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 six month periods ended June 30, 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 June 30, 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 June 30 Six Months Ended June 30
2022 2021 2022 2021
Per Share Data
Net income per common share — basic $ .96 $ 1.32 * $ 1.93 $ 2.38 *
Net income per common share — diluted .96 1.32 * 1.93 2.38 *
Cash dividends on common stock .265 .250 * .530 .500 *
Book value per common share 22.29 28.47 *
Market price 65.65 71.01 *
Selected Ratios
(Based on average balance sheets)
Loans to deposits (1)
53.93 % 57.78 % 52.91 % 59.73 %
Non-interest bearing deposits to total deposits 39.02 40.09 39.18 39.76
Equity to loans (1)
18.41 21.26 20.10 20.97
Equity to deposits 9.93 12.29 10.63 12.53
Equity to total assets 8.37 10.07 8.82 10.22
Return on total assets 1.36 1.93 1.35 1.78
Return on common equity 16.29 19.12 15.28 17.42
(Based on end-of-period data)
Non-interest income to revenue (2)
37.50 40.08 38.07 39.94
Efficiency ratio (3)
57.29 56.90 58.72 56.64
Tier I common risk-based capital ratio 13.95 14.20
Tier I risk-based capital ratio
13.95 14.20
Total risk-based capital ratio 14.64 15.07
Tangible common equity to tangible assets ratio (4)
7.56 9.91
Tier I leverage ratio
9.45 9.36
* 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.
June 30
(Dollars in thousands) 2022 2021
Total equity $ 2,675,313 $ 3,493,830
Less non-controlling interest 16,467 8,210
Less goodwill 138,921 138,921
Less core deposit premium 4,446 4,772
Total tangible common equity (a) $ 2,515,479 $ 3,341,927
Total assets $ 33,435,370 $ 33,856,162
Less goodwill 138,921 138,921
Less core deposit premium 4,446 4,772
Total tangible assets (b) $ 33,292,003 $ 33,712,469
Tangible common equity to tangible assets ratio (a)/(b) 7.56 % 9.91 %
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Results of Operations
Summary
Three Months Ended June 30 Six Months Ended June 30
(Dollars in thousands) 2022 2021 % change 2022 2021 % change
Net interest income $ 232,385 $ 207,982 11.7 % $ 441,171 $ 413,730 6.6 %
Provision for credit losses (7,162) 45,655 115.7 2,696 51,887 94.8
Non-interest income 139,427 139,143 .2 271,196 275,188 (1.5)
Investment securities gains, net 1,029 16,804 (93.9) 8,192 26,657 (69.3)
Non-interest expense (213,505) (198,126) 7.8 (419,153) (390,699) 7.3
Income taxes (32,021) (45,209) (29.2) (63,923) (77,285) (17.3)
Non-controlling interest expense (4,359) (3,923) 11.1 (6,231) (6,180) .8
Net income attributable to Commerce Bancshares, Inc. $ 115,794 $ 162,326 (28.7 %) $ 233,948 $ 293,298 (20.2 %)
For the quarter ended June 30, 2022, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $115.8 million, a decrease of $46.5 million, or 28.7%, compared to the second quarter of the previous year. For the current quarter, the annualized return on average assets was 1.36%, the annualized return on average equity was 16.29%, and the efficiency ratio was 57.29%. Diluted earnings per common share was $.96, a decrease of 27.3% compared to $1.32 per share in the second quarter of 2021, and decreased 1.0% compared to $.97 per share in the previous quarter.
Compared to the second quarter of last year, net interest income increased $24.4 million, or 11.7%, mainly due to an increase of $33.5 million in interest income on investment securities, partly offset by decreases in interest on loans and securities purchased under agreements to resell of $2.1 million and $6.0 million, respectively. The provision for credit losses increased $52.8 million due to an increase in the estimate of the allowance for credit losses on loans and unfunded lending commitments and higher net loan charge-offs, coupled with the release of allowances associated with certain pandemic-related estimates in the prior quarter. Non-interest income increased $284 thousand, or .2%, compared to the second quarter of 2021, mainly due to growth in deposit, bank card, and cash sweep fees, offset by lower loan fees and sales and a fair value adjustment on the Company's deferred compensation plan assets. Net gains on investment securities totaled $1.0 million in the current quarter compared to net gains of $16.8 million in the same quarter of last year. Net securities gains in the current quarter primarily resulted from net fair value gains of $15.6 million in the Company's private equity investment portfolio, mostly offset by losses of $9.6 million on sales of available for sale securities and a $4.3 million loss on the sale of an investment in the Company's private equity portfolio. Non-interest expense increased $15.4 million, or 7.8%, over the second quarter of 2021 mainly due to higher salaries, data processing and software, and travel and entertainment expense.
Net income for the first six months of 2022 was $233.9 million, a decrease of $59.4 million, or 20.2%, from the same period last year. Diluted earnings per common share was $1.93, a decrease of 18.9% compared to $2.38 per share in the same period last year. For the first six months of 2022, the annualized return on average assets was 1.35%, the annualized return on average equity was 15.28%, and the efficiency ratio was 58.72%. Net interest income increased $27.4 million, or 6.6%, over the same period last year. This growth was largely due to an increase of $55.0 million in interest income on investment securities, partly offset by decreases in interest on loans and securities purchased under agreements to resell of $16.6 million and $11.9 million, respectively. The provision for credit losses was a recovery of $2.7 million for the first six months of 2022, compared to a recovery of $51.9 million in the same period last year, resulting in an increase in provision expense of $49.2 million. Non-interest income decreased $4.0 million, or 1.5%, from the first six months of last year mainly due to lower loan fees and sales and other non-interest income, partly offset by higher trust fees and net bank card fees. Non-interest expense increased $28.5 million, or 7.3%, over the first six months of last year mainly due to increases in salaries and benefits expense and data processing and software 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 June 30, 2022 vs. 2021 Six Months Ended June 30, 2022 vs. 2021
Change due to Change due to
(In thousands) Average
Volume Average
Rate
Total Average
Volume Average
Rate
Total
Interest income, fully taxable equivalent basis:
Loans:
Business $ (6,530) $ 88 $ (6,442) $ (15,788) $ (1,936) $ (17,724)
Real estate - construction and land 1,214 1,605 2,819 1,587 2,216 3,803
Real estate - business 1,293 1,657 2,950 1,918 589 2,507
Real estate - personal 175 (295) (120) 36 (1,158) (1,122)
Consumer 631 (1,112) (481) 1,546 (3,247) (1,701)
Revolving home equity (126) 178 52 (339) 243 (96)
Consumer credit card (1,064) 133 (931) (2,909) 642 (2,267)
Overdrafts — — — — — —
Total interest on loans (4,407) 2,254 (2,153) (13,949) (2,651) (16,600)
Loans held for sale (139) 55 (84) (340) 102 (238)
Investment securities:
U.S. government and federal agency securities 5,497 (1,639) 3,858 7,773 860 8,633
Government-sponsored enterprise obligations 29 8 37 35 5 40
State and municipal obligations 961 (606) 355 1,685 (1,505) 180
Mortgage-backed securities 1,309 15,829 17,138 2,454 26,455 28,909
Asset-backed securities 4,314 1,036 5,350 10,489 (1,282) 9,207
Other securities 1,800 4,715 6,515 3,292 4,322 7,614
Total interest on investment securities 13,910 19,343 33,253 25,728 28,855 54,583
Federal funds sold 4 13 17 5 13 18
Securities purchased under agreements to resell 8,520 (14,551) (6,031) 19,876 (31,735) (11,859)
Interest earning deposits with banks (405) 2,090 1,685 (99) 2,565 2,466
Total interest income 17,483 9,204 26,687 31,221 (2,851) 28,370
Interest expense:
Deposits:
Savings 27 (147) (120) 72 (291) (219)
Interest checking and money market 236 318 554 544 (234) 310
Certificates of deposit of less than $100,000 (55) (67) (122) (135) (321) (456)
Certificates of deposit of $100,000 and over (88) (103) (191) (48) (778) (826)
Total interest on deposits 120 1 121 433 (1,624) (1,191)
Federal funds purchased 11 210 221 10 213 223
Securities sold under agreements to repurchase 17 2,368 2,385 104 2,656 2,760
Other borrowings 2 8 10 2 7 9
Total interest expense 150 2,587 2,737 549 1,252 1,801
Net interest income, tax equivalent basis $ 17,333 $ 6,617 $ 23,950 $ 30,672 $ (4,103) $ 26,569
Net interest income in the second quarter of 2022 was $232.4 million, an increase of $24.4 million over the second quarter of 2021. On a tax equivalent (T/E) basis, net interest income totaled $235.0 million in the second quarter of 2022, up $24.0 million over the same period last year and up $23.6 million over the previous quarter. The increase in net interest income
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compared to the second quarter of 2021 was mainly due to higher interest income earned on on investment securities (T/E) of $33.3 million, partly offset by lower interest earned on loans (T/E) of $2.2 million and securities purchased under agreements to resell of $6.0 million and higher interest expense on securities sold under agreements to repurchase of $2.4 million. The increase in interest earned on investment securities (T/E) was due to higher average balances and rates, an increase of $3.4 million in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS), the receipt of $6.5 million in non-accrual interest on the sale of a private equity investment during the current quarter and a $5.0 million adjustment to premium amortization on mortgage-backed securities. The decrease in total interest earned on loans (T/E) was the result of a decline in average balances, partly offset by higher rates earned, while the decrease in securities purchased under agreements to resell declined due to lower average rates, partly offset by higher average balances. Interest expense on securities sold under agreements to repurchase increased due to higher average rates. The Company's net yield on earning assets (T/E) was 2.79% in the current quarter compared to 2.60% in the second quarter of 2021.
Total interest income (T/E) increased $26.7 million over the second quarter of 2021. Interest income on loans (T/E) was $143.5 million during the second quarter of 2022, a decrease of $2.2 million, or 1.5%, from the same quarter last year. The decrease in interest income from the same quarter last year was primarily due to a decline of $504.9 million, or 3.2%, in average loan balances, partly offset by an increase of seven basis points in the average rate earned. Most of the decrease in interest income occurred in the business, consumer credit card and consumer loan categories. These decreases were partly offset by increases in interest income in the business real estate and construction and land loan categories. Business loan interest income decreased $6.4 million due to a decline of $826.4 million in average balances. The decline in business loan average balances was mainly due to a decrease of $1.2 billion in Paycheck Protection Program (PPP) loans, while interest earned on PPP loans declined $11.2 million from the same quarter last year. Consumer credit card loan interest decreased $931 thousand mainly due to a decline of $38.0 million in average balances, slightly offset by a ten basis point increase in the average rate earned. Consumer loan interest declined $481 thousand due to a decrease of 22 basis points in the average rate earned, partly offset by a $65.9 million, or 3.3%, increase in average balances. Personal real estate loan interest income fell $120 thousand due to a four basis point decrease in the average rate earned, partly offset by higher average balances of $21.2 million. These decreases to interest income (T/E) were partly offset by an increase of $2.8 million in interest earned on construction and land loans, due to an increase of 53 basis points in the average rate earned and growth of $136.8 million, or 12.6%, in average loan balances. In addition, interest earned on business real estate loans increased $3.0 million due to a 21 basis point increase in the average rate earned and higher average balances of $148.6 million, or 4.9%.
Interest income on investment securities (T/E) was $90.4 million during the second quarter of 2022, which was an increase of $33.3 million over the same quarter last year. The increase in interest income occurred mainly in interest earned on mortgage-backed securities, which increased $17.1 million, partly due to a $5.0 million increase in premium amortization, reflecting slower forward prepayment speed estimates in the current quarter, compared to a premium amortization adjustment decrease of $1.9 million in the prior year. In addition, the average rate earned on mortgage-backed securities increased 88 basis points and the average balance increased $472.8 million, or 7.1%. Interest on U.S. government and federal agency obligations grew $3.9 million mainly due to higher average loan balances of $399.5 million, or 55.5%, and an increase in inflation income on the Company's TIPS, while an overall decrease of 59 basis points in the average rate earned partially offset these increases in income. Interest income related to TIPS, which is tied to the Consumer Price Index, increased $3.4 million over the same quarter last year. Interest on asset-backed securities rose $5.4 million due to higher average balances of $1.4 billion, or 52.2%, coupled with an increase of ten basis points in the average rate earned. Interest earned on other securities increased $6.2 million mainly due to the receipt of non-accrual interest of $6.5 million, mentioned above. 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 second quarter of 2022, compared to $12.9 billion in the second quarter of 2021.
Interest income on securities purchased under agreements to resell decreased $6.0 million from the same quarter last year, due to a decrease of 343 basis points in the average rate earned, partly offset by growth of $766.2 million in the average balance. Interest income on balances at the Federal Reserve grew $1.7 million due to an increase of 67 basis points in the average rate earned, partly offset by a decrease of $1.5 billion in the average balance invested.
The average tax equivalent yield on total interest earning assets was 2.86% in the second quarter of 2022, up from 2.64% in the second quarter of 2021.
Total interest expense increased $2.7 million compared to the second quarter of 2021 due to a increases in interest expense of $121 thousand on interest bearing deposits and $2.6 million on borrowings. The increase in deposit interest expense resulted mainly from an increase of $554 thousand in interest expense on interest checking and money market deposit accounts due to a one basis point increase in the average rate paid and higher average balances of $1.6 billion. Partially offsetting the increase in income earned on interest checking and money market deposits was a lower average rate earned on savings deposits (partially offset by higher average balances), as well as lower average rates earned and lower average balances of certificates of deposit.
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Interest expense on borrowings was higher due to an increase of 42 basis points in the average rate paid on customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .12% and .07% in the second quarters of 2022 and 2021, respectively.
Net interest income (T/E) for the first six months of 2022 was $446.4 million compared to $419.8 million for the same period in 2021. For the first six months of 2022, the net interest margin was 2.62% compared to 2.65% for the same period in 2021.
Total interest income (T/E) for the first six months of 2022 increased $28.4 million over the same period last year mainly due to higher interest income on investment securities (T/E), partly offset by lower interest earned on loans (T/E) and securities purchased under agreements to resell. Loan interest income (T/E) declined $16.6 million, or 5.7%, due to an $805.7 million decrease in average loan balances and a three basis point decrease in the average rate earned. Most of the decrease in loan interest occurred in the business loan category due to lower average balances and rates. In addition, consumer credit card loan interest declined due to lower average balances, partly offset by higher rates earned, while consumer and personal real estate loan interest declined due to lower average rates earned, partly offset by higher average balances. These decreases were partly offset by higher interest earned on business real estate and construction and land development loans due to higher average balances and rates earned. Interest income on investment securities (T/E) increased $54.6 million due to a 42 basis point increase in the average rate earned and a $2.6 billion increase in average balances. Interest earned on U.S. government and federal agency obligations increased $8.6 million, mainly due to higher TIPS interest income. Interest earned on mortgage-backed securities increased $28.9 million due to higher average rates earned and growth in average balances, while interest on asset-backed securities increased $9.2 million due to higher average balances, partly offset by lower average rates earned. Interest income on securities purchased under agreements to resell decreased $11.9 million due to lower rates earned, partly offset by higher average balances, while interest income on balances at the Federal Reserve increased $2.5 million due to higher average rates earned.
Total interest expense for the first six months of 2022 increased $1.8 million compared to the same period last year. Interest expense on borrowings increased $3.0 million, mainly due to higher rates paid on customer repurchase agreements. This increase was partly offset by a decline of $1.2 million in interest expense on interest bearing deposits, mainly due to a two basis point decrease in the average rate paid. The overall cost of total interest bearing liabilities increased to .09% compared to .08% in the same period last year.
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 June 30 Increase (Decrease) Six Months Ended June 30 Increase (Decrease)
(Dollars in thousands) 2022 2021 Amount % change 2022 2021 Amount % change
Bank card transaction fees $ 43,873 $ 42,608 $ 1,265 3.0 % $ 85,918 $ 80,303 $ 5,615 7.0 %
Trust fees 46,792 46,257 535 1.2 94,603 90,384 4,219 4.7
Deposit account charges and other fees 25,564 23,988 1,576 6.6 47,871 46,563 1,308 2.8
Capital market fees 3,327 3,327 — — 7,452 8,308 (856) (10.3)
Consumer brokerage services 5,068 4,503 565 12.5 9,514 8,584 930 10.8
Loan fees and sales 3,246 7,446 (4,200) (56.4) 7,481 17,630 (10,149) (57.6)
Other 11,557 11,014 543 4.9 18,357 23,416 (5,059) (21.6)
Total non-interest income $ 139,427 $ 139,143 $ 284 .2 % $ 271,196 $ 275,188 (3,992) (1.5 %)
Non-interest income as a % of total revenue* 37.5 % 40.1 % 38.1 % 39.9 %
* 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 and six month periods ended June 30, 2022 and 2021.
Three Months Ended June 30 Six Months Ended June 30
(Dollars in thousands) 2022 2021 $ change % change 2022 2021 $ change % change
Net debit card fees $ 10,533 $ 10,505 $ 28 .3 % $ 20,085 $ 19,872 $ 213 1.1 %
Net credit card fees 3,712 4,105 (393) (9.6) 7,434 7,526 (92) (1.2)
Net merchant fees 4,934 4,895 39 .8 9,914 9,509 405 4.3
Net corporate card fees 24,694 23,103 1,591 6.9 48,485 43,396 5,089 11.7
Total bank card transaction fees $ 43,873 $ 42,608 $ 1,265 3.0 % $ 85,918 $ 80,303 $ 5,615 7.0 %
For the second quarter of 2022, total non-interest income amounted to $139.4 million compared to $139.1 million in the same quarter last year, which was an increase of $284 thousand, or .2%. The increase was mainly due to higher bank card and deposit fees, offset by lower loan fees and sales. Bank card transaction fees for the current quarter grew $1.3 million, or 3.0%, over the same period last year, mainly due to growth of $1.6 million in net corporate card fees, partly offset by lower net credit card fees of $393 thousand. The growth in net corporate card fees was mainly due to higher interchange income, partly offset by higher rewards expense, while the decline in net credit card fees was due to higher rewards expense, partly offset by higher interchange income. Trust fees for the quarter increased $535 thousand, or 1.2%, over the same quarter last year, resulting from higher private client fees, which were up 3.1%. Compared to the second quarter of last year, deposit account fees increased $1.6 million, or 6.6%, mainly due to higher corporate cash management fees. Consumer brokerage service fees increased $565 thousand, or 12.5%, due to growth in annuity, advisory, and mutual fund fees, while loan fees and sales decreased $4.2 million, or 56.4%, due to a decline in mortgage banking revenue. Other non-interest income increased $543 thousand, or 4.9%, mainly due to $2.3 million higher cash sweep commissions, $450 thousand higher tax credit sales fees, and income of $2.2 million from a life insurance death benefit. Partly offsetting these increases was a decrease of $3.7 million in fair value adjustments on the Company's deferred compensation plan assets, which are held in a trust, recorded as both an asset and a liability, and affect both other income and other expense.
Non-interest income for the first six months of 2022 was $271.2 million, compared to $275.2 million in the first six months of 2021, resulting in a decrease of $4.0 million, or 1.5%. Bank card fees increased $5.6 million, or 7.0%, mainly due to growth of $5.1 million in net corporate card fees. Trust fees increased $4.2 million, or 4.7%, mainly due to continued growth in private client trust fees. Deposit account fees increased $1.3 million, or 2.8%, mainly due to higher corporate cash management fees and overdraft and return item fees, partly offset by lower personal account deposit fees. Capital market fees declined $856 thousand, or 10.3%, while consumer brokerage service fees increased $930 thousand, or 10.8%, due to higher advisory and annuity fees. Loan fees and sales decreased $10.1 million, or 57.6%, due to lower mortgage banking revenue. Other income decreased $5.1 million, or 21.6%, 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 first quarter of 2022. In addition, fair value adjustments on the Company's deferred compensation plan assets decreased $5.6 million from the same period last year. Partly offsetting these decreases were $1.9 million higher cash sweep commissions and income of $2.2 million from a life insurance death benefit.
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Investment Securities Gains (Losses), Net
Three Months Ended June 30 Six Months Ended June 30
(In thousands) 2022 2021 2022 2021
Net losses on sales of available for sale debt securities $ (9,582) $ — $ (9,582) $ —
Fair value adjustments on equity securities, net (736) 50 (1,023) 15
Net gains (losses) on sales of private equity investments (4,286) 88 (4,286) 1,611
Fair value adjustments on private equity investments 15,633 16,666 23,083 25,031
Total investment securities gains, net $ 1,029 $ 16,804 $ 8,192 $ 26,657
Net gains on investment securities, which were recognized in earnings during the three months ended June 30, 2022 and 2021, are shown in the table above. Net securities gains of $1.0 million were reported in the second quarter of 2022, compared to net gains of $16.8 million in the same period last year. The net gains in the second quarter of 2022 were primarily comprised of $15.6 million of net gains in fair value on the Company’s private equity investments, partially offset by losses of $9.6 million and $4.3 million on sales of available for sale securities and a private equity investment, respectively. The Company received $6.5 million in nonaccrual interest, recorded in net interest income, upon the sale of the private investment. The net gains on investment securities for the same quarter last year were mainly comprised of $16.7 million of net gains in fair value on the Company’s private equity investments.
Net gains on investment securities of $8.2 million were recognized in earnings for the six months ended June 30, 2022, compared to net gains of $26.7 million for the same period in 2021. Net gains in the first half of 2022 were mainly comprised of net gains in fair value of $23.1 million on private equity investments, due to fair value adjustments, offset by losses of $9.6 million on sales of available for sale securities, net losses of $4.3 million on sales of private equity investments, and net losses in fair value of $1.0 million on equity investments. Net gains in the first half of 2021 were mainly comprised of a gain of $1.6 million on the sale of a private equity investment and $25.0 million of net gains in fair value on 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 $3.8 million during the first six months of 2022 and expense of $5.2 million during the first six months of 2021.
Non-Interest Expense
Three Months Ended June 30 Increase (Decrease) Six Months Ended June 30 Increase (Decrease)
(Dollars in thousands) 2022 2021 Amount % change 2022 2021 Amount % change
Salaries and employee benefits $ 142,243 $ 130,751 $ 11,492 8.8 % $ 278,196 $ 259,784 $ 18,412 7.1 %
Net occupancy 12,503 11,527 976 8.5 24,799 23,548 $ 1,251 5.3
Equipment 4,734 4,605 129 2.8 9,302 8,958 $ 344 3.8
Supplies and communication 4,361 4,033 328 8.1 9,074 8,158 $ 916 11.2
Data processing and software 27,635 24,954 2,681 10.7 54,651 50,417 $ 4,234 8.4
Marketing 5,836 5,680 156 2.7 12,180 10,838 $ 1,342 12.4
Other 16,193 16,576 (383) (2.3) 30,951 28,996 $ 1,955 6.7
Total non-interest expense $ 213,505 $ 198,126 $ 15,379 7.8 % $ 419,153 $ 390,699 $ 28,454 7.3 %
Non-interest expense for the second quarter of 2022 amounted to $213.5 million, an increase of $15.4 million, or 7.8%, compared to expense of $198.1 million in the second quarter of last year. The increase in expense over the same period last year was mainly due to higher salaries and benefits expense, data processing and software expense and occupancy expense. Salaries expense increased $10.6 million, or 9.5%, due to growth in full-time salaries expense and an accrual of $5.4 million for special bonuses to be paid to non-incentivized full-time and part-time employees in the second half of 2022. Employee benefits expense totaled $19.9 million, reflecting growth of $862 thousand, or 4.5%, mainly due to higher payroll taxes and 401(k) expense, partly offset by lower healthcare expense. Full-time equivalent employees totaled 4,579 at June 30, 2022, compared to 4,590 at June 30, 2021. Occupancy expense increased $976 thousand, or 8.5%, mainly due to increases in rent expense, outside services expense, depreciation expense, and building repairs and supplies. Equipment expense increased $129 thousand, or 2.8%, while supplies and communication expense increased $328 thousand, or 8.1%, due to higher postage and courier expense and bank card reissuance fees. Data processing and software expense increased $2.7 million, or 10.7%, due to higher software amortization, bank card processing fees and increased costs for service providers. Other non-interest expense
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decreased $383 thousand, or 2.3%, mainly due to a decline of $3.7 million in the deferred compensation adjustment previously mentioned, mostly offset by increases in travel and entertainment expense of $1.3 million, loan collection fees of $430 thousand, and legal and professional fees of $339 thousand.
Non-interest expense amounted to $419.2 million for the first six months of 2022, an increase of $28.5 million, or 7.3%, over the first six months of 2021. Salaries and benefits expense increased $18.4 million, or 7.1%, mainly due to higher costs for salaries, payroll taxes, 401(k) expense, and the special bonus accrual mentioned above. Occupancy expense increased $1.3 million, or 5.3%, mainly due to higher rent expense, outside services expense, and building repairs and supplies expense, while equipment expense increased $344 thousand, or 3.8%. Marketing expense increased $1.3 million, or 12.4%, while supplies and communication expense increased $916 thousand, or 11.2%, mainly due to higher postage and courier expense and bank card reissuance fees. Data processing and software expense increased $4.2 million, or 8.4%, due to higher costs for service providers, software amortization and bank card processing fees. Other non-interest expense increased $2.0 million, or 6.7%, mainly due to an increase in travel and entertainment expense of $2.4 million, higher loan collection fees, professional and legal fees and insurance expense, in addition to lower deferred origination costs. These increases to expense were partly offset by the previously mentioned fair value equity adjustments (decrease of $5.6 million) on the Company's deferred compensation plan assets.
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Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments
Three Months Ended Six Months Ended June 30
June 30, 2022 Mar. 31, 2022 June 30, 2021 2022 2021
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period $ 134,710 $ 150,044 $ 200,527 $ 150,044 $ 220,834
Provision for credit losses on loans 7,287 (10,686) (27,433) $ (3,399) $ (37,788)
Net loan charge-offs (recoveries):
Commercial:
Business 19 77 (4,909) 96 (4,913)
Real estate-construction and land — — — — 1
Real estate-business (1) (7) (85) (8) (65)
Commercial net loan charge-offs (recoveries) 18 70 (4,994) 88 (4,977)
Personal Banking:
Real estate-personal (41) 22 (16) (19) (1)
Consumer 633 808 378 1,441 1,141
Revolving home equity (14) 18 28 4 51
Consumer credit card 2,937 3,372 5,155 6,309 14,136
Overdrafts 425 358 148 783 301
Personal banking net loan charge-offs 3,940 4,578 5,693 8,518 15,628
Total net loan charge-offs 3,958 4,648 699 8,606 10,651
Balance at end of period $ 138,039 $ 134,710 $ 172,395 $ 138,039 $ 172,395
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at beginning of period 25,032 24,204 42,430 24,204 38,307
Provision for credit losses on unfunded lending commitments (125) 828 (18,222) 703 (14,099)
Balance at end of period 24,907 25,032 24,208 24,907 24,208
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 162,946 $ 159,742 $ 196,603 $ 162,946 $ 196,603
Three Months Ended Six Months Ended June 30
June 30, 2022 Mar. 31, 2022 June 30, 2021 2022 2021
Annualized net loan charge-offs (recoveries)*:
Commercial:
Business — % .01 % (.32 %) — % (.16 %)
Real estate-construction and land — — — — —
Real estate-business — — (.01) — —
Commercial net loan charge-offs (recoveries) — — (.19) — (.10)
Personal Banking:
Real estate-personal (.01) — — — —
Consumer .12 .16 .08 .14 .12
Revolving home equity (.02) .03 .04 — .04
Consumer credit card 2.19 2.53 3.59 2.36 4.81
Overdrafts 30.86 28.04 15.89 29.50 16.67
Personal banking net loan charge-offs .28 .33 .40 .30 .55
Total annualized net loan charge-offs .10 % .12 % .02 % .11 % .13 %
* 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 2021 Annual Report on Form 10-K.
Net loan charge-offs in the second quarter of 2022 amounted to $4.0 million, compared to $4.6 million in the prior quarter and $699 thousand in the second quarter of last year. During the second quarter of 2022, the Company recorded net charge-offs on commercial loans of $18 thousand, compared to net charge-offs of $70 thousand in the prior quarter and net recoveries of $4.9 million in the second quarter of 2021. Business loan net charge-offs decreased $58 thousand in the second quarter of 2022, compared to the prior quarte r, but increased $4.9 million compared to the same quarter in the prior year due to two large recoveries in 2021. Comp ared to the same period last year, net loan charge-offs in the second quarter of 2022 increased $3.3 million. This increase was primarily driven by the increase in net charge-offs on business loans created by the two non-recurring recoveries, but partially offset by a $2.2 million decrease in net charge-offs on consumer credit card loans.
For the three months ended June 30, 2022, annualized net charge-offs on average consumer credit card loans totaled 2.19%, compared to 2.53% in the previous quarter and 3.59% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .12%, compared to .16% in the prior quarter and .08% in the same period last year. In the second quarter of 2022, total annualized net loan charge-offs were .10%, compared to .12% in the previous quarter and .02% in the same period last year.
For the six months ended June 30, 2022, net loan charge-offs amounted to $8.6 million, compared to $10.7 million during the same period in the prior year. The decrease in net loan charge-offs in the six months ended June 30, 2022 was primarily driven by a $7.8 million decline in net charge-offs on consumer credit card loans, but partly offset by a $5.0 million increase in net charge-offs on business loans due to the non-recurring recoveries in 2021. For the six months ended June 30, 2022, annualized net charge-offs on average consumer credit card loans totaled 2.36%, compared to 4.81% during the same period last year, while consumer loan annualized net charge-offs in the six months ended June 30, 2022 amounted to .14%, compared to .12% during the same period last year. During the first half of 2022, total annualized net loan charge-offs were .11%, compared to .13% during the same period last year.
The provision for credit losses on loans was $7.3 million in the current quarter, which was an $18.0 million increase from the $10.7 million benefit recorded in the prior quarter and an increase of $34.7 million over the benefit recorded for the three months ended June 30, 2021. The increase in the provision from the prior quarter was due to higher loan balances and economic uncertainties associated with the possibility of a future recession as inflation rises and supply chain issues continue, coupled with the release of allowances associated with certain pandemic estimates in the prior quarter. The provision for credit losses on loans for the second quarter of the prior year reflected lower than projected net charge-offs and an improved forecast at that point in time. For the six months ended June 30, 2022, the provision for credit losses on loans was a recovery of $3.4 million, compared to a recovery of $37.8 million during the same period in the prior year.
For the six months ended June 30, 2022, the allowance for credit losses on loans decreased $12.0 million, compared to the allowance for credit losses on loans as of December 31, 2021. The decrease was primarily the net result of lower than projected net loan charge-offs during the first quarter of 2022 and the improved economic forecast as pandemic economic concerns lessened compared to December 31, 2021, slightly offset by an emerging uncertainty introduced in 2022 related to the geopolitical environment, high inflation, and supply constraints on the economy. The allowance for credit losses on commercial loans decreased by $1.7 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, decreased $13.8 million, mostly related to decreases in consumer credit card loans experienced in first quarter of 2022.
While the forecast reflects a continued economic recovery from the recession driven by 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 June 30, 2022, the allowance for credit losses on loans amounted to $138.0 million, compared to $134.7 million at March 31, 2022. This increase in the allowance for credit losses on loans compared to the prior quarter is due to the higher loan balances and the economic uncertainties associated with the possibility of a future recession as inflation rises and supply chain issues continue. The allowance for credit losses on loans was $172.4 million at June 30, 2021, reflecting pandemic uncertainties and the economic forecast at that point in time, and was .88%, .87% and 1.10% of total loans at June 30, 2022, March 31, 2022 and June 30, 2021, respectively.
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In the current quarter, the provision for credit losses on unfunded lending commitments was a benefit of $125 thousand, reflecting a $953 thousand decrease over the provision in the prior quarter and a $18.1 million increase compared to the second quarter of 2021. For the six months ended June 30, 2022, the provision for credit losses on unfunded lending commitments was $703 thousand, compared to a benefit of $14.1 million during the same period in the prior year. At June 30, 2022, the liability for unfunded lending commitments was $24.9 million, compared to $25.0 million at March 31, 2022 and $24.2 million at June 30, 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 June 30, 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)
June 30, 2022 December 31, 2021
Non-accrual loans $ 7,917 $ 9,157
Foreclosed real estate 296 115
Total non-performing assets $ 8,213 $ 9,272
Non-performing assets as a percentage of total loans .05 % .06 %
Non-performing assets as a percentage of total assets .02 % .03 %
Total loans past due 90 days and still accruing interest $ 11,909 $ 11,726
Non-accrual loans totaled $7.9 million at June 30, 2022, a decrease of $1.2 million from the balance at December 31, 2021. The decrease occurred mainly in business loans which decreased $998 thousand. At June 30, 2022, non-accrual loans were comprised of business (79.8%), personal real estate (18.1%), and business real estate (2.1%) loans. Foreclosed real estate totaled $296 thousand at June 30, 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 $11.9 million as of June 30, 2022, an increase of $183 thousand 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 $319.2 million at June 30, 2022 compared with $278.7 million at December 31, 2021, resulting in an increase of $40.5 million, or 14.5%.
(In thousands)
June 30, 2022 December 31, 2021
Potential problem loans:
Business $ 32,338 $ 37,143
Real estate – construction and land 59,229 40,259
Real estate – business 227,158 200,766
Real estate – personal 436 526
Total potential problem loans $ 319,161 $ 278,694
At June 30, 2022, the Company had $142.4 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 $126.5 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 8.1% of total loans outstanding at June 30, 2022. The largest component of construction and land loans was commercial construction, which increased $114.7 million during the six months ended June 30, 2022. At June 30, 2022, multi-family residential construction loans totaled approximately $238.3 million, or 23.0%, of the commercial construction loan portfolio, compared to $155.9 million, or 16.9%, at December 31, 2021.
(Dollars in thousands) June 30,
2022
% of Total
% of
Total
Loans
December 31, 2021
% of Total
% of
Total
Loans
Commercial construction $ 1,037,311 81.9 % 6.6 % $ 922,654 82.5 % 6.1 %
Residential construction 130,388 10.3 .9 96,618 8.6 .7
Commercial land and land development 52,062 4.1 .3 48,481 4.3 .3
Residential land and land development 46,499 3.7 .3 50,513 4.6 .3
Total real estate - construction and land loans $ 1,266,260 100.0 % 8.1 % $ 1,118,266 100.0 % 7.4 %
Real Estate – Business Loans
Total business real estate loans were $3.2 billion at June 30, 2022 and comprised 20.5% 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 June 30, 2022, 37.4% 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) June 30,
2022
% of Total
% of
Total
Loans
December 31, 2021
% of Total
% of
Total
Loans
Owner-occupied $ 1,202,576 37.4 % 7.7 % $ 1,188,469 38.9 % 7.8 %
Office 503,895 15.7 3.2 380,101 12.4 2.5
Retail 333,391 10.4 2.1 339,874 11.1 2.2
Multi-family 332,799 10.3 2.1 354,282 11.6 2.3
Hotels 232,191 7.2 1.5 234,673 7.7 1.5
Farm 196,527 6.1 1.3 178,780 5.8 1.2
Senior living 147,433 4.6 .9 174,871 5.7 1.2
Industrial 142,074 4.4 .9 99,800 3.3 .7
Other 124,692 3.9 .8 107,987 3.5 .8
Total real estate - business loans $ 3,215,578 100.0 % 20.5 % $ 3,058,837 100.0 % 20.2 %
Revolving Home Equity Loans
The Company had $271.9 million in revolving home equity loans at June 30, 2022 that were generally collateralized by residential real estate. Most of these loans (92.3%) 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 June 30, 2022, the outstanding principal of loans with an original LTV higher than 80% was $29.4 million, or 10.8% 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 $1.3 million at June 30, 2022 and $1.6 million at December 31, 2021, and there were no revolving home equity loans on non-accrual status at June 30, 2022 or December 31, 2021. The weighted average FICO score for the total current portfolio balance is 791. 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 14% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 87% 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 38.0% of the consumer loan portfolio at June 30, 2022, and outstanding balances for auto loans were $794.9 million and $855.4 million at June 30, 2022 and December 31, 2021,
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respectively. The balances over 30 days past due amounted to $7.6 million at June 30, 2022 and $9.0 million at December 31, 2021, respectively and comprised 1.0% of the outstanding balances of these loans at June 30, 2022 and 1.1% at December 31, 2021, respectively. For the six months ended June 30, 2022, $153.5 million of new auto loans were originated, compared to $228.5 million during the first six months of 2021. At June 30, 2022, the automobile loan portfolio had a weighted average FICO score of 756, and net charge-offs on auto loans were .2% 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 June 30, 2022. Losses on these loans have historically been low, and the Company saw net recoveries of $35 thousand for the first six months of 2022. Private banking loans comprised 34% of the consumer loan portfolio at June 30, 2022. The Company's private banking loans are generally well-collateralized, and at June 30, 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 $779 thousand in the first six months of 2022 and were .2% of the average balances of these loans at June 30, 2022.
Consumer Credit Card Loans
The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at June 30, 2022 of $558.1 million in consumer credit card loans outstanding, approximately $90.4 million, or 16.2%, carried a low promotional rate. Within the next six months, $32.1 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 $289.1 million, or 1.8% of total loans at June 30, 2022, an increase of $28.5 million from year end 2021, as shown in the table below.
(In thousands)
June 30, 2022 December 31, 2021 Unfunded commitments at June 30, 2022
Extraction $ 213,398 $ 184,840 $ 192,997
Mid-stream shipping and storage 38,732 36,850 70,283
Downstream distribution and refining 25,953 24,915 18,037
Support activities 11,037 14,039 7,055
Total energy lending portfolio $ 289,120 $ 260,644 $ 288,372
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 $1.2 billion at June 30, 2022 and December 31, 2021. Additional unfunded commitments at June 30, 2022 totaled $1.8 billion.
Income Taxes
Income tax expense was $32.0 million in the second quarter of 2022, compared to $31.9 million in the first quarter of 2022 and $45.2 million in the second quarter of 2021. The Company's effective tax rate, including the effect of non-controlling interest, was 21.7% in the second quarter of 2022, compared to 21.3% in the first quarter of 2022 and 21.8% in the second quarter of 2021. For the six months ended June 30, 2022, income tax expense was $63.9 million, compared to $77.3 million for the same period during the previous year, resulting in effective tax rates of 21.5% and 20.9%, respectively.
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Financial Condition
Balance Sheet
Total assets of the Company were $33.4 billion at June 30, 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 $32.9 billion at June 30, 2022 and $35.5 billion at December 31, 2021, and consisted of 48% in loans and 46% in investment securities at June 30, 2022.
At June 30, 2022, total loans increased $510.3 million, or 3.4%, compared to balances at December 31, 2021. The increase was mainly due to growth in business real estate, construction and business loans of $156.7 million, $148.0 million and $138.1 million, respectively. The growth in business loans was mainly the result of increased commercial and industrial and commercial card lending, partly offset by declines in tax free and lease loans. Personal real estate loans increased $31.4 million. Consumer loans, which includes automobile, marine and RV, fixed rate home equity and other consumer loans, increased $57.4 million, as declines in auto loans were offset by growth in other consumer loans. These increases were partly offset by a decline in consumer credit card loans of $17.3 million.
Available for sale debt securities, excluding fair value adjustments, increased $364.2 million at June 30, 2022 compared to December 31, 2021. Purchases of securities during this period totaled $1.9 billion, offset by sales, maturities and pay downs of $1.5 billion. The largest increases in outstanding balances occurred in asset-backed securities, non-agency mortgage-backed securities, and U.S. government and federal agency obligations, which increased $413.4 million, $97.9 million, and $90.1 million, respectively. These increases were partially offset by a decrease in agency mortgage-backed securities of $233.8 million at June 30, 2022 compared to December 31, 2021. At June 30, 2022, the duration of the investment portfolio was 3.8 years, and maturities and pay downs of approximately $2.2 billion are expected to occur during the next 12 months.
Total deposits at June 30, 2022 amounted to $28.2 billion, a decrease of $1.6 billion compared to December 31, 2021. The decline in deposits largely resulted from a decrease in demand deposits, mainly in business demand deposits (decrease of $1.0 billion). Additionally, certificates of deposit decreased $437.0 million, interest checking deposits decreased $412.2 million, and money market deposits decreased $200.0 million, at June 30, 2022 compared to balances at December 31, 2021. The Company's borrowings totaled $2.2 billion at June 30, 2022, a decrease of $795.2 million from balances at December 31, 2021, mainly due to a decline in customer repurchase agreements.
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)
June 30, 2022 June 30, 2021 December 31, 2021
Liquid assets:
Available for sale debt securities $ 13,700,308 $ 13,291,506 $ 14,450,027
Federal funds sold 26,000 5,945 2,800
Securities purchased under agreements to resell 1,450,000 1,300,000 1,625,000
Balances at the Federal Reserve Bank 684,994 2,161,644 3,971,217
Total $ 15,861,302 $ 16,759,095 $ 20,049,044
Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $26.0 million as of June 30, 2022. Resale agreements, maturing through 2025, totaled $1.5 billion at June 30, 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 $1.5 billion in fair value at June 30, 2022. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $685.0 million at June 30, 2022. The fair value of the available for sale debt portfolio was $13.7 billion at June 30, 2022 and included an unrealized net loss of $1.1 billion.
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Approximately $2.2 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)
June 30, 2022 June 30, 2021 December 31, 2021
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings $ 14,854 $ 25,179 $ 17,465
FHLB borrowings and letters of credit 2,405 4,296 3,218
Securities sold under agreements to repurchase * 2,506,986 2,573,314 3,475,589
Other deposits and swaps 2,767,433 2,982,225 2,897,576
Total pledged securities 5,291,678 5,585,014 6,393,848
Unpledged and available for pledging 7,390,389 6,369,604 6,913,721
Ineligible for pledging 1,018,241 1,336,888 1,142,458
Total available for sale debt securities, at fair value $ 13,700,308 $ 13,291,506 $ 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 June 30, 2022, such deposits totaled $27.2 billion and represented 96.4% 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 $601.5 million at June 30, 2022. These accounts are normally considered more volatile with higher cost and comprised 2.1% of total deposits at June 30, 2022.
(In thousands)
June 30, 2022 June 30, 2021 December 31, 2021
Core deposit base:
Non-interest bearing $ 11,102,585 $ 11,085,286 $ 11,772,374
Interest checking 2,815,600 2,192,932 3,227,822
Savings and money market 13,247,464 12,461,764 13,370,263
Total $ 27,165,649 $ 25,739,982 $ 28,370,459
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)
June 30, 2022 June 30, 2021 December 31, 2021
Borrowings:
Federal funds purchased $ 7,750 $ 12,335 $ 43,385
Securities sold under agreements to repurchase 2,226,546 2,305,893 2,979,582
Other debt 6,025 2,194 12,560
Total $ 2,240,321 $ 2,320,422 $ 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 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 $2.2 billion at June 30, 2022 and are collateralized by securities in the Company's investment portfolio. At June 30, 2022, the value of the collateral pledged for the benefit of customers was $2.3 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 no advances outstanding from the FHLB at June 30, 2022.
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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 June 30, 2022.
June 30, 2022
(In thousands)
FHLB
Federal Reserve
Total
Collateral value established by FHLB and FRB $ 1,927,044 $ 982,080 $ 2,909,124
Letters of credit issued (162,645) — (162,645)
Available for future advances $ 1,764,399 $ 982,080 $ 2,746,479
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 $3.2 billion during the first six 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 $286.2 million and has historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, used cash of $799.4 million. Activity in the investment securities portfolio used cash of $428.4 million from purchases (net of sales, maturities and pay downs), securities purchased under agreements to resell used cash of $200.0 million, and an increase in the loan portfolio used cash of $518.9 million. These cash outflows were partially offset by repayments related to securities purchased under agreements to resell, which provided cash of $375.0 million. Financing activities used cash of $2.7 billion, largely resulting from a decrease in federal funds purchased and securities sold under agreements to repurchase of $788.7 million, paired with a decrease in deposits of $1.7 billion.
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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 at June 30, 2022 and December 31, 2021, as shown in the following table.
(Dollars in thousands) June 30, 2022 December 31, 2021 Minimum Ratios under Capital Adequacy Guidelines
Minimum Ratios
for
Well-Capitalized
Banks *
Risk-adjusted assets $ 23,597,076 $ 22,483,748
Tier I common risk-based capital 3,290,703 3,225,044
Tier I risk-based capital 3,290,703 3,225,044
Total risk-based capital 3,454,090 3,399,880
Tier I common risk-based capital ratio 13.95 % 14.34 % 7.00 % 6.50 %
Tier I risk-based capital ratio 13.95 14.34 8.50 8.00
Total risk-based capital ratio 14.64 15.12 10.50 10.00
Tier I leverage ratio 9.45 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 extended through December 31, 2021. Beginning on January 1, 2022, the Company began to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025.
The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and normally purchases stock in the open market. During the six months ended June 30, 2022, the Company purchased 1,641,610 shares at an average price of $68.96 in open market purchases and through stock-based compensation transactions. At June 30, 2022, 4,155,115 shares remained available for purchase under the current Board authorization.
The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.265 per share cash dividend on its common stock in the second 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.
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 June 30, 2022 totaled $13.1 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 $504.0 million and $1.2 million, respectively, at June 30, 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 $4.0 million at June 30, 2022. The allowance for these commitments is recorded in the Company’s
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liability for unfunded lending commitments within other liabilities on its consolidated balance sheets. At June 30, 2022, the liability for unfunded commitments totaled $24.9 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 June 30, 2022, the Company has made payments totaling $71.8 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 six months of 2022, purchases and sales of tax credits amounted to $62.3 million and $78.9 million, respectively. Fees from sales of tax credits were $2.7 million for the six months ended June 30, 2022, compared to $2.6 million in the same period last year. At June 30, 2022, the Company expected to fund outstanding purchase commitments of $122.6 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 six months of 2022 and 2021.
(Dollars in thousands)
Consumer
Commercial
Wealth
Segment
Totals
Other/ Elimination
Consolidated Totals
Six Months Ended June 30, 2022
Net interest income $ 163,529 $ 219,176 $ 38,094 $ 420,799 $ 20,372 $ 441,171
Provision for credit losses (8,422) (145) (3) (8,570) 11,266 2,696
Non-interest income 59,278 110,466 107,189 276,933 (5,737) 271,196
Investment securities gains, net — — — — 8,192 8,192
Non-interest expense (148,400) (180,852) (72,773) (402,025) (17,128) (419,153)
Income before income taxes $ 65,985 $ 148,645 $ 72,507 $ 287,137 $ 16,965 $ 304,102
Six Months Ended June 30, 2021
Net interest income $ 158,746 $ 224,750 $ 35,111 $ 418,607 $ (4,877) $ 413,730
Provision for credit losses (15,565) 4,925 1 (10,639) 62,526 51,887
Non-interest income 75,153 102,987 103,490 281,630 (6,442) 275,188
Investment securities gains, net — — — — 26,657 26,657
Non-interest expense (144,284) (161,900) (67,092) (373,276) (17,423) (390,699)
Income before income taxes $ 74,050 $ 170,762 $ 71,510 $ 316,322 $ 60,441 $ 376,763
Increase (decrease) in income before income taxes:
Amount $ (8,065) $ (22,117) $ 997 $ (29,185) $ (43,476) $ (72,661)
Percent (10.9 %) (13.0 %) 1.4 % (9.2 %) (71.9 %) (19.3 %)
Consumer
For the six months ended June 30, 2022, income before income taxes for the Consumer segment decreased $8.1 million, or 10.9%, compared to the first six months of 2021. The decrease in income before income taxes was mainly due to a decline in non-interest income of $15.9 million, or 21.1%, and higher non-interest expense of $4.1 million, or 2.9%. These decreases to income were partly offset by growth in net interest income of $4.8 million, or 3.0%, and a decrease in the provision for credit losses of $7.1 million, or 45.9%. Net interest income increased due to a $7.8 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and a $1.8 million decrease in deposit interest expense. These increases to income were partly offset by a $4.8 million decline in loan interest income. Non-interest income decreased mainly due to a decline of $14.9 million in mortgage banking revenue. Non-interest expense increased over the same period in the previous year mainly due to higher salaries expense, marketing expense and allocated service and support costs for information
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technology and bank card fraud operations, partly offset by lower allocated service costs for branch employees. The provision for credit losses totaled $8.4 million, a $7.1 million decrease from the first six months of 2021, mainly due to lower credit card loan net charge-offs.
Commercial
For the six months ended June 30, 2022, income before income taxes for the Commercial segment decreased $22.1 million, or 13.0%, compared to the same period in the previous year. This decrease was mainly due to an increase in non-interest expense and a decline in net interest income, partly offset by an increase in non-interest income. Net interest income decreased $5.6 million, or 2.5%, due to lower loan interest income of $12.8 million and higher interest expense on customer repurchase agreements and deposits of $2.8 million and $1.1 million, respectively. These decreases to income were partly offset by a $10.9 million increase in net allocated funding credits. Non-interest income increased $7.5 million, or 7.3%, 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), partly offset by a decline in capital market fees. Non-interest expense increased $19.0 million, or 11.7%, mainly due to higher salaries and benefits expense, data processing and software expense, allocated service and support costs (mainly information technology, branch employee expense and commercial banking and payments expense), and lower deferred origination costs. The provision for credit losses increased $5.1 million over the same period last year, mainly due to lower recoveries on business loans.
Wealth
Wealth segment pre-tax profitability for the six months ended June 30, 2022 increased $997 thousand, or 1.4%, over the same period in the previous year. Net interest income increased $3.0 million, or 8.5%, mainly due to a $3.1 million increase in loan interest income. Non-interest income increased $3.7 million, or 3.6%, over the prior year largely due to higher trust fees (mainly private client trust fees), cash sweep commissions and brokerage fees, partly offset by lower mortgage banking revenue. Non-interest expense increased $5.7 million, or 8.5%, mainly due to higher salaries and benefits expense, travel and entertainment expense, marketing expense and allocated costs for management fees. The provision for credit losses increased $4 thousand over the same period last year, due to higher overdraft 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 lower than in the same period last year by $43.5 million. Unallocated securities gains were $8.2 million in the first six months of 2022 compared to gains of $26.7 million in 2021. Also, the unallocated provision for credit losses increased $51.3 million, primarily driven by increases in the liability for unfunded lending commitments and 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 $12.0 million lower than net charge-offs, as the provision was a benefit in 2022, while the provision was $48.4 million lower than net charge-offs, as the provision was also a benefit in 2021. For the six months ended June 30, 2022, the Company's provision on unfunded lending commitments was expense of $699 thousand. These decreases to pre-tax profitability were partly offset by higher net interest income of $25.2 million, non-interest income of $705 thousand, and lower non-interest expense of $295 thousand.
Impact of Recently Issued Accounting Standards
Reference Rate Reform The Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting", in March 2020, and has been followed by additional clarifying guidance related to derivatives that are modified as a result of reference rate reform. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if they reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Further, the guidance applies to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The expedients and exceptions provided by the new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated for effectiveness after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022. In 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
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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. The Company plans to finish transitioning the impacted loans by late spring of 2023.
Credit Losses The FASB issued ASU 2022-02, "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.
Fair Value Measurement The FASB issued ASU 2022-03 "Fair Value Measurement of Equity Securities Subject to
Contractual Sale Restrictions", in June 2022. ASU 2022-3 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The guidance is effective January 1, 2024. 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 June 30, 2022 and 2021
Second Quarter 2022
Second 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)
$ 5,385,181 $ 42,402 3.16 % $ 6,211,610 $ 48,844 3.15 %
Real estate — construction and land 1,225,267 12,489 4.09 1,088,433 9,670 3.56
Real estate — business 3,163,508 29,173 3.70 3,014,955 26,223 3.49
Real estate — personal 2,825,578 23,043 3.27 2,804,388 23,163 3.31
Consumer 2,070,560 18,697 3.62 2,004,625 19,178 3.84
Revolving home equity 272,280 2,507 3.69 287,031 2,455 3.43
Consumer credit card 537,681 15,170 11.32 575,725 16,101 11.22
Overdrafts 5,524 — — 3,735 — —
Total loans 15,485,579 143,481 3.72 15,990,502 145,634 3.65
Loans held for sale 7,933 161 8.14 23,389 245 4.20
Investment securities:
U.S. government and federal agency obligations 1,119,305 13,770 4.93 719,849 9,912 5.52
Government-sponsored enterprise obligations 55,762 332 2.39 50,793 295 2.33
State and municipal obligations (A)
2,126,380 12,189 2.30 1,966,673 11,834 2.41
Mortgage-backed securities 7,158,252 35,602 1.99 6,685,407 18,464 1.11
Asset-backed securities 4,038,113 13,612 1.35 2,653,928 8,262 1.25
Other debt securities 643,463 3,157 1.97 605,772 3,118 2.06
Trading debt securities (A)
43,904 269 2.46 34,955 104 1.19
Equity securities (A)
9,094 610 26.90 4,914 528 43.10
Other securities (A)
195,090 10,886 22.38 156,984 4,657 11.90
Total investment securities 15,389,363 90,427 2.36 12,879,275 57,174 1.78
Federal funds sold 4,269 19 1.79 1,338 2 .60
Securities purchased under agreements to resell 1,703,569 4,385 1.03 937,372 10,416 4.46
Interest earning deposits with banks 1,248,942 2,428 .78 2,724,782 743 .11
Total interest earning assets 33,839,655 240,901 2.86 32,556,658 214,214 2.64
Allowance for credit losses on loans (134,670) (200,801)
Unrealized gain (loss) on debt securities (851,110) 197,124
Cash and due from banks 315,352 329,366
Premises and equipment, net 401,663 403,810
Other assets 521,478 525,813
Total assets $ 34,092,368 $ 33,811,970
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings $ 1,609,694 157 .04 $ 1,474,391 277 .08
Interest checking and money market 14,847,306 2,121 .06 13,283,481 1,567 .05
Certificates of deposit of less than $100,000 411,655 205 .20 491,446 327 .27
Certificates of deposit of $100,000 and over 648,728 470 .29 1,354,685 661 .20
Total interest bearing deposits 17,517,383 2,953 .07 16,604,003 2,832 .07
Borrowings:
Federal funds purchased $ 113,128 $ 224 .79 23,292 $ 3 .05
Securities sold under agreements to repurchase 2,258,184 2,702 .48 2,142,404 317 .06
Other borrowings (B)
2,029 12 2.37 978 2 .82
Total borrowings 2,373,341 2,938 .50 2,166,674 322 .06
Total interest bearing liabilities 19,890,724 5,891 .12 % 18,770,677 3,154 .07 %
Non-interest bearing deposits 11,209,680 11,109,198
Other liabilities 139,986 527,401
Equity 2,851,978 3,404,694
Total liabilities and equity $ 34,092,368 $ 33,811,970
Net interest margin (T/E) $ 235,010 $ 211,060
Net yield on interest earning assets 2.79 % 2.60 %
(A) Stated on a tax 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.
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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Six Months Ended June 30, 2022 and 2021
Six Months 2022
Six Months 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)
$ 5,354,845 $ 80,818 3.04 % $ 6,371,378 $ 98,542 3.12 %
Real estate — construction and land 1,180,334 23,015 3.93 1,090,191 19,212 3.55
Real estate — business 3,129,477 54,974 3.54 3,018,945 52,467 3.50
Real estate — personal 2,817,325 45,739 3.27 2,815,190 46,861 3.36
Consumer 2,055,464 36,781 3.61 1,976,132 38,482 3.93
Revolving home equity 273,065 4,854 3.58 293,167 4,950 3.40
Consumer credit card 539,254 30,300 11.33 592,145 32,567 11.09
Overdrafts 5,352 — — 3,641 — —
Total loans 15,355,116 276,481 3.63 16,160,789 293,081 3.66
Loans held for sale 8,654 311 7.25 29,567 549 3.74
Investment securities:
U.S. government and federal agency obligations 1,111,570 23,087 4.19 722,593 14,454 4.03
Government-sponsored enterprise obligations 53,777 630 2.36 50,797 590 2.34
State and municipal obligations (A)
2,102,125 23,897 2.29 1,962,677 23,717 2.44
Mortgage-backed securities 7,236,993 71,372 1.99 6,841,099 42,463 1.25
Asset-backed securities 3,985,877 24,596 1.24 2,371,280 15,389 1.31
Other debt securities 639,875 6,291 1.98 588,042 6,138 2.10
Trading debt securities (A)
42,304 454 2.16 33,645 190 1.14
Equity securities (A)
9,295 1,219 26.45 4,619 1,056 46.10
Other securities (A)
193,708 13,688 14.25 155,515 6,654 8.63
Total investment securities 15,375,524 165,234 2.17 12,730,267 110,651 1.75
Federal funds sold 2,670 20 1.51 676 2 .60
Securities purchased under agreements to resell 1,718,644 9,685 1.14 893,927 21,544 4.86
Interest earning deposits with banks 1,924,731 3,579 .37 2,105,994 1,113 .11
Total interest earning assets 34,385,339 455,310 2.67 31,921,220 426,940 2.70
Allowance for credit losses on loans (142,136) (210,602)
Unrealized gain (loss) on debt securities (514,573) 240,079
Cash and due from banks 327,728 341,898
Premises and equipment, net 404,317 402,527
Other assets 539,219 538,986
Total assets $ 34,999,894 $ 33,234,108
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings $ 1,586,522 335 .04 $ 1,404,174 554 .08
Interest checking and money market 14,898,234 3,703 .05 13,127,919 3,393 .05
Certificates of deposit of less than $100,000 420,703 344 .16 504,017 800 .32
Certificates of deposit of $100,000 and over 754,890 897 .24 1,292,724 1,723 .27
Total interest bearing deposits 17,660,349 5,279 .06 16,328,834 6,470 .08
Borrowings:
Federal funds purchased $ 68,490 $ 231 .68 $ 30,125 8 .05
Securities sold under agreements to repurchase 2,484,071 3,384 .27 2,135,758 624 .06
Other borrowings (B)
1,402 13 1.87 905 4 .89
Total borrowings 2,553,963 3,628 .29 2,166,788 636 .06
Total interest bearing liabilities 20,214,312 8,907 .09 % 18,495,622 7,106 .08 %
Non-interest bearing deposits 11,376,265 10,775,770
Other liabilities 321,805 567,584
Equity 3,087,512 3,395,132
Total liabilities and equity $ 34,999,894 $ 33,234,108
Net interest margin (T/E) $ 446,403 $ 419,834
Net yield on interest earning assets 2.62 % 2.65 %
(A) Stated on a tax 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.
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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.