card 556,223 18,757 13.68 540,844 15,130 11.35 Overdrafts 4,449 - - 5,178 - - Total loans 16,403,876 225,016 5.56 15,223,203 133,000 3.54 Loans held for sale 5,708 145 10.30 9,383 150 6.48 Investment securities: U.S. government and federal agency obligations 1,099,067 5,138 1.90 1,103,749 9,317 3.42 Government-sponsored enterprise obligations 87,086 690 3.21 51,770 298 2.33 State and municipal obligations(A) 1,793,756 9,994 2.26 2,077,600 11,708 2.29 Mortgage-backed securities 6,454,408 32,830 2.06 7,316,609 35,770 1.98 Asset-backed securities 3,233,757 16,041 2.01 3,933,061 10,984 1.13 Other debt securities 528,941 2,523 1.93 636,247 3,134 2.00 Trading debt securities(A) 45,757 518 4.59 40,686 185 1.84 Equity securities(A) 12,458 714 23.24 9,498 609 26.00 Other securities(A) 229,867 4,029 7.11 192,311 2,802 5.91 Total investment securities
13,485,097 72,477 2.18 15,361,531 74,807 1.97 Federal funds sold 38,978 489 5.09 1,053 1 .39 Securities purchased under agreements to resell 825,000 3,952 1.94 1,733,887 5,300 1.24 Interest earning deposits with banks 809,935 9,336 4.67 2,608,029 1,151 .18 Total interest earning assets 31,568,594 311,415 4.00 34,937,086 214,409 2.49 Allowance for credit losses on loans (150,117)
(149,685)
Unrealized loss on debt securities (1,387,196) (174,297) Cash and due from banks 314,024 340,242 Premises and equipment, net 431,288 407,000 Other assets 631,239 557,158 Total assets$ 31,407,832 $ 35,917,504 LIABILITIES AND EQUITY: Interest bearing deposits: Savings$ 1,550,215 193 .05$ 1,563,093 178 .05 Interest checking and money market 13,265,485 19,958 .61 14,949,727 1,582 .04 Certificates of deposit of less than$100,000 415,367 1,425 1.39 429,852 139 .13 Certificates of deposit of$100,000 and over 903,393 6,627 2.98 862,232 427 .20 Total interest bearing deposits 16,134,460 28,203 .71 17,804,904 2,326 .05
Borrowings:
Federal funds purchased$ 493,721 $ 5,586 4.59 23,356 $ 7 .12 Securities sold under agreements to repurchase 2,418,726 17,495 2.93 2,712,468 682 .10 Other borrowings(B) 551,267 6,720 4.94 768 1 .53 Total borrowings 3,463,714 29,801 3.49 2,736,592 690 .10 Total interest bearing liabilities 19,598,174 58,004 1.20 % 20,541,496 3,016 .06 % Non-interest bearing deposits 9,114,512 11,544,701 Other liabilities 112,052 505,644 Equity 2,583,094 3,325,663 Total liabilities and equity$ 31,407,832 $ 35,917,504 Net interest margin (FTE)$ 253,411 $ 211,393 Net yield on interest earning assets 3.26 % 2.45 % (A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%. (B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above. 65 -------------------------------------------------------------------------------- Table of
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