Item 2. Management’s Discussion and Analysis
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 2021 Annual Report on Form 10-K. Results of operations for the three month periods ended March 31, 2022 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 2021 Annual Report on Form 10-K and in Part II Item 1A of this Quarterly Report on Form 10-Q. During the quarter ended March 31, 2022, there were no material changes to the Risk Factors disclosed in the Company's 2021 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 2021 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2021.
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Selected Financial Data
Three Months Ended March 31
2022 2021
Per Share Data
Net income per common share — basic $ .97 $ 1.06 *
Net income per common share — diluted .97 1.06 *
Cash dividends on common stock .265 .250 *
Book value per common share 24.60 26.99 *
Market price 71.59 72.96 *
Selected Ratios
(Based on average balance sheets)
Loans to deposits (1)
51.90 % 61.79 %
Non-interest bearing deposits to total deposits 39.34 39.41
Equity to loans (1)
21.83 20.68
Equity to deposits 11.33 12.78
Equity to total assets 9.26 10.37
Return on total assets 1.33 1.63
Return on common equity 14.41 15.69
(Based on end-of-period data)
Non-interest income to revenue (2)
38.69 39.80
Efficiency ratio (3)
60.29 56.37
Tier I common risk-based capital ratio 13.92 13.76
Tier I risk-based capital ratio
13.92 13.76
Total risk-based capital ratio 14.61 14.79
Tangible common equity to tangible assets ratio (4)
8.09 9.57
Tier I leverage ratio
9.07 9.38
* Restated for the 5% stock dividend distributed in December 2021.
(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) 2022 2021
Total equity $ 2,973,402 $ 3,317,385
Less non-controlling interest 12,762 4,795
Less goodwill 138,921 138,921
Less core deposit premium 4,525 4,864
Total tangible common equity (a) $ 2,817,194 $ 3,168,805
Total assets $ 34,986,793 $ 33,269,786
Less goodwill 138,921 138,921
Less core deposit premium 4,525 4,864
Total tangible assets (b) $ 34,843,347 $ 33,126,001
Tangible common equity to tangible assets ratio (a)/(b) 8.09 % 9.57 %
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Results of Operations
Summary
Three Months Ended March 31 Increase (Decrease)
(Dollars in thousands) 2022 2021 Amount % change
Net interest income $ 208,786 $ 205,748 $ 3,038 1.5 %
Provision for credit losses 9,858 6,232 (3,626) 58.2
Non-interest income 131,769 136,045 (4,276) (3.1)
Investment securities gains, net 7,163 9,853 (2,690) (27.3)
Non-interest expense (205,648) (192,573) 13,075 6.8
Income taxes (31,902) (32,076) (174) (.5)
Non-controlling interest expense (1,872) (2,257) (385) (17.1)
Net income attributable to Commerce Bancshares, Inc. $ 118,154 $ 130,972 (12,818) (9.8) %
For the quarter ended March 31, 2022, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $118.2 million, a decrease of $12.8 million, or 9.8%, compared to the first quarter of the previous year. For the current quarter, the annualized return on average assets was 1.33%, the annualized return on average equity was 14.41%, and the efficiency ratio was 60.29%. Diluted earnings per common share was $.97, a decrease of 8.5% compared to $1.06 per share in the first quarter of 2021, and increased 3.2% compared to $.94 per share in the previous quarter.
Compared to the first quarter of last year, net interest income increased $3.0 million, or 1.5%, mainly due to an increase of $21.5 million in interest income on investment securities, partly offset by decreases in loan interest and interest on securities purchased under agreements to resell of $14.4 million and $5.8 million, respectively. The provision for credit losses declined $3.6 million due to a decrease in the estimate of the allowance for credit losses on loans and unfunded commitments and lower net loan charge-offs. Non-interest income decreased $4.3 million, or 3.1%, compared to the first quarter of 2021, mainly due to lower loan fees and sales and income from branch sales, partly offset by growth in net bank card and trust fees. Net gains on investment securities totaled $7.2 million in the current quarter compared to net gains of $9.9 million in the same quarter last year. Net securities gains in the current quarter primarily resulted from unrealized fair value gains of $7.5 million in the Company's private equity investment portfolio. Non-interest expense increased $13.1 million, or 6.8%, over the first quarter of 2021 mainly due to higher salaries and employee benefits, data processing and software, marketing, and travel and entertainment expense.
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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, 2022 vs. 2021
Change due to
(In thousands) Average
Volume Average
Rate
Total
Interest income, fully taxable equivalent basis:
Loans:
Business $ (9,222) $ (2,060) $ (11,282)
Real estate - construction and land 375 609 984
Real estate - business 626 (1,069) (443)
Real estate - personal (144) (858) (1,002)
Consumer 921 (2,141) (1,220)
Revolving home equity (213) 65 (148)
Consumer credit card (1,837) 501 (1,336)
Overdrafts — — —
Total interest on loans (9,494) (4,953) (14,447)
Loans held for sale (201) 47 (154)
Investment securities:
U.S. government and federal agency securities 2,370 2,405 4,775
Government-sponsored enterprise obligations 6 (3) 3
State and municipal obligations 722 (897) (175)
Mortgage-backed securities 1,090 10,681 11,771
Asset-backed securities 6,332 (2,475) 3,857
Other securities 1,501 (402) 1,099
Total interest on investment securities 12,021 9,309 21,330
Federal funds sold 1 — 1
Securities purchased under agreements to resell 11,573 (17,401) (5,828)
Interest earning deposits with banks 278 503 781
Total interest income 14,178 (12,495) 1,683
Interest expense:
Deposits:
Savings 45 (144) (99)
Interest checking and money market 317 (561) (244)
Certificates of deposit of less than $100,000 (81) (253) (334)
Certificates of deposit of $100,000 and over 64 (699) (635)
Total interest on deposits 345 (1,657) (1,312)
Federal funds purchased (2) 4 2
Securities sold under agreements to repurchase 86 289 375
Other borrowings — (1) (1)
Total interest expense 429 (1,365) (936)
Net interest income, tax equivalent basis $ 13,749 $ (11,130) $ 2,619
Net interest income in the first quarter of 2022 was $208.8 million, an increase of $3.0 million over the first quarter of 2021. On a tax equivalent (T/E) basis, net interest income totaled $211.4 million in the first quarter of 2022, up $2.6 million over the same period last year and up $969 thousand over the previous quarter. The increase in net interest income compared to the first
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quarter of 2021 was mainly due to higher interest income earned on on investment securities (T/E) of $21.3 million, partly offset by lower interest earned on loans (T/E) of $14.4 million and securities purchased under agreements to resell of $5.8 million. The increase in interest earned on investment securities (T/E) was mainly due to higher average balances and rates earned. The decrease in total interest earned on loans (T/E) was the result of declines in average balances and rates earned, while the decrease in securities purchased under agreements to resell declined due to lower average rates, partly offset by higher average balances. The Company's net yield on earning assets (T/E) was 2.45% in the current quarter compared to 2.71% in the first quarter of 2021.
Total interest income (T/E) increased $1.7 million over the first quarter of 2021. Interest income on loans (T/E) was $133.0 million during the first quarter of 2022, a decrease of $14.4 million, or 9.8%, from the same quarter last year. The decrease in interest income from the same quarter last year was primarily due to a decline of $1.1 billion, or 6.8%, in average loan balances, coupled with a decrease of 12 basis points in the average rate earned. Most of the decrease in interest income occurred in the business, consumer credit card, consumer, and personal real estate loan categories. These decreases were partly offset by an increase in interest income in the construction and land loan category. Business loan interest income decreased $11.3 million due to a decline of $1.2 billion in average balances and a decrease of 16 basis points in the average rate earned. The decline in business loan average balances was mainly due to a decrease of $1.3 billion in Paycheck Protection Program (PPP) loans, while interest earned on PPP loans declined $10.0 million from the same quarter last year. Consumer credit card loan interest decreased $1.3 million mainly due to a decline of $67.9 million in average balances, partly offset by a 38 basis point increase in the average rate earned. Consumer loan interest declined $1.2 million due to a decrease of 43 basis points in the average rate earned, partly offset by a $92.9 million, or 4.8%, increase in average balances. Personal real estate loan interest income fell $1.0 million due to a 12 basis point decrease in the average rate earned and lower average balances of $17.1 million. These decreases to interest income (T/E) were partly offset by an increase of $984 thousand in interest earned on construction and land loans, due to an increase of 22 basis points in the average rate earned and growth of $42.9 million, or 3.9%, in average loan balances.
Interest income on investment securities (T/E) was $74.8 million during the first quarter of 2022, which was an increase of $21.3 million over the same quarter last year. The increase in interest income occurred mainly in interest earned on mortgage-backed securities, which increased $11.8 million, partly due to a $7.5 million increase in premium amortization, reflecting slower forward prepayment speed estimates in the current quarter, compared to a premium amortization adjustment increase of $4.1 million in the prior year. In addition, the average rate earned increased 59 basis points and the average balance increased $318.1 million, or 4.5%. Interest on U.S. government and federal agency obligations grew $4.8 million mainly due to an increase in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS). Interest income related to TIPS, which is tied to the Consumer Price Index, increased $4.4 million over the same quarter last year. The average balance of U.S. government and federal agency obligations also increased $378.4 million, or 52.2%. Interest on asset-backed securities rose $3.9 million due to higher average balances of $1.8 billion, partly offset by a decrease of 26 basis points in the average rate earned. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $15.4 billion in the first quarter of 2022, compared to $12.6 billion in the first quarter of 2021.
Interest income on securities purchased under agreements to resell decreased $5.8 million from the same quarter last year, due to a decrease of 407 basis points in the average rate earned, partly offset by growth of $883.9 million in the average balance. Interest income on balances at the Federal Reserve grew $781 thousand due to an increase of $1.1 billion in the average balance invested and an increase of eight basis points in the average rate earned.
The average tax equivalent yield on total interest earning assets was 2.49% in the first quarter of 2022, down from 2.76% in the first quarter of 2021.
Total interest expense decreased $936 thousand compared to the first quarter of 2021 due to a $1.3 million decrease in interest expense on interest bearing deposits, partly offset by a $376 thousand increase in interest expense on borrowings. The decrease in deposit interest expense resulted mainly from a four basis point decline in the overall average rate paid. Interest expense on certificates of deposit (CD's) declined $969 thousand due to an 18 basis point decrease in the average rate paid, coupled with a decrease of $454.7 million in the average balance. Interest expense on interest checking and money market accounts declined $244 thousand, due to a two basis point decrease in the average rate paid, partly offset by higher average balances of $2.0 billion. Interest expense on borrowings was higher due to an increase of four basis points in the average rate paid on customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .06% and .09% in the first quarters of 2022 and 2021, 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) 2022 2021 Amount % change
Bank card transaction fees $ 42,045 $ 37,695 $ 4,350 11.5 %
Trust fees 47,811 44,127 3,684 8.3
Deposit account charges and other fees 22,307 22,575 (268) (1.2)
Capital market fees 4,125 4,981 (856) (17.2)
Consumer brokerage services 4,446 4,081 365 8.9
Loan fees and sales 4,235 10,184 (5,949) (58.4)
Other 6,800 12,402 (5,602) (45.2)
Total non-interest income $ 131,769 $ 136,045 $ (4,276) (3.1) %
Non-interest income as a % of total revenue* 38.7 % 39.8 %
* 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 March 31, 2022 and 2021.
Three Months Ended March 31
(Dollars in thousands) 2022 2021 $ change % change
Net debit card fees $ 9,552 $ 9,367 $ 185 2.0 %
Net credit card fees 3,722 3,421 301 8.8
Net merchant fees 4,980 4,614 366 7.9
Net corporate card fees 23,791 20,293 3,498 17.2
Total bank card transaction fees $ 42,045 $ 37,695 $ 4,350 11.5 %
For the first quarter of 2022, total non-interest income amounted to $131.8 million compared to $136.0 million in the same quarter last year, which was a decrease of $4.3 million, or 3.1%. The decrease was mainly due to lower loan fees and sales and a decline in other non-interest income, partly offset by higher net bank card fees and trust fees. Bank card transaction fees for the current quarter grew $4.4 million, or 11.5%, over the same period last year, due to growth of $3.5 million in net corporate card fees, $366 thousand in net merchant card fees, $301 thousand in net credit card fees, and $185 thousand in net debit card fees. The growth in net corporate, credit and debit card fees was mainly due to higher interchange income, partly offset by higher rewards expense. The growth in net merchant fees was mostly due to higher merchant fees, partly offset by higher network expense. Trust fees for the quarter increased $3.7 million, or 8.3%, over the same quarter last year, resulting from higher private client fees, which were up 10.1%. Compared to the same period last year, deposit account fees decreased $268 thousand, or 1.2%, mainly due to lower personal deposit account fees, partly offset by higher corporate cash management fees. Capital market fees decreased $856 thousand, or 17.2%, while consumer brokerage service fees increased $365 thousand, or 8.9%, due to growth in advisory fees. Loan fees and sales decreased $5.9 million, or 58.4%, compared to the same quarter last year, mainly due to a decline in mortgage banking revenue. Other non-interest income decreased $5.6 million, or 45.2%, mainly due to a gain of $2.4 million on the sale of a branch location recorded last year coupled with a write-down of $965 thousand on a branch location recorded in the current quarter. In addition, swap fees, cash sweep commissions and tax credit sales fees declined $637 thousand, $403 thousand and $394 thousand, respectively. Fair value adjustments on the Company's deferred compensation plan assets, which are held in a trust and recorded as both an asset and a liability, decreased $1.9 million from the same quarter last year, affecting both other income and other expense.
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Investment Securities Gains (Losses), Net
Three Months Ended March 31
(In thousands) 2022 2021
Net gains (losses) on sales and fair value adjustments of private equity investments $ 7,450 $ 9,888
Fair value adjustments on equity securities, net (287) (35)
Total investment securities gains, net $ 7,163 $ 9,853
Net gains on investment securities, which were recognized in earnings during the three months ended March 31, 2022 and 2021, are shown in the table above. Net securities gains of $7.2 million were reported in the first quarter of 2022, compared to net gains of $9.9 million in the same period last year. The net gains in the first quarter of 2022 were primarily comprised of $7.5 million of net gains in fair value on the Company’s private equity investments. The net gains on investment securities for the same quarter last year were mainly comprised of a net gain of $1.5 million realized on the sale of a private equity investment and $8.4 million of net gains in fair value on the Company’s private equity investments. The 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 $1.5 million during the first three months of 2022 and expense of $2.0 million during the first three months of 2021.
Non-Interest Expense
Three Months Ended March 31 Increase (Decrease)
(Dollars in thousands) 2022 2021 Amount % change
Salaries and employee benefits $ 135,953 $ 129,033 $ 6,920 5.4 %
Net occupancy 12,296 12,021 275 2.3
Equipment 4,568 4,353 215 4.9
Supplies and communication 4,713 4,125 588 14.3
Data processing and software 27,016 25,463 1,553 6.1
Marketing 6,344 5,158 1,186 23.0
Other 14,758 12,420 2,338 18.8
Total non-interest expense $ 205,648 $ 192,573 $ 13,075 6.8 %
Non-interest expense for the first quarter of 2022 amounted to $205.6 million, an increase of $13.1 million, or 6.8%, compared to expense of $192.6 million in the first quarter of last year. The increase in expense was mainly due to higher salaries and benefits expense, data processing and software expense, marketing expense and other non-interest expense. Salaries expense increased $4.4 million, or 4.1%, driven by growth in full-time salary costs and incentive compensation. Employee benefits expense totaled $24.2 million, reflecting growth of $2.5 million, or 11.5%, mainly as a result of higher healthcare expense, payroll taxes and retirement expense. Full-time equivalent employees totaled 4,563 at March 31, 2022, compared to 4,619 at March 31, 2021. Supplies and communication expense increased $588 thousand, or 14.3%, mainly due to higher postage and courier expense, while marketing expense increased $1.2 million, or 23.0%, due to an expansion of marketing efforts in the first quarter of 2022. Data processing and software expense increased $1.6 million, or 6.1%, due to higher software amortization, including expense related to the completed implementation of the Company's new core customer and deposit system placed into service in January 2022, as well as increased costs for service providers and bank card processing fees. Other non-interest expense increased $2.3 million, mainly due to higher travel and entertainment expense of $1.1 million, lower deferred origination costs of $1.1 million, partly offset by a $1.9 million decline in the Company's deferred compensation liability, as previously mentioned.
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Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments
Three Months Ended
Mar. 31, 2022 Dec. 31, 2021 Mar. 31, 2021
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period $ 150,044 $ 162,775 $ 220,834
Provision for credit losses on loans (10,686) (8,474) (10,355)
Net loan charge-offs (recoveries):
Commercial:
Business 77 90 (4)
Real estate-construction and land — — 1
Real estate-business (7) 6 20
Commercial net loan charge-offs (recoveries) 70 96 17
Personal Banking:
Real estate-personal 22 (71) 15
Consumer 808 919 763
Revolving home equity 18 (26) 23
Consumer credit card 3,372 2,964 8,981
Overdrafts 358 375 153
Personal banking net loan charge-offs (recoveries) 4,578 4,161 9,935
Total net loan charge-offs 4,648 4,257 9,952
Balance at end of period $ 134,710 $ 150,044 $ 200,527
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at beginning of period 24,204 22,784 38,307
Provision for credit losses on unfunded lending commitments 828 1,420 4,123
Balance at end of period 25,032 24,204 42,430
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 159,742 $ 174,248 $ 242,957
Three Months Ended
Mar. 31, 2022 Dec. 31, 2021 Mar. 31, 2021
Annualized net loan charge-offs (recoveries)*:
Commercial:
Business .01 % .01 % — %
Real estate-construction and land — — —
Real estate-business — — —
Commercial net loan charge-offs — — —
Personal Banking:
Real estate-personal — (.01) —
Consumer .16 .18 .16
Revolving home equity .03 (.04) .03
Consumer credit card 2.53 2.10 5.98
Overdrafts 28.04 30.20 17.50
Personal banking net loan charge-offs (recoveries) .33 .29 .71
Total annualized net loan charge-offs .12 % .11 % .25 %
* as a percentage of average loans (excluding loans held for sale)
The Company has an established process to determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, which assesses the risks and losses expected in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded lending commitments, as well as a second, smaller component based on certain individually evaluated loans and unfunded lending commitments. The Company's policies and
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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 2021 Annual Report on Form 10-K.
Net loan charge-offs in the first quarter of 2022 amounted to $4.6 million, compared to $4.3 million in the prior quarter and $10.0 million in the first quarter of last year. During the first quarter of 2022, the Company recorded net charge-offs on commercial loans of $70 thousand, compared to net charge-offs of $96 thousand in the prior quarter. Consumer credit card loan net charge-offs increased $408 thousand in the first quarter of 2022, compared to the prior quarte r, but declined $5.6 million compared to the same quarter in the prior year. Comp ared to the same period last year, net loan charge-offs in the first quarter of 2022 decreased $5.4 million, primarily driven by the decrease in net charge-offs on consumer credit card loans.
For the three months ended March 31, 2022, annualized net charge-offs on average consumer credit card loans totaled 2.53%, compared to 2.10% in the previous quarter and 5.98% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .16%, compared to .18% in the prior quarter and .16% in the same period last year. In the first quarter of 2022, total annualized net loan charge-offs were .12%, compared to .11% in the previous quarter and .25% in the same period last year.
The continued recovery of the provision for credit losses on loans is the result of an improved forecast coupled with lower than projected net charge-offs. For the quarter ended March 31, 2021, the allowance for credit losses on loans decreased $15.3 million, compared to the allowance for credit losses on loans as of December 31, 2021. The decrease was primarily due to the improved economic forecast utilized in the Company's estimate of future credit losses at March 31, 2022, coupled with lower than projected net loan charge-offs during the first quarter of 2022. The allowance for credit losses on commercial loans decreased slightly by $2.9 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, decreased $12.4 million. As a result, the provision for credit losses on loans was a recovery of $10.7 million in the current quarter, which was a $2.2 million increase from the $8.5 million benefit recorded in the prior quarter. The recovery of the provision for credit losses on loans in the current quarter was $331 thousand more than the recovery recorded in the third quarter of 2020 .
While the forecast reflects a continued recovery from the COVID-19 pandemic, the allowance considered the uncertainty of disruptions caused by higher inflation, the geopolitical environment, and ongoing supply constraints on the economy and on the consumer and commercial loan portfolios. At March 31, 2022, the allowance for credit losses on loans amounted to $134.7 million, compared to $150.0 million and $200.5 million at December 31, 2021 and March 31, 2021, respectively, and was .87%, .99% and 1.22% of total loans at March 31, 2022, December 31, 2021 and March 31, 2021, respectively.
In the current quarter, the provision for credit losses on unfunded lending commitments was $828 thousand, reflecting a $592 thousand decrease over the provision in the prior quarter and a $3.3 million decrease compared to the first quarter of 2021. At March 31, 2022, the liability for unfunded lending commitments was $25.0 million, compared to $24.2 million at December 31, 2021 and $42.4 million at March 31, 2021. 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, 2022.
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 its best judgment to assess the macro-economic forecast and internal loss data in estimating the allowance for credit losses on loans and the liability for unfunded lending commitments. These estimates are subject to periodic refinement based on changes in the underlying external and internal data.
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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, 2022 December 31, 2021
Non-accrual loans $ 8,335 $ 9,157
Foreclosed real estate 296 115
Total non-performing assets $ 8,631 $ 9,272
Non-performing assets as a percentage of total loans .06 % .06 %
Non-performing assets as a percentage of total assets .02 % .03 %
Total loans past due 90 days and still accruing interest $ 10,670 $ 11,726
Non-accrual loans totaled $8.3 million at March 31, 2022, a decrease of $822 thousand from the balance at December 31, 2021. The decrease occurred mainly in business loans which decreased $556 thousand. At March 31, 2022, non-accrual loans were comprised of business (81.1%), personal real estate (16.6%), and business real estate (2.3%) loans. Foreclosed real estate totaled $296 thousand at March 31, 2022, an increase of $181 thousand when compared to December 31, 2021. Total loans past due 90 days or more and still accruing interest were $10.7 million as of March 31, 2022, a decrease of $1.1 million from December 31, 2021. 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 $306.6 million at March 31, 2022 compared with $278.7 million at December 31, 2021, resulting in an increase of $27.9 million, or 10.0%.
(In thousands)
March 31, 2022 December 31, 2021
Potential problem loans:
Business $ 50,198 $ 37,143
Real estate – construction and land 55,274 40,259
Real estate – business 200,631 200,766
Real estate – personal 533 526
Total potential problem loans $ 306,636 $ 278,694
At March 31, 2022, the Company had $125.8 million of loans whose terms have been modified or restructured under a troubled debt restructuring. These loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession, as defined by accounting guidance, and are further discussed in the "Troubled debt restructurings" section in Note 2 to the consolidated financial statements. This balance includes certain commercial loans totaling $108.8 million which are classified as substandard and included in the table above because of this classification.
Loans with Special Risk Characteristics
Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon.
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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 7.4% of total loans outstanding at March 31, 2022. The largest component of construction and land loans was commercial construction, which increased $17.1 million during the three months ended March 31, 2022. At March 31, 2022, multi-family residential construction loans totaled approximately $180.5 million, or 19.2%, of the commercial construction loan portfolio, compared to $155.9 million, or 16.9%, at December 31, 2021.
(Dollars in thousands) March 31,
2022
% of Total
% of
Total
Loans
December 31, 2021
% of Total
% of
Total
Loans
Commercial construction $ 939,785 82.1 % 6.1 % $ 922,654 82.5 % 6.1 %
Residential construction 115,079 10.1 .7 96,618 8.6 .7
Commercial land and land development 45,827 4.0 .3 48,481 4.3 .3
Residential land and land development 43,720 3.8 .3 50,513 4.6 .3
Total real estate - construction and land loans $ 1,144,411 100.0 % 7.4 % $ 1,118,266 100.0 % 7.4 %
Real Estate – Business Loans
Total business real estate loans were $3.1 billion at March 31, 2022 and comprised 20.1% 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, 2022, 38.0% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans.
(Dollars in thousands) March 31,
2022
% of Total
% of
Total
Loans
December 31, 2021
% of Total
% of
Total
Loans
Owner-occupied $ 1,180,589 38.0 % 7.6 % $ 1,188,469 38.9 % 7.8 %
Office 419,430 13.5 2.7 380,101 12.4 2.5
Multi-family 350,567 11.3 2.3 354,282 11.6 2.3
Retail 336,142 10.8 2.2 339,874 11.1 2.2
Hotels 232,470 7.5 1.5 234,673 7.7 1.5
Farm 188,130 6.0 1.2 178,780 5.8 1.2
Senior living 177,534 5.7 1.1 174,871 5.7 1.2
Industrial 111,467 3.6 .7 99,800 3.3 .7
Other 113,339 3.6 .8 107,987 3.5 .8
Total real estate - business loans $ 3,109,668 100.0 % 20.1 % $ 3,058,837 100.0 % 20.2 %
Revolving Home Equity Loans
The Company had $264.4 million in revolving home equity loans at March 31, 2022 that were generally collateralized by residential real estate. Most of these loans (92.8%) 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, 2022, the outstanding principal of loans with an original LTV higher than 80% was $30.7 million, or 11.6% of the portfolio, compared to $30.9 million as of December 31, 2021. Total revolving home equity loan balances over 30 days past due were $1.6 million at March 31, 2022 and December 31, 2021, and there were no revolving home equity loans on non-accrual status at March 31, 2022 or December 31, 2021. The weighted average FICO score for the total current portfolio balance is 790. 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 2022 through 2024, approximately 17% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 81% 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 40% of the consumer loan portfolio at March 31, 2022, and outstanding balances for auto loans were $830.7 million and $855.4 million at March 31, 2022 and December 31, 2021,
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respectively. The balances over 30 days past due amounted to $6.9 million at March 31, 2022 and $9.0 million at December 31, 2021, respectively and comprised .8% of the outstanding balances of these loans at March 31, 2022 and 1.1% at December 31, 2021, respectively. For the three months ended March 31, 2022, $84.7 million of new auto loans were originated, compared to $106.2 million during the first three months of 2021. At March 31, 2022, the automobile loan portfolio had a weighted average FICO score of 755, and net charge-offs on auto loans were .1% 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% of the consumer loan portfolio at March 31, 2022. Losses on these loans have historically been low, and the Company saw net recoveries of $28 thousand for the first three months of 2022. Private banking loans comprised 31% of the consumer loan portfolio at March 31, 2022. The Company's private banking loans are generally well-collateralized, and at March 31, 2022 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 $428 thousand in the first three months of 2022 and were .2% of the average balances of these loans at March 31, 2022.
Consumer Credit Card Loans
The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at March 31, 2022 of $544.6 million in consumer credit card loans outstanding, approximately $84.3 million, or 15.5%, carried a low promotional rate. Within the next six months, $32.7 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 $275.8 million, or 1.8% of total loans at March 31, 2022, an increase of $15.1 million from year end 2021, as shown in the table below.
(In thousands)
March 31, 2022 December 31, 2021 Unfunded commitments at March 31, 2022
Extraction $ 201,185 $ 184,840 $ 165,853
Mid-stream shipping and storage 38,413 36,850 67,878
Downstream distribution and refining 22,067 24,915 19,899
Support activities 14,103 14,039 17,843
Total energy lending portfolio $ 275,768 $ 260,644 $ 271,473
Information about the credit quality of the Company's energy lending portfolio as of March 31, 2022 and December 31, 2021 is provided in the table below.
(Dollars in thousands) March 31, 2022 % of Energy Lending December 31, 2021 % of Energy Lending
Pass $ 271,368 98.4 % $ 256,186 98.3 %
Special mention 1,999 .7 1,999 .8
Non-accrual 2,401 .9 2,459 .9
Total $ 275,768 100.0 % $ 260,644 100.0 %
Energy lending balances classified as substandard and non-accrual represented 0.9% of total energy lending loan balances at March 31, 2022. The Company saw a small recovery on energy loans during the three months ended March 31, 2022. The Company recorded $10 thousand of recoveries on energy loans for the year ended December 31, 2021.
Shared National Credits
The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans
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totaled $1.2 billion at March 31, 2022 and December 31, 2021. Additional unfunded commitments at March 31, 2022 totaled $1.8 billion.
Income Taxes
Income tax expense was $31.9 million in the first quarter of 2022, compared to $33.8 million in the fourth quarter of 2021 and $32.1 million in the first quarter of 2021. The Company's effective tax rate, including the effect of non-controlling interest, was 21.3% in the first quarter of 2022, compared to 22.7% in the fourth quarter of 2021 and 19.7% in the first quarter of 2021. The effective tax rate in the first quarter has historically been lower than other quarters due to the recognition of share-based excess tax benefits as a reduction to income tax expense. These benefits result from transactions relating to equity award vesting, most of which occur in the first quarter of each year. The effective tax rate in the first quarter of 2022 increased compared to the effective tax rate in the first quarter of 2021 mainly due to executive compensation limitations on stock-based compensation.
Financial Condition
Balance Sheet
Total assets of the Company were $35.0 billion at March 31, 2022 and $36.7 billion at December 31, 2021. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $34.2 billion at March 31, 2022 and $35.5 billion at December 31, 2021, and consisted of 45% in loans and 46% in investment securities at March 31, 2022.
During the first quarter of 2022, average loans totaled $15.2 billion, an increase of $130.1 million over the prior quarter, and declined $1.1 billion, or 6.8%, from the same quarter last year. Compared to the previous quarter, average balances of business loans grew $132.3 million (includes a decline of $132.0 million in Paycheck Protection Program (PPP) average loan balances). Average business real estate loan balances grew $91.6 million, while construction loan balances declined $93.3 million. Period end loans increased $282.7 million compared to the prior quarter, including PPP loan balances that decreased $75.7 million this quarter and totaled $53.4 million at March 31, 2022. Excluding PPP loans, period end business loans increased $280.7 million. As of March 31, 2022, 97% of PPP loan balances have been forgiven. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $55.6 million, compared to $119.3 million in the prior quarter.
Total average available for sale debt securities increased $418.0 million over the previous quarter to $14.9 billion, at fair value. The increase in investment securities was mainly the result of growth in asset-backed securities. During the current quarter, purchases of securities totaled $1.8 billion with a weighted average yield of approximately 2.06%. Maturities and pay downs were $806.5 million. At March 31, 2022, the duration of the investment portfolio was 3.6 years, and maturities and pay downs of approximately $3.1 billion are expected to occur during the next 12 months.
Total average deposits increased $501.7 million this quarter compared to the previous quarter. The increase in deposits mostly resulted from growth in interest checking and money market deposits of $1.1 billion, partially offset by declines in demand deposit and certificates of deposit balances of $374.6 million and $255.3 million, respectively. Compared to the previous quarter, total average consumer and wealth deposits grew $290.2 million and $213.6 million, respectively. The average loans to deposits ratio was 51.9% in the current quarter and 52.4% in the prior quarter. The Company’s average borrowings, which include customer repurchase agreements, were $2.7 billion in the first quarter of 2022 and $2.6 billion in the prior quarter.
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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, 2022 March 31, 2021 December 31, 2021
Liquid assets:
Available for sale debt securities $ 14,780,494 $ 12,528,203 $ 14,450,027
Federal funds sold — 500 2,800
Securities purchased under agreements to resell 1,825,000 850,000 1,625,000
Balances at the Federal Reserve Bank 1,260,813 2,017,128 3,971,217
Total $ 17,866,307 $ 15,395,831 $ 20,049,044
There were no federal funds sold at March 31, 2022, which are funds lent to the Company's correspondent bank customers with overnight maturities. Resale agreements, maturing through 2024, totaled $1.8 billion at March 31, 2022. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled $1.9 billion in fair value at March 31, 2022. 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, 2022. The fair value of the available for sale debt portfolio was $14.8 billion at March 31, 2022 and included an unrealized net loss of $645.5 million.
Approximately $3.1 billion of the available for sale debt portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet new loan demand or help offset potential reductions in the Company's deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows:
(In thousands)
March 31, 2022 March 31, 2021 December 31, 2021
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings $ 16,260 $ 39,586 $ 17,465
FHLB borrowings and letters of credit 2,798 4,874 3,218
Securities sold under agreements to repurchase * 2,575,444 2,170,744 3,475,589
Other deposits and swaps 2,606,141 2,477,132 2,897,576
Total pledged securities 5,200,643 4,692,336 6,393,848
Unpledged and available for pledging 8,426,648 6,490,351 6,913,721
Ineligible for pledging 1,153,203 1,345,516 1,142,458
Total available for sale debt securities, at fair value $ 14,780,494 $ 12,528,203 $ 14,450,027
* 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, 2022, such deposits totaled $28.2 billion and represented 96.1% 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 $716.3 million at March 31, 2022. These accounts are normally considered more volatile with higher cost and comprised 2.4% of total deposits at March 31, 2022.
(In thousands)
March 31, 2022 March 31, 2021 December 31, 2021
Core deposit base:
Non-interest bearing $ 11,428,372 $ 11,076,556 $ 11,772,374
Interest checking 3,301,315 2,180,434 3,227,822
Savings and money market 13,450,317 12,391,944 13,370,263
Total $ 28,180,004 $ 25,648,934 $ 28,370,459
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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, 2022 March 31, 2021 December 31, 2021
Borrowings:
Federal funds purchased $ 17,315 $ 28,490 $ 43,385
Securities sold under agreements to repurchase 2,300,146 1,909,620 2,979,582
Other debt 9,057 3,791 12,560
Total $ 2,326,518 $ 1,941,901 $ 3,035,527
Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Repurchase agreements are collateralized by securities in the Company's investment portfolio and are comprised of non-insured customer funds totaling $2.3 billion, which generally mature overnight. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were no advances outstanding from the FHLB at March 31, 2022.
The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral. Also, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at March 31, 2022.
March 31, 2022
(In thousands)
FHLB
Federal Reserve
Total
Collateral value established by FHLB and FRB $ 1,949,603 $ 1,011,829 $ 2,961,432
Letters of credit issued (199,250) — (199,250)
Available for future advances $ 1,750,353 $ 1,011,829 $ 2,762,182
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 decrease in cash, cash equivalents and restricted cash of $2.7 billion during the first three months of 2022, 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 $124.5 million and has historically been a stable source of funds. Investing activities, which occur mainly in the
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loan and investment securities portfolios, used cash of $1.5 billion. Activity in the investment securities portfolio used cash of $1.0 billion from purchases (net of sales, maturities and pay downs), securities purchased under agreements to resell used cash of $200.0 million, and increase in the loan portfolio, which used cash of $287.3 million. Financing activities used cash of $1.3 billion, largely resulting from a decrease in federal funds purchased and securities sold under agreements to repurchase of $705.5 million, paired with a decrease in deposits of $511.6 million.
Capital Management
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, 2022 and December 31, 2021, as shown in the following table.
(Dollars in thousands) March 31, 2022 December 31, 2021 Minimum Ratios under Capital Adequacy Guidelines
Minimum Ratios
for
Well-Capitalized
Banks *
Risk-adjusted assets $ 23,415,739 $ 22,483,748
Tier I common risk-based capital 3,259,861 3,225,044
Tier I risk-based capital 3,259,861 3,225,044
Total risk-based capital 3,420,044 3,399,880
Tier I common risk-based capital ratio 13.92 % 14.34 % 7.00 % 6.50 %
Tier I risk-based capital ratio 13.92 14.34 8.50 8.00
Total risk-based capital ratio 14.61 15.12 10.50 10.00
Tier I leverage ratio 9.07 9.13 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 extends 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, 2022, the Company purchased 795,387 shares at an average price of $70.22 in open market purchases and through stock-based compensation transactions. At March 31, 2022, 941,935 shares remained available for purchase under the Board authorization. On April 20, 2022, the share repurchase authorization was increased to 5,000,000 shares.
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 $.265 per share cash dividend on its common stock in the first quarter of 2022, which was a 6.0% increase compared to its 2021 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 growth. Additionally, the Company will utilize cash to fund deposit maturities and withdrawals that may occur in the next 12 months. 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 2021 Annual Report on Form 10-K. There have been no changes in the Company's material cash requirements since December 31, 2021. Further discussion of the Company's longer-term material cash obligations is below.
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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 at March 31, 2022 totaled $13.0 billion (including $5.0 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $502.1 million and $1.4 million, respectively, at March 31, 2022. 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 $4.2 million at March 31, 2022. 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, 2022, the liability for unfunded commitments totaled $25.0 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 is expected to be completed near the end of 2022. As of March 31, 2022, the Company has made payments totaling $63.3 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 2022, purchases and sales of tax credits amounted to $52.1 million and $22.1 million, respectively. Fees from sales of tax credits were $783 thousand for the three months ended March 31, 2022, compared to $1.2 million in the same period last year. At March 31, 2022, the Company expected to fund outstanding purchase commitments of $167.3 million during the remainder of 2022.
The Company's sound equity base, along with its long-term low debt level, common and preferred stock availability, and excellent debt ratings, provide several alternatives for future financing. Future acquisitions may utilize partial funding through one or more of these options. Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations. The Company is not aware of any trends, events, or commitments that are reasonably likely to increase or decrease its liquidity in a material way.
Segment Results
The table below is a summary of segment pre-tax income results for the first three months of 2022 and 2021.
(Dollars in thousands)
Consumer
Commercial
Wealth
Segment
Totals
Other/ Elimination
Consolidated Totals
Three Months Ended March 31, 2022
Net interest income $ 79,896 $ 109,530 $ 18,868 $ 208,294 $ 492 $ 208,786
Provision for credit losses (4,498) (82) (26) (4,606) 14,464 9,858
Non-interest income 28,354 53,651 53,206 135,211 (3,442) 131,769
Investment securities gains, net — — — — 7,163 7,163
Non-interest expense (72,994) (89,524) (36,286) (198,804) (6,844) (205,648)
Income before income taxes $ 30,758 $ 73,575 $ 35,762 $ 140,095 $ 11,833 $ 151,928
Three Months Ended March 31, 2021
Net interest income $ 77,939 $ 110,565 $ 17,457 $ 205,961 $ (213) $ 205,748
Provision for credit losses (9,901) (27) 5 (9,923) 16,155 6,232
Non-interest income 38,248 50,728 50,985 139,961 (3,916) 136,045
Investment securities gains, net — — — — 9,853 9,853
Non-interest expense (70,369) (79,281) (33,043) (182,693) (9,880) (192,573)
Income before income taxes $ 35,917 $ 81,985 $ 35,404 $ 153,306 $ 11,999 $ 165,305
Increase (decrease) in income before income taxes:
Amount $ (5,159) $ (8,410) $ 358 $ (13,211) $ (166) $ (13,377)
Percent (14.4 %) (10.3 %) 1.0 % (8.6 %) (1.4 %) (8.1 %)
Consumer
For the three months ended March 31, 2022, income before income taxes for the Consumer segment decreased $5.2 million, or 14.4%, compared to the first three months of 2021. The decrease in income before income taxes was mainly due to a decline
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in non-interest income of $9.9 million, or 25.9%, and higher non-interest expense of $2.6 million, or 3.7%. These decreases to income were partly offset by growth in net interest income of $2.0 million, or 2.5%, and a decrease in the provision for loan losses of $5.4 million, or 54.6%. Net interest income increased due to a $3.7 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios, and a $968 thousand decrease in deposit interest expense. These increases were partly offset by a $2.7 million decline in loan interest income. Non-interest income decreased mainly due to a decline of $9.5 million in mortgage banking revenue. Personal deposit account fees also declined from the prior year, while net credit and debit card fees were higher. Non-interest expense increased over the same period in the previous year mainly due to higher full-time salaries expense, marketing expense and allocated support costs for information technology. In addition, impairment expense on mortgage servicing rights (MSR) increased, while MSR amortization expense declined. The provision for credit losses totaled $4.5 million, a $5.4 million decrease from the first three months of 2021, mainly due to lower credit card loan net charge-offs.
Commercial
For the three months ended March 31, 2022, income before income taxes for the Commercial segment decreased $8.4 million, or 10.3%, compared to the same period in the previous year. This decrease was mainly due to an increase in non-interest expense and and a decline in net interest income, partly offset by an increase in non-interest income. Net interest income decreased $1.0 million, or .9%, due to lower loan interest income of $11.3 million and higher interest expense on customer repurchase agreements of $378 thousand, partly offset by a $10.5 million increase in net allocated funding credits. Non-interest income increased $2.9 million, or 5.8%, over the previous year mainly due to growth in net bank card fees (mainly corporate card fees) and deposit account fees (mainly corporate cash management fees). These increases were partly offset by declines in capital market fees and swap fees. Non-interest expense increased $10.2 million, or 12.9%, mainly due to higher salaries and benefits expense, data processing and software expense and allocated support costs for information technology, and lower deferred origination costs. The provision for credit losses increased $55 thousand over the same period last year, mainly due to higher commercial card loan net charge-offs.
Wealth
Wealth segment pre-tax profitability for the three months ended March 31, 2022 increased $358 thousand, or 1.0%, over the same period in the previous year. Net interest income increased $1.4 million, or 8.1%, mainly due to a $1.0 million increase in loan interest income. Non-interest income increased $2.2 million, or 4.4%, over the prior year largely due to higher trust fees (mainly private client trust fees) and brokerage fees, partly offset by lower mortgage banking revenue. Non-interest expense increased $3.2 million, or 9.8%, mainly due to higher salaries and benefits expense. In addition, travel and entertainment expense and marketing expense also increased. The provision for credit losses increased $31 thousand over the same period last year, mainly due to higher net charge-offs on personal real estate loans.
The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was lower than in the same period last year by $166 thousand. This decrease was partly due to higher non-interest expense of $3.0 million, partly offset by higher net interest income of $705 thousand and non-interest income of $474 thousand. Unallocated securities gains were $7.2 million in the first three months of 2022 compared to gains of $9.9 million in 2021. Also, the unallocated provision for credit losses increased $1.7 million, primarily driven by an increase in the liability for unfunded lending commitments and an increase in the provision for credit losses on loans, 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 $15.3 million lower than net charge-offs, as the provision was a benefit in 2022, while the provision was $20.3 million lower than net charge-offs, as the provision was also a benefit in 2021. For the three months ended March 31, 2022, the Company's provision on unfunded lending commitments was expense of $828 thousand.
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Impact of Recently Issued Accounting Standards
Reference Rate Reform The FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting", in March 2020, and has been followed by additional clarifying guidance related to derivatives that are modified as a result of reference rate reform. The 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 April 2022, the FASB proposed extending 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 earlier this year 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 has been performed, and the Committee has developed and prioritized action items. All 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 from 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. Additionally, changes to the Company's systems have been identified, and the process of installing and testing code was started in the third quarter of 2021. The installation and testing process is expected to be completed in 2022.
Credit Losses The FASB issued ASU 2022-01, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures", in March 2022. This ASU eliminates the troubled debt restructuring recognition and measurement guidance and, instead, requires that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The amendments require that an entity disclose current period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. The guidance is effective January 1, 2023. The Company is evaluating the guidance to determine the impact on the Company's consolidated financial statements.
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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Three Months Ended March 31, 2022 and 2021
First Quarter 2022
First Quarter 2021
(Dollars in thousands)
Average Balance
Interest Income/Expense
Avg. Rates Earned/Paid
Average Balance Interest Income/Expense Avg. Rates Earned/Paid
ASSETS:
Loans:
Business (A)
$ 5,324,172 $ 38,416 2.93 % $ 6,532,921 $ 49,698 3.09 %
Real estate — construction and land 1,134,902 10,526 3.76 1,091,969 9,542 3.54
Real estate — business 3,095,068 25,801 3.38 3,022,979 26,244 3.52
Real estate — personal 2,808,980 22,696 3.28 2,826,112 23,698 3.40
Consumer 2,040,200 18,084 3.59 1,947,322 19,304 4.02
Revolving home equity 273,859 2,347 3.48 299,371 2,495 3.38
Consumer credit card 540,844 15,130 11.35 608,747 16,466 10.97
Overdrafts 5,178 — — 3,546 — —
Total loans 15,223,203 133,000 3.54 16,332,967 147,447 3.66
Loans held for sale 9,383 150 6.48 35,814 304 3.44
Investment securities:
U.S. government and federal agency obligations 1,103,749 9,317 3.42 725,367 4,542 2.54
Government-sponsored enterprise obligations 51,770 298 2.33 50,801 295 2.36
State and municipal obligations (A)
2,077,600 11,708 2.29 1,958,637 11,883 2.46
Mortgage-backed securities 7,316,609 35,770 1.98 6,998,521 23,999 1.39
Asset-backed securities 3,933,061 10,984 1.13 2,085,491 7,127 1.39
Other debt securities 636,247 3,134 2.00 570,115 3,020 2.15
Trading debt securities (A)
40,686 185 1.84 32,320 86 1.08
Equity securities (A)
9,498 609 26.00 4,321 528 49.56
Other securities (A)
192,311 2,802 5.91 154,030 1,997 5.26
Total investment securities 15,361,531 74,807 1.97 12,579,603 53,477 1.72
Federal funds sold 1,053 1 .39 7 — —
Securities purchased under agreements to resell 1,733,887 5,300 1.24 849,999 11,128 5.31
Interest earning deposits with banks 2,608,029 1,151 .18 1,480,331 370 .10
Total interest earning assets 34,937,086 214,409 2.49 31,278,721 212,726 2.76
Allowance for credit losses on loans (149,685) (220,512)
Unrealized gain (loss) on debt securities (174,297) 283,511
Cash and due from banks 340,242 354,569
Premises and equipment, net 407,000 401,230
Other assets 557,158 552,306
Total assets $ 35,917,504 $ 32,649,825
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings $ 1,563,093 178 .05 $ 1,333,177 277 .08
Interest checking and money market 14,949,727 1,582 .04 12,970,629 1,826 .06
Certificates of deposit of less than $100,000 429,852 139 .13 516,728 473 .37
Certificates of deposit of $100,000 and over 862,232 427 .20 1,230,075 1,062 .35
Total interest bearing deposits 17,804,904 2,326 .05 16,050,609 3,638 .09
Borrowings:
Federal funds purchased $ 23,356 $ 7 .12 37,034 $ 5 .05
Securities sold under agreements to repurchase 2,712,468 682 .10 2,129,038 307 .06
Other borrowings 768 1 .53 831 2 .98
Total borrowings 2,736,592 690 .10 2,166,903 314 .06
Total interest bearing liabilities 20,541,496 3,016 .06 % 18,217,512 3,952 .09 %
Non-interest bearing deposits 11,544,701 10,438,637
Other liabilities 505,644 608,212
Equity 3,325,663 3,385,464
Total liabilities and equity $ 35,917,504 $ 32,649,825
Net interest margin (T/E) $ 211,393 $ 208,774
Net yield on interest earning assets 2.45 % 2.71 %
(A) Stated on a tax equivalent basis using a federal income tax rate of 21%.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.