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 2022 Annual Report on Form 10-K. Results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of results to be attained for any other period.
Forward-Looking Information
This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, the effects of the COVID-19 pandemic, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2022 Annual Report on Form 10-K. During the quarter ended June 30, 2023, there were no material changes to the Risk Factors disclosed in the Company's 2022 Annual Report on Form 10-K.
Critical Accounting Estimates and Related Policies
The Company has identified certain policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates and related policies are the Company's allowance for credit losses and fair value measurement policies. A discussion of these estimates and related policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2022 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2022.
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Selected Financial Data
Three Months Ended June 30 Six Months Ended June 30
2023 2022 2023 2022
Per Share Data
Net income per common share — basic $ 1.03 $ .92 * $ 1.98 $ 1.84 *
Net income per common share — diluted 1.02 .92 * 1.97 1.84 *
Cash dividends on common stock .270 .252 * .540 .505 *
Book value per common share 21.53 21.23 *
Market price 48.70 62.52 *
Selected Ratios
(Based on average balance sheets)
Loans to deposits (1)
66.15 % 53.93 % 65.57 % 52.91 %
Non-interest bearing deposits to total deposits 32.63 39.02 34.35 39.18
Equity to loans (1)
16.35 18.41 16.05 20.10
Equity to deposits 10.81 9.93 10.52 10.63
Equity to total assets 8.29 8.37 8.26 8.82
Return on total assets 1.56 1.36 1.55 1.35
Return on equity 18.81 16.29 18.78 15.28
(Based on end-of-period data)
Non-interest income to revenue (2)
37.17 37.50 36.27 38.07
Efficiency ratio (3)
57.22 57.29 57.35 58.72
Tier I common risk-based capital ratio 14.75 13.95
Tier I risk-based capital ratio
14.75 13.95
Total risk-based capital ratio 15.53 14.64
Tangible common equity to tangible assets ratio (4)
7.70 7.56
Tier I leverage ratio
10.46 9.45
* Restated for the 5% stock dividend distributed in December 2022.
(1) Includes loans held for sale.
(2) Revenue includes net interest income and non-interest income.
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization.
It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP.
The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets.
June 30
(Dollars in thousands) 2023 2022
Total equity $ 2,685,228 $ 2,675,313
Less non-controlling interest 17,870 16,467
Less goodwill 146,371 138,921
Less intangible assets* 4,173 4,446
Total tangible common equity (a) $ 2,516,814 $ 2,515,479
Total assets $ 32,831,262 $ 33,435,370
Less goodwill 146,371 138,921
Less intangible assets* 4,173 4,446
Total tangible assets (b) $ 32,680,718 $ 33,292,003
Tangible common equity to tangible assets ratio (a)/(b) 7.70 % 7.56 %
* Intangible assets other than mortgage servicing rights.
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Results of Operations
Summary
Three Months Ended June 30 Six Months Ended June 30
(Dollars in thousands) 2023 2022 % change 2023 2022 % change
Net interest income (expense) $ 249,538 $ 232,385 7.4 % $ 501,161 $ 441,171 13.6 %
Provision for credit losses (6,471) (7,162) 9.6 (17,927) 2,696 764.9
Non-interest income 147,605 139,427 5.9 285,217 271,196 5.2
Investment securities gains (losses), net 3,392 1,029 N.M. 3,086 8,192 (62.3)
Non-interest expense (227,611) (213,505) 6.6 (451,718) (419,153) 7.8
Income taxes (35,990) (32,021) 12.4 (68,803) (63,923) 7.6
Non-controlling interest income (expense) (2,674) (4,359) (38.7) (3,775) (6,231) (39.4)
Net income attributable to Commerce Bancshares, Inc. $ 127,789 $ 115,794 10.4 % $ 247,241 $ 233,948 5.7 %
For the quarter ended June 30, 2023, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $127.8 million, an increase of $12.0 million, or 10.4%, compared to the second quarter of the previous year. For the current quarter, the annualized return on average assets was 1.56%, the annualized return on average equity was 18.81%, and the efficiency ratio was 57.22%. Diluted earnings per common share was $1.02 per share in the current quarter, an increase of 10.9% compared to $0.92 per share in the second quarter of 2022, and increased 7.4% compared to $0.95 per share in the previous quarter.
Compared to the second quarter of last year, net interest income increased $17.2 million, or 7.4%, mainly due to increases in interest income on loans and interest income on deposits with banks of $98.8 million and $26.8 million, respectively. These increases were partly offset by an increase in deposits and borrowings interest expense of $93.4 million. The provision for credit losses decreased $691 thousand, or 9.6%, compared to the same quarter in the prior year. Non-interest income increased $8.2 million, or 5.9%, compared to the second quarter of 2022, mainly due to an increase in net bank card fees and letters of credit fees, partly offset by lower deposit account charges. Net gains on investment securities totaled $3.4 million in the current quarter compared to net gains of $1.0 million in the same quarter of last year. Net securities gains in the current quarter primarily resulted from gains of $9.1 million related to fair value adjustments on private equity investments, partly offset by $5.4 million of net losses realized on the sales of available for sale debt securities. Non-interest expense increased $14.1 million, or 6.6%, over the second quarter of 2022, mainly due to higher salaries and employee benefits expense and higher FDIC insurance expense.
Net income for the first six months of 2023 was $247.2 million, an increase of $13.3 million, or 5.7%, from the same period last year. Diluted earnings per common share was $1.97, an increase of 7.1% compared to $1.84 per share in the same period last year. For the first six months of 2023, the annualized return on average assets was 1.55%, the annualized return on average equity was 18.78%, and the efficiency ratio was 57.35%. Net interest income increased $60.0 million, or 13.6%, over the same period last year. This growth was largely due to an increase of $190.5 million in interest income on loans, partly offset by increases in interest expense on deposits and borrowings of $147.6 million. The provision for credit losses was $17.9 million for the first six months of 2023, compared to a recovery of $2.7 million in the same period last year. Non-interest income increased $14.0 million, or 5.2%, from the first six months of last year mainly due to higher bank card fees, cash sweep commission fees, and letters of credit fees. Non-interest expense increased $32.6 million, or 7.8%, over the first six months of last year mainly due to increases in salaries and benefits expense and and higher FDIC insurance 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, 2023 vs. 2022 Six Months Ended June 30, 2023 vs. 2022
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 $ 2,992 $ 34,646 $ 37,638 $ 5,592 $ 67,667 $ 73,259
Real estate - construction and land 2,294 13,862 16,156 4,878 26,238 31,116
Real estate - business 3,481 19,972 23,453 6,676 39,420 46,096
Real estate - personal 1,104 2,992 4,096 2,110 5,376 7,486
Consumer 252 10,505 10,757 494 19,239 19,733
Revolving home equity 261 2,893 3,154 455 5,498 5,953
Consumer credit card 513 3,405 3,918 944 6,601 7,545
Overdrafts — — — — — —
Total interest on loans 10,897 88,275 99,172 21,149 170,039 191,188
Loans held for sale (33) 23 (10) (61) 46 (15)
Investment securities:
U.S. government and federal agency securities (1,028) (3,900) (4,928) (922) (8,185) (9,107)
Government-sponsored enterprise obligations — (1) (1) 205 186 391
State and municipal obligations (3,404) (976) (4,380) (4,999) (1,095) (6,094)
Mortgage-backed securities (4,178) 1,506 (2,672) (8,408) 2,796 (5,612)
Asset-backed securities (4,073) 5,127 1,054 (5,879) 11,990 6,111
Other securities 4,008 (8,868) (4,860) 3,424 (7,230) (3,806)
Total interest on investment securities (8,675) (7,112) (15,787) (16,579) (1,538) (18,117)
Federal funds sold 14 72 86 153 421 574
Securities purchased under agreements to resell (2,256) 1,970 (286) (5,052) 3,418 (1,634)
Interest earning deposits with banks 2,013 24,813 26,826 (685) 35,696 35,011
Total interest income 1,960 108,041 110,001 (1,075) 208,082 207,007
Interest expense:
Deposits:
Savings (9) 38 29 (11) 55 44
Interest checking and money market (594) 28,333 27,739 (682) 46,797 46,115
Certificates of deposit of less than $100,000 76 9,844 9,920 69 11,137 11,206
Certificates of deposit of $100,000 and over 319 13,627 13,946 160 19,986 20,146
Total interest on deposits (208) 51,842 51,634 (464) 77,975 77,511
Federal funds purchased 776 5,397 6,173 1,457 10,295 11,752
Securities sold under agreements to repurchase (62) 14,374 14,312 (230) 31,355 31,125
Other borrowings 21,136 (1) 21,135 27,852 2 27,854
Total interest expense 21,642 71,612 93,254 28,615 $ 119,627 $ 148,242
Net interest income, tax equivalent basis $ (19,682) $ 36,429 $ 16,747 $ (29,690) $ 88,455 $ 58,765
Net interest income in the second quarter of 2023 was $249.5 million, an increase of $17.2 million over the second quarter of 2022. On a fully taxable-equivalent (FTE) basis, net interest income totaled $251.8 million in the second quarter of 2023, up $16.7 million over the same period last year and down $1.7 million from the previous quarter. The increase in net interest
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income compared to the second quarter of 2022 was mainly due to higher interest income earned on loans (FTE) of $99.2 million, partly offset by higher interest expense on deposits and borrowings of $93.3 million. The increase in total interest earned on loans (FTE) was the result of higher loan yields on all loan products, especially commercial loans, many of which have variable rates, coupled with higher average balances, while the increase in interest expense was mainly due to higher rates paid on deposits and borrowings. The Company's net yield on earning assets (FTE) was 3.12% in the current quarter compared to 2.79% in the second quarter of 2022.
Total interest income (FTE) increased $110.0 million over the second quarter of 2022. Interest income on loans (FTE) was $242.7 million during the second quarter of 2023, an increase of $99.2 million, or 69.1%, over the same quarter last year. The increase in interest income over the same quarter of last year was primarily due to an increase of 212 basis points in the average rate earned and growth of $1.2 billion, or 7.6%, in average loan balances. Most of the increase in interest income occurred in the business, business real estate and construction loan categories. The largest increase to interest income occurred in business loan interest, which grew $37.6 million due to a 242 basis point increase in the average rate earned, coupled with growth in average balances of $372.2 million, or 6.9%. Business real estate loan interest income increased $23.5 million due to an increase of 226 basis points in the average rate earned and higher average balances of $377.3 million, or 11.9%. Construction and land loan interest grew $16.2 million due to a 383 basis point increase in the average rate earned and growth of $224.9 million, or 18.4%, in average loan balances. In addition, consumer loan interest increased $10.8 million due to an increase of 201 basis points in the average rate earned, while consumer credit card loan increased $3.9 million mainly due to a 245 basis point increase in the average rate earned. Personal real estate loan interest income grew $4.1 million due to a 41 basis point increase in the average rate earned and growth of $135.4 million, or 4.8%, in average loan balances.
Interest income on investment securities (FTE) was $74.6 million during the second quarter of 2023, which was a decrease of $15.8 million from the same quarter last year. The decrease in interest income occurred mainly in interest earned on U.S. government and federal agency obligations, which declined $4.9 million due to a decrease in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS). Interest income related to TIPS, which is tied to the non-seasonally adjusted Consumer Price Index (CPI-U), decreased $4.5 million from the same quarter last year. Interest income earned on state and municipal securities declined $4.4 million mainly due to a $593.9 million, or 27.9%, decrease in average balances. Interest income on other securities decreased $4.9 million, mainly due the receipt of $6.5 million in non-accrual interest on the sale of a private equity investment recorded in the second quarter of 2022. This increase was partly offset by an increase in the average balance of Federal Home Loan Bank (FHLB) stock. Interest income earned on mortgage-backed securities decreased $2.7 million mainly due to a decline of $842.0 million, or 11.8%, in the average balance. In addition, a $1.7 million increase in premium amortization, reflecting slower forward prepayment speed estimates was recorded in the current quarter, compared to a premium amortization adjustment increase of $5.0 million in the prior year. These decreases were partly offset by an increase of ten basis points in the average rate earned. These decreases to interest income were partly offset by growth of $1.1 million in interest earned on asset-backed securities, due to an increase of 73 basis points in the average rate earned, partly offset by lower average balances of $1.2 billion, or 30.0%. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $12.6 billion in the second quarter of 2023, compared to $15.4 billion in the second quarter of 2022.
Interest income on securities purchased under agreements to resell decreased $286 thousand from the same quarter last year, due to a decline of $878.6 million in the average balance, partly offset by an increase of 96 basis points in the average rate earned. Interest income on balances at the Federal Reserve grew $26.8 million due to an increase of 436 basis points in the average rate earned and an increase of $1.0 billion in the average balance invested.
The average fully taxable-equivalent yield on total interest earning assets was 4.34% in the second quarter of 2023, up from 2.86% in the second quarter of 2022.
Total interest expense increased $93.3 million compared to the second quarter of 2022 due to increases in interest expense of $51.6 million on interest bearing deposits and $41.6 million on borrowings. The increase in deposit interest expense resulted mainly from an increase of $27.7 million in interest expense on interest checking and money market deposit accounts due to an 87 basis point increase in the average rate paid, slightly offset by lower average balances of $1.9 billion, or 13.0%. In addition, interest expense on certificates of deposit increased $23.9 million mainly due to an increase of 361 basis points in the average rate paid and an increase in average balances of $1.5 billion. A portion of this increase was due to brokered deposits added by the Company during the second quarter of 2023. The brokered deposits consist of short-term certificates of deposit less than $100 thousand, and $903.9 million were outstanding at June 30, 2023. Interest expense on borrowings was higher due to an increase of $14.3 million in interest expense on customer repurchase agreements resulting from an increase of 261 basis points in the average rate paid. Interest expense on federal funds purchased increased $6.2 million mainly due to a 427 basis point increase in the average rate paid, while FHLB borrowings increased $1.6 billion and resulted in an increase of $21.1 million in
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interest expense. The overall average rate incurred on all interest bearing liabilities was 1.87% and .12% in the second quarters of 2023 and 2022, respectively.
Net interest income (FTE) for the first six months of 2023 was $505.2 million compared to $446.4 million for the same period in 2022. For the first six months of 2023, the net interest margin was 3.18% compared to 2.62% for the same period in 2022.
Total interest income (FTE) for the first six months of 2023 increased $58.8 million over the same period last year mainly due to higher interest income on loans (FTE) and balances at the Federal Reserve, partly offset by higher interest expense on deposit and borrowings and lower interest income on investment securities (FTE). Loan interest income (FTE) increased $191.2 million, or 69.2%, due to a 207 basis point increase in the average rate earned and a $1.2 billion, or 7.7%, increase in average loan balances. Most of the increase occurred in the business, business real estate and construction loan categories, but interest income in all loan categories increased due to higher average rates earned and higher average loan balances. Interest income on investment securities (FTE) decreased $18.1 million due to a $2.3 billion decrease in average balances, slightly offset by a ten basis point increase in the average rate earned. Interest earned on U.S. government and federal agency obligations decreased $9.1 million, mainly due to lower TIPS interest income. Interest income earned on state and municipal securities declined $6.1 million mainly due to lower average balances and interest rates earned. Interest earned on mortgage-backed securities decreased $5.6 million due to lower average balances, partly offset by higher average rates earned, while interest on asset-backed securities increased $6.1 million due to higher average rates earned, partly offset by lower average balances. Interest income on securities purchased under agreements to resell decreased $1.6 million due to lower average balances, partly offset higher average rates earned. Interest income on balances at the Federal Reserve increased $35.0 million due to higher average rates earned.
Total interest expense for the first six months of 2023 increased $148.2 million compared to the same period last year. Interest expense on deposits increased $77.5 million, due to a 95 basis point increase in the average rate paid. Interest expense on borrowings increased $70.7 million, mainly due to higher rates paid on federal funds purchased and customer repurchase agreements and higher average balances of FHLB borrowings. The overall cost of total interest bearing liabilities increased to 1.55% compared to .09% 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.
Non-Interest Income
Three Months Ended June 30 Increase (Decrease) Six Months Ended June 30 Increase (Decrease)
(Dollars in thousands) 2023 2022 Amount % change 2023 2022 Amount % change
Bank card transaction fees $ 49,725 $ 43,873 $ 5,852 13.3 % $ 96,379 $ 85,918 $ 10,461 12.2 %
Trust fees 47,265 46,792 473 1.0 92,593 94,603 (2,010) (2.1)
Deposit account charges and other fees 22,633 25,564 (2,931) (11.5) 44,385 47,871 (3,486) (7.3)
Consumer brokerage services 4,677 5,068 (391) (7.7) 9,762 9,514 248 2.6
Capital market fees 2,539 3,327 (788) (23.7) 5,901 7,452 (1,551) (20.8)
Loan fees and sales 2,735 3,246 (511) (15.7) 5,324 7,481 (2,157) (28.8)
Other 18,031 11,557 6,474 56.0 30,873 18,357 12,516 68.2
Total non-interest income $ 147,605 $ 139,427 $ 8,178 5.9 % $ 285,217 $ 271,196 $ 14,021 5.2 %
Non-interest income as a % of total revenue* 37.2 % 37.5 % 36.3 % 38.1 %
* Total revenue includes net interest income and non-interest income.
The table below is a summary of net bank card transaction fees for the six month periods ended June 30, 2023 and 2022.
Three Months Ended June 30 Six Months Ended June 30
(Dollars in thousands) 2023 2022 $ change % change 2023 2022 $ change % change
Net debit card fees $ 11,340 $ 10,533 $ 807 7.7 % $ 21,627 $ 20,085 $ 1,542 7.7 %
Net credit card fees 3,812 3,712 100 2.7 7,486 7,434 52 .7
Net merchant fees 5,359 4,934 425 8.6 10,710 9,914 796 8.0
Net corporate card fees 29,214 24,694 4,520 18.3 56,556 48,485 8,071 16.6
Total bank card transaction fees $ 49,725 $ 43,873 $ 5,852 13.3 % $ 96,379 $ 85,918 $ 10,461 12.2 %
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For the second quarter of 2023, total non-interest income amounted to $147.6 million compared to $139.4 million in the same quarter last year, which was an increase of $8.2 million, or 5.9%. The increase was mainly due to higher net bank card fees and other income, partly offset by lower deposit account fees. Bank card transaction fees for the current quarter grew $5.9 million, or 13.3%, over the same period last year, mainly due to growth of $4.5 million in net corporate card fees. The growth in net corporate card fees was mainly due to higher interchange income and lower rewards and network expense. Debit card fees increased mainly due to lower network expense, while merchant fees increased due to higher interchange fees. Compared to the second quarter of last year, deposit account fees decreased $2.9 million, or 11.5%, due to lower overdraft and return item fees. Trust fees increased $473 thousand due to higher private client trust fees, while consumer brokerage fees declined $391 thousand due to lower advisory and annuity fees. Capital market fees decreased $788 thousand, or 23.7% and loan fees and sales decreased $511 thousand, or 15.7%, mainly due to a decline in mortgage banking revenue. Other non-interest income increased $6.5 million, or 56.0%, mainly due to higher letter of credit fees of $2.9 million, swap fees of $1.1 million, cash sweep commissions of $855 thousand and a gain on the sale of real estate of $1.1 million recorded in the current quarter. In addition, an increase of $3.4 million in fair value adjustments was recorded on the Company's deferred compensation plan assets, which are held in a trust, recorded as both an asset and liability, and affect both other income and other expense. These increases were partly offset by a decrease in tax credit sales fees of $1.5 million and the receipt of a $2.2 million life insurance death benefit recorded in the second quarter of 2022.
Non-interest income for the first six months of 2023 was $285.2 million compared to $271.2 million in the first six months of 2023, which was an increase of $14.0 million, or 5.2%. The increase was mainly due to higher net bank card fees and other income, partly offset by lower deposit account fees, trust fees and loan fees and sales. Bank card transaction fees for the current quarter grew $10.5 million, or 12.2%, over the same period last year, mainly due to growth of $8.1 million in net corporate card fees. Trust fees increased $2.0 million, or 2.1%, mainly due to higher private client and institutional trust fees. Deposit account fees decreased $3.5 million, or 7.3%, mainly due to lower overdraft and return item fees, partly offset by higher corporate cash management fees and personal deposit account fees. Capital market fees decreased $1.6 million, or 20.8%, while loan fees and sales decreased $2.2 million mainly due to lower mortgage banking revenue. Other non-interest income increased $12.5 million, or 68.2%, mainly due to higher cash sweep commissions of $3.5 million, letter of credit fees of $2.8 million, the $1.1 million gain on the sale of real estate mentioned above and a write-down of $965 thousand on a branch location recorded in 2022. In addition, fair value adjustments on the Company's deferred compensation plan assets increased $5.4 million. These increases were partly offset by lower tax credit sales fees of $1.7 million and income of $2.2 million from a life insurance death benefit recorded in 2022.
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Investment Securities Gains (Losses), Net
Three Months Ended June 30 Six Months Ended June 30
(In thousands) 2023 2022 2023 2022
Net gains (losses) on sales of available for sale debt securities $ (5,356) $ (9,582) $ (8,444) $ (9,582)
Fair value adjustments on equity securities, net (563) (736) (690) (1,023)
Net gains (losses) on sales of private equity investments 221 (4,286) 879 (4,286)
Fair value adjustments on private equity investments 9,090 15,633 11,341 23,083
Total investment securities gains (losses), net $ 3,392 $ 1,029 $ 3,086 $ 8,192
Net gains on investment securities, which were recognized in earnings during the three months ended June 30, 2023 and 2022, are shown in the table above. Net securities gains of $3.4 million were reported in the second quarter of 2023, compared to net gains of $1.0 million in the same period last year. The net gains in the second quarter of 2023 were primarily comprised of $9.1 million of net gains in fair value on the Company’s private equity investments, due to fair value adjustments, partially offset by net losses of $5.4 million on the sale of available for sale securities. The net gains on investment securities for the same quarter last year 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.
Net gains on investment securities of $3.1 million were recognized in earnings for the six months ended June 30, 2023, compared to net gains of $8.2 million for the same period in 2022. Net gains in the first half of 2023 were mainly comprised of net gains in fair value of $11.3 million on private equity investments, due to fair value adjustments, partially offset by losses of $8.4 million on sales of available for sale securities. 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, 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. 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 $2.5 million during the first six months of 2023 and expense of $3.8 million during the first six months of 2022.
Non-Interest Expense
Three Months Ended June 30 Increase (Decrease) Six Months Ended June 30 Increase (Decrease)
(Dollars in thousands) 2023 2022 Amount % change 2023 2022 Amount % change
Salaries and employee benefits $ 145,429 $ 142,243 $ 3,186 2.2 % $ 289,802 $ 278,196 $ 11,606 4.2 %
Data processing and software 28,719 27,635 1,084 3.9 56,873 54,651 2,222 4.1
Net occupancy 12,995 12,503 492 3.9 25,754 24,799 955 3.9
Marketing 6,368 5,836 532 9.1 11,839 12,180 (341) (2.8)
Equipment 4,864 4,734 130 2.7 9,714 9,302 412 4.4
Supplies and communication 4,625 4,361 264 6.1 9,215 9,074 141 1.6
Other 24,611 16,193 8,418 52.0 48,521 30,951 17,570 56.8
Total non-interest expense $ 227,611 $ 213,505 $ 14,106 6.6 % $ 451,718 $ 419,153 $ 32,565 7.8 %
Non-interest expense for the second quarter of 2023 amounted to $227.6 million, an increase of $14.1 million, or 6.6%, compared to expense of $213.5 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 employee benefits expense, data processing and software expense and other non-interest expense. Salaries expense increased $929 thousand, or .8%, due to higher full-time salaries expense of $6.9 million, or 7.6%, partly offset by lower incentive compensation expense of $5.7 million, largely the result of a $5.4 million accrual for special bonuses in 2022 that did not reoccur in 2023. Employee benefits expense totaled $25.7 million, reflecting growth of $2.3 million, or 11.4%, mainly due to higher healthcare expense. Full-time equivalent employees totaled 4,680 at June 30, 2023, compared to 4,579 at June 30, 2022. Data processing and software expense increased $1.1 million, or 3.9%, due to higher bank card processing fees and increased costs for service providers. Occupancy expense increased $492 thousand, or 3.9%, mainly due to higher depreciation expense and real estate taxes, partly offset by higher rent income. Marketing expense increased $532 thousand, or 9.1%, and supplies and communication expense increased $264 thousand, or 6.1%, mainly due to higher postage expense. Other non-interest expense increased $8.4 million, or 52.0%, mainly due to higher deferred compensation adjustments (previously mentioned), FDIC insurance and travel and entertainment expense of $3.4 million, $1.8
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million and $797 thousand, respectively. Additionally, the Company recorded deconversion expense of $2.1 million relating to the transition of Commerce Financial Advisors support to LPL Financial's Institution Services platform.
Non-interest expense amounted to $451.7 million for the first six months of 2023, an increase of $32.6 million, or 7.8%, over the first six months of 2022. Salaries and benefits expense increased $11.6 million, or 4.2%, mainly due to higher full-time salaries expense, healthcare expense and payroll taxes, partly offset by a decrease in incentive compensation, mainly the special bonus accrual in 2022 mentioned above. Data processing and software expense increased $2.2 million, or 4.1%, due to increased costs for service providers and higher bank card processing fees. Occupancy expense increased $1.0 million, or 3.9%, mainly due to higher depreciation and utilities expense, partly offset by higher external rent income. Marketing expense decreased $341 thousand, or 2.8%, while equipment expense increased $412 thousand, or 4.4%, due to higher furniture and equipment service contracts and rental expense. Other non-interest expense increased $17.6 million, or 56.8%, mainly due to higher FDIC insurance expense, travel and entertainment expense, miscellaneous losses and pension plan expense, in addition to the previously mentioned deconversion costs of $2.1 million and the fair value equity adjustments of $5.4 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, 2023 Mar. 31, 2023 June 30, 2022 2023 2022
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period $ 159,317 $ 150,136 $ 134,710 $ 150,136 $ 150,044
Provision for credit losses on loans 5,864 15,948 7,287 $ 21,812 $ (3,399)
Net loan charge-offs (recoveries):
Commercial:
Business 165 230 19 395 96
Real estate-construction and land (115) — — (115) —
Real estate-business (5) (4) (1) (9) (8)
Commercial net loan charge-offs (recoveries) 45 226 18 271 88
Personal Banking:
Real estate-personal (6) (11) (41) (17) (19)
Consumer 1,273 1,275 633 2,548 1,441
Revolving home equity (20) (26) (14) (46) 4
Consumer credit card 4,687 4,325 2,937 9,012 6,309
Overdrafts 517 978 425 1,495 783
Personal banking net loan charge-offs (recoveries) 6,451 6,541 3,940 12,992 8,518
Total net loan charge-offs (recoveries) 6,496 6,767 3,958 13,263 8,606
Balance at end of period $ 158,685 $ 159,317 $ 138,039 $ 158,685 $ 138,039
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at beginning of period 28,628 33,120 25,032 33,120 24,204
Provision for credit losses on unfunded lending commitments 607 (4,492) (125) (3,885) 703
Balance at end of period 29,235 28,628 24,907 29,235 24,907
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 187,920 $ 187,945 $ 162,946 $ 187,920 $ 162,946
Three Months Ended Six Months Ended June 30
June 30, 2023 Mar. 31, 2023 June 30, 2022 2023 2022
Annualized net loan charge-offs (recoveries)*:
Commercial:
Business .01 % .02 % — % .01 % — %
Real estate-construction and land (.03) — — (.02) —
Real estate-business — — — — —
Commercial net loan charge-offs (recoveries) — .01 — .01 —
Personal Banking:
Real estate-personal — — (.01) — —
Consumer .24 .25 .12 .25 .14
Revolving home equity (.03) (.04) (.02) (.03) —
Consumer credit card 3.38 3.15 2.19 3.27 2.36
Overdrafts 44.79 89.15 30.86 66.40 29.50
Personal banking net loan charge-offs (recoveries) .44 .45 .28 .44 .30
Total annualized net loan charge-offs (recoveries) .16 % .17 % .10 % .16 % .11 %
* as a percentage of average loans (excluding loans held for sale)
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To determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, the Company has an established process which assesses the risks and losses expected in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded lending commitments, as well as a second, smaller component based on certain individually evaluated loans and unfunded lending commitments. The Company's policies and processes for determining the allowance for credit losses on loans and the liability for unfunded lending commitments are discussed in Note 1 to the consolidated financial statements and in the " Allowance for Credit Losses" discussion within Critical Accounting Estimates and Related Policies in Item 7 of the 2022 Annual Report on Form 10-K.
Net loan charge-offs in the second quarter of 2023 amounted to $6.5 million, compared to $6.8 million in the prior quarter and $4.0 million in the second quarter of last year. Comp ared to the same period last year, total net loan charge-offs in the second quarter of 2023 increased $2.5 million and decreased $271 thousand from the previous quarter. The increase over the prior year was mainly driven by increases in net charge-offs on consumer credit cards, consumer, and business loans of $1.8 million, $640 thousand, and $146 thousand, respectively. The decrease from the previous quarter was driven by decreases in net charge-offs on overdrafts and construction loans, partly offset by an increase in net charge-offs on consumer credit card loans.
For the three months ended June 30, 2023, annualized net charge-offs on average consumer credit card loans were 3.38%, compared to 3.15% in the previous quarter and 2.19% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .24%, compared to .25% in the prior quarter and .12% in the same period last year. In the second quarter of 2023 , total annualized net loan charge-offs were .16%, compared to .17% in the previous quarter and .10% in the same period last year.
The provision for credit losses on loans was $5.9 million in the current quarter, which was a $10.1 million decrease from the $15.9 million provision recorded in the p rior quarter and a $1.4 million decrease from the $7.3 million provision recorded for the three months ended June 30, 2022. The decrease in the provision from the prior quarter was due to growth in the related allowance for credit losses on loans experienced in the first quarter of 2023, which was not repeated in the second quarter.
For the six months ended June 30, 2023, net loan charge-offs amounted to $13.3 million, compared to $8.6 million for the same period in the prior year. The increase in net loan charge-offs over the prior year was driven mainly by increases in consumer credit card and consumer loans and overdrafts. Annualized net charge-offs on consumer credit card loans totaled 3.27% and 2.36% for the six months ended June 30, 2023 and 2022, respectively. Consumer loan annualized net charge-offs were .25% and .14% in the six months ended June 30, 2023 and 2022, respectively, while annualized net charge-offs on overdrafts were 66.40% and 29.50% for the first half of 2023 and 2022, respectively. Total annualized net loan charge-offs were .16% and .11% for the six months ended June 30, 2023 and 2022, respectively.
For the six months ended June 30, 2023, the provision for credit losses on loans was $21.8 million, which was a $25.2 million increase over the $3.4 million benefit recorded in the same period last year. The increase in the provision over the prior year was due to the buildup of the related allowance for credit losses in the first six months of 2023 related to forecasting a future mild recession, while the first six months of 2022 experienced reductions in the related allowance for credit losses primarily related to the improving economic forecast at that time.
For the six months ended June 30, 2023, the allowance for credit losses on loans increased $8.5 million, compared to the allowance for credit losses on loans at December 31, 2022. During the six months ended June 30, 2023, the allowance for credit losses on commercial loans increased by $4.7 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, increased $3.8 million. The increase was primarily the result of applying a slightly more pessimistic forecast compared to the forecast used at December 31, 2022, coupled with raising interest rates that extended the estimate lives of certain loan portfolios. Compared to June 30, 2022, the allowance for credit losses on loans at June 30, 2023 increased $20.6 million, mainly due to a less optimistic forecast that reflected a future mild recession. The allowance for credit losses on loans was $158.7 million at June 30, 2023 and was .94%, .92% and .88% of total loans at June 30, 2023, December 31, 2022 and June 30, 2022, respectively.
In the current quarter, the provision for credit losses on unfunded lending commitments was $607 thousand, compared to a benefit of $125 thousand at June 30, 2022. For the six months ended June 30, 2023, the provision for credit losses on unfunded commitments was a benefit of $3.9 million, compared to a provision of $703 thousand in the first six months of 2022. At June 30, 2023, the liability for unfunded lending commitments was $29.2 million, compared to $33.1 million at December 31, 2022 and $24.9 million at June 30, 2022. The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans. See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses.
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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, 2023.
The allowance for credit losses on loans and the liability for unfunded lending commitments are estimates that require significant judgment including projections of the macro-economic environment. The Company utilizes a third-party macro-economic forecast that continuously changes due to economic conditions and events. These changes in the forecast cause fluctuations in the allowance for credit losses on loans and the liability for unfunded lending commitments. The Company uses judgment to assess the macro-economic forecast and internal loss data in estimating the allowance for credit losses on loans and the liability for unfunded lending commitments. These estimates are subject to periodic refinement based on changes in the underlying external and internal data.
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, 2023 December 31, 2022
Non-accrual loans $ 6,161 $ 8,306
Foreclosed real estate 94 96
Total non-performing assets $ 6,255 $ 8,402
Non-performing assets as a percentage of total loans .04 % .05 %
Non-performing assets as a percentage of total assets .02 % .03 %
Total loans past due 90 days and still accruing interest $ 15,351 $ 15,830
Non-accrual loans totaled $6.2 million at June 30, 2023, a decrease of $2.1 million from the balance at December 31, 2022. The decrease occurred mainly in business loans which decreased $2.0 million. At June 30, 2023, non-accrual loans were comprised of business (76.8%), personal real estate (20.7%), and business real estate (2.5%) loans. Foreclosed real estate totaled $94 thousand at June 30, 2023, a slight decrease compared to December 31, 2022. Total loans past due 90 days or more and still accruing interest were $15.4 million as of June 30, 2023, a decrease of $479 thousand from December 31, 2022. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements.
In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $228.8 million at June 30, 2023 compared with $259.7 million at December 31, 2022, resulting in a decrease of $30.9 million, or 11.9%.
(In thousands)
June 30, 2023 December 31, 2022
Potential problem loans:
Business $ 62,100 $ 29,455
Real estate – construction and land 4,100 47,493
Real estate – business 162,353 182,526
Real estate – personal 258 250
Total potential problem loans $ 228,811 $ 259,724
At June 30, 2023, the Company had $72.7 million of loans modified to a borrower experiencing financial difficulty, and these loans are further discussed in the "Modifications for borrowers experiencing financial difficulty" section in Note 2 to the consolidated financial statements.
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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.
Real Estate – Construction and Land Loans
The Company's portfolio of construction and land loans, as shown in the table below, amounted to 8.6% of total loans outstanding at June 30, 2023. The largest component of construction and land loans was commercial construction, which increased $96.1 million during the six months ended June 30, 2023. At June 30, 2023, multi-family residential construction loans totaled approximately $370.3 million, or 30.4%, of the commercial construction loan portfolio, compared to $303.5 million, or 27.0%, at December 31, 2022.
(Dollars in thousands) June 30,
2023
% of Total
% of
Total
Loans
December 31, 2022
% of Total
% of
Total
Loans
Commercial construction $ 1,218,245 83.9 % 7.2 % $ 1,122,105 82.4 % 6.9 %
Residential construction 134,012 9.2 .9 138,311 10.2 .8
Residential land and land development 57,541 4.0 .3 50,012 3.7 .3
Commercial land and land development 41,985 2.9 .2 50,667 3.7 .3
Total real estate - construction and land loans $ 1,451,783 100.0 % 8.6 % $ 1,361,095 100.0 % 8.3 %
Real Estate – Business Loans
Total business real estate loans were $3.6 billion at June 30, 2023 and comprised 21.4% 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, 2023, 31.7% 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,
2023
% of Total
% of
Total
Loans
December 31, 2022
% of Total
% of
Total
Loans
Owner-occupied $ 1,146,899 31.7 % 6.8 % $ 1,136,189 33.3 % 7.0 %
Industrial 566,197 15.6 3.3 478,534 14.0 2.9
Office 502,774 13.9 3.0 497,601 14.6 3.1
Retail 358,048 9.9 2.1 322,971 9.5 2.0
Multi-family 303,323 8.4 1.8 308,156 9.0 1.9
Hotels 250,269 6.9 1.5 230,972 6.8 1.4
Farm 195,645 5.4 1.2 195,920 5.8 1.2
Senior living 171,198 4.7 1.0 131,217 3.9 .8
Other 126,869 3.5 .7 105,421 3.1 .6
Total real estate - business loans $ 3,621,222 100.0 % 21.4 % $ 3,406,981 100.0 % 20.9 %
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Information about the credit quality of the Company's business real estate loan portfolio as of June 30, 2023 and December 31, 2022 is provided in the table below.
(Dollars in thousands) Pass Special Mention Substandard Non-Accrual Total
June 30, 2023
Owner-occupied $ 1,131,420 $ 8,446 $ 6,939 $ 94 $ 1,146,899
Industrial 566,103 94 — — 566,197
Office 499,432 — 3,342 — 502,774
Retail 356,182 — 1,866 — 358,048
Multi-family 301,377 1,946 — — 303,323
Hotels 239,115 9,492 1,662 — 250,269
Farm 195,409 177 — 59 195,645
Senior living 22,858 — 148,340 — 171,198
Other 126,609 260 — — 126,869
Total $ 3,438,505 $ 20,415 $ 162,149 $ 153 $ 3,621,222
December 31, 2022
Owner-occupied $ 1,129,343 $ 632 $ 6,084 $ 130 $ 1,136,189
Industrial 478,534 — — — 478,534
Office 494,169 3,432 — — 497,601
Retail 321,041 — 1,930 — 322,971
Multi-family 286,202 1,975 19,979 — 308,156
Hotels 174,558 9,725 46,689 — 230,972
Farm 195,685 177 — 58 195,920
Senior living 23,514 — 107,702 1 131,217
Other 105,144 277 — — 105,421
Total $ 3,208,190 $ 16,218 $ 182,384 $ 189 $ 3,406,981
Revolving Home Equity Loans
The Company had $303.8 million in revolving home equity loans at June 30, 2023 that were generally collateralized by residential real estate. Most of these loans (91.0%) 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, 2023, the outstanding principal of loans with an original LTV higher than 80% was $33.8 million, or 11.1% of the portfolio, compared to $32.4 million as of December 31, 2022. Total revolving home equity loan balances over 30 days past due were $3.5 million at June 30, 2023 and $1.9 million at December 31, 2022, and there were no revolving home equity loans on non-accrual status at June 30, 2023 or December 31, 2022. The weighted average FICO score for the total current portfolio balance is 788. At maturity, the accounts are re-underwritten, and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of 2023 through 2025, approximately 15% 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 39.3% of the consumer loan portfolio at June 30, 2023, and outstanding balances for auto loans were $829.7 million and $798.6 million at June 30, 2023 and December 31, 2022, respectively. The balances over 30 days past due amounted to $8.2 million at June 30, 2023 and $9.9 million at December 31, 2022, respectively and comprised 1.0% of the outstanding balances of these loans at June 30, 2023 and 1.2% at December 31, 2022, respectively. For the six months ended June 30, 2023, $210.1 million of new auto loans were originated, compared to $153.5 million during the first six months of 2022. At June 30, 2023, the automobile loan portfolio had a weighted average FICO score of 757, and net charge-offs on auto loans were .4% of average auto loans.
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The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 11.3% of the consumer loan portfolio at June 30, 2023. Losses on these loans have historically been low, and the Company saw net recoveries of $29 thousand for the first six months of 2023. Private banking loans comprised 32.9% of the consumer loan portfolio at June 30, 2023. The Company's private banking loans are generally well-collateralized, and at June 30, 2023 were secured primarily by assets held by the Company's trust department. The remaining portion of the Company's consumer loan portfolio is comprised of health services financing, motorcycles, marine and RV loans. Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $1.0 million in the first six months of 2023 and were .4% of the average balances of these loans at June 30, 2023.
Consumer Credit Card Loans
The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at June 30, 2023 of $574.8 million in consumer credit card loans outstanding, approximately $110.9 million, or 19.3%, carried a low promotional rate. Within the next six months, $44.1 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 $238.2 million, or 1.4% of total loans at June 30, 2023, a decrease of $58.3 million from year end 2022, as shown in the table below.
(In thousands)
June 30, 2023 December 31, 2022 Unfunded commitments at June 30, 2023
Extraction $ 191,884 $ 235,933 $ 160,598
Mid-stream shipping and storage 26,382 43,432 94,215
Downstream distribution and refining 10,686 7,675 12,117
Support activities 9,202 9,387 5,964
Total energy lending portfolio $ 238,154 $ 296,427 $ 272,894
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 $1.4 billion at June 30, 2023, compared to $1.4 billion at December 31, 2022. Additional unfunded commitments at June 30, 2023 totaled $2.1 billion.
Income Taxes
Income tax expense was $36.0 million in the second quarter of 2023, compared to $32.8 million in the first quarter of 2023 and $32.0 million in the second quarter of 2022. The Company's effective tax rate, including the effect of non-controlling interest, was 22.0% in the second quarter of 2023, compared to 21.6% in the first quarter of 2023 and 21.7% in the second quarter of 2022.
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Financial Condition
Balance Sheet
Total assets of the Company were $32.8 billion at June 30, 2023 and $31.9 billion at December 31, 2022. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $32.5 billion at June 30, 2023 and $31.6 billion at December 31, 2022, and consisted of 52% in loans and 37% in investment securities at June 30, 2023.
At June 30, 2023, total loans increased $653.4 million or 4.0%, compared to balances at December 31, 2022. The increase was mainly due to growth in business, business real estate and construction loans of $244.8 million, $214.2 million, and $90.7 million, respectively. The growth in business loans was mainly the result of increased commercial and industrial lending and higher tax free and lease loan balances. Personal real estate loans increased $62.5 million. Consumer loans, which includes automobile, marine and RV, fixed rate home equity and other consumer loans, increased $51.5 million, due to growth in auto loans and other consumer loans. These increases were slightly offset by a decline in consumer credit card loans of $9.2 million.
Total available for sale debt securities, excluding fair value adjustments, decreased $1.9 billion at June 30, 2023 compared to December 31, 2022. Purchases of securities during this period totaled $87.4 million, offset by sales, maturities and pay downs of $2.0 billion. The decline in investment securities was mainly the result of lower balances of asset-backed securities, state and municipal securities, and agency mortgage-backed securities, which decreased $941.2 million, $563.4 million, and $238.7 million, respectively, at June 30, 2023 compared to December 31, 2022. At June 30, 2023, the duration of the available for sale investment portfolio was 3.9 years, and maturities and pay downs of approximately $2.0 billion are expected to occur during the next 12 months. The Company does not have any investment securities classified as held-to-maturity.
Total deposits at June 30, 2023 amounted to $25.9 billion, a decrease of $318.0 million compared to December 31, 2022. The decline in deposits largely resulted from a decrease in demand deposits, mainly in business demand deposits (decrease of $1.7 billion). Additionally, money market and savings deposit balances decreased $887.4 million and $70.9 million, respectively, while certificate of deposit balances grew $2.3 billion and interest checking balances increased $250.2 million over balances at December 31, 2022. The Company’s borrowings totaled $3.9 billion at June 30, 2023, an increase of $1.0 billion over balances at December 31, 2022, mainly due to an increase in FHLB advances.
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, 2023 June 30, 2022 December 31, 2022
Liquid assets:
Available for sale debt securities $ 10,414,625 $ 13,700,308 $ 12,238,316
Federal funds sold 2,750 26,000 49,505
Securities purchased under agreements to resell 825,000 1,450,000 825,000
Balances at the Federal Reserve Bank 2,568,695 684,994 389,140
Total $ 13,811,070 $ 15,861,302 $ 13,501,961
The fair value of the available for sale debt portfolio was $10.4 billion at June 30, 2023 and included an unrealized net loss of $1.4 billion. Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $2.8 million as of June 30, 2023. Resale agreements, maturing through 2025, totaled $825.0 million at June 30, 2023. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral, and this collateral totaled $866.8 million in fair value at June 30, 2023. $700.0 million of the Company's resale agreements will mature in the next 12 months. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $2.6 billion at June 30, 2023 and increased $2.2 billion over December 31, 2022 balances.
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Approximately $2.0 billion of the Company's available for sale debt portfolio is expected to mature or pay down during the next 12 months, and at June 30, 2023, the duration of the Company's available for sale debt securities portfolio was 3.9 years. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows:
(In thousands)
June 30, 2023 June 30, 2022 December 31, 2022
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings $ 2,852,481 $ 14,854 $ 11,469
FHLB borrowings and letters of credit 315,323 2,405 1,817
Securities sold under agreements to repurchase * 2,630,852 2,506,986 2,950,240
Other deposits and swaps 2,340,094 2,767,433 1,772,974
Total pledged securities 8,138,750 5,291,678 4,736,500
Unpledged and available for pledging 2,263,586 7,390,389 6,545,695
Ineligible for pledging 12,289 1,018,241 956,121
Total available for sale debt securities, at fair value $ 10,414,625 $ 13,700,308 $ 12,238,316
* Includes securities pledged for collateral swaps, as discussed in Note 12 to the consolidated financial statements.
Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At June 30, 2023, such deposits totaled $22.6 billion and represented 87.4% 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 $1.7 billion at June 30, 2023. These accounts are normally considered more volatile with higher cost and comprised 6.6% of total deposits at June 30, 2023.
(In thousands)
June 30, 2023 June 30, 2022 December 31, 2022
Core deposit base:
Non-interest bearing $ 8,198,849 $ 11,102,585 $ 10,066,356
Interest checking 6,790,331 2,815,600 1,854,336
Savings and money market 7,628,643 13,247,464 13,272,645
Total $ 22,617,823 $ 27,165,649 $ 25,193,337
During the second quarter of 2023, the Company added brokered deposits in the form of short-term certificates of deposit less than $100 thousand, and $903.9 million were outstanding at June 30, 2023. At June 30, 2023, the Company's total deposit portfolio was $25.9 billion, compared to $26.2 billion at December 31, 2022. The Company's uninsured deposits were $10.4 billion, or 40.2% of total deposits at June 30, 2023. The Company's uninsured deposits include $2.2 billion of affiliate deposits and collateralized deposits. Excluding those affiliate and collateralized deposits, the Company's uninsured deposits at June 30, 2023 were $8.2 billion, or 31.7% of total deposits.
Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company's outside borrowings are mainly comprised of federal funds purchased and repurchase agreements, as follows:
(In thousands)
June 30, 2023 June 30, 2022 December 31, 2022
Borrowings:
Federal funds purchased $ 511,400 $ 7,750 $ 159,860
Securities sold under agreements to repurchase 2,366,621 2,226,546 2,681,874
FHLB advances 1,000,000 — —
Other debt 5,613 6,025 9,672
Total $ 3,883,634 $ 2,240,321 $ 2,851,406
Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. In addition to the amount accessed as of June 30, 2023, the Company had access to an additional $3.5 billion of overnight, approved federal funds as of that date. Repurchase agreements are borrowings by the Company from its customers in the form of securities sold under agreements to repurchase. These repurchase agreements, which generally mature overnight, are comprised of non-insured customer funds totaling $2.4 billion at
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June 30, 2023 and are collateralized by securities in the Company's investment portfolio. At June 30, 2023, the value of the collateral pledged for the benefit of customers was $2.4 billion. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were $1.0 billion advances outstanding from the FHLB at June 30, 2023.
The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank (FRB) and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral and enables the FHLB to issue letters of credit in favor of public fund depositors of the Company. The FRB also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at June 30, 2023.
June 30, 2023
(In thousands)
FHLB
Federal Reserve
Total
Total collateral value established by FHLB and FRB $ 2,446,938 $ 4,952,458 $ 7,399,396
Advances outstanding (1,000,000) — (1,000,000)
Letters of credit issued (327,541) — (327,541)
Available for future advances $ 1,119,397 $ 4,952,458 $ 6,071,855
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 ratings from both Standard & Poor's and Moody's on both the consolidated company level and its subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise. These ratings are as follows:
Standard & Poor’s Moody’s
Commerce Bancshares, Inc.
Issuer rating A-
Rating outlook Stable
Commerce Bank
Issuer rating A A2
Baseline credit assessment a1
Short-term rating A-1 P-1
Rating outlook Stable Stable
The cash flows from the operating, investing and financing activities of the Company resulted in a net increase in cash, cash equivalents and restricted cash of $2.0 billion during the first six months of 2023, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $220.9 million and has historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, provided cash of $1.1 billion. Activity in the investment securities portfolio provided cash of $1.9 billion from sales, maturities, and pay downs (net of purchases), but this increase in investing cash flows was partially offset by growth in the loan portfolio, which used cash of $666.7 million. Financing activities provided cash of $678.8 million, largely resulting from borrowings, including FHLB advances during the first six months of 2023 which increased financing cash flows by $2.3 billion. Partly offsetting this cash inflow were repayments of $1.3 billion of FHLB borrowings and decreases of $249.4 million in deposits.
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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, 2023 and December 31, 2022, as shown in the following table.
(Dollars in thousands) June 30, 2023 December 31, 2022 Minimum Ratios under Capital Adequacy Guidelines
Minimum Ratios
for
Well-Capitalized
Banks *
Risk-adjusted assets $ 24,144,821 $ 24,178,423
Tier I common risk-based capital 3,561,233 3,417,223
Tier I risk-based capital 3,561,233 3,417,223
Total risk-based capital 3,749,447 3,600,920
Tier I common risk-based capital ratio 14.75 % 14.13 % 7.00 % 6.50 %
Tier I risk-based capital ratio 14.75 14.13 8.50 8.00
Total risk-based capital ratio 15.53 14.89 10.50 10.00
Tier I leverage ratio 10.46 10.34 4.00 5.00
*Under Prompt Corrective Action requirements
The Company is subject to a 2.5% capital conservation buffer, which is an amount above the minimum ratios under capital adequacy guidelines, and is required under Basel III. The capital conservation buffer is intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, share repurchases, and executive compensation.
In the first quarter of 2020, the interim final rule of the Federal Reserve Bank and other U.S. banking agencies became effective, providing banks that adopt CECL (ASU 2016-13) during the 2020 calendar year the option to delay recognizing the estimated impact on regulatory capital until after a two year deferral period, followed by a three year transition period. In connection with the adoption of CECL on January 1, 2020, the Company elected to utilize this option. As a result, the two year deferral period for the Company extended through December 31, 2021. Beginning on January 1, 2022, the Company began to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025.
The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and normally purchases stock in the open market. During the six months ended June 30, 2023, the Company purchased 553,586 shares at an average price of $65.78 in open market purchases and through stock-based compensation transactions. At June 30, 2023, 2,558,472 shares remained available for purchase under the current Board authorization.
The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.270 per share cash dividend on its common stock in the second quarter of 2023, which was a 7.1% increase compared to its 2022 quarterly dividend.
Material Cash Requirements, Commitments, Off-Balance Sheet Arrangements and Contingencies
The Company's material cash requirements include commitments for contractual obligations (both short-term and long-term), commitments to extend credit, and off-balance sheet arrangements. The Company's material cash requirements for the next 12 months are primarily to fund loan commitments, deposit maturities and deposit withdrawals that may occur; repay borrowings; and fund loan growth. Other contractual obligations, purchase commitments, lease obligations, and unfunded commitments may require cash payments by the Company, and these are further discussed in the Company's 2022 Annual Report on Form 10-K. Further discussion of the Company's longer-term material cash obligations and sources for fulfilling those obligations is below.
Events impacting the banking industry during the first few months of 2023, including the failure of Silicon Valley Bank and Signature Bank, have resulted in decreased confidence in banks among consumer and commercial customers, investors, and other counterparties. Additionally, rapidly rising interest rates have resulted in unrealized losses in the Company's available for sale debt securities portfolio. In response to these industry events, the Company sought additional borrowings of $1.3 billion during the first quarter of 2023, and as a result, the Company had outstanding borrowings of $1.5 billion from the FHLB as of March 31, 2023. During the second quarter of 2023, the Company initially borrowed an additional $500.0 million but subsequently repaid $1.0 billion of its FHLB borrowings, resulting in $1.0 billion of FHLB borrowings outstanding as of June
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30, 2023. Additionally, the Company added short-term brokered certificates of deposit during the second quarter of 2023 to provide additional liquidity. As of June 30, 2023, the Company had $903.9 million of brokered deposits that are scheduled to mature prior to December 31, 2023. Other than the repayment of these additional borrowings and deposits, the Company’s material cash requirements have not changed significantly since December 31, 2022. Further discussion of the Company's longer-term material cash obligations and sources for fulfilling those obligations is below.
In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at June 30, 2023 totaled $14.2 billion (including $5.2 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $590.3 million (net of conveyances to other institutions) and $5.7 million, respectively, at June 30, 2023. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to $4.2 million at June 30, 2023. The allowance for these commitments is recorded in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheets. At June 30, 2023, the liability for unfunded commitments totaled $29.2 million. See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements.
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 2023, purchases and sales of tax credits amounted to $55.5 million and $15.3 million, respectively. Fees from sales of tax credits were $1.0 million for the six months ended June 30, 2023, compared to $2.7 million in the same period last year. At June 30, 2023, the Company expected to fund outstanding purchase commitments of $91.4 million during the remainder of 2023.
The Company continued to maintain a strong liquidity position throughout the first six months of 2023. Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations.
Segment Results
The table below is a summary of segment pre-tax income results for the first six months of 2023 and 2022.
(Dollars in thousands)
Consumer
Commercial
Wealth
Segment
Totals
Other/ Elimination
Consolidated Totals
Six Months Ended June 30, 2023
Net interest income $ 198,406 $ 232,628 $ 34,564 $ 465,598 $ 35,563 $ 501,161
Provision for credit losses (12,736) (483) (13) (13,232) (4,695) (17,927)
Non-interest income 49,834 123,093 107,457 280,384 4,833 285,217
Investment securities gains (losses), net — — — — 3,086 3,086
Non-interest expense (160,757) (192,050) (80,108) (432,915) (18,803) (451,718)
Income before income taxes $ 74,747 $ 163,188 $ 61,900 $ 299,835 $ 19,984 $ 319,819
Six Months Ended June 30, 2022
Net interest income $ 177,379 $ 219,135 $ 38,091 $ 434,605 $ 6,566 $ 441,171
Provision for credit losses (8,413) (145) (3) (8,561) 11,257 2,696
Non-interest income 54,755 110,466 107,189 272,410 (1,214) 271,196
Investment securities gains (losses), net — — — — 8,192 8,192
Non-interest expense (152,453) (180,822) (72,779) (406,054) (13,099) (419,153)
Income before income taxes $ 71,268 $ 148,634 $ 72,498 $ 292,400 $ 11,702 $ 304,102
Increase (decrease) in income before income taxes:
Amount $ 3,479 $ 14,554 $ (10,598) $ 7,435 $ 8,282 $ 15,717
Percent 4.9 % 9.8 % (14.6 %) 2.5 % 70.8 % 5.2 %
Consumer
For the six months ended June 30, 2023, income before income taxes for the Consumer segment increased $3.5 million, or 4.9%, compared to the first six months of 2022. The increase in income before income taxes was mainly due to an increase in net interest income of $21.0 million, or 11.9%, partly offset by a decrease in non-interest income of $4.9 million, or 9.0%, and higher non-interest expense of $8.3 million, or 5.4%. Net interest income increased due to a $13.7 million increase in net
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allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and a $20.8 million increase in loan interest income. These increases were partly offset by higher deposit interest expense of $13.5 million. Non-interest income decreased mainly due to lower deposit account fees (mainly overdraft and return item fees) and mortgage banking revenue, partly offset by growth in net debit card fees. Non-interest expense increased over the same period in the previous year mainly due to higher salaries and benefits expense, FDIC insurance expense and allocated support costs for consumer administration and operations, partly offset by lower marketing expense. The provision for credit losses totaled $12.7 million, a $4.3 million increase over the first six months of 2022, mainly due to higher credit card, personal and overdraft loan net charge-offs.
Commercial
For the six months ended June 30, 2023, income before income taxes for the Commercial segment increased $14.6 million, or 9.8%, compared to the same period in the previous year. This increase was mainly due to growth in net interest income and non-interest income, partly offset by higher non-interest expense. Net interest income increased $13.5 million, or 6.2%, mainly due to higher loan interest income of $154.1 million. This increase was partly offset by lower net allocated funding credits of $61.4 million and increases of $48.6 million in deposit interest expense and $31.3 million in interest expense on customer repurchase agreements. Non-interest income increased $12.6 million, or 11.4%, over the previous year mainly due to growth in net bank card fees (mainly corporate card fees), deposit account fees (mainly corporate cash management fees), letters of credit fees and cash sweep commissions, partly offset by a decline in capital market fees. Non-interest expense increased $11.2 million, or 6.2%, mainly due to higher salaries and benefits expense, FDIC insurance expense and allocated service and support costs (mainly bank operations and commercial products and payments). These increases were partly offset by lower allocated support costs for information technology. The provision for credit losses increased $338 thousand over the same period last year, mainly due to higher commercial credit card and overdraft loan net charge-offs.
Wealth
Wealth segment pre-tax profitability for the six months ended June 30, 2023 decreased $10.6 million, or 14.6%, from the same period in the previous year. Net interest income decreased $3.5 million, or 9.3%, mainly due to a $14.2 million decline in net allocated funding credits and an $8.7 million increase in deposit interest expense, partly offset by a $19.4 million increase in loan interest income. Non-interest income increased $268 thousand, or .3%, over the prior year largely due to higher cash sweep commissions, partly offset by lower private client and institutional trust fees. Non-interest expense increased $7.3 million, or 10.1%, mainly due to higher salaries and benefits expense and the deconversion costs previously mentioned. The provision for credit losses increased $10 thousand over the same period last year.
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, brokered deposits, 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 $8.3 million higher than in the same period last year. Unallocated securities gains were $3.1 million in the first six months of 2023 compared to gains of $8.2 million in 2022. Also, the unallocated provision for credit losses increased $16.0 million, primarily driven by an increase in the provision for credit losses on loans, partly offset by a decrease in the liability for unfunded lending commitments, which are both not allocated to the segments for management reporting purposes. Net charge-offs are allocated to the segments when incurred for management reporting purposes. The provision for credit losses on loans in the first six months of 2023 was $21.8 million, or $8.5 million higher than net charge-offs due to an increase in the allowance for credit losses on loans. In the comparable period last year, the provision for credit losses on loans was a benefit of $3.4 million, or $12.0 million lower than net charge-offs, due to a decrease in the allowance for credit losses on loans. For the six months ended June 30, 2023, the Company's provision on unfunded lending commitments was a benefit of $3.9 million. Additionally, non-interest expense decreased $5.7 million. These decreases to pre-tax profitability were offset by higher net interest income of $29.0 million, and non-interest income of $6.0 million.
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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 December 2022, the FASB issued ASU 2022-06 which extended the sunset date under Topic 848 to December 31, 2024. The change is to align the temporary accounting relief guidance with the expected cessation date of LIBOR, which was postponed by administrators in 2021 to June 2023, a year after the current sunset date of ASU 2020-04. The Company's LIBOR Transition Steering Committee completed the Company's transition from LIBOR during the first half of 2023.
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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Three Months Ended June 30, 2023 and 2022
Second Quarter 2023
Second Quarter 2022
(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)
$ 5,757,388 $ 80,040 5.58 % $ 5,385,181 $ 42,402 3.16 %
Real estate — construction and land 1,450,196 28,645 7.92 1,225,267 12,489 4.09
Real estate — business 3,540,851 52,626 5.96 3,163,508 29,173 3.70
Real estate — personal 2,960,962 27,139 3.68 2,825,578 23,043 3.27
Consumer 2,098,523 29,454 5.63 2,070,560 18,697 3.62
Revolving home equity 300,623 5,661 7.55 272,280 2,507 3.69
Consumer credit card 555,875 19,088 13.77 537,681 15,170 11.32
Overdrafts 4,630 — — 5,524 — —
Total loans 16,669,048 242,653 5.84 15,485,579 143,481 3.72
Loans held for sale 5,957 151 10.17 7,933 161 8.14
Investment securities:
U.S. government and federal agency obligations 1,035,651 8,842 3.42 1,119,305 13,770 4.93
Government-sponsored enterprise obligations 55,751 331 2.38 55,762 332 2.39
State and municipal obligations (A)
1,532,519 7,809 2.04 2,126,380 12,189 2.30
Mortgage-backed securities 6,316,224 32,930 2.09 7,158,252 35,602 1.99
Asset-backed securities 2,827,911 14,666 2.08 4,038,113 13,612 1.35
Other debt securities 519,988 2,413 1.86 643,463 3,157 1.97
Trading debt securities (A)
46,493 525 4.53 43,904 269 2.46
Equity securities (A)
12,335 715 23.25 9,094 610 26.90
Other securities (A)
273,587 6,409 9.40 195,090 10,886 22.38
Total investment securities 12,620,459 74,640 2.37 15,389,363 90,427 2.36
Federal funds sold 7,484 105 5.63 4,269 19 1.79
Securities purchased under agreements to resell 824,974 4,099 1.99 1,703,569 4,385 1.03
Interest earning deposits with banks 2,284,162 29,254 5.14 1,248,942 2,428 .78
Total interest earning assets 32,412,084 350,902 4.34 33,839,655 240,901 2.86
Allowance for credit losses on loans (159,068) (134,670)
Unrealized gain (loss) on debt securities (1,331,002) (851,110)
Cash and due from banks 309,789 315,352
Premises and equipment, net 449,030 401,663
Other assets 1,182,521 521,478
Total assets $ 32,863,354 $ 34,092,368
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings $ 1,516,887 186 .05 $ 1,609,694 157 .04
Interest checking and money market 12,918,399 29,860 .93 14,847,306 2,121 .06
Certificates of deposit of less than $100,000 1,075,110 10,125 3.78 411,655 205 .20
Certificates of deposit of $100,000 and over 1,472,208 14,416 3.93 648,728 470 .29
Total interest bearing deposits 16,982,604 54,587 1.29 17,517,383 2,953 .07
Borrowings:
Federal funds purchased $ 507,165 $ 6,397 5.06 113,128 $ 224 .79
Securities sold under agreements to repurchase 2,206,612 17,014 3.09 2,258,184 2,702 .48
Other borrowings (B)
1,617,952 21,147 5.24 2,029 12 2.37
Total borrowings 4,331,729 44,558 4.13 2,373,341 2,938 .50
Total interest bearing liabilities 21,314,333 99,145 1.87 % 19,890,724 5,891 .12 %
Non-interest bearing deposits 8,224,475 11,209,680
Other liabilities 598,915 139,986
Equity 2,725,631 2,851,978
Total liabilities and equity $ 32,863,354 $ 34,092,368
Net interest margin (FTE) $ 251,757 $ 235,010
Net yield on interest earning assets 3.12 % 2.79 %
(A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%.
(B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above.
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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Six Months Ended June 30, 2023 and 2022
Six Months 2023
Six Months 2022
(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)
$ 5,707,026 $ 154,077 5.44 % $ 5,354,845 $ 80,818 3.04 %
Real estate — construction and land 1,430,624 54,131 7.63 1,180,334 23,015 3.93
Real estate — business 3,509,789 101,070 5.81 3,129,477 54,974 3.54
Real estate — personal 2,947,431 53,225 3.64 2,817,325 45,739 3.27
Consumer 2,083,040 56,514 5.47 2,055,464 36,781 3.61
Revolving home equity 298,696 10,807 7.30 273,065 4,854 3.58
Consumer credit card 556,048 37,845 13.72 539,254 30,300 11.33
Overdrafts 4,540 — — 5,352 — —
Total loans 16,537,194 467,669 5.70 15,355,116 276,481 3.63
Loans held for sale 5,833 296 10.23 8,654 311 7.25
Investment securities:
U.S. government and federal agency obligations 1,067,184 13,980 2.64 1,111,570 23,087 4.19
Government-sponsored enterprise obligations 71,332 1,021 2.89 53,777 630 2.36
State and municipal obligations (A)
1,662,416 17,803 2.16 2,102,125 23,897 2.29
Mortgage-backed securities 6,384,934 65,760 2.08 7,236,993 71,372 1.99
Asset-backed securities 3,029,713 30,707 2.04 3,985,877 24,596 1.24
Other debt securities 524,440 4,936 1.90 639,875 6,291 1.98
Trading debt securities (A)
46,127 1,043 4.56 42,304 454 2.16
Equity securities (A)
12,396 1,429 23.25 9,295 1,219 26.45
Other securities (A)
251,848 10,438 8.36 193,708 13,688 14.25
Total investment securities 13,050,390 147,117 2.27 15,375,524 165,234 2.17
Federal funds sold 23,144 594 5.18 2,670 20 1.51
Securities purchased under agreements to resell 824,987 8,051 1.97 1,718,644 9,685 1.14
Interest earning deposits with banks 1,551,121 38,590 5.02 1,924,731 3,579 .37
Total interest earning assets 31,992,669 662,317 4.17 34,385,339 455,310 2.67
Allowance for credit losses on loans (154,617) (142,136)
Unrealized gain (loss) on debt securities (1,358,944) (514,573)
Cash and due from banks 311,895 327,728
Premises and equipment, net 440,208 404,317
Other assets 908,403 539,219
Total assets $ 32,139,614 $ 34,999,894
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings $ 1,533,459 379 .05 $ 1,586,522 335 .04
Interest checking and money market 13,090,983 49,818 .77 14,898,234 3,703 .05
Certificates of deposit of less than $100,000 747,061 11,550 3.12 420,703 344 .16
Certificates of deposit of $100,000 and over 1,189,372 21,043 3.57 754,890 897 .24
Total interest bearing deposits 16,560,875 82,790 1.01 17,660,349 5,279 .06
Borrowings:
Federal funds purchased $ 500,480 $ 11,983 4.83 $ 68,490 231 .68
Securities sold under agreements to repurchase 2,312,083 34,509 3.01 2,484,071 3,384 .27
Other borrowings (B)
1,087,556 27,867 5.17 1,402 13 1.87
Total borrowings 3,900,119 74,359 3.84 2,553,963 3,628 .29
Total interest bearing liabilities 20,460,994 157,149 1.55 % 20,214,312 8,907 .09 %
Non-interest bearing deposits 8,667,035 11,376,265
Other liabilities 356,829 321,805
Equity 2,654,756 3,087,512
Total liabilities and equity $ 32,139,614 $ 34,999,894
Net interest margin (FTE) $ 505,168 $ 446,403
Net yield on interest earning assets 3.18 % 2.62 %
(A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%.
(B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above.
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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.