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 2024 Annual Report on Form 10-K. Results of operations for the three months ended March 31, 2025 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, 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 2024 Annual Report on Form 10-K. During the quarter ended March 31, 2025, there were no material changes to the Risk Factors disclosed in the Company's 2024 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 2024 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2024.
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Selected Financial Data
Three Months Ended March 31
2025 2024
Per Share Data
Net income per common share — basic $ .98 $ .82 *
Net income per common share — diluted .98 .82 *
Cash dividends on common stock .275 .257 *
Book value per common share 26.19 21.62 *
Market price 62.23 50.67 *
Selected Ratios
(Based on average balance sheets)
Loans to deposits (1)
69.38 % 69.87 %
Non-interest bearing deposits to total deposits 29.36 29.97
Equity to loans (1)
19.56 17.24
Equity to deposits 13.57 12.05
Equity to total assets 10.71 9.61
Return on total assets 1.69 1.48
Return on equity 15.82 15.39
(Based on end-of-period data)
Non-interest income to revenue (2)
37.13 37.41
Efficiency ratio (3)
55.61 61.67
Tier I common risk-based capital ratio 16.86 15.35
Tier I risk-based capital ratio
16.86 15.35
Total risk-based capital ratio 17.65 16.11
Tangible common equity to tangible assets ratio (4)
10.33 9.24
Tier I leverage ratio
12.29 11.75
* Restated for the 5% stock dividend distributed in December 2024.
(1) Includes loans held for sale.
(2) Revenue includes net interest income and non-interest income.
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization.
It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP.
The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets.
March 31
(Dollars in thousands) 2025 2024
Total equity $ 3,498,402 $ 2,963,889
Less non-controlling interest 20,615 19,913
Less goodwill 146,539 146,539
Less intangible assets* 3,825 4,005
Total tangible common equity (a) $ 3,327,423 $ 2,793,432
Total assets $ 32,364,964 $ 30,372,108
Less goodwill 146,539 146,539
Less intangible assets* 3,825 4,005
Total tangible assets (b) $ 32,214,600 $ 30,221,564
Tangible common equity to tangible assets ratio (a)/(b) 10.33 % 9.24 %
* Intangible assets other than mortgage servicing rights.
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Results of Operations
Summary
Three Months Ended March 31 Increase (Decrease)
(Dollars in thousands) 2025 2024 Amount % change
Net interest income (expense) $ 269,102 $ 248,999 $ 20,103 8.1 %
Provision for credit losses (14,487) (4,787) 9,700 202.6
Non-interest income 158,949 148,848 10,101 6.8
Investment securities gains (losses), net (7,591) (259) (7,332) N.M.
Non-interest expense (238,376) (245,697) (7,321) (3.0)
Income taxes (36,964) (31,652) 5,312 16.8
Non-controlling interest income (expense) 959 (2,789) (3,748) N.M.
Net income attributable to Commerce Bancshares, Inc. $ 131,592 $ 112,663 $ 18,929 16.8 %
For the quarter ended March 31, 2025, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $131.6 million, an increase of $18.9 million, or 16.8%, compared to the first quarter of the previous year. For the current quarter, the annualized return on average assets was 1.69%, the annualized return on average equity was 15.82%, and the efficiency ratio was 55.61%. Diluted earnings per common share was $.98 per share in the current quarter, an increase of 19.5% compared to $.82 per share in the first quarter of 2024, and a decrease compared to $1.01 per share in the previous quarter.
Compared to the first quarter of last year, net interest income increased $20.1 million, or 8.1%, mainly due to increases in interest income on investment securities and securities purchased under agreements to resell ("resale agreements") of $10.5 million and $5.8 million, respectively. In addition to the increase in interest income, interest expense on deposits decreased $9.2 million and interest expense on borrowings decreased $5.2 million. The provision for credit losses increased $9.7 million, compared to the same quarter in the prior year due to an increase in the estimate of allowance for credit losses on loans. Non-interest income increased $10.1 million, or 6.8%, compared to the first quarter of 2024, mainly due to an increase in trust fees, deposit account fees, and capital market fees. Net losses on investment securities totaled $7.6 million in the current quarter compared to net losses of $259 thousand in the same quarter of last year. Securities losses in the current quarter primarily resulted from net losses in fair value of $8.5 million recorded on private equity investment which were partly offset by net gains of $1.0 million on sales of private equity securities. Non-interest expense decreased $7.3 million, or 3.0%, over the first quarter of 2024, mainly due to non-recurring litigation settlement expense and an FDIC special assessment accrual adjustment during the prior year, partly offset by higher marketing expense, professional and other services expense, salaries expense, and data processing and software expense.
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Net Interest Income
The following table summarizes the changes in net interest income on a fully taxable-equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate are allocated to rate.
Analysis of Changes in Net Interest Income
Three Months Ended March 31, 2025 vs. 2024
Change due to
(In thousands) Average
Volume Average
Rate
Total
Interest income, fully taxable equivalent basis:
Loans:
Business $ 3,637 $ (5,711) $ (2,074)
Real estate - construction and land (1,185) (4,083) (5,268)
Real estate - business (923) (3,903) (4,826)
Real estate - personal 143 2,227 2,370
Consumer (2) 342 340
Revolving home equity 695 (433) 262
Consumer credit card (82) (1,021) (1,103)
Overdrafts — — —
Total interest on loans 2,283 (12,582) (10,299)
Loans held for sale (31) 14 (17)
Investment securities:
U.S. government and federal agency securities 8,900 12,761 21,661
Government-sponsored enterprise obligations (2) (1) (3)
State and municipal obligations (2,557) 110 (2,447)
Mortgage-backed securities (6,017) (1,456) (7,473)
Asset-backed securities (2,530) 4,246 1,716
Other securities 1,982 (5,097) (3,115)
Total interest on investment securities (224) 10,563 10,339
Federal funds sold 25 (6) 19
Securities purchased under agreements to resell 2,132 3,652 5,784
Interest earning deposits with banks 6,082 (6,265) (183)
Total interest income 10,267 (4,624) 5,643
Interest expense:
Deposits:
Savings (6) (22) (28)
Interest checking and money market 3,431 (6,580) (3,149)
Certificates of deposit of less than $100,000 509 (1,768) (1,259)
Certificates of deposit of $100,000 and over (2,467) (2,310) (4,777)
Total interest on deposits 1,467 (10,680) (9,213)
Federal funds purchased (2,671) (364) (3,035)
Securities sold under agreements to repurchase 1,787 (4,001) (2,214)
Other borrowings 2 (1) 1
Total interest expense 585 (15,046) (14,461)
Net interest income, fully taxable-equivalent basis $ 9,682 $ 10,422 $ 20,104
Net interest income in the first quarter of 2025 was $269.1 million, an increase of $20.1 million over the first quarter of 2024. On a fully taxable-equivalent (FTE) basis, net interest income totaled $271.4 million in the first quarter of 2025, up $20.1 million over the same period last year and up $2.5 million over the previous quarter. The increase in net interest income
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compared to the first quarter of 2024 was mainly due to higher interest income earned on investment securities (FTE) of $10.3 million and lower deposit interest expense of $9.2 million, partly offset by lower interest income earned on loans (FTE) of $10.3 million. The increase in total interest earned on investment securities (FTE) was mainly the result of higher average rates earned, while the decrease in deposit interest expense was due to lower average rates paid, slightly offset by higher average balances. Interest income on loans (FTE) decreased mainly due to lower average rates earned, partly offset by higher average business loan balances. The Company's net yield on earning assets (FTE) was 3.56% in the current quarter compared to 3.33% in the first quarter of 2024.
Total interest income (FTE) increased $5.6 million over the first quarter of 2024. Interest income on loans (FTE) was $255.9 million during the first quarter of 2025, a decrease of $10.3 million, or 3.9%, from the same quarter last year. The decrease in loan interest income from the same quarter of last year was primarily due to a decrease of 25 basis points in the average rate earned, partly offset by growth of $162.6 million, or 1.0%, in average loan balances. Most of the decrease in interest income occurred in the construction and land, business real estate and business loan categories. The largest decrease to interest income occurred in construction and land loan interest, which declined $5.3 million due to a 110 basis point decrease in the average rate earned, coupled with a decline in average balances of $57.2 million, or 3.9%. Business real estate loan interest income decreased $4.8 million due to a decrease of 38 basis points in the average rate earned and lower average balances of $59.8 million, or 1.6%. Business loan interest income declined $2.1 million due to a 32 basis point decrease in the average rate earned, partly offset by higher average balances of $232.7 million, or 4.0%. Consumer credit card loan interest income declined $1.1 million mainly due to a 62 basis point decrease in the average rate earned. These decreases in interest income were partly offset by an increase in personal real estate loan interest income of $2.4 million due to a 33 basis point increase in the average rate earned and growth of $14.7 million in average loan balances.
Interest income on investment securities (FTE) was $77.0 million during the first quarter of 2025, which was an increase of $10.3 million over the same quarter last year. The increase in interest income occurred mainly in interest earned on U.S. government and federal agency securities which grew $21.7 million due to a $1.7 billion increase in average balances and a 201 basis point increase in the average rate earned. A portion of the increase in interest earned on U.S. government securities was interest related to the Company's U.S. Treasury inflation-protected securities, which are tied to the non-seasonally adjusted Consumer Price Index (CPI-U). Interest earned on these securities increased $1.6 million over the same quarter last year. Interest income earned on asset-backed securities grew $1.7 million due to a 107 basis point increase in the average rate earned, partly offset by a decrease in average balances of $429.3 million, or 20.6%. These increases to interest income were partly offset by a decline in interest income on mortgage-backed securities of $7.5 million, driven by lower average balances of $1.1 billion, or 18.9%, and a decline of 11 basis points in the average rate earned. In addition, the Company recorded a $539 thousand adjustment to premium amortization at March 31, 2025, which increased interest income and reflected slower forward prepayment speed estimates on mortgage-backed securities. This increase was lower than the $2.0 million adjustment increasing income in the same quarter last year. Interest income earned on state and municipal obligations declined $2.4 million mainly due to a $526.4 million, or 39.6%, decrease in average balances. Interest earned on other securities decreased $3.1 million mainly driven by dividend payments of $3.4 million from the Company's private equity investments recorded in 2024. Additionally, the average rate earned on investment securities during the three months ended March 31, 2025 increased 54 basis points over the same period in the prior year. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $10.5 billion in the first quarter of 2025, compared to $11.0 billion in the first quarter of 2024.
Interest income on securities purchased under agreements to resell increased $5.8 million over the same quarter last year, due to an increase of 188 basis points in the average rate earned and growth of $448.0 million in the average balance. Interest income on deposits at the Federal Reserve decreased $183 thousand mainly due to a decline of 102 basis points in average rate earned, mostly offset by an increase of $450.1 million in the average balance.
The average fully taxable-equivalent yield on total interest earning assets was 4.81% in the first quarter of 2025, up from 4.78% in the first quarter of 2024.
Total interest expense decreased $14.5 million compared to the first quarter of 2024 due to decreases of $9.2 million in interest expense on interest bearing deposits and $5.2 million in interest expense on borrowings. The decrease in deposit interest expense resulted mainly from a decrease of $6.0 million in interest expense on certificates of deposit due to a 59 basis point decline in the average rate paid and a decrease of $216.6 million, or 8.4%, in average balances. Interest expense on interest checking and money market deposit accounts decreased $3.1 million due to a 17 basis point decrease in average rates paid, partly offset by an increase of $691.6 million, or 5.2%, in average balances. The overall rate paid on total deposits decreased 25 basis points from the same quarter last year. Interest expense on federal funds purchased decreased $3.0 million due to lower average balances of $199.9 million and a 105 basis point decline in the average rate paid. Interest expense on customer repurchase agreements decreased $2.2 million due to a 57 basis point decline in the average rate paid, partly offset by
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growth of $211.3 million in the average balance. The overall average rate incurred on all interest bearing liabilities was 1.89% and 2.21% in the first quarters of 2025 and 2024, respectively.
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 March 31 Increase (Decrease)
(Dollars in thousands) 2025 2024 Amount % change
Trust fees $ 56,592 $ 51,105 $ 5,487 10.7 %
Bank card transaction fees 45,593 46,930 (1,337) (2.8)
Deposit account charges and other fees 26,622 24,151 2,471 10.2
Capital market fees 5,112 3,892 1,220 31.3
Consumer brokerage services 4,785 4,408 377 8.6
Loan fees and sales 3,404 3,141 263 8.4
Other 16,841 15,221 1,620 10.6
Total non-interest income $ 158,949 $ 148,848 $ 10,101 6.8 %
Non-interest income as a % of total revenue* 37.1 % 37.4 %
* Total revenue includes net interest income and non-interest income.
The table below is a summary of net bank card transaction fees for the three month periods ended March 31, 2025 and 2024.
Three Months Ended March 31
(Dollars in thousands) 2025 2024 $ change % change
Net debit card fees $ 10,288 $ 10,405 $ (117) (1.1) %
Net credit card fees 3,608 3,772 (164) (4.3)
Net merchant fees 5,767 5,247 520 9.9
Net corporate card fees 25,930 27,506 (1,576) (5.7)
Total bank card transaction fees $ 45,593 $ 46,930 $ (1,337) (2.8) %
For the first quarter of 2025, total non-interest income amounted to $158.9 million compared to $148.8 million in the same quarter last year, which was an increase of $10.1 million, or 6.8%. The increase was mainly due to higher trust fees, deposit account fees, capital market fees and other income. Trust fees increased $5.5 million, or 10.7%, mainly due to growth of $5.1 million in private client trust fees. Bank card transaction fees for the current quarter declined $1.3 million, or 2.8%, from the same period last year. Net corporate card fees declined $1.6 million mainly due to lower interchange income, partly offset by lower rewards expense. Net merchant fees increased $520 thousand mainly due to higher fees and lower network expense. Net credit and debit card fees decreased $164 thousand and $117 thousand, respectively, mainly due to lower interchange fees. Compared to the first quarter of last year, deposit account fees increased $2.5 million, or 10.2%, mainly due to higher corporate cash management fees of $2.6 million. Capital market fees increased $1.2 million, or 31.3%, mainly due to higher underwriting and trading securities income, while consumer brokerage fees increased $377 thousand, or 8.6%, mainly due to higher advisory fees. Other non-interest income increased $1.6 million, or 10.6%, mainly due to an increase of $2.4 million in gains on the sales of assets, partly offset by a decrease of $538 thousand in fair value adjustments recorded on the Company's deferred compensation plan, which is held in a trust and recorded as both an asset and liability, affecting both other income and other expense.
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Investment Securities Gains (Losses), Net
Three Months Ended March 31
(In thousands) 2025 2024
Net gains (losses) on sales of available for sale debt securities $ 4 $ (8,470)
Net gains (losses) on equity securities (97) 142
Net gains (losses) on sales of private equity investments 1,027 969
Fair value adjustments on private equity investments (8,525) 7,100
Total investment securities gains (losses), net $ (7,591) $ (259)
Net gains and losses on investment securities, which were recognized in earnings during the three months ended March 31, 2025 and 2024, are shown in the table above. Net securities losses of $7.6 million were reported in the first quarter of 2025, compared to net losses of $259 thousand in the same period last year. The net losses in the first quarter of 2025 were mainly comprised of net losses in fair value of $8.5 million recorded on private equity investments, partly offset by net gains of $1.0 million on sales of private equity investments. The net losses on investment securities for the same quarter last year were primarily comprised of net losses of $8.5 million realized on the sale of available for sale securities, mostly offset by net gains in fair value of $7.1 million and a gain of $969 thousand on the sale of an investment, both in the Company's private equity investment portfolio. 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 income of $1.5 million during the first three months of 2025 and expense of $1.5 million during the first three months of 2024.
Non-Interest Expense
Three Months Ended March 31 Increase (Decrease)
(Dollars in thousands) 2025 2024 Amount % change
Salaries and employee benefits $ 153,078 $ 151,801 $ 1,277 .8 %
Data processing and software 32,238 31,153 1,085 3.5
Net occupancy 14,020 13,574 446 3.3
Professional and other services 10,026 8,648 1,378 15.9
Marketing 5,843 4,036 1,807 44.8
Equipment 5,248 5,010 238 4.8
Supplies and communication 5,046 4,744 302 6.4
Deposit insurance 3,744 8,017 (4,273) (53.3)
Other 9,133 18,714 (9,581) (51.2)
Total non-interest expense $ 238,376 $ 245,697 $ (7,321) (3.0) %
Non-interest expense for the first quarter of 2025 amounted to $238.4 million, a decrease of $7.3 million, or 3.0%, compared to expense of $245.7 million in the first quarter of last year. The decrease in expense from the same period last year was mainly due to lower deposit insurance expense and litigation settlement expense, partly offset by higher marketing expense, professional and other services expense, salaries expense and data processing and software expense. Salaries and employee benefits expense increased $1.3 million, or .8%, mainly due to higher incentive compensation expense of $811 thousand and full-time salaries expense of $578 thousand, partly offset by lower medical expense of $970 thousand. Full-time equivalent employees totaled 4,662 at March 31, 2025, compared to 4,721 at March 31, 2024. Data processing and software expense increased $1.1 million, or 3.5%, mainly due to higher costs for service providers and software. Net occupancy increased $446 thousand, 3.3%, mainly due to higher demolition costs. Professional and other services expense increased $1.4 million, or 15.9%, and marketing expense increased $1.8 million, or 44.8%. Deposit insurance expense decreased $4.3 million due to a $4.0 million accrual adjustment recorded in 2024 for a one-time FDIC special assessment to replenish the Deposit Insurance Fund. Other non-interest expense decreased $9.6 million, or 51.2%, mainly due to a $10.0 million litigation settlement recorded in 2024 that did not reoccur.
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Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments
Three Months Ended
(In thousands) Mar. 31, 2025 Dec. 31, 2024 Mar. 31, 2024
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period $ 162,742 $ 160,839 $ 162,395
Provision for credit losses on loans 15,095 12,557 6,947
Net loan charge-offs (recoveries):
Commercial:
Business 46 335 23
Real estate-construction and land — — —
Real estate-business 377 50 (141)
Commercial net loan charge-offs (recoveries) 423 385 (118)
Personal Banking:
Real estate-personal 72 8 24
Consumer 2,852 3,237 1,983
Revolving home equity (3) (3) (4)
Consumer credit card 6,967 6,557 6,435
Overdrafts 495 470 557
Personal banking net loan charge-offs (recoveries) 10,383 10,269 8,995
Total net loan charge-offs (recoveries) 10,806 10,654 8,877
Balance at end of period $ 167,031 $ 162,742 $ 160,465
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at beginning of period $ 18,935 $ 17,984 $ 25,246
Provision for credit losses on unfunded lending commitments (608) 951 (2,160)
Balance at end of period 18,327 18,935 23,086
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 185,358 $ 181,677 $ 183,551
Three Months Ended
Mar. 31, 2025 Dec. 31, 2024 Mar. 31, 2024
Annualized net loan charge-offs (recoveries)*:
Commercial:
Business — % .02 % — %
Real estate-construction and land — — —
Real estate-business .04 .01 (.02)
Commercial net loan charge-offs (recoveries) .02 .01 —
Personal Banking:
Real estate-personal .01 — —
Consumer .56 .62 .38
Revolving home equity — — —
Consumer credit card 5.04 4.59 4.60
Overdrafts 34.26 33.22 29.11
Personal banking net loan charge-offs (recoveries) .70 .67 .60
Total annualized net loan charge-offs (recoveries) .25 % .25 % .21 %
* as a percentage of average loans (excluding loans held for sale)
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The following schedule provides a breakdown of the allowance for credit losses on loans (ACL) by loan class and the percentage of the allowance for credit losses to the related loan class at period end.
(Dollars in thousands) Mar. 31, 2025 Dec. 31, 2024 Mar. 31, 2024
Credit Loss Allowance Allocation % of ACL to Loan Category Credit Loss Allowance Allocation % of ACL to Loan Category Credit Loss Allowance Allocation % of ACL to Loan Category
Business $ 45,669 .73 % $ 43,826 .72 % $ 43,810 .73 %
RE — construction and land 29,284 2.06 30,164 2.14 31,437 2.10
RE — business 31,747 .87 32,779 .90 30,217 .81
RE — personal 13,475 .44 11,632 .38 12,266 .40
Consumer 14,967 .71 11,772 .57 11,849 .56
Revolving home equity 1,857 .52 1,707 .48 1,801 .56
Consumer credit card 29,904 5.26 30,717 5.15 28,940 5.13
Overdrafts 128 4.09 145 1.29 145 .30
Total $ 167,031 .96 % $ 162,742 .95 % $ 160,465 .93 %
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 2024 Annual Report on Form 10-K.
Net loan charge-offs in the first quarter of 2025 amounted to $10.8 million, compared to $10.7 million in the prior quarter and $8.9 million in the first quarter of last year. Comp ared to the same period last year, total net loan charge-offs in the first quarter of 2025 increased $1.9 million and increased $152 thousand over the previous quarter. The increase over the prior year was mainly driven by increases of $869 thousand, $532 thousand, and $518 thousand in consumer, consumer credit card, and business real estate loan net charge-offs, respectively. The increase over the previous quarter was driven by increases in net charge-offs on consumer credit card and business real estate loans, largely offset by decreases in net charge-offs on consumer and business loans.
For the three months ended March 31, 2025, annualized net charge-offs on average consumer credit card loans were 5.04%, compared to 4.59% in the previous quarter and 4.60% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .56%, compared to .62% in the prior quarter and .38% in the same period last year. In the first quarter of 2025 , total annualized net loan charge-offs were .25%, compared to .25% in the previous quarter and .21% in the same period last year.
For the three months ended March 31, 2025, the provision for credit losses on loans was $15.1 million, which was an $8.1 million increase over the $6.9 million provision recorded in the same period last year. The increase resulted from the provision recorded for the first three months of 2024 including a reduction of the allowance for credit losses on loans, while the provision for credit losses in the first three months of 2025 includes an increase in the allowance for credit losses on loans. The provision for credit losses on loans for the three months ended March 31, 2025 increased $2.5 million increase over the $12.6 million provision recorded for the three months ending December 31, 2024. Changes in the provision are driven by changes in the estimate for the allowance for credit losses on loans.
At March 31, 2025, the allowance for credit losses on loans increased by $4.3 million, compared to the allowance for credit losses on loans at December 31, 2024. The forecast utilized to estimate the allowance for credit losses at March 31, 2025 reflected a slight decline in key macroeconomic variables, causing the allowance to increase. In the commercial loan portfolio, the increase in the allowance related to the decline in forecast variables was mostly offset by improvements in the volume of loans classified as substandard or requiring additional qualitative factors due to the type of industry. The allowance for the personal banking loan portfolio increased $4.4 million compared to December 31, 2024 due to the changes in the forecast assumptions, in addition to lower prepayment speeds in the personal real estate loan portfolio and increased loss experience in the consumer loan portfolio, partially offset by decreases in outstanding loan balances in the consumer credit card portfolio. The allowance for credit losses on loans was $167.0 million at March 31, 2025 and was .96%, .95% and .93% of total loans at March 31, 2025, December 31, 2024 and March 31, 2024, respectively.
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In the current quarter, the provision for credit losses on unfunded lending commitments was a benefit of $608 thousand, compared to a benefit of $2.2 million for the three months ended March 31, 2024. At March 31, 2025, the liability for unfunded lending commitments was $18.3 million, compared to $18.9 million at December 31, 2024 and $23.1 million at March 31, 2024. The liability decreased primarily due to decreases in unfunded lending commitment balances, coupled with improvement in loss rate assumptions for the Company's construction loans. The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans. See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses.
The Company considers the allowance for credit losses on loans and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at March 31, 2025.
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)
March 31, 2025 December 31, 2024
Non-accrual loans $ 22,603 $ 18,278
Foreclosed real estate 642 343
Total non-performing assets $ 23,245 $ 18,621
Non-performing assets as a percentage of total loans .13 % .11 %
Non-performing assets as a percentage of total assets .07 % .06 %
Total loans past due 90 days and still accruing interest $ 19,417 $ 24,516
Non-accrual loans totaled $22.6 million at March 31, 2025, an increase of $4.3 million from the balance at December 31, 2024. The increase occurred mainly in business real estate non-accrual loans, which increased $3.4 million, as well as business non-accrual loans, which increased $1.0 million. At March 31, 2025, non-accrual loans were comprised of business real estate (81.0%), revolving home equity (8.7%), business (4.9%), personal real estate (4.4%), and construction and land (1.0%) loans. Foreclosed real estate totaled $642 thousand at March 31, 2025, an increase of $299 thousand compared to December 31, 2024. Total loans past due 90 days or more and still accruing interest totaled $19.4 million as of March 31, 2025, a decrease of $5.1 million from December 31, 2024. 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.
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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 $286.9 million at March 31, 2025 compared to $330.3 million at December 31, 2024, resulting in a decrease of $43.5 million, or 13.2%.
(In thousands)
March 31, 2025 December 31, 2024
Potential problem loans:
Business $ 127,854 $ 131,527
Real estate – construction and land 2,824 2,662
Real estate – business 156,120 196,030
Real estate – personal 66 96
Total potential problem loans $ 286,864 $ 330,315
When borrowers are experiencing financial difficulty, the Company may agree to modify the contractual terms of a loan to a borrower in order to assist the borrower in repaying principal and interest owed to the Company. At March 31, 2025, the Company held $136.3 million of loans that had been modified during the three months ended March 31, 2025. These loans are further discussed in the "Modifications for borrowers experiencing financial difficulty" section in Note 2 to the consolidated financial statements.
Loans with Special Risk Characteristics
Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon.
Real Estate – Construction and Land Loans
The Company's portfolio of construction and land loans, as shown in the table below, amounted to 8.2% of total loans outstanding at March 31, 2025. The largest component of construction and land loans was commercial construction, which increased $18.6 million during the three months ended March 31, 2025. At March 31, 2025, multi-family residential construction loans totaled approximately $585.7 million, or 48.2%, of the commercial construction loan portfolio, compared to $526.6 million, or 44.0%, at December 31, 2024.
(Dollars in thousands) March 31,
2025
% of Total
% of
Total
Loans
December 31, 2024
% of Total
% of
Total
Loans
Commercial construction $ 1,215,869 85.7 % 7.0 % $ 1,197,278 84.9 % 7.0 %
Residential construction 102,993 7.3 .6 106,884 7.6 .6
Residential land and land development 64,251 4.4 .4 65,342 4.6 .4
Commercial land and land development 36,459 2.6 .2 40,397 2.9 .2
Total real estate - construction and land loans $ 1,419,572 100.0 % 8.2 % $ 1,409,901 100.0 % 8.2 %
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Real Estate – Business Loans
Total business real estate loans were $3.6 billion at March 31, 2025 and comprised 20.9% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At March 31, 2025, 34.5% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans.
(Dollars in thousands) March 31,
2025
% of Total
% of
Total
Loans
December 31, 2024
% of Total
% of
Total
Loans
Owner-occupied $ 1,252,580 34.5 % 7.2 % $ 1,237,265 33.8 % 7.2 %
Office 525,276 14.5 3.0 520,715 14.2 3.0
Industrial 510,597 14.1 2.9 485,250 13.3 2.8
Hotels 297,253 8.2 1.7 334,479 9.1 1.9
Multi-family 284,761 7.8 1.6 310,806 8.5 1.8
Retail 307,694 8.5 1.8 309,431 8.5 1.8
Farm 195,233 5.4 1.1 189,794 5.2 1.1
Senior living 153,036 4.2 .9 183,695 5.0 1.1
Other 102,205 2.8 .7 89,783 2.4 .6
Total real estate - business loans $ 3,628,635 100.0 % 20.9 % $ 3,661,218 100.0 % 21.3 %
Information about the credit quality of the Company's business real estate loan portfolio as of March 31, 2025 and December 31, 2024 is provided in the table below.
(Dollars in thousands) Pass Special Mention Substandard Non-Accrual Total
March 31, 2025
Owner-occupied $ 1,194,765 $ 24,527 $ 29,651 $ 3,637 $ 1,252,580
Office 467,222 — 58,054 — 525,276
Industrial 510,597 — — — 510,597
Hotels 283,382 — 13,871 — 297,253
Multi-family 258,813 15,000 10,948 — 284,761
Retail 307,694 — — — 307,694
Farm 191,714 365 3,154 — 195,233
Senior living 98,036 — 40,332 14,668 153,036
Other 99,384 2,821 — — 102,205
Total $ 3,411,607 $ 42,713 $ 156,010 $ 18,305 $ 3,628,635
December 31, 2024
Owner-occupied $ 1,203,019 $ 3,362 $ 30,598 $ 286 $ 1,237,265
Office 451,189 11,980 57,546 — 520,715
Industrial 485,250 — — — 485,250
Hotels 334,479 — — — 334,479
Multi-family 299,825 10,981 — — 310,806
Retail 308,730 — 701 — 309,431
Farm 185,998 642 3,154 — 189,794
Senior living 65,366 — 103,661 14,668 183,695
Other 89,577 206 — — 89,783
Total $ 3,423,433 $ 27,171 $ 195,660 $ 14,954 $ 3,661,218
Revolving Home Equity Loans
The Company had $356.7 million in revolving home equity loans at March 31, 2025 that were collateralized by residential real estate. Most of these loans (93.3%) are written with terms requiring interest-only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of March 31, 2025, the outstanding
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principal of loans with an original LTV higher than 80% was $30.0 million, or 8.6% of the portfolio, compared to $31.9 million as of December 31, 2024. Total revolving home equity loan balances over 30 days past due were $3.5 million at March 31, 2025 and $5.6 million at December 31, 2024, and the outstanding balance of revolving home equity loans on non-accrual status was $2.0 million at both March 31, 2025 and December 31, 2024. The weighted average FICO score for the total portfolio balance at March 31, 2025 is 774. 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 2025 through 2027, approximately 14% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 83% 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 36.6% of the consumer loan portfolio at March 31, 2025, and outstanding balances for auto loans were $774.3 million and $776.7 million at March 31, 2025 and December 31, 2024, respectively. The balances over 30 days past due amounted to $10.9 million at March 31, 2025 and $14.4 million at December 31, 2024, respectively, and comprised 1.4% of the outstanding balances of these loans at March 31, 2025 and 1.9% at December 31, 2024. For the three months ended March 31, 2025, $98.0 million of new auto loans were originated, compared to $101.2 million during the first three months of 2024. At March 31, 2025, the automobile loan portfolio had a weighted average FICO score of 755, and net charge-offs on auto loans were 1.1% of average auto loans.
The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 10.3% of the consumer loan portfolio at March 31, 2025. Losses on these loans have historically been low, and the Company saw net recoveries of $14 thousand for the first three months of 2025. Private banking loans comprised 37.3% of the consumer loan portfolio at March 31, 2025. The Company's private banking loans are generally well-collateralized, and at March 31, 2025 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 $823 thousand in the first three months of 2025 and were .3% of the average balances of these loans at March 31, 2025.
Consumer Credit Card Loans
The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at March 31, 2025 of $568.2 million in consumer credit card loans outstanding, approximately $120.3 million, or 21.2%, carried a low promotional rate. Within the next six months, $52.7 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters.
March 31, 2025 December 31, 2024
FICO score:
Under 600
5.4 % 5.1 %
600 – 659
12.2 11.9
660 – 719
28.9 28.3
720 – 779
26.8 26.3
780 and over
26.7 28.4
Total
100.0 % 100.0 %
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Oil and Gas Energy Lending
The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $322.4 million, or 1.9% of total loans at March 31, 2025, a decrease of $15.6 million from December 31, 2024, as shown in the table below.
(In thousands)
March 31, 2025 December 31, 2024 Unfunded commitments at March 31, 2025
Extraction $ 258,642 $ 274,265 $ 151,489
Mid-stream shipping and storage 28,246 36,801 102,091
Downstream distribution and refining 8,270 9,757 37,798
Support activities 27,290 17,226 9,684
Total energy lending portfolio $ 322,448 $ 338,049 $ 301,062
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 $1.6 billion at both March 31, 2025 and December 31, 2024. Additional unfunded commitments at March 31, 2025 totaled $2.3 billion.
Income Taxes
Income tax expense was $37.0 million in the first quarter of 2025, compared to $36.6 million in the fourth quarter of 2024 and $31.7 million in the first quarter of 2024. The Company's effective tax rate, including the effect of non-controlling interest, was 21.9% in the first quarter of 2025, compared to 21.2% in the fourth quarter of 2024 and 21.9% in the first quarter of 2024.
Financial Condition
Balance Sheet
Total assets of the Company were $32.4 billion at March 31, 2025 and $32.0 billion at December 31, 2024. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on available for sale debt securities) amounted to $31.4 billion at March 31, 2025 and $30.9 billion at December 31, 2024, and consisted of 55% in loans and 33% in investment securities at March 31, 2025.
During the first quarter of 2025, average loans totaled $17.2 billion, an increase of $173.0 million, or 1.0%, over the prior quarter, and an increase of $162.6 million over the same quarter last year. Compared to the previous quarter, average balances of business loans and business real estate loans grew $143.0 million and $31.8 million, respectively. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $14.9 million, compared to $21.9 million in the prior quarter.
Total average available for sale debt securities increased $66.1 million over the previous quarter to $9.2 billion, at fair value. The increase in available for sale debt securities was mainly the result of higher average balances of U.S. government and federal agency obligations and other asset-backed securities, partly offset by lower average balances of mortgage-backed securities. During the first quarter of 2025, the unrealized loss on available for sale debt securities decreased $157.7 million to $832.9 million, at period end. Also, during the first quarter of 2025, purchases of available for sale debt securities totaled $507.7 million with a weighted average yield of approximately 4.74%, and maturities and pay downs of available for sale debt securities were $542.3 million. At March 31, 2025, the duration of the available for sale investment portfolio was 4.1 years, and maturities and pay downs of approximately $1.4 billion are expected to occur during the next 12 months.
Total average deposits decreased $83.7 million this quarter compared to the previous quarter. The decrease in deposits mostly resulted from declines of $165.6 million and $158.2 million in average balances of demand deposits and certificates of deposit, respectively, partly offset by higher interest checking and money market deposit average balances of $227.2 million. Compared to the previous quarter, total average commercial deposits declined $264.7 million, while wealth and consumer average deposits grew $145.7 million and $82.2 million, respectively. The average loans to deposits ratio was 69.4% in the
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current quarter and 68.5% in the prior quarter. The Company’s average borrowings, which included average customer repurchase agreements of $2.7 billion, increased $283.4 million to $2.9 billion at March 31, 2025.
Liquidity and Capital Resources
Liquidity Management
The Company’s most liquid assets include balances at the Federal Reserve Bank, federal funds sold, and available for sale debt securities, as follows:
(In thousands)
March 31, 2025 March 31, 2024 December 31, 2024
Liquid assets:
Balances at the Federal Reserve Bank $ 2,756,521 $ 1,609,614 $ 2,624,553
Federal funds sold — — 3,000
Available for sale debt securities 9,264,947 9,141,695 9,136,853
Total $ 12,021,468 $ 10,976,309 $ 11,764,406
Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $2.8 billion at March 31, 2025 and increased $132.0 million from December 31, 2024. At March 31, 2025, the Company did not have a balance of federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities. The fair value of the available for sale debt portfolio was $9.3 billion at March 31, 2025 and included an unrealized net loss of $832.9 million. The total net unrealized loss included net losses of $743.8 million on mortgage-backed and asset-backed securities and $68.4 million on state and municipal obligations.
The Company's available for sale debt securities portfolio has a diverse mix of high quality and liquid investment securities with a duration of 4.1 years at March 31, 2025. Approximately $1.4 billion of the Company's available for sale debt portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet either new loan demand or offset potential reductions in the Company's deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the FHLB and the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows:
(In thousands)
March 31, 2025 March 31, 2024 December 31, 2024
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings $ 686,733 $ 1,990,347 $ 840,771
FHLB borrowings and letters of credit 1,498,670 293,345 1,473,691
Securities sold under agreements to repurchase * 2,324,605 2,294,520 2,866,468
Other deposits and swaps 1,791,223 1,975,291 1,755,335
Total pledged securities 6,301,231 6,553,503 6,936,265
Unpledged and available for pledging 2,939,139 2,582,746 2,175,800
Ineligible for pledging 24,577 5,446 24,788
Total available for sale debt securities, at fair value $ 9,264,947 $ 9,141,695 $ 9,136,853
* Includes securities pledged for collateral swaps outstanding at each period end shown in the table.
The average loans to deposits ratio is a measure of a bank's liquidity, and the Company’s average loans to deposits ratio was 69.4% for the three months ended March 31, 2025. Core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts totaled $23.5 billion and represented 90.9% of the Company's total deposits at March 31, 2025. 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. Core deposits increased $588.3 million at March 31, 2025 compared to December 31, 2024, primarily due to increases in commercial and consumer deposits of $327.7 million and $149.6 million, respectively. While the Company considers core consumer and wealth management deposits less volatile, corporate deposits could decline if interest rates increase significantly, encouraging corporate customers to increase investing activities, or if the economy deteriorates and companies experience lower cash inflows, reducing deposit balances. If these corporate deposits decline, the Company's funding needs may be met by liquidity supplied by investment security maturities and pay downs expected to total $1.4 billion over the next year, as noted above. In addition, as shown in the table of collateral available for future advances below, the Company has borrowing capacity of $6.1 billion through advances from the FHLB and the Federal Reserve.
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The Company also holds securities sold under agreements to repurchase ("resale agreements") which are an additional source of liquidity. At March 31, 2025, the Company's resale agreements totaled $850.0 million and mature from 2028 through 2030. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled $875.2 million in fair value at March 31, 2025.
Certificates of deposit of $100,000 or greater totaled $1.4 billion at March 31, 2025. These deposits are normally considered more volatile and higher costing, and comprised 5.3% of total deposits at March 31, 2025.
(In thousands)
March 31, 2025 March 31, 2024 December 31, 2024
Core deposit base:
Non-interest bearing $ 7,518,243 $ 7,513,464 $ 8,150,669
Interest checking 8,247,769 6,811,384 7,301,288
Savings and money market 7,727,514 7,651,827 7,453,283
Total $ 23,493,526 $ 21,976,675 $ 22,905,240
During the third quarter of 2024, the Company issued $100.0 million of short-term brokered certificates of deposit, which all matured by December 31, 2024. The Company may occasionally issue brokered certificates of deposit to test the reliability of this potential funding source. While it is not clear how many brokered certificates of deposit the market would allow the Company to issue, the Company believes brokered certificates of deposits may be an additional, reliable source of liquidity during periods of stress in the banking industry.
Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. During 2025, the Company's outside borrowings have mainly been comprised of federal funds purchased and repurchase agreements, as follows:
(In thousands)
March 31, 2025 March 31, 2024 December 31, 2024
Borrowings:
Federal funds purchased $ 132,370 $ 264,470 $ 123,715
Securities sold under agreements to repurchase 2,267,666 2,241,106 2,803,043
Other debt 17,743 2,359 56
Total $ 2,417,779 $ 2,507,935 $ 2,926,814
Federal funds purchased, which totaled $132.4 million at March 31, 2025, are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. At March 31, 2025, the Company had approved lines of credit totaling $4.1 billion. Since these borrowings are unsecured and limited by market trading activity, their availability may be less certain than collateralized sources of borrowings. Retail repurchase agreements are offered to customers wishing to earn interest in highly liquid balances and are used by the Company as a funding source considered to be stable, but short-term in nature. Repurchase agreements are collateralized by securities in the Company's investment portfolio. Total repurchase agreements at March 31, 2025 were comprised of non-insured customer funds totaling $2.3 billion, and securities pledged as collateral for these retail agreements totaled $2.3 billion at March 31, 2025. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were no advances outstanding from the FHLB at March 31, 2025.
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The Company pledges certain assets, including loans and investment securities, to both the 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. Additionally, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The FRB also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at March 31, 2025.
March 31, 2025
(In thousands)
FHLB
Federal Reserve
Total
Total collateral value established by FHLB and FRB $ 3,345,701 $ 2,823,169 $ 6,168,870
Letters of credit issued (114,050) — (114,050)
Available for future advances $ 3,231,651 $ 2,823,169 $ 6,054,820
The Company receives outside ratings from both Standard & Poor’s and Moody’s on the consolidated company and its subsidiary bank, Commerce Bank. These ratings are as follows:
Standard & Poor’s Moody’s
Commerce Bancshares, Inc.
Issuer rating A-
Rating outlook Stable
Commerce Bank
Issuer rating A A3
Baseline credit assessment a2
Short-term rating A-1 P-1
Rating outlook Stable Stable
The Company considers these ratings to be indications of a sound capital base and strong liquidity and believes that these ratings would help ensure the ready marketability of its commercial paper, should the need arise. No commercial paper has been outstanding during the past ten years. The Company has no subordinated or hybrid debt instruments which would affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that through its Commercial Tradable Products division or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit, privately placed corporate notes or other forms of debt.
The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash equivalents and restricted cash of $102.1 million during the first three months of 2025, 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 $138.6 million and have historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, used cash of $373.4 million. Activity in the investment securities portfolio used cash of $225.0 million from purchases of securities under agreements to resell (net of repayments). This decrease in investing cash flows was further supported by a net increase in the loan portfolio, which used cash of $170.6 million. These uses of cash were partly balanced by sales, maturities, and pay downs (net of purchases) of investment securities, which provided cash of $34.6 million. Investing activities are somewhat unique to financial institutions in that, while large sums of cash flow are normally used to fund growth in investment securities, loans, or other bank assets, they are normally dependent on the financing activities described below. Financing activities provided cash of $132.7 million, largely resulting from a net increase of $734.8 million in deposits during the first three months of 2025. This increase was largely offset by federal funds purchases and securities sold under agreements to repurchase, which used cash of $526.7 million. Additionally, purchases of treasury stock and cash dividends (including distributions to non-controlling interest) used cash of $55.2 million and $37.9 million, respectively.
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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 March 31, 2025 and December 31, 2024, as shown in the following table.
(Dollars in thousands) March 31, 2025 December 31, 2024 Minimum Capital Requirement Capital Conservation Buffer Minimum Ratios Requirement including Capital Conservation Buffer
Minimum Ratios
for
Well-Capitalized
Banks *
Risk-adjusted assets $ 23,546,902 $ 23,500,396
Tier I common risk-based capital 3,969,930 3,926,446
Tier I risk-based capital 3,969,930 3,926,446
Total risk-based capital 4,155,288 4,108,270
Tier I common risk-based capital ratio 16.86 % 16.71 % 4.50 % 2.50 % 7.00 % 6.50 %
Tier I risk-based capital ratio 16.86 16.71 6.00 2.50 8.50 8.00
Total risk-based capital ratio 17.65 17.48 8.00 2.50 10.50 10.00
Tier I leverage ratio 12.29 12.26 4.00 N/A 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 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 adopted 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 was required 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, which was during the first quarter of 2025.
The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and periodically purchases stock in the open market. During the three months ended March 31, 2025, the Company purchased 854,806 shares at an average price of $64.56 in open market purchases and through stock-based compensation transactions. At March 31, 2025, 2,076,842 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 levels and alternative investment options. The Company paid a $.275 per share cash dividend on its common stock in the first quarter of 2025, which was a 7.0% increase compared to its 2024 quarterly dividend.
Material Cash Requirements, Commitments, Off-Balance Sheet Arrangements and Contingencies
The Company's material cash requirements include commitments for contractual obligations (both short-term and long-term), commitments to extend credit, and off-balance sheet arrangements. The Company's material cash requirements for the next 12 months are primarily to fund loan growth. Additionally, the Company will utilize cash to fund deposit maturities and withdrawals that may occur in the next 12 months. Other contractual obligations, purchase commitments, lease obligations, and unfunded commitments may require cash payments by the Company within the next 12 months, and these are further discussed in the Company's 2024 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.
In the normal course of business, various commitments and contingent liabilities arise that are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at March 31, 2025 totaled $15.9 billion (including $5.9 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. The contractual amount of standby and commercial letters of credit totaled $613.5 million and $2.0 million, respectively, at March 31, 2025. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The allowance for these commitments is recorded in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheets. At March 31, 2025, the liability for unfunded
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lending commitments totaled $18.3 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 three months of 2025, purchases and sales of tax credits amounted to $47.0 million and $49.8 million, respectively. Fees from sales of tax credits were $1.9 million for the three months ended March 31, 2025, compared to $2.1 million in the same period last year. At March 31, 2025, the Company expected to fund outstanding purchase commitments of $207.9 million during the remainder of 2025 and had purchase commitments of $334.0 million that it expects to fund from 2026 through 2029.
The Company continued to maintain a strong liquidity position throughout the first three months of 2025. Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations.
Segment Results
The table below is a summary of segment pre-tax income results for the first three months of 2025 and 2024.
(Dollars in thousands)
Consumer
Commercial
Wealth
Segment
Totals
Other/ Elimination
Consolidated Totals
Three Months Ended March 31, 2025
Net interest income $ 125,385 $ 133,115 $ 22,159 $ 280,659 $ (11,557) $ 269,102
Provision for credit losses (10,250) (532) — (10,782) (3,705) (14,487)
Non-interest income 23,987 69,599 64,039 157,625 1,324 158,949
Investment securities gains (losses), net — — — — (7,591) (7,591)
Non-interest expense (83,805) (103,244) (41,279) (228,328) (10,048) (238,376)
Income before income taxes $ 55,317 $ 98,938 $ 44,919 $ 199,174 $ (31,577) $ 167,597
Three Months Ended March 31, 2024
Net interest income $ 128,157 $ 126,687 $ 23,198 $ 278,042 $ (29,043) $ 248,999
Provision for credit losses (8,888) (41) 1 (8,928) 4,141 (4,787)
Non-interest income 24,335 63,802 58,399 146,536 2,312 148,848
Investment securities gains (losses), net — — — — (259) (259)
Non-interest expense (80,717) (100,356) (39,551) (220,624) (25,073) (245,697)
Income before income taxes $ 62,887 $ 90,092 $ 42,047 $ 195,026 $ (47,922) $ 147,104
Increase (decrease) in income before income taxes:
Amount $ (7,570) $ 8,846 $ 2,872 $ 4,148 $ 16,345 $ 20,493
Percent (12.0) % 9.8 % 6.8 % 2.1 % (34.1) % 13.9 %
Consumer
For the three months ended March 31, 2025, income before income taxes for the Consumer segment decreased $7.6 million, or 12.0%, compared to the first three months of 2024. The decrease in income before income taxes was mainly due to a decline in net interest income of $2.8 million, or 2.2%, and increases in non-interest expense of $3.1 million, or 3.8%, and the provision for credit losses of $1.4 million. Net interest income declined mainly due to a $3.8 million decrease in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios. This decrease was partly offset by lower deposit interest expense of $870 thousand. Non-interest income decreased $348 thousand, or 1.4%, mainly due to lower net bank card fees (mainly credit and debit card fees). Non-interest expense increased over the same period in the previous year mainly due to higher marketing expense, miscellaneous losses, supplies expense, and allocated support costs for marketing and retail administration and operations. These increases were partly offset by lower FDIC insurance expense and allocated support costs for online banking and information technology. The increase in the provision for credit losses over the first three months of 2024 was mainly due to higher auto and consumer credit card loan net charge-offs.
Commercial
For the three months ended March 31, 2025, income before income taxes for the Commercial segment increased $8.8 million, or 9.8%, compared to the same period in the previous year. T his increase was mainly due to higher net interest income and non-interest income, partly offset by higher non-interest expense and an increase in the provision for credit losses. Net interest income increased $6.4 million, or 5.1%, mainly due to higher net allocated funding credits of $8.0 million, coupled with
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lower interest expense on deposits and borrowings of $7.5 million and $2.1 million, respectively. These increases to income were partly offset by lower loan interest income of $11.7 million. Non-interest income increased $5.8 million, or 9.1%, over the previous year mainly due to growth in deposit account fees (mainly corporate cash management fees), capital market fees (mainly underwriting and trading securities) and higher gains on asset sales. These increases were partly offset by a decrease in net bank card fees (mainly corporate card fees). Non-interest expense increased $2.9 million, or 2.9%, mainly due to higher marketing expense, professional and other services expense and higher allocated support costs for bank operations and branch employee expense. The provision for credit losses increased $491 thousand over the same period last year, mainly due to higher business real estate loan net charge-offs.
Wealth
Wealth segment pre-tax profitability for the three months ended March 31, 2025 increased $2.9 million, or 6.8%, over the same period in the previous year. Net interest income decreased $1.0 million, or 4.5%, mainly due to a $2.9 million decrease in net allocated funding credits. This decrease was partly offset by a $1.1 million increase in loan interest income and an $822 thousand decrease deposit interest expense. Non-interest income increased $5.6 million, or 9.7%, over the prior year largely due to higher private client and institutional trust fees and brokerage fees (mainly advisory fees). Non-interest expense increased $1.7 million, or 4.4%, mainly due to higher salaries and benefits expense and marketing expense. The provision for credit losses increased $1 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 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 in this category was $16.3 million higher than in the same period last year. Unallocated securities losses were $7.6 million in the first three months of 2025 compared to losses of $259 thousand in 2024. Also, the unallocated provision for credit losses increased $7.8 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 segment s when incurred for management reporting purposes. The provision for credit losses on loans in the first three months of 2025 was $15.1 million, or $4.3 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 $6.9 million, or $1.9 million lower than net charge-offs, due to a decrease in the allowance for credit losses on loans. For th e three months ended March 31, 2025, the Company's provision on unfunded lending commitments was a benefit of $608 thousand. Additionally, net interest income increased $17.5 million, while non-interest expense decreased $15.0 million. These increases to pre-tax profitability were slightly offset by lower non-interest income of $988 thousand.
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Impact of Recently Issued Accounting Standards
Income Taxes The FASB issued ASU 2023-09, "Income Taxes (Topic 740) - Improvements to Income Tax Disclosures", in December 2023. The amendments in this Update require additional disclosures regarding the rate reconciliation and income taxes paid. This Update also removed certain existing disclosure requirements. This Update is effective for annual periods beginning January 1, 2025. Early adoption is permitted. The amendments in this Update should be applied on a prospective basis, though retrospective application is permitted. Other than the inclusion of additional disclosures, the adoption is not expected to have a significant effect on the Company's consolidated financial statements.
Income Statement Reporting The FASB issued ASU 2024-03, "Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses" in November 2024. The amendments in this Update require new disclosures providing further detail of a company's income statement expense items. This Update is effective for annual periods beginning January 1, 2027, and interim periods beginning January 1, 2028. Early adoption is permitted. The amendments in this Update should be applied on a prospective basis. Other than the inclusion of additional disclosures, the adoption is not expected to have a significant effect on the Company's consolidated financial statements.
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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Three Months Ended March 31, 2025 and 2024
First Quarter 2025
First Quarter 2024
(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)
$ 6,106,185 $ 86,564 5.75 % $ 5,873,525 $ 88,638 6.07 %
Real estate — construction and land 1,415,349 25,486 7.30 1,472,554 30,754 8.40
Real estate — business 3,667,833 53,203 5.88 3,727,643 58,029 6.26
Real estate — personal 3,045,876 32,145 4.28 3,031,193 29,775 3.95
Consumer 2,082,360 33,466 6.52 2,082,490 33,126 6.40
Revolving home equity 358,684 6,425 7.26 322,074 6,163 7.70
Consumer credit card 560,534 18,647 13.49 562,892 19,750 14.11
Overdrafts 5,860 — — 7,696 — —
Total loans 17,242,681 255,936 6.02 17,080,067 266,235 6.27
Loans held for sale 1,584 23 5.89 2,149 40 7.49
Investment securities:
U.S. government and federal agency obligations 2,586,944 26,063 4.09 851,656 4,402 2.08
Government-sponsored enterprise obligations 55,330 328 2.40 55,652 331 2.39
State and municipal obligations (A)
804,363 4,072 2.05 1,330,808 6,519 1.97
Mortgage-backed securities 4,788,102 24,615 2.08 5,902,328 32,088 2.19
Asset-backed securities 1,655,701 14,115 3.46 2,085,050 12,399 2.39
Other debt securities 258,136 1,715 2.69 503,204 2,410 1.93
Trading debt securities (A)
38,298 469 4.97 40,483 533 5.30
Equity securities (A)
57,028 1,128 8.02 12,768 814 25.64
Other securities (A)
233,461 4,519 7.85 221,695 7,189 13.04
Total investment securities 10,477,363 77,024 2.98 11,003,644 66,685 2.44
Federal funds sold 2,089 29 5.63 599 10 6.71
Securities purchased under agreements to resell 788,889 7,418 3.81 340,934 1,634 1.93
Interest earning deposits with banks 2,388,504 26,249 4.46 1,938,381 26,432 5.48
Total interest earning assets 30,901,110 366,679 4.81 30,365,774 361,036 4.78
Allowance for credit losses on loans (162,186) (161,891)
Unrealized gain (loss) on debt securities (935,054) (1,274,125)
Cash and due from banks 391,436 281,610
Premises and equipment, net 497,057 477,881
Other assets 809,803 956,225
Total assets $ 31,502,166 $ 30,645,474
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings $ 1,294,174 167 .05 $ 1,333,983 195 .06
Interest checking and money market 13,906,827 52,236 1.52 13,215,270 55,385 1.69
Certificates of deposit of less than $100,000 991,826 8,932 3.65 976,804 10,191 4.20
Certificates of deposit of $100,000 and over 1,363,655 13,319 3.96 1,595,310 18,096 4.56
Total interest bearing deposits 17,556,482 74,654 1.72 17,121,367 83,867 1.97
Borrowings:
Federal funds purchased $ 128,340 $ 1,384 4.37 328,216 $ 4,419 5.42
Securities sold under agreements to repurchase 2,723,227 19,224 2.86 2,511,959 21,438 3.43
Other borrowings (B)
616 1 .66 76 — —
Total borrowings 2,852,183 20,609 2.93 2,840,251 25,857 3.66
Total interest bearing liabilities 20,408,665 95,263 1.89 % 19,961,618 109,724 2.21 %
Non-interest bearing deposits 7,298,686 7,328,603
Other liabilities 421,370 410,310
Equity 3,373,445 2,944,943
Total liabilities and equity $ 31,502,166 $ 30,645,474
Net interest margin (FTE) $ 271,416 $ 251,312
Net yield on interest earning assets 3.56 % 3.33 %
(A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%.
(B) Interest expense capitalized on construction projects in 2024 is not deducted from the interest expense shown above. There was no interest expense capitalized in 2025.
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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.