COMMERCE BANCSHARES INC /MO/ - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | |||||
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | ||||
| SECURITIES EXCHANGE ACT OF 1934 | |||||
________________________________________________________
For the quarterly period ended March 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | ||||
| SECURITIES EXCHANGE ACT OF 1934 | |||||
____________________________________________________________
For the transition period from to
Commission File No. 001-36502
| COMMERCE BANCSHARES, INC. | ||||||||
| (Exact name of registrant as specified in its charter) | ||||||||
| Missouri | 43-0889454 | ||||||||||
| (State of Incorporation) | (IRS Employer Identification No.) | ||||||||||
| 1000 Walnut | |||||||||||
| Kansas City, | MO | 64106 | |||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(816) 234-2000
(Registrant’s telephone number, including area code)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of class | Trading symbol(s) | Name of exchange on which registered | ||||||
| $5 Par Value Common Stock | CBSH | NASDAQ Global Select Market | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of May 2, 2022, the registrant had outstanding 120,734,318 shares of its $5 par value common stock, registrant’s only class of common stock.
Commerce Bancshares, Inc. and Subsidiaries
Form 10-Q
| Page | |||||||||||
| INDEX | |||||||||||
Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021 | |||||||||||
Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021 (unaudited) | |||||||||||
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021 (unaudited) | |||||||||||
Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited) | |||||||||||
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (unaudited) | |||||||||||
2
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
| March 31, 2022 | December 31, 2021 | ||||||||||
| (Unaudited) | |||||||||||
| (In thousands) | |||||||||||
| ASSETS | |||||||||||
| Loans | $ | 15,459,014 | $ | 15,176,359 | |||||||
| Allowance for credit losses on loans | (134,710) | (150,044) | |||||||||
| Net loans | 15,324,304 | 15,026,315 | |||||||||
Loans held for sale (including $3,901,000 and $5,570,000 of residential mortgage loans carried at fair value at March 31, 2022 and December 31, 2021, respectively) | 8,908 | 8,615 | |||||||||
| Investment securities: | |||||||||||
Available for sale debt, at fair value (amortized cost of $15,425,954,000 and $14,419,133,000 at | |||||||||||
March 31, 2022 and December 31, 2021, respectively, and allowance for credit losses of $— | |||||||||||
at March 31, 2022 and December 31, 2021, respectively) | 14,780,494 | 14,450,027 | |||||||||
| Trading debt | 31,380 | 46,235 | |||||||||
| Equity | 9,284 | 9,202 | |||||||||
| Other | 199,576 | 194,047 | |||||||||
| Total investment securities | 15,020,734 | 14,699,511 | |||||||||
| Federal funds sold and short-term securities purchased under agreements to resell | — | 2,800 | |||||||||
| Securities purchased under agreements to resell | 1,825,000 | 1,625,000 | |||||||||
| Interest earning deposits with banks | 1,260,813 | 3,971,217 | |||||||||
| Cash and due from banks | 326,549 | 305,539 | |||||||||
| Premises and equipment – net | 394,028 | 388,738 | |||||||||
| Goodwill | 138,921 | 138,921 | |||||||||
| Other intangible assets – net | 15,885 | 15,570 | |||||||||
| Other assets | 671,651 | 506,862 | |||||||||
| Total assets | $ | 34,986,793 | $ | 36,689,088 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Deposits: | |||||||||||
| Non-interest bearing | $ | 11,428,372 | $ | 11,772,374 | |||||||
| Savings, interest checking and money market | 16,751,632 | 16,598,085 | |||||||||
| Certificates of deposit of less than $100,000 | 422,992 | 435,960 | |||||||||
| Certificates of deposit of $100,000 and over | 716,345 | 1,006,654 | |||||||||
| Total deposits | 29,319,341 | 29,813,073 | |||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 2,317,461 | 3,022,967 | |||||||||
| Other borrowings | 9,057 | 12,560 | |||||||||
| Other liabilities | 367,532 | 392,164 | |||||||||
| Total liabilities | 32,013,391 | 33,240,764 | |||||||||
| Commerce Bancshares, Inc. stockholders’ equity: | |||||||||||
Common stock, $5 par value | |||||||||||
Authorized 140,000,000; issued 122,160,705 shares | 610,804 | 610,804 | |||||||||
| Capital surplus | 2,678,025 | 2,689,894 | |||||||||
| Retained earnings | 178,504 | 92,493 | |||||||||
Treasury stock of 1,034,382 shares at March 31, 2022 | |||||||||||
and 476,392 shares at December 31, 2021, at cost | (72,293) | (32,973) | |||||||||
| Accumulated other comprehensive income | (434,400) | 77,080 | |||||||||
| Total Commerce Bancshares, Inc. stockholders' equity | 2,960,640 | 3,437,298 | |||||||||
| Non-controlling interest | 12,762 | 11,026 | |||||||||
| Total equity | 2,973,402 | 3,448,324 | |||||||||
| Total liabilities and equity | $ | 34,986,793 | $ | 36,689,088 | |||||||
See accompanying notes to consolidated financial statements.
3
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
| For the Three Months Ended March 31 | |||||||||||
| (In thousands, except per share data) | 2022 | 2021 | |||||||||
| (Unaudited) | |||||||||||
| INTEREST INCOME | |||||||||||
| Interest and fees on loans | $ | 132,075 | $ | 146,338 | |||||||
| Interest and fees on loans held for sale | 150 | 304 | |||||||||
| Interest on investment securities | 73,105 | 51,557 | |||||||||
| Interest on federal funds sold | 1 | — | |||||||||
| Interest on securities purchased under agreements to resell | 5,300 | 11,128 | |||||||||
| Interest on deposits with banks | 1,151 | 370 | |||||||||
| Total interest income | 211,782 | 209,697 | |||||||||
| INTEREST EXPENSE | |||||||||||
| Interest on deposits: | |||||||||||
| Savings, interest checking and money market | 1,760 | 2,103 | |||||||||
| Certificates of deposit of less than $100,000 | 139 | 473 | |||||||||
| Certificates of deposit of $100,000 and over | 427 | 1,062 | |||||||||
| Interest on federal funds purchased and securities sold under | |||||||||||
| agreements to repurchase | 689 | 312 | |||||||||
| Interest on other borrowings | (19) | (1) | |||||||||
| Total interest expense | 2,996 | 3,949 | |||||||||
| Net interest income | 208,786 | 205,748 | |||||||||
| Provision for credit losses | (9,858) | (6,232) | |||||||||
| Net interest income after credit losses | 218,644 | 211,980 | |||||||||
| NON-INTEREST INCOME | |||||||||||
| Bank card transaction fees | 42,045 | 37,695 | |||||||||
| Trust fees | 47,811 | 44,127 | |||||||||
| Deposit account charges and other fees | 22,307 | 22,575 | |||||||||
| Capital market fees | 4,125 | 4,981 | |||||||||
| Consumer brokerage services | 4,446 | 4,081 | |||||||||
| Loan fees and sales | 4,235 | 10,184 | |||||||||
| Other | 6,800 | 12,402 | |||||||||
| Total non-interest income | 131,769 | 136,045 | |||||||||
| INVESTMENT SECURITIES GAINS, NET | 7,163 | 9,853 | |||||||||
| NON-INTEREST EXPENSE | |||||||||||
| Salaries and employee benefits | 135,953 | 129,033 | |||||||||
| Net occupancy | 12,296 | 12,021 | |||||||||
| Equipment | 4,568 | 4,353 | |||||||||
| Supplies and communication | 4,713 | 4,125 | |||||||||
| Data processing and software | 27,016 | 25,463 | |||||||||
| Marketing | 6,344 | 5,158 | |||||||||
| Other | 14,758 | 12,420 | |||||||||
| Total non-interest expense | 205,648 | 192,573 | |||||||||
| Income before income taxes | 151,928 | 165,305 | |||||||||
| Less income taxes | 31,902 | 32,076 | |||||||||
| Net income | 120,026 | 133,229 | |||||||||
| Less non-controlling interest expense | 1,872 | 2,257 | |||||||||
| Net income attributable to Commerce Bancshares, Inc. | $ | 118,154 | $ | 130,972 | |||||||
| Net income per common share — basic | $ | .97 | $ | 1.06 | |||||||
| Net income per common share — diluted | $ | .97 | $ | 1.06 | |||||||
See accompanying notes to consolidated financial statements.
4
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| For the Three Months Ended March 31 | ||||||||
| (In thousands) | 2022 | 2021 | ||||||
| (Unaudited) | ||||||||
| Net income | $ | 120,026 | $ | 133,229 | ||||
| Other comprehensive income (loss): | ||||||||
| Net unrealized losses on available for sale debt securities | (507,265) | (158,676) | ||||||
Pension loss amortization | 323 | 437 | ||||||
| Unrealized losses on cash flow hedge derivatives | (4,538) | (4,386) | ||||||
| Other comprehensive income (loss) | (511,480) | (162,625) | ||||||
| Comprehensive income (loss) | (391,454) | (29,396) | ||||||
| Less non-controlling interest expense | 1,872 | 2,257 | ||||||
| Comprehensive income (loss) attributable to Commerce Bancshares, Inc. | $ | (393,326) | $ | (31,653) | ||||
See accompanying notes to consolidated financial statements.
5
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Three Months Ended March 31, 2022 and 2021
| Commerce Bancshares, Inc. Shareholders | |||||||||||||||||||||||
(In thousands, except per share data) | Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Non-Controlling Interest | Total | ||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
Balance December 31, 2021 | $ | 610,804 | $ | 2,689,894 | $ | 92,493 | $ | (32,973) | $ | 77,080 | $ | 11,026 | $ | 3,448,324 | |||||||||
| Net income | 118,154 | 1,872 | 120,026 | ||||||||||||||||||||
| Other comprehensive loss | (511,480) | (511,480) | |||||||||||||||||||||
| Distributions to non-controlling interest | (136) | (136) | |||||||||||||||||||||
| Purchases of treasury stock | (55,855) | (55,855) | |||||||||||||||||||||
| Issuance of stock under purchase and equity compensation plans | $ | (16,087) | 16,535 | 448 | |||||||||||||||||||
| Stock-based compensation | 4,218 | 4,218 | |||||||||||||||||||||
Cash dividends paid on common stock ($0.265 per share) | (32,143) | (32,143) | |||||||||||||||||||||
Balance March 31, 2022 | $ | 610,804 | $ | 2,678,025 | $ | 178,504 | $ | (72,293) | $ | (434,400) | $ | 12,762 | $ | 2,973,402 | |||||||||
Balance December 31, 2020 | $ | 589,352 | $ | 2,436,288 | $ | 73,000 | $ | (32,970) | $ | 331,377 | $ | 2,925 | $ | 3,399,972 | |||||||||
| Net income | 130,972 | 2,257 | 133,229 | ||||||||||||||||||||
| Other comprehensive loss | (162,625) | (162,625) | |||||||||||||||||||||
| Distributions to non-controlling interest | (387) | (387) | |||||||||||||||||||||
| Purchases of treasury stock | (25,923) | (25,923) | |||||||||||||||||||||
| Issuance of stock under purchase and equity compensation plans | (19,828) | 19,813 | (15) | ||||||||||||||||||||
| Stock-based compensation | 3,933 | 3,933 | |||||||||||||||||||||
Cash dividends paid on common stock ($.250 per share) | (30,799) | (30,799) | |||||||||||||||||||||
Balance March 31, 2021 | $ | 589,352 | $ | 2,420,393 | $ | 173,173 | $ | (39,080) | $ | 168,752 | $ | 4,795 | $ | 3,317,385 | |||||||||
See accompanying notes to consolidated financial statements.
6
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Three Months Ended March 31 | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| (Unaudited) | |||||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 120,026 | $ | 133,229 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Provision for credit losses | (9,858) | (6,232) | |||||||||
| Provision for depreciation and amortization | 11,811 | 11,379 | |||||||||
| Amortization of investment security premiums, net | 4,932 | 22,079 | |||||||||
| Investment securities gains, net (A) | (7,163) | (9,853) | |||||||||
| Net gains on sales of loans held for sale | (1,302) | (7,381) | |||||||||
| Originations of loans held for sale | (57,580) | (172,435) | |||||||||
| Proceeds from sales of loans held for sale | 57,789 | 184,155 | |||||||||
| Net decrease in trading debt securities, excluding unsettled transactions | 9,798 | 4,872 | |||||||||
| Stock-based compensation | 4,218 | 3,933 | |||||||||
| (Increase) decrease in interest receivable | (7,972) | 444 | |||||||||
| Increase (decrease) in interest payable | 273 | (1,804) | |||||||||
| Increase in income taxes payable | 28,657 | 28,105 | |||||||||
| Other changes, net | (29,115) | 11,178 | |||||||||
| Net cash provided by operating activities | 124,514 | 201,669 | |||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Distributions received from equity-method investment | 400 | — | |||||||||
| Proceeds from sales of investment securities (A) | 1,745 | 9,292 | |||||||||
| Proceeds from maturities/pay downs of investment securities (A) | 805,355 | 938,527 | |||||||||
| Purchases of investment securities (A) | (1,812,434) | (1,194,891) | |||||||||
| Net increase in loans | (287,328) | (72,497) | |||||||||
| Securities purchased under agreements to resell | (200,000) | — | |||||||||
| Purchases of premises and equipment | (15,597) | (10,730) | |||||||||
| Sales of premises and equipment | 175 | 2,568 | |||||||||
| Net cash used in investing activities | (1,507,684) | (327,731) | |||||||||
| FINANCING ACTIVITIES: | |||||||||||
| Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits | (208,358) | 585,579 | |||||||||
| Net decrease in certificates of deposit | (303,277) | (73,000) | |||||||||
| Net decrease in federal funds purchased and securities sold under agreements to repurchase | (705,506) | (160,273) | |||||||||
| Net increase (decrease) in other borrowings | (3,503) | 2,989 | |||||||||
| Purchases of treasury stock | (55,855) | (25,923) | |||||||||
| Issuance of stock under equity compensation plans | 448 | (15) | |||||||||
| Cash dividends paid on common stock | (32,143) | (30,799) | |||||||||
| Net cash provided by (used in) financing activities | (1,308,194) | 298,558 | |||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | (2,691,364) | 172,496 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 4,296,954 | 2,208,328 | |||||||||
Cash, cash equivalents and restricted cash at March 31 | $ | 1,605,590 | $ | 2,380,824 | |||||||
| Income tax payments, net | $ | 1,640 | $ | 2,510 | |||||||
| Interest paid on deposits and borrowings | $ | 2,723 | $ | 5,753 | |||||||
| Loans transferred to foreclosed real estate | $ | 25 | $ | 115 | |||||||
(A) Available for sale debt securities, equity securities, and other securities.
See accompanying notes to consolidated financial statements.
Restricted cash is comprised of cash collateral posted by the Company to secure interest rate swap agreements. This balance is included in other assets in the consolidated balance sheets and totaled $18.2 million and $24.5 million at March 31, 2022 and 2021, respectively.
7
Commerce Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 (Unaudited)
1. Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2021 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three month period ended March 31, 2022 are not necessarily indicative of results to be attained for the full year or any other interim period.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company's most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto.
2. Loans and Allowance for Credit Losses
Major classifications within the Company’s held for investment loan portfolio at March 31, 2022 and December 31, 2021 are as follows:
(In thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Commercial: | |||||||||||
| Business | $ | 5,508,508 | $ | 5,303,535 | |||||||
| Real estate – construction and land | 1,144,411 | 1,118,266 | |||||||||
| Real estate – business | 3,109,668 | 3,058,837 | |||||||||
| Personal Banking: | |||||||||||
| Real estate – personal | 2,820,076 | 2,805,401 | |||||||||
| Consumer | 2,053,160 | 2,032,225 | |||||||||
| Revolving home equity | 264,401 | 275,945 | |||||||||
| Consumer credit card | 544,579 | 575,410 | |||||||||
| Overdrafts | 14,211 | 6,740 | |||||||||
| Total loans | $ | 15,459,014 | $ | 15,176,359 | |||||||
Accrued interest receivable totaled $32.1 million and $25.9 million at March 31, 2022 and December 31, 2021, respectively, and was included within other assets on the consolidated balance sheets. For the three months ended March 31, 2022, the Company wrote-off accrued interest by reversing interest income of $29 thousand and $899 thousand in the Commercial and Personal Banking portfolios, respectively. Similarly, for the three months ended March 31, 2021, the Company wrote-off accrued interest of $125 thousand and $2.0 million in the Commercial and Personal Banking portfolios, respectively.
At March 31, 2022, loans of $3.2 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.3 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.
8
Allowance for credit losses
The allowance for credit losses is measured using an average historical loss model which incorporates relevant information about past events (including historical credit loss experience on loans with similar risk characteristics), current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily large loans on non-accrual status, are evaluated on an individual basis.
For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using the Company’s historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and outstanding loan balances during a lookback period. Lookback periods can be different based on the individual pool and represent management’s credit expectations for the pool of loans over the remaining contractual life. In certain loan pools, if the Company’s own historical loss rate is not reflective of the loss expectations, the historical loss rate is augmented by industry and peer data. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given a single path economic forecast of key macroeconomic variables including GDP, disposable income, various interest rates, unemployment rate, consumer price index (CPI) inflation rate, housing price index (HPI), commercial real estate price index (CREPI) and market volatility. The adjustments are based on results from various regression models projecting the impact of the macroeconomic variables to loss rates. The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method. The forecast adjusted loss rate is applied to the amortized cost of loans over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions (except for contractual extensions at the option of the customer), renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring will be executed. Credit cards and certain similar consumer lines of credit do not have stated maturities and therefore, for these loan classes, remaining contractual lives are determined by estimating future cash flows expected to be received from customers until payments have been fully allocated to outstanding balances. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.
9
Key model assumptions in the Company’s allowance for credit loss model include the economic forecast, the reasonable and supportable period, forecasted macro-economic variables, prepayment assumptions and qualitative factors applied for portfolio composition changes, underwriting practices, or significant unique events or conditions. The assumptions utilized in estimating the Company’s allowance for credit losses at March 31, 2022 and December 31, 2021 are discussed below.
| Key Assumption | March 31, 2022 | December 31, 2021 | ||||||
| Overall economic forecast | •Improving health situation supports positive economic momentum in the short term •Projects significant monetary policy tightening to rein in inflation •Projects continued high inflation •Uncertainties related to supply chain issues | •Continued recovery from the Global Coronavirus Recession (GCR) •Assumes improving health conditions •Assumes gradual easing of supply constraints •Continued uncertainty regarding the health crisis •Uncertainty regarding rising inflation | ||||||
| Reasonable and supportable period and related reversion period | •One year for commercial and personal banking loans •Reversion to historical average loss rates within two quarters using straight-line method | •One year for commercial and personal banking loans •Reversion to historical average loss rates within two quarters using straight-line method | ||||||
| Forecasted macro-economic variables | •Unemployment rate ranging from 3.6% to 3.4% during the supportable forecast period •Real GDP growth ranging from 2.6% to 3.7% •Prime rate from 4.0% to 5.2% | •Unemployment rate ranging from 4.1% to 3.7% during the supportable forecast period •Real GDP growth ranges from 5.0% to 3.4% •Prime rate of 3.25% through the second quarter of 2022, increasing to 3.5% by the end of 2022 | ||||||
| Prepayment assumptions | Commercial loans •5% for most loan pools Personal banking loans •Ranging from 28.3% to 16.5% for most loan pools •66.0% for consumer credit cards | Commercial loans •5% for most loan pools Personal banking loans •Ranging from 28.0% to 16.5% for most loan pools •64.1% for consumer credit cards | ||||||
| Qualitative factors | Added qualitative factors related to: •Certain portfolios sensitive to pandemic economic uncertainties •Changes in the composition of the loan portfolios •Uncertainty related to unusually high rate of inflation, geopolitical environment, and supply chain issues •Loans downgraded to special mention, substandard, or non-accrual status | Added net reserves using qualitative processes related to: •Loans originated in our expansion markets, loans that are designated as shared national credits, and certain portfolios sensitive to pandemic economic uncertainties •Changes in the composition of the loan portfolios •Loans downgraded to special mention, substandard, or non-accrual status | ||||||
The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans, however, the liability for unfunded lending commitments incorporates an assumption for the portion of unfunded commitments that are expected to be funded.
Sensitivity in the Allowance for Credit Loss model
The allowance for credit losses is an estimate that requires significant judgment including projections of the macro-economic environment. The forecasted macro-economic environment continuously changes which can cause fluctuations in estimated expected losses.
The current forecast projects a continued recovery of the COVID-19 related health situation, which is expected to create positive economic momentum. However, the higher inflation and Russia's invasion of Ukraine has created greater uncertainty in the forecast. The geopolitical environment, trends in health conditions, and ongoing supply constraints could significantly modify economic projections used in the estimation of the allowance for credit losses.
10
A summary of the activity in the allowance for credit losses on loans and the liability for unfunded lending commitments during the three months ended March 31, 2022 and 2021, respectively, follows:
For the Three Months Ended March 31, 2022 | |||||||||||
| (In thousands) | Commercial | Personal Banking | Total | ||||||||
| ALLOWANCE FOR CREDIT LOSSES ON LOANS | |||||||||||
| Balance at beginning of period | $ | 97,776 | $ | 52,268 | $ | 150,044 | |||||
| Provision for credit losses on loans | (2,879) | (7,807) | (10,686) | ||||||||
| Deductions: | |||||||||||
| Loans charged off | 177 | 7,285 | 7,462 | ||||||||
| Less recoveries on loans | 107 | 2,707 | 2,814 | ||||||||
| Net loan charge-offs (recoveries) | 70 | 4,578 | 4,648 | ||||||||
| Balance March 31, 2022 | $ | 94,827 | $ | 39,883 | $ | 134,710 | |||||
| LIABILITY FOR UNFUNDED LENDING COMMITMENTS | |||||||||||
| Balance at beginning of period | $ | 23,271 | $ | 933 | $ | 24,204 | |||||
| Provision for credit losses on unfunded lending commitments | 509 | 319 | 828 | ||||||||
| Balance March 31, 2022 | $ | 23,780 | $ | 1,252 | $ | 25,032 | |||||
| ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS | $ | 118,607 | $ | 41,135 | $ | 159,742 | |||||
For the Three Months Ended March 31, 2021 | |||||||||||
| (In thousands) | Commercial | Personal Banking | Total | ||||||||
| ALLOWANCE FOR CREDIT LOSSES ON LOANS | |||||||||||
| Balance at beginning of period | $ | 121,549 | $ | 99,285 | $ | 220,834 | |||||
| Provision for credit losses on loans | (1,909) | (8,446) | (10,355) | ||||||||
| Deductions: | |||||||||||
| Loans charged off | 232 | 12,709 | 12,941 | ||||||||
| Less recoveries on loans | 215 | 2,774 | 2,989 | ||||||||
| Net loan charge-offs | 17 | 9,935 | 9,952 | ||||||||
| Balance March 31, 2021 | $ | 119,623 | $ | 80,904 | $ | 200,527 | |||||
| LIABILITY FOR UNFUNDED LENDING COMMITMENTS | |||||||||||
| Balance at beginning of period | $ | 37,259 | $ | 1,048 | $ | 38,307 | |||||
| Provision for credit losses on unfunded lending commitments | 4,254 | (131) | 4,123 | ||||||||
| Balance March 31, 2021 | $ | 41,513 | $ | 917 | $ | 42,430 | |||||
| ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS | $ | 161,136 | $ | 81,821 | $ | 242,957 | |||||
11
Delinquent and non-accrual loans
The Company considers loans past due on the day following the contractual repayment date, if the contractual repayment was not received by the Company as of the end of the business day. The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at March 31, 2022 and December 31, 2021.
(In thousands) | Current or Less Than 30 Days Past Due | 30 – 89 Days Past Due | 90 Days Past Due and Still Accruing | Non-accrual | Total | ||||||||||||
| March 31, 2022 | |||||||||||||||||
| Commercial: | |||||||||||||||||
| Business | $ | 5,494,664 | $ | 6,747 | $ | 341 | $ | 6,756 | $ | 5,508,508 | |||||||
| Real estate – construction and land | 1,144,411 | — | — | — | 1,144,411 | ||||||||||||
| Real estate – business | 3,105,452 | 4,026 | — | 190 | 3,109,668 | ||||||||||||
| Personal Banking: | |||||||||||||||||
| Real estate – personal | 2,811,330 | 5,076 | 2,281 | 1,389 | 2,820,076 | ||||||||||||
| Consumer | 2,031,680 | 18,890 | 2,590 | — | 2,053,160 | ||||||||||||
| Revolving home equity | 262,799 | 748 | 854 | — | 264,401 | ||||||||||||
| Consumer credit card | 535,482 | 4,493 | 4,604 | — | 544,579 | ||||||||||||
| Overdrafts | 13,891 | 320 | — | — | 14,211 | ||||||||||||
| Total | $ | 15,399,709 | $ | 40,300 | $ | 10,670 | $ | 8,335 | $ | 15,459,014 | |||||||
| December 31, 2021 | |||||||||||||||||
| Commercial: | |||||||||||||||||
| Business | $ | 5,292,125 | $ | 3,621 | $ | 477 | $ | 7,312 | $ | 5,303,535 | |||||||
| Real estate – construction and land | 1,117,434 | 832 | — | — | 1,118,266 | ||||||||||||
| Real estate – business | 3,058,566 | 57 | — | 214 | 3,058,837 | ||||||||||||
| Personal Banking: | |||||||||||||||||
| Real estate – personal | 2,796,662 | 4,125 | 2,983 | 1,631 | 2,805,401 | ||||||||||||
| Consumer | 2,005,556 | 24,458 | 2,211 | — | 2,032,225 | ||||||||||||
| Revolving home equity | 274,372 | 772 | 801 | — | 275,945 | ||||||||||||
| Consumer credit card | 565,335 | 4,821 | 5,254 | — | 575,410 | ||||||||||||
| Overdrafts | 6,425 | 315 | — | — | 6,740 | ||||||||||||
| Total | $ | 15,116,475 | $ | 39,001 | $ | 11,726 | $ | 9,157 | $ | 15,176,359 | |||||||
At March 31, 2022, the Company had $4.9 million in non-accrual business loans that had no allowance for credit loss. At December 31, 2021, the Company had $5.3 million in non-accrual business loans that had no allowance for credit loss. The Company did not record any interest income on non-accrual loans during the three months ended March 31, 2022 and 2021, respectively.
Credit quality indicators
The following table provides information about the credit quality of the Commercial loan portfolio. The Company utilizes an internal risk rating system comprised of a series of grades to categorize loans according to perceived risk associated with the expectation of debt repayment based on borrower specific information including, but not limited to, current financial information, historical payment experience, industry information, collateral levels and collateral types. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. A loan is assigned the risk rating at origination and then monitored throughout the contractual term for possible risk rating changes. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.
All loans are analyzed for risk rating updates annually. For larger loans, rating assessments may be more frequent if relevant information is obtained earlier through debt covenant monitoring or overall relationship management. Smaller loans
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are monitored as identified by the loan officer based on the risk profile of the individual borrower or if the loan becomes past due related to credit issues. Loans rated Special Mention, Substandard or Non-accrual are subject to quarterly review and monitoring processes. In addition to the regular monitoring performed by the lending personnel and credit committees, loans are subject to review by a credit review department which verifies the appropriateness of the risk ratings for the loans chosen as part of its risk-based review plan.
The risk category of loans in the Commercial portfolio as of March 31, 2022 and December 31, 2021 are as follows:
| Term Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total | ||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Business | ||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||
| Pass | $ | 305,308 | $ | 1,246,520 | $ | 644,426 | $ | 533,462 | $ | 219,320 | $ | 368,615 | $ | 2,106,483 | $ | 5,424,134 | ||||||||||
| Special mention | 2,622 | 976 | 83 | 1,315 | 11,452 | 8,138 | 2,806 | 27,392 | ||||||||||||||||||
| Substandard | 2,437 | 1,230 | 1,110 | 7,172 | 4,530 | 10,503 | 23,244 | 50,226 | ||||||||||||||||||
| Non-accrual | 302 | 86 | — | — | 1,462 | 4,906 | — | 6,756 | ||||||||||||||||||
| Total Business: | $ | 310,669 | $ | 1,248,812 | $ | 645,619 | $ | 541,949 | $ | 236,764 | $ | 392,162 | $ | 2,132,533 | $ | 5,508,508 | ||||||||||
| Real estate-construction | ||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||
| Pass | $ | 155,429 | $ | 591,643 | $ | 249,882 | $ | 53,869 | $ | 1,236 | $ | 2,800 | $ | 13,968 | $ | 1,068,827 | ||||||||||
| Special mention | — | 19,474 | — | — | 976 | — | — | 20,450 | ||||||||||||||||||
| Substandard | — | 15,486 | 11,600 | — | 14,891 | 13,157 | — | 55,134 | ||||||||||||||||||
| Total Real estate-construction: | $ | 155,429 | $ | 626,603 | $ | 261,482 | $ | 53,869 | $ | 17,103 | $ | 15,957 | $ | 13,968 | $ | 1,144,411 | ||||||||||
| Real estate-business | ||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||
| Pass | $ | 232,411 | $ | 726,266 | $ | 687,933 | $ | 514,629 | $ | 206,324 | $ | 378,239 | $ | 83,578 | $ | 2,829,380 | ||||||||||
| Special mention | — | 3,537 | 30,657 | 8,995 | 34,319 | 2,345 | — | 79,853 | ||||||||||||||||||
| Substandard | 589 | 15,589 | 62,170 | 12,993 | 4,867 | 103,044 | 993 | 200,245 | ||||||||||||||||||
| Non-accrual | — | — | — | — | 173 | 17 | — | 190 | ||||||||||||||||||
| Total Real estate-business: | $ | 233,000 | $ | 745,392 | $ | 780,760 | $ | 536,617 | $ | 245,683 | $ | 483,645 | $ | 84,571 | $ | 3,109,668 | ||||||||||
| Commercial loans | ||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||
| Pass | $ | 693,148 | $ | 2,564,429 | $ | 1,582,241 | $ | 1,101,960 | $ | 426,880 | $ | 749,654 | $ | 2,204,029 | $ | 9,322,341 | ||||||||||
| Special mention | 2,622 | 23,987 | 30,740 | 10,310 | 46,747 | 10,483 | 2,806 | 127,695 | ||||||||||||||||||
| Substandard | 3,026 | 32,305 | 74,880 | 20,165 | 24,288 | 126,704 | 24,237 | 305,605 | ||||||||||||||||||
| Non-accrual | 302 | 86 | — | — | 1,635 | 4,923 | — | 6,946 | ||||||||||||||||||
| Total Commercial loans: | $ | 699,098 | $ | 2,620,807 | $ | 1,687,861 | $ | 1,132,435 | $ | 499,550 | $ | 891,764 | $ | 2,231,072 | $ | 9,762,587 | ||||||||||
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| Term Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost Basis | Total | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Business | ||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||
| Pass | $ | 1,473,869 | $ | 704,157 | $ | 554,759 | $ | 248,739 | $ | 159,238 | $ | 270,454 | $ | 1,795,073 | $ | 5,206,289 | ||||||||||
| Special mention | 1,785 | 126 | 17,576 | 12,050 | 1,490 | 3,232 | 16,545 | 52,804 | ||||||||||||||||||
| Substandard | 836 | 1,191 | 8,855 | 4,936 | 1 | 10,775 | 10,536 | 37,130 | ||||||||||||||||||
| Non-accrual | 430 | — | 1 | 1,549 | — | 5,332 | — | 7,312 | ||||||||||||||||||
| Total Business: | $ | 1,476,920 | $ | 705,474 | $ | 581,191 | $ | 267,274 | $ | 160,729 | $ | 289,793 | $ | 1,822,154 | $ | 5,303,535 | ||||||||||
| Real estate-construction | ||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||
| Pass | $ | 598,734 | $ | 346,507 | $ | 66,985 | $ | 2,110 | $ | 2,655 | $ | 2,252 | $ | 13,230 | $ | 1,032,473 | ||||||||||
| Special mention | 44,649 | — | — | 985 | — | — | — | 45,634 | ||||||||||||||||||
| Substandard | 485 | 11,620 | — | 14,896 | 13,158 | — | — | 40,159 | ||||||||||||||||||
| Total Real estate-construction: | $ | 643,868 | $ | 358,127 | $ | 66,985 | $ | 17,991 | $ | 15,813 | $ | 2,252 | $ | 13,230 | $ | 1,118,266 | ||||||||||
| Real estate- business | ||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||
| Pass | $ | 775,561 | $ | 712,173 | $ | 551,697 | $ | 230,138 | $ | 170,888 | $ | 254,489 | $ | 76,641 | $ | 2,771,587 | ||||||||||
| Special mention | 4,011 | 30,322 | 10,500 | 37,576 | 2,068 | 2,103 | 1 | 86,581 | ||||||||||||||||||
| Substandard | 17,079 | 62,939 | 12,930 | 2,326 | 58,934 | 45,265 | 982 | 200,455 | ||||||||||||||||||
| Non-accrual | — | — | — | 189 | — | 25 | — | 214 | ||||||||||||||||||
| Total Real-estate business: | $ | 796,651 | $ | 805,434 | $ | 575,127 | $ | 270,229 | $ | 231,890 | $ | 301,882 | $ | 77,624 | $ | 3,058,837 | ||||||||||
| Commercial loans | ||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||
| Pass | $ | 2,848,164 | $ | 1,762,837 | $ | 1,173,441 | $ | 480,987 | $ | 332,781 | $ | 527,195 | $ | 1,884,944 | $ | 9,010,349 | ||||||||||
| Special mention | 50,445 | 30,448 | 28,076 | 50,611 | 3,558 | 5,335 | 16,546 | 185,019 | ||||||||||||||||||
| Substandard | 18,400 | 75,750 | 21,785 | 22,158 | 72,093 | 56,040 | 11,518 | 277,744 | ||||||||||||||||||
| Non-accrual | 430 | — | 1 | 1,738 | — | 5,357 | — | 7,526 | ||||||||||||||||||
| Total Commercial loans: | $ | 2,917,439 | $ | 1,869,035 | $ | 1,223,303 | $ | 555,494 | $ | 408,432 | $ | 593,927 | $ | 1,913,008 | $ | 9,480,638 | ||||||||||
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The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided as of March 31, 2022 and December 31, 2021 below:
| Term Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total | ||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Real estate-personal | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | 144,994 | $ | 668,179 | $ | 853,063 | $ | 328,209 | $ | 150,144 | $ | 661,855 | $ | 9,962 | $ | 2,816,406 | ||||||||||
| Over 90 days past due | — | 192 | 962 | 126 | 114 | 887 | — | 2,281 | ||||||||||||||||||
| Non-accrual | — | — | — | 182 | 107 | 1,100 | — | 1,389 | ||||||||||||||||||
| Total Real estate-personal: | $ | 144,994 | $ | 668,371 | $ | 854,025 | $ | 328,517 | $ | 150,365 | $ | 663,842 | $ | 9,962 | $ | 2,820,076 | ||||||||||
| Consumer | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | 208,522 | $ | 504,841 | $ | 310,052 | $ | 165,881 | $ | 66,175 | $ | 102,869 | $ | 692,230 | $ | 2,050,570 | ||||||||||
| Over 90 days past due | — | 283 | 157 | 243 | 200 | 444 | 1,263 | 2,590 | ||||||||||||||||||
| Total Consumer: | $ | 208,522 | $ | 505,124 | $ | 310,209 | $ | 166,124 | $ | 66,375 | $ | 103,313 | $ | 693,493 | $ | 2,053,160 | ||||||||||
| Revolving home equity | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 263,547 | $ | 263,547 | ||||||||||
| Over 90 days past due | — | — | — | — | — | — | 854 | 854 | ||||||||||||||||||
| Total Revolving home equity: | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 264,401 | $ | 264,401 | ||||||||||
| Consumer credit card | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 539,975 | $ | 539,975 | ||||||||||
| Over 90 days past due | — | — | — | — | — | — | 4,604 | 4,604 | ||||||||||||||||||
| Total Consumer credit card: | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 544,579 | $ | 544,579 | ||||||||||
| Overdrafts | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | 14,211 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 14,211 | ||||||||||
| Total Overdrafts: | $ | 14,211 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 14,211 | ||||||||||
| Personal banking loans | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | 367,727 | $ | 1,173,020 | $ | 1,163,115 | $ | 494,090 | $ | 216,319 | $ | 764,724 | $ | 1,505,714 | $ | 5,684,709 | ||||||||||
| Over 90 days past due | — | 475 | 1,119 | 369 | 314 | 1,331 | 6,721 | 10,329 | ||||||||||||||||||
| Non-accrual | — | — | — | 182 | 107 | 1,100 | — | 1,389 | ||||||||||||||||||
| Total Personal banking loans: | $ | 367,727 | $ | 1,173,495 | $ | 1,164,234 | $ | 494,641 | $ | 216,740 | $ | 767,155 | $ | 1,512,435 | $ | 5,696,427 | ||||||||||
15
| Term Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost Basis | Total | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Real estate-personal | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | 690,058 | $ | 888,631 | $ | 354,292 | $ | 157,485 | $ | 149,391 | $ | 551,460 | $ | 9,470 | $ | 2,800,787 | ||||||||||
| Over 90 days past due | 133 | 1,150 | 298 | 124 | 97 | 1,181 | — | 2,983 | ||||||||||||||||||
| Non-accrual | 115 | — | 251 | 109 | — | 1,156 | — | 1,631 | ||||||||||||||||||
| Total Real estate-personal: | $ | 690,306 | $ | 889,781 | $ | 354,841 | $ | 157,718 | $ | 149,488 | $ | 553,797 | $ | 9,470 | $ | 2,805,401 | ||||||||||
| Consumer | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | 571,455 | $ | 348,774 | $ | 192,076 | $ | 79,887 | $ | 47,401 | $ | 78,088 | $ | 712,333 | $ | 2,030,014 | ||||||||||
| Over 90 days past due | 283 | 335 | 257 | 250 | 74 | 351 | 661 | 2,211 | ||||||||||||||||||
| Total Consumer: | $ | 571,738 | $ | 349,109 | $ | 192,333 | $ | 80,137 | $ | 47,475 | $ | 78,439 | $ | 712,994 | $ | 2,032,225 | ||||||||||
| Revolving home equity | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 275,144 | $ | 275,144 | ||||||||||
| Over 90 days past due | — | — | — | — | — | — | 801 | 801 | ||||||||||||||||||
| Total Revolving home equity: | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 275,945 | $ | 275,945 | ||||||||||
| Consumer credit card | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 570,156 | $ | 570,156 | ||||||||||
| Over 90 days past due | — | — | — | — | — | — | 5,254 | 5,254 | ||||||||||||||||||
| Total Consumer credit card: | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 575,410 | $ | 575,410 | ||||||||||
| Overdrafts | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | 6,740 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 6,740 | ||||||||||
| Total Overdrafts: | $ | 6,740 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 6,740 | ||||||||||
| Personal banking loans | ||||||||||||||||||||||||||
| Current to 90 days past due | $ | 1,268,253 | $ | 1,237,405 | $ | 546,368 | $ | 237,372 | $ | 196,792 | $ | 629,548 | $ | 1,567,103 | $ | 5,682,841 | ||||||||||
| Over 90 days past due | 416 | 1,485 | 555 | 374 | 171 | 1,532 | 6,716 | 11,249 | ||||||||||||||||||
| Non-accrual | 115 | — | 251 | 109 | — | 1,156 | — | 1,631 | ||||||||||||||||||
| Total Personal banking loans: | $ | 1,268,784 | $ | 1,238,890 | $ | 547,174 | $ | 237,855 | $ | 196,963 | $ | 632,236 | $ | 1,573,819 | $ | 5,695,721 | ||||||||||
Collateral-dependent loans
The Company's collateral-dependent loans are comprised of large loans on non-accrual status. The Company requires that collateral-dependent loans are either over-collateralized or carry collateral equal to the amortized cost of the loan. The following table presents the amortized cost basis of collateral-dependent loans as of March 31, 2022 and December 31, 2021.
| (In thousands) | Business Assets | Oil & Gas Assets | Total | ||||||||
| March 31, 2022 | |||||||||||
| Commercial: | |||||||||||
| Business | $ | 1,498 | $ | 2,401 | $ | 3,899 | |||||
| Total | $ | 1,498 | $ | 2,401 | $ | 3,899 | |||||
| December 31, 2021 | |||||||||||
| Commercial: | |||||||||||
| Business | $ | 1,604 | $ | 2,459 | $ | 4,063 | |||||
| Total | $ | 1,604 | $ | 2,459 | $ | 4,063 | |||||
Other Personal Banking loan information
As noted above, the credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above section on "Credit quality indicators." In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history and is considered supplementary information utilized by the Company, as management does not consider this information in evaluating the allowance for credit losses on loans. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain personal real estate loans for which FICO scores are not obtained because the loans generally pertain to commercial customer activities and are
16
often underwritten with other collateral considerations. These loans totaled $183.4 million at March 31, 2022 and $185.6 million at December 31, 2021. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $181.8 million at March 31, 2022 and $186.6 million at December 31, 2021. As the healthcare loans are guaranteed by the hospital, customer FICO scores are not obtained for these loans. The personal real estate loans and consumer loans excluded below totaled less than 7% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at March 31, 2022 and December 31, 2021 by FICO score.
| Personal Banking Loans | ||||||||||||||
| % of Loan Category | ||||||||||||||
| Real Estate - Personal | Consumer | Revolving Home Equity | Consumer Credit Card | |||||||||||
| March 31, 2022 | ||||||||||||||
| FICO score: | ||||||||||||||
| Under 600 | .9 | % | 1.9 | % | 0.9 | % | 3.4 | % | ||||||
| 600 - 659 | 2.5 | 3.9 | 2.6 | 11.3 | ||||||||||
| 660 - 719 | 7.2 | 13.5 | 10.1 | 31.0 | ||||||||||
| 720 - 779 | 26.6 | 24.9 | 21.7 | 28.0 | ||||||||||
| 780 and over | 62.8 | 55.8 | 64.7 | 26.3 | ||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| December 31, 2021 | ||||||||||||||
| FICO score: | ||||||||||||||
| Under 600 | 1.0 | % | 1.9 | % | 0.9 | % | 3.4 | % | ||||||
| 600 - 659 | 2.4 | 3.9 | 2.6 | 11.3 | ||||||||||
| 660 - 719 | 7.4 | 13.8 | 9.4 | 29.9 | ||||||||||
| 720 - 779 | 25.2 | 25.3 | 20.4 | 28.2 | ||||||||||
| 780 and over | 64.0 | 55.1 | 66.7 | 27.2 | ||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Troubled debt restructurings
Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected. Commercial performing restructured loans are primarily comprised of certain business, construction and business real estate loans classified as substandard but renewed at rates judged to be non-market. These loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card and other small consumer loans under various debt management and assistance programs. Modifications to these loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. Certain personal real estate, revolving home equity, and consumer loans were classified as consumer bankruptcy troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments. Other consumer loans classified as troubled debt restructurings consist of various other workout arrangements with consumer customers.
| (In thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Accruing restructured loans: | |||||||||||
Commercial | $ | 108,789 | $ | 46,867 | |||||||
Assistance programs | 5,865 | 6,146 | |||||||||
Other consumer | 4,681 | 4,787 | |||||||||
Non-accrual loans | 6,457 | 7,087 | |||||||||
Total troubled debt restructurings | $ | 125,792 | $ | 64,887 | |||||||
Section 4013 of the CARES Act was signed into law on March 27, 2020, and included a provision that short-term modifications are not troubled debt restructurings, if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to December 31, 2019. The Company elected such option under the CARES Act when determining if a customer’s modification is subject to troubled debt restructuring classification. The initial guidance issued under the CARES Act was due to expire on December 31, 2020. During January 2021, the Consolidated Appropriations Act, 2021 was enacted and extended through the end of 2021 the relief offered under the CARES Act related to the accounting and disclosure
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requirements for troubled debt restructurings as a result of COVID-19. The Company elected to extend its application of this guidance through December 31, 2021. During the period covered by the CARES Act, if it was deemed that the loan modification was not short-term, not COVID-19 related or the customer does not meet the criteria under the guidance to be scoped out of troubled debt restructuring classification, the Company evaluated the loan modifications under its existing framework and accounted for the modification as a troubled debt restructuring.
The table below shows the balance of troubled debt restructurings by loan classification at March 31, 2022, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.
| (In thousands) | March 31, 2022 | Balance 90 days past due at any time during previous 12 months | ||||||
| Commercial: | ||||||||
| Business | $ | 30,254 | $ | — | ||||
| Real estate - construction and land | 10,101 | — | ||||||
| Real estate - business | 73,804 | — | ||||||
| Personal Banking: | ||||||||
| Real estate - personal | 3,220 | 729 | ||||||
| Consumer | 20 | — | ||||||
| Revolving home equity | 2,637 | 282 | ||||||
| Consumer credit card | 5,756 | 518 | ||||||
| Total troubled debt restructurings | $ | 125,792 | $ | 1,529 | ||||
For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. However, the effects of modifications to loans under various debt management and assistance programs were estimated to decrease interest income by approximately $649 thousand on an annual, pre-tax basis, compared to amounts contractually owed. Other modifications to consumer loans mainly involve extensions and other small modifications that did not include the forgiveness of principal or interest.
The allowance for credit losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms. Performing commercial loans having no other concessions granted other than being renewed at non-market interest rates are judged to have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.
If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for credit losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing troubled debt restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for credit losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begin.
The Company had commitments of $17.7 million at March 31, 2022 to lend additional funds to borrowers with restructured loans. Additionally, the Company had commitments at March 31, 2022 of $24.0 million related to letters of credit with an internal risk rating below substandard.
Loans held for sale
The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 11. The loans are primarily sold to Federal Home Loan Mortgage Corporation
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(FHLMC) and Federal National Mortgage Association (FNMA). At March 31, 2022, the fair value of these loans was $3.9 million, and the unpaid principal balance was $3.9 million.
The Company also designates certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which at March 31, 2022 totaled $5.0 million.
At March 31, 2022, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing interest.
Foreclosed real estate/repossessed assets
The Company’s holdings of foreclosed real estate totaled $296 thousand and $115 thousand at March 31, 2022 and December 31, 2021, respectively. Personal property acquired in repossession, generally autos, totaled $1.3 million and $1.1 million at March 31, 2022 and December 31, 2021, respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.
3. Investment Securities
Investment securities consisted of the following at March 31, 2022 and December 31, 2021.
| (In thousands) | March 31, 2022 | December 31, 2021 | ||||||
| Available for sale debt securities | $ | 14,780,494 | $ | 14,450,027 | ||||
| Trading debt securities | 31,380 | 46,235 | ||||||
| Equity securities: | ||||||||
| Readily determinable fair value | 6,866 | 7,153 | ||||||
| No readily determinable fair value | 2,418 | 2,049 | ||||||
| Other: | ||||||||
| Federal Reserve Bank stock | 34,532 | 34,379 | ||||||
| Federal Home Loan Bank stock | 10,199 | 10,428 | ||||||
| Equity method investments | 1,434 | 1,834 | ||||||
| Private equity investments | 153,411 | 147,406 | ||||||
Total investment securities (1) | $ | 15,020,734 | $ | 14,699,511 | ||||
(1)Accrued interest receivable totaled $41.4 million and $39.5 million at March 31, 2022 and December 31, 2021, respectively, and was included within other assets on the consolidated balance sheets.
The Company has elected to measure equity securities with no readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. This portfolio includes the Company's holdings of Visa Class B shares, which have a carrying value of zero, as there have not been observable price changes in orderly transactions for identical or similar investments of the same issuer. During the three months ended March 31, 2022, the Company did not record any impairment or other adjustments to the carrying amount of its portfolio of equity securities with no readily determinable fair value.
Other investment securities include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, equity method investments, and investments in portfolio concerns held by the Company's private equity subsidiary. FRB stock and FHLB stock are held for debt and regulatory purposes. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the asset size of the borrowing bank and the level of borrowings from the FHLB. These holdings are carried at cost. Additionally, the Company's equity method investments are carried at cost, adjusted to reflect the Company's portion of income, loss, or dividends of the investee. These adjustments are included in non-interest income on the Company's consolidated statements of income. The Company's private equity investments are carried at estimated fair value.
The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in other comprehensive income (OCI). A summary of the available for sale debt securities by maturity groupings as of March 31, 2022 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as FHLMC, FNMA, and Government National Mortgage Association (GNMA), in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit
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cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.
| (In thousands) | Amortized Cost | Fair Value | ||||||
| U.S. government and federal agency obligations: | ||||||||
| Within 1 year | $ | 186,706 | $ | 189,347 | ||||
| After 1 but within 5 years | 746,460 | 746,770 | ||||||
| After 5 but within 10 years | 181,875 | 193,844 | ||||||
| Total U.S. government and federal agency obligations | 1,115,041 | 1,129,961 | ||||||
| Government-sponsored enterprise obligations: | ||||||||
| After 5 but within 10 years | 5,000 | 5,000 | ||||||
| After 10 years | 50,765 | 46,390 | ||||||
| Total government-sponsored enterprise obligations | 55,765 | 51,390 | ||||||
| State and municipal obligations: | ||||||||
| Within 1 year | 181,848 | 182,560 | ||||||
| After 1 but within 5 years | 735,420 | 730,637 | ||||||
| After 5 but within 10 years | 917,122 | 860,827 | ||||||
| After 10 years | 326,616 | 298,241 | ||||||
| Total state and municipal obligations | 2,161,006 | 2,072,265 | ||||||
| Mortgage and asset-backed securities: | ||||||||
| Agency mortgage-backed securities | 5,774,953 | 5,441,374 | ||||||
| Non-agency mortgage-backed securities | 1,525,223 | 1,435,363 | ||||||
| Asset-backed securities | 4,121,388 | 4,011,361 | ||||||
| Total mortgage and asset-backed securities | 11,421,564 | 10,888,098 | ||||||
| Other debt securities: | ||||||||
| Within 1 year | 121,215 | 121,629 | ||||||
| After 1 but within 5 years | 229,677 | 223,109 | ||||||
| After 5 but within 10 years | 312,426 | 285,620 | ||||||
| After 10 years | 9,260 | 8,422 | ||||||
| Total other debt securities | 672,578 | 638,780 | ||||||
| Total available for sale debt securities | $ | 15,425,954 | $ | 14,780,494 | ||||
Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $399.4 million, at fair value, at March 31, 2022. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. At maturity, the principal paid is the greater of an inflation-adjusted principal or the original principal.
Allowance for credit losses on available for sale debt securities
The Company’s model for establishing its allowance for credit losses uses cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Securities for which fair value is less than amortized cost are reviewed for impairment. Special emphasis is placed on securities whose credit rating has fallen below Baa3 (Moody's) or BBB- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price, or who have been identified based on management’s judgment. These securities are placed on a watch list and cash flow analyses are prepared on an individual security basis. Credit impairment is determined using input factors such as cash flow projections, contractual payments required, expected delinquency rates, credit support from other tranches, prepayment speeds, collateral loss severity rates (including loan to values), and various other information related to the underlying collateral. At March 31, 2022, the fair value of securities on this watch list was $13.1 million compared to $13.4 million at December 31, 2021.
Significant inputs to the cash flow model used at March 31, 2022 to quantify credit losses were primarily credit support agreements, as the securities on the Company's watch list at March 31, 2022 were securities backed by government-guaranteed student loans and are expected to perform as contractually required. As of March 31, 2022, the Company did not identify any securities for which a credit loss exists, and for the three months ended March 31, 2022 and 2021, the Company did not recognize a credit loss expense on any available for sale debt securities.
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The table below summarizes debt securities available for sale in an unrealized loss position, aggregated by length of loss period, for which an allowance for credit losses has not been recorded at March 31, 2022 and December 31, 2021. Unrealized losses on these available for sale securities have not been recognized into income because after review, the securities were deemed not to be impaired. The unrealized losses on these securities are primarily attributable to changes in interest rates and current market conditions. Additionally, management does not intend to sell the securities, and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery.
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||
(In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| U.S. government and federal agency obligations | $ | 390,451 | $ | 13,082 | $ | — | $ | — | $ | 390,451 | $ | 13,082 | ||||||||||||||
| Government-sponsored enterprise obligations | 29,665 | 1,281 | 16,725 | 3,094 | 46,390 | 4,375 | ||||||||||||||||||||
| State and municipal obligations | 1,204,526 | 80,379 | 136,076 | 15,435 | 1,340,602 | 95,814 | ||||||||||||||||||||
| Mortgage and asset-backed securities: | ||||||||||||||||||||||||||
| Agency mortgage-backed securities | 4,009,914 | 242,976 | 987,082 | 96,265 | 4,996,996 | 339,241 | ||||||||||||||||||||
| Non-agency mortgage-backed securities | 1,360,220 | 87,585 | 28,932 | 2,525 | 1,389,152 | 90,110 | ||||||||||||||||||||
| Asset-backed securities | 3,439,877 | 106,785 | 149,894 | 6,339 | 3,589,771 | 113,124 | ||||||||||||||||||||
| Total mortgage and asset-backed securities | 8,810,011 | 437,346 | 1,165,908 | 105,129 | 9,975,919 | 542,475 | ||||||||||||||||||||
| Other debt securities | 326,917 | 17,622 | 148,487 | 16,683 | 475,404 | 34,305 | ||||||||||||||||||||
| Total | $ | 10,761,570 | $ | 549,710 | $ | 1,467,196 | $ | 140,341 | $ | 12,228,766 | $ | 690,051 | ||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| U.S. government and federal agency obligations | $ | 296,492 | $ | 2,241 | $ | — | $ | — | $ | 296,492 | $ | 2,241 | ||||||||||||||
| Government-sponsored enterprise obligations | — | — | 18,899 | 919 | 18,899 | 919 | ||||||||||||||||||||
| State and municipal obligations | 876,691 | 15,874 | 32,684 | 1,049 | 909,375 | 16,923 | ||||||||||||||||||||
| Mortgage and asset-backed securities: | ||||||||||||||||||||||||||
| Agency mortgage-backed securities | 3,333,691 | 59,044 | 265,835 | 8,720 | 3,599,526 | 67,764 | ||||||||||||||||||||
| Non-agency mortgage-backed securities | 1,285,611 | 17,222 | 1,948 | 19 | 1,287,559 | 17,241 | ||||||||||||||||||||
| Asset-backed securities | 2,518,935 | 19,201 | 87,893 | 525 | 2,606,828 | 19,726 | ||||||||||||||||||||
| Total mortgage and asset-backed securities | 7,138,237 | 95,467 | 355,676 | 9,264 | 7,493,913 | 104,731 | ||||||||||||||||||||
| Other debt securities | 270,409 | 5,098 | 58,574 | 3,017 | 328,983 | 8,115 | ||||||||||||||||||||
| Total | $ | 8,581,829 | $ | 118,680 | $ | 465,833 | $ | 14,249 | $ | 9,047,662 | $ | 132,929 | ||||||||||||||
The entire available for sale debt portfolio included $12.2 billion of securities that were in a loss position at March 31, 2022, compared to $9.0 billion at December 31, 2021. The total amount of unrealized loss on these securities was $690.1 million at March 31, 2022, an increase of $557.1 million compared to the unrealized loss at December 31, 2021. Securities with significant unrealized losses are discussed in the "Allowance for credit losses on available for sale debt securities" section above.
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For debt securities classified as available for sale, the following table shows the amortized cost, fair value, and allowance for credit losses of securities available for sale at March 31, 2022 and December 31, 2021, and the corresponding amounts of gross unrealized gains and losses (pre-tax) in AOCI, by security type.
(In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Losses | Fair Value | ||||||||||||
| March 31, 2022 | |||||||||||||||||
| U.S. government and federal agency obligations | $ | 1,115,041 | $ | 28,002 | $ | (13,082) | $ | — | $ | 1,129,961 | |||||||
| Government-sponsored enterprise obligations | 55,765 | — | (4,375) | — | 51,390 | ||||||||||||
| State and municipal obligations | 2,161,006 | 7,073 | (95,814) | — | 2,072,265 | ||||||||||||
| Mortgage and asset-backed securities: | |||||||||||||||||
| Agency mortgage-backed securities | 5,774,953 | 5,662 | (339,241) | — | 5,441,374 | ||||||||||||
| Non-agency mortgage-backed securities | 1,525,223 | 250 | (90,110) | — | 1,435,363 | ||||||||||||
| Asset-backed securities | 4,121,388 | 3,097 | (113,124) | — | 4,011,361 | ||||||||||||
| Total mortgage and asset-backed securities | 11,421,564 | 9,009 | (542,475) | — | 10,888,098 | ||||||||||||
| Other debt securities | 672,578 | 507 | (34,305) | — | 638,780 | ||||||||||||
| Total | $ | 15,425,954 | $ | 44,591 | $ | (690,051) | $ | — | $ | 14,780,494 | |||||||
| December 31, 2021 | |||||||||||||||||
| U.S. government and federal agency obligations | $ | 1,035,477 | $ | 47,484 | $ | (2,241) | $ | — | $ | 1,080,720 | |||||||
| Government-sponsored enterprise obligations | 50,773 | 1,901 | (919) | — | 51,755 | ||||||||||||
| State and municipal obligations | 2,072,210 | 41,540 | (16,923) | — | 2,096,827 | ||||||||||||
| Mortgage and asset-backed securities: | |||||||||||||||||
| Agency mortgage-backed securities | 5,698,088 | 52,676 | (67,764) | — | 5,683,000 | ||||||||||||
| Non-agency mortgage-backed securities | 1,383,037 | 681 | (17,241) | — | 1,366,477 | ||||||||||||
| Asset-backed securities | 3,546,024 | 12,921 | (19,726) | — | 3,539,219 | ||||||||||||
| Total mortgage and asset-backed securities | 10,627,149 | 66,278 | (104,731) | — | 10,588,696 | ||||||||||||
| Other debt securities | 633,524 | 6,620 | (8,115) | — | 632,029 | ||||||||||||
| Total | $ | 14,419,133 | $ | 163,823 | $ | (132,929) | $ | — | $ | 14,450,027 | |||||||
The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.
| For the Three Months Ended March 31 | ||||||||
| (In thousands) | 2022 | 2021 | ||||||
Proceeds from sales of securities: | ||||||||
Other investments | $ | 1,745 | $ | 9,292 | ||||
Total proceeds | $ | 1,745 | $ | 9,292 | ||||
| Investment securities gains (losses), net: | ||||||||
Equity securities: | ||||||||
Fair value adjustments, net | $ | (287) | $ | (35) | ||||
Other: | ||||||||
Gains realized on sales | — | 1,523 | ||||||
| Fair value adjustments, net | 7,450 | 8,365 | ||||||
| Total investment securities gains, net | $ | 7,163 | $ | 9,853 | ||||
Net gains on investment securities for the three months ended March 31, 2022 were mainly comprised of net losses of $287 thousand on equity investments, offset by net gains in fair value of $7.5 million on private equity investments, due to fair value adjustments.
At March 31, 2022, securities totaling $5.2 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB, compared to $6.4 billion at December 31, 2021. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $201.0 million, while the remaining securities were pledged under agreements pursuant to which the secured
22
parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.
4. Goodwill and Other Intangible Assets
The following table presents information about the Company's intangible assets which have estimable useful lives.
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||
(In thousands) | Gross Carrying Amount | Accumulated Amortization | Valuation Allowance | Net Amount | Gross Carrying Amount | Accumulated Amortization | Valuation Allowance | Net Amount | |||||||||||||||||||||
| Amortizable intangible assets: | |||||||||||||||||||||||||||||
| Core deposit premium | $ | 31,270 | $ | (30,345) | $ | — | $ | 925 | $ | 31,270 | $ | (30,266) | $ | — | $ | 1,004 | |||||||||||||
| Mortgage servicing rights | 21,490 | (10,130) | — | 11,360 | 20,870 | (9,600) | (304) | 10,966 | |||||||||||||||||||||
| Total | $ | 52,760 | $ | (40,475) | $ | — | $ | 12,285 | $ | 52,140 | $ | (39,866) | $ | (304) | $ | 11,970 | |||||||||||||
Aggregate amortization expense on intangible assets was $609 thousand and $951 thousand for the three month periods ended March 31, 2022 and 2021. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of March 31, 2022. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.
| (In thousands) | |||||
| 2022 | $ | 1,785 | |||
| 2023 | 1,402 | ||||
| 2024 | 1,240 | ||||
| 2025 | 1,088 | ||||
| 2026 | 945 | ||||
Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2022 are as follows:
| (In thousands) | Goodwill | Easement | Core Deposit Premium | Mortgage Servicing Rights | ||||||||||
Balance January 1, 2022 | $ | 138,921 | $ | 3,600 | $ | 1,004 | $ | 10,966 | ||||||
| Originations, net of disposals | — | — | — | 620 | ||||||||||
| Amortization | — | — | (79) | (530) | ||||||||||
| Impairment recovery | — | — | — | 304 | ||||||||||
| Balance March 31, 2022 | $ | 138,921 | $ | 3,600 | $ | 925 | $ | 11,360 | ||||||
Goodwill allocated to the Company’s operating segments at March 31, 2022 and December 31, 2021 is shown below.
| (In thousands) | |||||
| Consumer segment | $ | 70,721 | |||
| Commercial segment | 67,454 | ||||
| Wealth segment | 746 | ||||
| Total goodwill | $ | 138,921 | |||
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5. Guarantees
The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured, and in the event of nonperformance by customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.
Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At March 31, 2022, that net liability was $4.2 million, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $502.1 million at March 31, 2022.
The Company periodically enters into credit risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral and at March 31, 2022, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 2 years to 15 years. At March 31, 2022, the fair value of the Company's guarantee liabilities for RPAs was $126 thousand, and the notional amount of the underlying swaps was $347.9 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default.
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6. Leases
The Company has net investments in direct financing and sales-type leases to commercial, industrial, and tax-exempt entities. These leases are included within business loans on the Company's consolidated balance sheets. The Company primarily leases various types of equipment, trucks and trailers, and office furniture and fixtures. Lease agreements may include options for the lessee to renew or purchase the leased equipment at the end of the lease term. The Company has elected to adopt the lease component expedient in which the lease and nonlease components are combined into the total lease receivable. The Company also leases office space to third parties, and these leases are classified as operating leases. The leases may include options to renew or expand the leased space, and currently the leases have remaining terms of 3 months to 6 years.
The following table provides the components of lease income.
| For the Three Months Ended March 31 | ||||||||
| (in thousands) | 2022 | 2021 | ||||||
| Direct financing and sales-type leases | $ | 5,247 | $ | 6,121 | ||||
Operating leases(a) | 2,184 | 2,074 | ||||||
| Total lease income | $ | 7,431 | $ | 8,195 | ||||
(a) Includes rent from Tower Properties Company, a related party, of $19 thousand for the three month periods ended March 31, 2022 and 2021.
7. Pension
The amount of net pension cost is shown in the table below:
| For the Three Months Ended March 31 | ||||||||
| (In thousands) | 2022 | 2021 | ||||||
| Service cost - benefits earned during the period | $ | 132 | $ | 95 | ||||
| Interest cost on projected benefit obligation | 665 | 556 | ||||||
| Expected return on plan assets | (1,126) | (1,124) | ||||||
| Amortization of prior service cost | (68) | (68) | ||||||
| Amortization of unrecognized net loss | 498 | 651 | ||||||
| Net periodic pension cost | $ | 101 | $ | 110 | ||||
All benefits accrued under the Company’s defined benefit pension plan have been frozen since January 1, 2011. During the first three months of 2022, the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets.
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8. Common Stock *
Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that pay nonforfeitable common stock dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 13.
| For the Three Months Ended March 31 | ||||||||
| (In thousands, except per share data) | 2022 | 2021 | ||||||
| Basic income per common share: | ||||||||
| Net income attributable to Commerce Bancshares, Inc. | $ | 118,154 | $ | 130,972 | ||||
| Less income allocated to nonvested restricted stock | 1,070 | 1,200 | ||||||
| Net income allocated to common stock | $ | 117,084 | $ | 129,772 | ||||
| Weighted average common shares outstanding | 120,324 | 122,073 | ||||||
| Basic income per common share | $ | .97 | $ | 1.06 | ||||
| Diluted income per common share: | ||||||||
| Net income attributable to Commerce Bancshares, Inc. | $ | 118,154 | $ | 130,972 | ||||
| Less income allocated to nonvested restricted stock | 1,068 | 1,198 | ||||||
| Net income allocated to common stock | $ | 117,086 | $ | 129,774 | ||||
| Weighted average common shares outstanding | 120,324 | 122,073 | ||||||
| Net effect of the assumed exercise of stock-based awards - based on the treasury stock method using the average market price for the respective periods | 292 | 329 | ||||||
| Weighted average diluted common shares outstanding | 120,616 | 122,402 | ||||||
| Diluted income per common share | $ | .97 | $ | 1.06 | ||||
Unexercised stock appreciation rights of 119 thousand and 54 thousand for the three month periods ended March 31, 2022 and 2021, respectively, were excluded from the computation of diluted income per common share because their inclusion would have been anti-dilutive.
* All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December 2021.
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9. Accumulated Other Comprehensive Income
The table below shows the activity and accumulated balances for components of other comprehensive income. Information about unrealized gains and losses on securities can be found in Note 3, and information about unrealized gains and losses on cash flow hedge derivatives is located in Note 11.
| Unrealized Gains (Losses) on Securities (1) | Pension Loss | Unrealized Gains (Losses) on Cash Flow Hedge Derivatives (2) | Total Accumulated Other Comprehensive Income (Loss) | |||||||||||
| (In thousands) | ||||||||||||||
Balance January 1, 2022 | $ | 23,174 | $ | (20,668) | $ | 74,574 | $ | 77,080 | ||||||
| Other comprehensive loss before reclassifications to current earnings | (676,353) | — | — | (676,353) | ||||||||||
| Amounts reclassified to current earnings from accumulated other comprehensive income | — | 430 | (6,050) | (5,620) | ||||||||||
| Current period other comprehensive income (loss), before tax | (676,353) | 430 | (6,050) | (681,973) | ||||||||||
| Income tax (expense) benefit | 169,088 | (107) | 1,512 | 170,493 | ||||||||||
| Current period other comprehensive income (loss), net of tax | (507,265) | 323 | (4,538) | (511,480) | ||||||||||
Balance March 31, 2022 | $ | (484,091) | $ | (20,345) | $ | 70,036 | $ | (434,400) | ||||||
Balance January 1, 2021 | $ | 263,801 | $ | (25,118) | $ | 92,694 | $ | 331,377 | ||||||
| Other comprehensive income (loss) before reclassifications to current earnings | (211,569) | — | — | (211,569) | ||||||||||
| Amounts reclassified to current earnings from accumulated other comprehensive income | — | 583 | (5,848) | (5,265) | ||||||||||
| Current period other comprehensive income (loss), before tax | (211,569) | 583 | (5,848) | (216,834) | ||||||||||
| Income tax (expense) benefit | 52,893 | (146) | 1,462 | 54,209 | ||||||||||
| Current period other comprehensive income (loss), net of tax | (158,676) | 437 | (4,386) | (162,625) | ||||||||||
Balance March 31, 2021 | $ | 105,125 | $ | (24,681) | $ | 88,308 | $ | 168,752 | ||||||
(1) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "investment securities gains (losses), net" in the consolidated statements of income.
(2) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "interest and fees on loans" in the consolidated statements of income.
10. Segments
The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial and Wealth. The Consumer segment consists of various consumer loan and deposit products offered through its retail branch network of approximately 150 locations. This segment also includes indirect and other consumer loan financing businesses, along with debit and credit card loan and fee businesses. Residential mortgage origination, sales and servicing functions are included in this Consumer segment, but residential mortgage loans retained by the Company are not considered part of this segment and are instead included in the Other/Elimination column. The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, and international services, along with business and governmental deposit products and commercial cash management services. This segment also includes both merchant and commercial bank card products as well as the Capital Markets Group, which sells fixed income securities and provides securities safekeeping and accounting services to its business and correspondent bank customers. The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management, and brokerage services. This segment also provides various loan and deposit related services to its private banking customers.
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The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues between the three segments. Management periodically makes changes to methods of assigning costs and income to its business segments to better reflect operating results. If appropriate, these changes are reflected in prior year information presented below.
(In thousands) | Consumer | Commercial | Wealth | Segment Totals | Other/Elimination | Consolidated Totals | ||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||
| Net interest income | $ | 79,896 | $ | 109,530 | $ | 18,868 | $ | 208,294 | $ | 492 | $ | 208,786 | ||||||||
| Provision for credit losses | (4,498) | (82) | (26) | (4,606) | 14,464 | 9,858 | ||||||||||||||
| Non-interest income | 28,354 | 53,651 | 53,206 | 135,211 | (3,442) | 131,769 | ||||||||||||||
| Investment securities gains, net | — | — | — | — | 7,163 | 7,163 | ||||||||||||||
| Non-interest expense | (72,994) | (89,524) | (36,286) | (198,804) | (6,844) | (205,648) | ||||||||||||||
| Income before income taxes | $ | 30,758 | $ | 73,575 | $ | 35,762 | $ | 140,095 | $ | 11,833 | $ | 151,928 | ||||||||
| Three Months Ended March 31, 2021 | ||||||||||||||||||||
| Net interest income | $ | 77,939 | $ | 110,565 | $ | 17,457 | $ | 205,961 | $ | (213) | $ | 205,748 | ||||||||
| Provision for credit losses | (9,901) | (27) | 5 | (9,923) | 16,155 | 6,232 | ||||||||||||||
| Non-interest income | 38,248 | 50,728 | 50,985 | 139,961 | (3,916) | 136,045 | ||||||||||||||
| Investment securities gains, net | — | — | — | — | 9,853 | 9,853 | ||||||||||||||
| Non-interest expense | (70,369) | (79,281) | (33,043) | (182,693) | (9,880) | (192,573) | ||||||||||||||
| Income before income taxes | $ | 35,917 | $ | 81,985 | $ | 35,404 | $ | 153,306 | $ | 11,999 | $ | 165,305 | ||||||||
The information presented above was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting procedures and methods, which have been developed to reflect the underlying economics of the businesses. The methodologies are applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided by) assets and liabilities based on their maturity, prepayment and/or repricing characteristics.
The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column include activity not related to the segments, such as that relating to administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. The provision for credit losses in this category contains the difference between net loan charge-offs assigned directly to the segments and the recorded provision for credit loss expense. Included in this category’s net interest income are earnings of the investment portfolio, which are not allocated to a segment.
The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities.
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11. Derivative Instruments
The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. At March 31, 2022, the Company’s derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings.
(In thousands) | March 31, 2022 | December 31, 2021 | ||||||
| Interest rate swaps | $ | 2,177,130 | $ | 2,229,419 | ||||
| Interest rate caps | 221,293 | 152,058 | ||||||
| Credit risk participation agreements | 475,944 | 485,633 | ||||||
| Foreign exchange contracts | 2,797 | 5,119 | ||||||
Mortgage loan commitments | 19,638 | 21,787 | ||||||
| Mortgage loan forward sale contracts | 638 | 1,165 | ||||||
| Forward TBA contracts | 18,500 | 21,000 | ||||||
| Total notional amount | $ | 2,915,940 | $ | 2,916,181 | ||||
The largest group of notional amounts relate to interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. The customers are engaged in a variety of businesses, including real estate, manufacturing, retail product distribution, education, and retirement communities. These interest rate swap contracts with customers are offset by matching interest rate swap contracts purchased by the Company from other financial institutions (dealers). Contracts with dealers that require central clearing are novated to a clearing agency who becomes the Company's counterparty. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings.
Many of the Company’s interest rate swap contracts with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions or instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.
During the year ended December 31, 2020, the Company monetized three interest rate floors that were previously classified as cash flow hedges with a combined notional balance of $1.5 billion and an asset fair value of $163.2 million. As of March 31, 2022, the total realized gains on the monetized cash flow hedges remaining in AOCI was $93.4 million (pre-tax), which will be reclassified into interest income over the next 4.7 years. The estimated amount of net gains related to the cash flow hedges remaining in AOCI at March 31, 2022 that is expected to be reclassified into income within the next 12 months is $24.4 million.
The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further discussed in Note 5 on Guarantees. In addition, the Company enters into foreign exchange contracts, which are mainly comprised of contracts to purchase or deliver foreign currencies for customers at specific future dates.
Under its program to sell residential mortgage loans in the secondary market, the Company designates certain newly-originated residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments and forward loan sale contracts. Changes in the fair values of the loan commitments and funded loans prior to sale that are due to changes in interest rates are economically hedged with forward contracts to sell residential mortgage-backed securities in the to-be-announced (TBA) market. These forward TBA contracts are also considered to be derivatives and are settled in cash at the security settlement date.
The fair values of the Company's derivative instruments, whose notional amounts are listed above, are shown in the table below. Information about the valuation methods used to determine fair value is provided in Note 17 on Fair Value Measurements in the 2021 Annual Report on Form 10-K.
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The Company's policy is to present its derivative assets and derivative liabilities on a gross basis in its consolidated balance sheets, and these are reported in other assets and other liabilities. Certain collateral posted to and from the Company's clearing counterparty has been applied to the fair values of the cleared swaps, such that at March 31, 2022 in the table below, the positive fair values of cleared swaps were reduced by $11.3 million and the negative fair values of cleared swaps were reduced by $5.5 million. At December 31, 2021, positive fair values of cleared swaps were reduced by $587 thousand and the negative fair values of cleared swaps were reduced by $29.7 million.
| Asset Derivatives | Liability Derivatives | ||||||||||||||||
| Mar. 31, 2022 | Dec. 31, 2021 | Mar. 31, 2022 | Dec. 31, 2021 | ||||||||||||||
(In thousands) | Fair Value | Fair Value | |||||||||||||||
| Derivative instruments: | |||||||||||||||||
| Interest rate swaps | $ | 11,236 | $ | 40,752 | $ | (17,075) | $ | (11,606) | |||||||||
| Interest rate caps | 1,137 | 147 | (1,137) | (147) | |||||||||||||
| Credit risk participation agreements | 68 | 84 | (126) | (277) | |||||||||||||
| Foreign exchange contracts | 28 | 77 | (11) | (45) | |||||||||||||
| Mortgage loan commitments | 302 | 764 | (23) | — | |||||||||||||
| Mortgage loan forward sale contracts | 4 | 5 | — | (1) | |||||||||||||
| Forward TBA contracts | 355 | 13 | (10) | (25) | |||||||||||||
| Total | $ | 13,130 | $ | 41,842 | $ | (18,382) | $ | (12,101) | |||||||||
The pre-tax effects of derivative instruments on the consolidated statements of income and consolidated statements of comprehensive income are shown in the tables below.
Amount of Gain or (Loss) Recognized in OCI | Location of Gain (Loss) Reclassified from AOCI into Income | Amount of Gain (Loss) Reclassified from AOCI into Income | ||||||||||||||||||||||||
| (In thousands) | Total | Included Component | Excluded Component | Total | Included Component | Excluded Component | ||||||||||||||||||||
| For the Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships: | ||||||||||||||||||||||||||
| Interest rate floors | $ | — | $ | — | $ | — | Interest and fees on loans | $ | (6,050) | $ | (7,566) | $ | 1,516 | |||||||||||||
| Total | $ | — | $ | — | $ | — | Total | $ | (6,050) | $ | (7,566) | $ | 1,516 | |||||||||||||
For the Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships: | ||||||||||||||||||||||||||
| Interest rate floors | $ | — | $ | — | $ | — | Interest and fees on loans | $ | (5,848) | $ | (7,364) | $ | 1,516 | |||||||||||||
| Total | $ | — | $ | — | $ | — | Total | $ | (5,848) | $ | (7,364) | $ | 1,516 | |||||||||||||
| Location of Gain or (Loss) Recognized in Consolidated Statements of Income | Amount of Gain or (Loss) Recognized in Income on Derivatives | ||||||||||
| For the Three Months Ended March 31 | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Derivative instruments: | |||||||||||
| Interest rate swaps | Other non-interest income | $ | 812 | $ | 1,075 | ||||||
| Interest rate caps | Other non-interest income | 16 | 15 | ||||||||
| Credit risk participation agreements | Other non-interest income | (10) | 365 | ||||||||
| Foreign exchange contracts | Other non-interest income | (14) | 96 | ||||||||
| Mortgage loan commitments | Loan fees and sales | (485) | (1,372) | ||||||||
| Mortgage loan forward sale contracts | Loan fees and sales | — | 39 | ||||||||
| Forward TBA contracts | Loan fees and sales | 1,243 | 2,906 | ||||||||
| Total | $ | 1,562 | $ | 3,124 | |||||||
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The following table shows the extent to which assets and liabilities relating to derivative instruments have been offset in the consolidated balance sheets. It also provides information about these instruments which are subject to an enforceable master netting arrangement, irrespective of whether they are offset, and the extent to which the instruments could potentially be offset. Also shown is collateral received or pledged in the form of other financial instruments, which is generally cash or marketable securities. The collateral amounts in this table are limited to the outstanding balances of the related asset or liability (after netting is applied); thus, amounts of excess collateral are not shown. Most of the derivatives in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.
While the Company is party to master netting arrangements with most of its swap derivative counterparties, the Company does not offset derivative assets and liabilities under these agreements on its consolidated balance sheets. Collateral exchanged between the Company and dealer bank counterparties is generally subject to thresholds and transfer minimums, and usually consists of marketable securities. By contract, these may be sold or re-pledged by the secured party until recalled at a subsequent valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash or securities to its clearing agent. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below.
| Gross Amounts Not Offset in the Balance Sheet | ||||||||||||||||||||
| (In thousands) | Gross Amount Recognized | Gross Amounts Offset in the Balance Sheet | Net Amounts Presented in the Balance Sheet | Financial Instruments Available for Offset | Collateral Received/ Pledged | Net Amount | ||||||||||||||
| March 31, 2022 | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
Derivatives subject to master netting agreements | $ | 12,805 | $ | — | $ | 12,805 | $ | (2,036) | $ | (1,298) | $ | 9,471 | ||||||||
Derivatives not subject to master netting agreements | 325 | — | 325 | |||||||||||||||||
| Total derivatives | $ | 13,130 | $ | — | $ | 13,130 | ||||||||||||||
| Liabilities: | ||||||||||||||||||||
Derivatives subject to master netting agreements | $ | 18,308 | $ | — | $ | 18,308 | $ | (2,036) | $ | (1,035) | $ | 15,237 | ||||||||
Derivatives not subject to master netting agreements | 74 | — | 74 | |||||||||||||||||
| Total derivatives | $ | 18,382 | $ | — | $ | 18,382 | ||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
Derivatives subject to master netting agreements | $ | 40,970 | $ | — | $ | 40,970 | $ | (347) | $ | — | $ | 40,623 | ||||||||
Derivatives not subject to master netting agreements | 872 | — | 872 | |||||||||||||||||
| Total derivatives | $ | 41,842 | $ | — | $ | 41,842 | ||||||||||||||
| Liabilities: | ||||||||||||||||||||
Derivatives subject to master netting agreements | $ | 12,019 | $ | — | $ | 12,019 | $ | (347) | $ | (10,146) | $ | 1,526 | ||||||||
Derivatives not subject to master netting agreements | 82 | — | 82 | |||||||||||||||||
| Total derivatives | $ | 12,101 | $ | — | $ | 12,101 | ||||||||||||||
12. Resale and Repurchase Agreements
The Company regularly enters into resale and repurchase agreement transactions with other financial institutions and with its own customers. Resale and repurchase agreements are agreements to purchase/sell securities subject to an obligation to resell/repurchase the same or similar securities. They are accounted for as secured lending and collateralized borrowing (e.g. financing transactions), not as true sales and purchases of the underlying collateral securities. Some of the resale and repurchase agreements were transacted under master netting arrangements that contain a conditional right of offset, such as
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close-out netting, upon default. The security collateral accepted or pledged in resale and repurchase agreements with other financial institutions may be sold or re-pledged by the secured party, but is usually delivered to and held by third party trustees. The Company generally retains custody of securities pledged for repurchase agreements with its customers.
The Company is party to agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase and resale agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the consolidated balance sheets, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $200.0 million at March 31, 2022 and $400.0 million at December 31, 2021.
The following table shows the extent to which resale agreement assets and repurchase agreement liabilities with the same counterparty have been offset on the consolidated balance sheets, in addition to the extent to which they could potentially be offset. Also shown is collateral received or pledged, which consists of marketable securities. The collateral amounts in the table are limited to the outstanding balances of the related asset or liability (after offsetting is applied); thus amounts of excess collateral are not shown.
| Gross Amounts Not Offset in the Balance Sheet | ||||||||||||||||||||
| (In thousands) | Gross Amount Recognized | Gross Amounts Offset in the Balance Sheet | Net Amounts Presented in the Balance Sheet | Financial Instruments Available for Offset | Securities Collateral Received/Pledged | Unsecured Amount | ||||||||||||||
| March 31, 2022 | ||||||||||||||||||||
Total resale agreements, subject to master netting arrangements | $ | 2,025,000 | $ | (200,000) | $ | 1,825,000 | $ | — | $ | (1,825,000) | $ | — | ||||||||
Total repurchase agreements, subject to master netting arrangements | 2,500,146 | (200,000) | 2,300,146 | — | (2,300,146) | — | ||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
Total resale agreements, subject to master netting arrangements | $ | 2,025,000 | $ | (400,000) | $ | 1,625,000 | $ | — | $ | (1,625,000) | $ | — | ||||||||
Total repurchase agreements, subject to master netting arrangements | 3,379,582 | (400,000) | 2,979,582 | — | (2,979,582) | — | ||||||||||||||
The table below shows the remaining contractual maturities of repurchase agreements outstanding at March 31, 2022 and December 31, 2021, in addition to the various types of marketable securities that have been pledged by the Company as collateral for these borrowings.
| Remaining Contractual Maturity of the Agreements | ||||||||||||||
| (In thousands) | Overnight and continuous | Up to 90 days | Greater than 90 days | Total | ||||||||||
| March 31, 2022 | ||||||||||||||
| Repurchase agreements, secured by: | ||||||||||||||
| U.S. government and federal agency obligations | $ | 353,708 | $ | 23,631 | $ | 6,258 | $ | 383,597 | ||||||
| Agency mortgage-backed securities | 1,572,433 | 1,207 | 209,245 | 1,782,885 | ||||||||||
| Non-agency mortgage-backed securities | 24,953 | — | — | 24,953 | ||||||||||
| Asset-backed securities | 290,783 | — | — | 290,783 | ||||||||||
| Other debt securities | 17,928 | — | — | 17,928 | ||||||||||
| Total repurchase agreements, gross amount recognized | $ | 2,259,805 | $ | 24,838 | $ | 215,503 | $ | 2,500,146 | ||||||
| December 31, 2021 | ||||||||||||||
| Repurchase agreements, secured by: | ||||||||||||||
| U.S. government and federal agency obligations | $ | 600,866 | $ | 33,373 | $ | 9,259 | $ | 643,498 | ||||||
| Agency mortgage-backed securities | 1,844,652 | 3,908 | 400,250 | 2,248,810 | ||||||||||
| Non-agency mortgage-backed securities | 32,299 | — | — | 32,299 | ||||||||||
| Asset-backed securities | 422,525 | — | — | 422,525 | ||||||||||
| Other debt securities | 32,450 | — | — | 32,450 | ||||||||||
| Total repurchase agreements, gross amount recognized | $ | 2,932,792 | $ | 37,281 | $ | 409,509 | $ | 3,379,582 | ||||||
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13. Stock-Based Compensation
The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights (SARs). Historically, most of the awards have been issued during the first quarter of each year. The stock-based compensation expense that has been charged against income was $4.2 million and $3.9 million in the three months ended March 31, 2022 and 2021, respectively.
Nonvested stock awards granted generally vest in 4 to 7 years and contain restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant. A summary of the status of the Company’s nonvested share awards as of March 31, 2022, and changes during the three month period then ended, is presented below.
| Shares | Weighted Average Grant Date Fair Value | |||||||
| Nonvested at January 1, 2022 | 1,120,491 | $55.58 | ||||||
| Granted | 225,152 | 70.92 | ||||||
| Vested | (238,899) | 47.60 | ||||||
| Forfeited | (3,088) | 55.13 | ||||||
| Nonvested at March 31, 2022 | 1,103,656 | $60.44 | ||||||
SARs are granted with exercise prices equal to the market price of the Company’s stock at the date of grant. SARs vest ratably over 4 years of continuous service and have contractual terms of 10 years. All SARs must be settled in stock under provisions of the plan. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs on date of grant. The current year per share average fair value and the model assumptions are shown in the table below.
| Weighted per share average fair value at grant date | $17.42 | ||||
| Assumptions: | |||||
Dividend yield | 1.5 | % | |||
Volatility | 28.4 | % | |||
Risk-free interest rate | 1.6 | % | |||
Expected term | 5.7 years | ||||
A summary of SAR activity during the first three months of 2022 is presented below.
(Dollars in thousands, except per share data) | Rights | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
| Outstanding at January 1, 2022 | 896,348 | $ | 46.21 | |||||||||||
| Granted | 96,318 | 70.64 | ||||||||||||
| Forfeited | (1,797) | 58.26 | ||||||||||||
| Expired | (257) | 57.18 | ||||||||||||
| Exercised | (23,137) | 44.54 | ||||||||||||
Outstanding at March 31, 2022 | 967,475 | $ | 48.65 | 6.0 years | $ | 22,190 | ||||||||
33
14. Revenue from Contracts with Customers
Revenue from contracts with customers is recognized to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For the three months ended March 31, 2022, approximately 61% of the Company’s total revenue was comprised of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services.
The following table disaggregates non-interest income subject to ASC 606 by major product line.
| Three Months Ended March 31 | ||||||||
| (In thousands) | 2022 | 2021 | ||||||
| Bank card transaction fees | $ | 42,045 | $ | 37,695 | ||||
| Trust fees | 47,811 | 44,127 | ||||||
| Deposit account charges and other fees | 22,307 | 22,575 | ||||||
| Consumer brokerage services | 4,446 | 4,081 | ||||||
| Other non-interest income | 4,495 | 7,696 | ||||||
| Total non-interest income from contracts with customers | 121,104 | 116,174 | ||||||
Other non-interest income (1) | 10,665 | 19,871 | ||||||
| Total non-interest income | $ | 131,769 | $ | 136,045 | ||||
(1) This revenue is not within the scope of ASC 606, and includes fees relating to capital market activities, loan fees and sales, derivative instruments, standby letters of credit and various other transactions.
For bank card transaction fees, the majority of debit and credit card fees are earned in the Consumer segment, while corporate card and merchant fees are earned in the Commercial segment. The Consumer and Commercial segments contribute approximately 39% and 60%, respectively, of the Company's deposit account charge revenue. All trust fees and consumer brokerage services income are earned in the Wealth segment.
The following table presents the opening and closing receivable balances for the three month periods ended March 31, 2022 and 2021 for the Company’s significant revenue categories subject to ASC 606.
| (In thousands) | March 31, 2022 | December 31, 2021 | March 31, 2021 | December 31, 2020 | ||||||||||
| Bank card transaction fees | $ | 14,171 | $ | 16,424 | $ | 12,437 | $ | 14,199 | ||||||
| Trust fees | 2,094 | 2,222 | 2,017 | 2,071 | ||||||||||
| Deposit account charges and other fees | 5,452 | 6,702 | 5,281 | 6,933 | ||||||||||
| Consumer brokerage services | 324 | 391 | 323 | 432 | ||||||||||
For these revenue categories, none of the transaction price has been allocated to performance obligations that are unsatisfied as of the end of a reporting period.
34
15. Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale debt securities, equity securities, trading debt securities, certain investments relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or fair value accounting or write-downs of individual assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
•Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
•Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).
•Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.
The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value Measurements note in the Company's 2021 Annual Report on Form 10-K. There have been no significant changes in these methodologies since then.
35
Instruments Measured at Fair Value on a Recurring Basis
The table below presents the March 31, 2022 and December 31, 2021 carrying values of assets and liabilities measured at fair value on a recurring basis. There were no transfers among levels during the first three months of 2022 or the year ended December 31, 2021.
| Fair Value Measurements Using | ||||||||||||||
| (In thousands) | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
| March 31, 2022 | ||||||||||||||
| Assets: | ||||||||||||||
| Residential mortgage loans held for sale | $ | 3,901 | $ | — | $ | 3,901 | $ | — | ||||||
| Available for sale debt securities: | ||||||||||||||
| U.S. government and federal agency obligations | 1,129,961 | 1,129,961 | — | — | ||||||||||
| Government-sponsored enterprise obligations | 51,390 | — | 51,390 | — | ||||||||||
| State and municipal obligations | 2,072,265 | — | 2,070,363 | 1,902 | ||||||||||
| Agency mortgage-backed securities | 5,441,374 | — | 5,441,374 | — | ||||||||||
| Non-agency mortgage-backed securities | 1,435,363 | — | 1,435,363 | — | ||||||||||
| Asset-backed securities | 4,011,361 | — | 4,011,361 | — | ||||||||||
| Other debt securities | 638,780 | — | 638,780 | — | ||||||||||
| Trading debt securities | 31,380 | — | 31,380 | — | ||||||||||
| Equity securities | 6,866 | 6,866 | — | — | ||||||||||
| Private equity investments | 153,411 | — | — | 153,411 | ||||||||||
| Derivatives * | 13,130 | — | 12,760 | 370 | ||||||||||
| Assets held in trust for deferred compensation plan | 20,403 | 20,403 | — | — | ||||||||||
| Total assets | 15,009,585 | 1,157,230 | 13,696,672 | 155,683 | ||||||||||
| Liabilities: | ||||||||||||||
Derivatives * | 18,382 | — | 18,233 | 149 | ||||||||||
Liabilities held in trust for deferred compensation plan | 20,403 | 20,403 | — | — | ||||||||||
| Total liabilities | $ | 38,785 | $ | 20,403 | $ | 18,233 | $ | 149 | ||||||
| December 31, 2021 | ||||||||||||||
| Assets: | ||||||||||||||
| Residential mortgage loans held for sale | $ | 5,570 | $ | — | $ | 5,570 | $ | — | ||||||
| Available for sale debt securities: | ||||||||||||||
| U.S. government and federal agency obligations | 1,080,720 | 1,080,720 | — | — | ||||||||||
| Government-sponsored enterprise obligations | 51,755 | — | 51,755 | — | ||||||||||
| State and municipal obligations | 2,096,827 | — | 2,094,843 | 1,984 | ||||||||||
| Agency mortgage-backed securities | 5,683,000 | — | 5,683,000 | — | ||||||||||
| Non-agency mortgage-backed securities | 1,366,477 | — | 1,366,477 | — | ||||||||||
| Asset-backed securities | 3,539,219 | — | 3,539,219 | — | ||||||||||
| Other debt securities | 632,029 | — | 632,029 | — | ||||||||||
| Trading debt securities | 46,235 | — | 46,235 | — | ||||||||||
| Equity securities | 7,153 | 7,153 | — | — | ||||||||||
| Private equity investments | 147,406 | — | — | 147,406 | ||||||||||
| Derivatives * | 41,842 | — | 40,994 | 848 | ||||||||||
| Assets held in trust for deferred compensation plan | 21,794 | 21,794 | — | — | ||||||||||
| Total assets | 14,720,027 | 1,109,667 | 13,460,122 | 150,238 | ||||||||||
| Liabilities: | ||||||||||||||
Derivatives * | 12,101 | — | 11,824 | 277 | ||||||||||
Liabilities held in trust for deferred compensation plan | 21,794 | 21,794 | — | — | ||||||||||
| Total liabilities | $ | 33,895 | $ | 21,794 | $ | 11,824 | $ | 277 | ||||||
* The fair value of each class of derivative is shown in Note 11.
36
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||
(In thousands) | State and Municipal Obligations | Private Equity Investments | Derivatives | Total | ||||||||||
| For the three months ended March 31, 2022 | ||||||||||||||
Balance January 1, 2022 | $ | 1,984 | $ | 147,406 | $ | 571 | $ | 149,961 | ||||||
| Total gains or losses (realized/unrealized): | ||||||||||||||
| Included in earnings | — | 7,450 | (495) | 6,955 | ||||||||||
| Included in other comprehensive income * | (83) | — | — | (83) | ||||||||||
| Discount accretion | 1 | — | — | 1 | ||||||||||
| Purchases of private equity investments | — | 300 | — | 300 | ||||||||||
| Sale/pay down of private equity investments | — | (1,745) | — | (1,745) | ||||||||||
| Purchase of risk participation agreement | — | — | 145 | 145 | ||||||||||
| Balance March 31, 2022 | $ | 1,902 | $ | 153,411 | $ | 221 | $ | 155,534 | ||||||
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2022 | $ | — | $ | 7,450 | $ | 267 | $ | 7,717 | ||||||
*Total gains or losses for the three months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2022 | $ | (83) | $ | — | $ | — | $ | (83) | ||||||
| For the three months ended March 31, 2021 | ||||||||||||||
Balance January 1, 2021 | $ | 7,968 | $ | 94,368 | $ | 2,741 | $ | 105,077 | ||||||
| Total gains or losses (realized/unrealized): | ||||||||||||||
| Included in earnings | — | 8,365 | (1,007) | 7,358 | ||||||||||
| Included in other comprehensive income * | (1) | — | — | (1) | ||||||||||
| Discount accretion | 3 | — | — | 3 | ||||||||||
| Sale/pay down of private equity investments | — | (8,476) | — | (8,476) | ||||||||||
| Sale of risk participation agreement | — | — | (98) | (98) | ||||||||||
| Balance March 31, 2021 | $ | 7,970 | $ | 94,257 | $ | 1,636 | $ | 103,863 | ||||||
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2021 | $ | — | $ | 8,365 | $ | 2,050 | $ | 10,415 | ||||||
*Total gains or losses for the three months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2021 | $ | (1) | $ | — | $ | — | $ | (1) | ||||||
* Included in "net unrealized gains (losses) on other securities" in the consolidated statements of comprehensive income.
Gains and losses included in earnings for the Level 3 assets and liabilities in the previous table are reported in the following line items in the consolidated statements of income:
| (In thousands) | Loan Fees and Sales | Other Non-Interest Income | Investment Securities Gains (Losses), Net | Total | ||||||||||
For the three months ended March 31, 2022 | ||||||||||||||
| Total gains or losses included in earnings | $ | (485) | $ | (10) | $ | 7,450 | $ | 6,955 | ||||||
Change in unrealized gains or losses relating to assets still held at March 31, 2022 | $ | 279 | $ | (12) | $ | 7,450 | $ | 7,717 | ||||||
For the three months ended March 31, 2021 | ||||||||||||||
| Total gains or losses included in earnings | $ | (1,372) | $ | 365 | $ | 8,365 | $ | 7,358 | ||||||
Change in unrealized gains or losses relating to assets still held at March 31, 2021 | $ | 1,855 | $ | 195 | $ | 8,365 | $ | 10,415 | ||||||
Level 3 Inputs
The Company's significant Level 3 measurements, which employ unobservable inputs that are readily quantifiable, pertain to auction rate securities (ARS), investments in portfolio concerns held by the Company's private equity subsidiaries, and held for sale residential mortgage loan commitments. ARS are included in state and municipal securities and totaled $1.9 million at March 31, 2022, while private equity investments, included in other securities, totaled $153.4 million.
37
Information about these inputs is presented in the table below.
| Quantitative Information about Level 3 Fair Value Measurements | Weighted | ||||||||||||||||||||||
| Valuation Technique | Unobservable Input | Range | Average* | ||||||||||||||||||||
| Auction rate securities | Discounted cash flow | Estimated market recovery period | 5 years | 5 years | |||||||||||||||||||
| Estimated market rate | 2.5% | - | 3.0% | 2.8% | |||||||||||||||||||
| Private equity investments | Market comparable companies | EBITDA multiple | 4.0 | - | 6.0 | 5.4 | |||||||||||||||||
| Mortgage loan commitments | Discounted cash flow | Probability of funding | 68.2% | - | 100.0% | 90.2% | |||||||||||||||||
| Embedded servicing value | —% | - | 1.4% | 1.1% | |||||||||||||||||||
* Unobservable inputs were weighted by the relative fair value of the instruments.
Instruments Measured at Fair Value on a Nonrecurring Basis
For assets measured at fair value on a nonrecurring basis during the first three months of 2022 and 2021, and still held as of March 31, 2022 and 2021, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation inputs used to determine each adjustment, and the carrying value of the related individual assets or portfolios at March 31, 2022 and 2021.
| Fair Value Measurements Using | |||||||||||||||||
| (In thousands) | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Gains (Losses) Recognized During the Three Months Ended March 31 | ||||||||||||
| March 31, 2022 | |||||||||||||||||
| Mortgage servicing rights | 11,360 | — | — | 11,360 | 304 | ||||||||||||
| Long-lived assets | 497 | — | — | 497 | (965) | ||||||||||||
| March 31, 2021 | |||||||||||||||||
| Collateral dependent loans | $ | 11,233 | $ | — | $ | — | $ | 11,233 | $ | (2,926) | |||||||
| Mortgage servicing rights | 8,234 | — | — | 8,234 | 1,055 | ||||||||||||
The Company's significant Level 3 measurements that are measured on a nonrecurring basis pertain to the Company's mortgage servicing rights retained on certain fixed rate personal real estate loan originations. Mortgage servicing rights are included in other intangible assets-net on the consolidated balance sheets, and information about these inputs is presented in the table below.
| Quantitative Information about Level 3 Fair Value Measurements | Weighted | ||||||||||||||||||||||
| Valuation Technique | Unobservable Input | Range | Average* | ||||||||||||||||||||
| Mortgage servicing rights | Discounted cash flow | Discount rate | 9.01 | % | - | 9.34 | % | 9.12 | % | ||||||||||||||
| Prepayment speeds (CPR)* | 6.22 | % | - | 9.41 | % | 6.65 | % | ||||||||||||||||
| Loan servicing costs - annually per loan | |||||||||||||||||||||||
| Performing loans | $ | 70 | - | $ | 72 | $ | 71 | ||||||||||||||||
| Delinquent loans | $ | 200 | - | $ | 750 | ||||||||||||||||||
| Loans in foreclosure | $ | 1,000 | |||||||||||||||||||||
*Ranges and weighted averages based on interest rate tranches.
The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are updated periodically for changes in market conditions. Actual rates may differ from our estimates. Increases in prepayment speed and discount rates negatively impact the fair value of our mortgage servicing rights.
38
16. Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as follows at March 31, 2022 and December 31, 2021:
| Carrying Amount | Estimated Fair Value at March 31, 2022 | |||||||||||||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial Assets | ||||||||||||||||||||
| Loans: | ||||||||||||||||||||
| Business | $ | 5,508,508 | $ | — | $ | — | $ | 5,406,516 | $ | 5,406,516 | ||||||||||
Real estate - construction and land | 1,144,411 | — | — | 1,129,894 | 1,129,894 | |||||||||||||||
Real estate - business | 3,109,668 | — | — | 3,059,118 | 3,059,118 | |||||||||||||||
Real estate - personal | 2,820,076 | — | — | 2,777,860 | 2,777,860 | |||||||||||||||
Consumer | 2,053,160 | — | — | 2,043,692 | 2,043,692 | |||||||||||||||
| Revolving home equity | 264,401 | — | — | 261,985 | 261,985 | |||||||||||||||
| Consumer credit card | 544,579 | — | — | 508,944 | 508,944 | |||||||||||||||
Overdrafts | 14,211 | — | — | 13,985 | 13,985 | |||||||||||||||
| Total loans | 15,459,014 | — | — | 15,201,994 | 15,201,994 | |||||||||||||||
| Loans held for sale | 8,908 | — | 8,908 | — | 8,908 | |||||||||||||||
| Investment securities | 15,016,882 | 1,136,827 | 13,680,011 | 200,044 | 15,016,882 | |||||||||||||||
| Securities purchased under agreements to resell | 1,825,000 | — | — | 1,801,227 | 1,801,227 | |||||||||||||||
| Interest earning deposits with banks | 1,260,813 | 1,260,813 | — | — | 1,260,813 | |||||||||||||||
| Cash and due from banks | 326,549 | 326,549 | — | — | 326,549 | |||||||||||||||
| Derivative instruments | 13,130 | — | 12,760 | 370 | 13,130 | |||||||||||||||
| Assets held in trust for deferred compensation plan | 20,403 | 20,403 | — | — | 20,403 | |||||||||||||||
| Total | $ | 33,930,699 | $ | 2,744,592 | $ | 13,701,679 | $ | 17,203,635 | $ | 33,649,906 | ||||||||||
| Financial Liabilities | ||||||||||||||||||||
| Non-interest bearing deposits | $ | 11,428,372 | $ | 11,428,372 | $ | — | $ | — | $ | 11,428,372 | ||||||||||
| Savings, interest checking and money market deposits | 16,751,632 | 16,751,632 | — | — | 16,751,632 | |||||||||||||||
| Certificates of deposit | 1,139,337 | — | — | 1,124,978 | 1,124,978 | |||||||||||||||
| Federal funds purchased | 17,315 | 17,315 | — | — | 17,315 | |||||||||||||||
| Securities sold under agreements to repurchase | 2,300,146 | — | — | 2,300,267 | 2,300,267 | |||||||||||||||
| Other borrowings | 8,990 | — | 8,990 | — | 8,990 | |||||||||||||||
| Derivative instruments | 18,382 | — | 18,233 | 149 | 18,382 | |||||||||||||||
| Liabilities held in trust for deferred compensation plan | 20,403 | 20,403 | — | — | 20,403 | |||||||||||||||
| Total | $ | 31,684,577 | $ | 28,217,722 | $ | 27,223 | $ | 3,425,394 | $ | 31,670,339 | ||||||||||
39
| Carrying Amount | Estimated Fair Value at December 31, 2021 | |||||||||||||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial Assets | ||||||||||||||||||||
| Loans: | ||||||||||||||||||||
| Business | $ | 5,303,535 | $ | — | $ | — | $ | 5,229,153 | $ | 5,229,153 | ||||||||||
Real estate - construction and land | 1,118,266 | — | — | 1,099,747 | 1,099,747 | |||||||||||||||
Real estate - business | 3,058,837 | — | — | 3,054,481 | 3,054,481 | |||||||||||||||
Real estate - personal | 2,805,401 | — | — | 2,809,490 | 2,809,490 | |||||||||||||||
Consumer | 2,032,225 | — | — | 2,031,408 | 2,031,408 | |||||||||||||||
| Revolving home equity | 275,945 | — | — | 273,450 | 273,450 | |||||||||||||||
| Consumer credit card | 575,410 | — | — | 536,468 | 536,468 | |||||||||||||||
Overdrafts | 6,740 | — | — | 6,458 | 6,458 | |||||||||||||||
| Total loans | 15,176,359 | — | — | 15,040,655 | 15,040,655 | |||||||||||||||
| Loans held for sale | 8,615 | — | 8,615 | — | 8,615 | |||||||||||||||
| Investment securities | 14,695,628 | 1,087,873 | 13,413,558 | 194,197 | 14,695,628 | |||||||||||||||
| Federal funds sold | 2,800 | 2,800 | — | — | 2,800 | |||||||||||||||
| Securities purchased under agreements to resell | 1,625,000 | — | — | 1,623,856 | 1,623,856 | |||||||||||||||
| Interest earning deposits with banks | 3,971,217 | 3,971,217 | — | — | 3,971,217 | |||||||||||||||
| Cash and due from banks | 305,539 | 305,539 | — | — | 305,539 | |||||||||||||||
| Derivative instruments | 41,842 | — | 40,994 | 848 | 41,842 | |||||||||||||||
| Assets held in trust for deferred compensation plan | 21,794 | 21,794 | — | — | 21,794 | |||||||||||||||
| Total | $ | 35,848,794 | $ | 5,389,223 | $ | 13,463,167 | $ | 16,859,556 | $ | 35,711,946 | ||||||||||
| Financial Liabilities | ||||||||||||||||||||
| Non-interest bearing deposits | $ | 11,772,374 | $ | 11,772,374 | $ | — | $ | — | $ | 11,772,374 | ||||||||||
| Savings, interest checking and money market deposits | 16,598,085 | 16,598,085 | — | — | 16,598,085 | |||||||||||||||
| Certificates of deposit | 1,442,614 | — | — | 1,438,919 | 1,438,919 | |||||||||||||||
| Federal funds purchased | 43,385 | 43,385 | — | — | 43,385 | |||||||||||||||
| Securities sold under agreements to repurchase | 2,979,582 | — | — | 2,979,677 | 2,979,677 | |||||||||||||||
| Other borrowings | 12,514 | — | 12,514 | — | 12,514 | |||||||||||||||
| Derivative instruments | 12,101 | — | 11,824 | 277 | 12,101 | |||||||||||||||
| Liabilities held in trust for deferred compensation plan | 21,794 | 21,794 | — | — | 21,794 | |||||||||||||||
| Total | $ | 32,882,449 | $ | 28,435,638 | $ | 24,338 | $ | 4,418,873 | $ | 32,878,849 | ||||||||||
17. Legal and Regulatory Proceedings
The Company has various legal proceedings pending at March 31, 2022, arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at early stages of the legal process. The Company records a loss accrual for all legal and regulatory matters for which it deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet progressed to the point where a loss amount can be determined to be probable and estimable.
40
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2021 Annual Report on Form 10-K. Results of operations for the three month periods ended March 31, 2022 are not necessarily indicative of results to be attained for any other period.
Forward-Looking Information
This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, the effects of the COVID-19 pandemic, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2021 Annual Report on Form 10-K and in Part II Item 1A of this Quarterly Report on Form 10-Q. During the quarter ended March 31, 2022, there were no material changes to the Risk Factors disclosed in the Company's 2021 Annual Report on Form 10-K.
Critical Accounting Estimates and Related Policies
The Company has identified certain policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates and related policies are the Company's allowance for credit losses and fair value measurement policies. A discussion of these estimates and related policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2021 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2021.
41
Selected Financial Data
| Three Months Ended March 31 | ||||||||
| 2022 | 2021 | |||||||
| Per Share Data | ||||||||
| Net income per common share — basic | $ | .97 | $ | 1.06 | * | |||
| Net income per common share — diluted | .97 | 1.06 | * | |||||
| Cash dividends on common stock | .265 | .250 | * | |||||
| Book value per common share | 24.60 | 26.99 | * | |||||
| Market price | 71.59 | 72.96 | * | |||||
| Selected Ratios | ||||||||
| (Based on average balance sheets) | ||||||||
Loans to deposits (1) | 51.90 | % | 61.79 | % | ||||
| Non-interest bearing deposits to total deposits | 39.34 | 39.41 | ||||||
Equity to loans (1) | 21.83 | 20.68 | ||||||
| Equity to deposits | 11.33 | 12.78 | ||||||
| Equity to total assets | 9.26 | 10.37 | ||||||
| Return on total assets | 1.33 | 1.63 | ||||||
| Return on common equity | 14.41 | 15.69 | ||||||
| (Based on end-of-period data) | ||||||||
Non-interest income to revenue (2) | 38.69 | 39.80 | ||||||
Efficiency ratio (3) | 60.29 | 56.37 | ||||||
| Tier I common risk-based capital ratio | 13.92 | 13.76 | ||||||
Tier I risk-based capital ratio | 13.92 | 13.76 | ||||||
| Total risk-based capital ratio | 14.61 | 14.79 | ||||||
Tangible common equity to tangible assets ratio (4) | 8.09 | 9.57 | ||||||
Tier I leverage ratio | 9.07 | 9.38 | ||||||
* Restated for the 5% stock dividend distributed in December 2021.
(1) Includes loans held for sale.
(2) Revenue includes net interest income and non-interest income.
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization.
It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP.
The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets.
| March 31 | ||||||||
| (Dollars in thousands) | 2022 | 2021 | ||||||
| Total equity | $ | 2,973,402 | $ | 3,317,385 | ||||
| Less non-controlling interest | 12,762 | 4,795 | ||||||
| Less goodwill | 138,921 | 138,921 | ||||||
| Less core deposit premium | 4,525 | 4,864 | ||||||
| Total tangible common equity (a) | $ | 2,817,194 | $ | 3,168,805 | ||||
| Total assets | $ | 34,986,793 | $ | 33,269,786 | ||||
| Less goodwill | 138,921 | 138,921 | ||||||
| Less core deposit premium | 4,525 | 4,864 | ||||||
| Total tangible assets (b) | $ | 34,843,347 | $ | 33,126,001 | ||||
| Tangible common equity to tangible assets ratio (a)/(b) | 8.09 | % | 9.57 | % | ||||
42
Results of Operations
Summary
| Three Months Ended March 31 | Increase (Decrease) | |||||||||||||
| (Dollars in thousands) | 2022 | 2021 | Amount | % change | ||||||||||
| Net interest income | $ | 208,786 | $ | 205,748 | $ | 3,038 | 1.5 | % | ||||||
| Provision for credit losses | 9,858 | 6,232 | (3,626) | 58.2 | ||||||||||
| Non-interest income | 131,769 | 136,045 | (4,276) | (3.1) | ||||||||||
| Investment securities gains, net | 7,163 | 9,853 | (2,690) | (27.3) | ||||||||||
| Non-interest expense | (205,648) | (192,573) | 13,075 | 6.8 | ||||||||||
| Income taxes | (31,902) | (32,076) | (174) | (.5) | ||||||||||
| Non-controlling interest expense | (1,872) | (2,257) | (385) | (17.1) | ||||||||||
| Net income attributable to Commerce Bancshares, Inc. | $ | 118,154 | $ | 130,972 | (12,818) | (9.8) | % | |||||||
For the quarter ended March 31, 2022, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $118.2 million, a decrease of $12.8 million, or 9.8%, compared to the first quarter of the previous year. For the current quarter, the annualized return on average assets was 1.33%, the annualized return on average equity was 14.41%, and the efficiency ratio was 60.29%. Diluted earnings per common share was $.97, a decrease of 8.5% compared to $1.06 per share in the first quarter of 2021, and increased 3.2% compared to $.94 per share in the previous quarter.
Compared to the first quarter of last year, net interest income increased $3.0 million, or 1.5%, mainly due to an increase of $21.5 million in interest income on investment securities, partly offset by decreases in loan interest and interest on securities purchased under agreements to resell of $14.4 million and $5.8 million, respectively. The provision for credit losses declined $3.6 million due to a decrease in the estimate of the allowance for credit losses on loans and unfunded commitments and lower net loan charge-offs. Non-interest income decreased $4.3 million, or 3.1%, compared to the first quarter of 2021, mainly due to lower loan fees and sales and income from branch sales, partly offset by growth in net bank card and trust fees. Net gains on investment securities totaled $7.2 million in the current quarter compared to net gains of $9.9 million in the same quarter last year. Net securities gains in the current quarter primarily resulted from unrealized fair value gains of $7.5 million in the Company's private equity investment portfolio. Non-interest expense increased $13.1 million, or 6.8%, over the first quarter of 2021 mainly due to higher salaries and employee benefits, data processing and software, marketing, and travel and entertainment expense.
43
Net Interest Income
The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.
Analysis of Changes in Net Interest Income
| Three Months Ended March 31, 2022 vs. 2021 | |||||||||||
| Change due to | |||||||||||
| (In thousands) | Average Volume | Average Rate | Total | ||||||||
| Interest income, fully taxable equivalent basis: | |||||||||||
| Loans: | |||||||||||
| Business | $ | (9,222) | $ | (2,060) | $ | (11,282) | |||||
| Real estate - construction and land | 375 | 609 | 984 | ||||||||
| Real estate - business | 626 | (1,069) | (443) | ||||||||
| Real estate - personal | (144) | (858) | (1,002) | ||||||||
| Consumer | 921 | (2,141) | (1,220) | ||||||||
| Revolving home equity | (213) | 65 | (148) | ||||||||
| Consumer credit card | (1,837) | 501 | (1,336) | ||||||||
| Overdrafts | — | — | — | ||||||||
| Total interest on loans | (9,494) | (4,953) | (14,447) | ||||||||
| Loans held for sale | (201) | 47 | (154) | ||||||||
| Investment securities: | |||||||||||
| U.S. government and federal agency securities | 2,370 | 2,405 | 4,775 | ||||||||
| Government-sponsored enterprise obligations | 6 | (3) | 3 | ||||||||
| State and municipal obligations | 722 | (897) | (175) | ||||||||
| Mortgage-backed securities | 1,090 | 10,681 | 11,771 | ||||||||
| Asset-backed securities | 6,332 | (2,475) | 3,857 | ||||||||
| Other securities | 1,501 | (402) | 1,099 | ||||||||
| Total interest on investment securities | 12,021 | 9,309 | 21,330 | ||||||||
| Federal funds sold | 1 | — | 1 | ||||||||
| Securities purchased under agreements to resell | 11,573 | (17,401) | (5,828) | ||||||||
| Interest earning deposits with banks | 278 | 503 | 781 | ||||||||
| Total interest income | 14,178 | (12,495) | 1,683 | ||||||||
| Interest expense: | |||||||||||
| Deposits: | |||||||||||
| Savings | 45 | (144) | (99) | ||||||||
| Interest checking and money market | 317 | (561) | (244) | ||||||||
| Certificates of deposit of less than $100,000 | (81) | (253) | (334) | ||||||||
| Certificates of deposit of $100,000 and over | 64 | (699) | (635) | ||||||||
| Total interest on deposits | 345 | (1,657) | (1,312) | ||||||||
| Federal funds purchased | (2) | 4 | 2 | ||||||||
| Securities sold under agreements to repurchase | 86 | 289 | 375 | ||||||||
| Other borrowings | — | (1) | (1) | ||||||||
| Total interest expense | 429 | (1,365) | (936) | ||||||||
| Net interest income, tax equivalent basis | $ | 13,749 | $ | (11,130) | $ | 2,619 | |||||
Net interest income in the first quarter of 2022 was $208.8 million, an increase of $3.0 million over the first quarter of 2021. On a tax equivalent (T/E) basis, net interest income totaled $211.4 million in the first quarter of 2022, up $2.6 million over the same period last year and up $969 thousand over the previous quarter. The increase in net interest income compared to the first
44
quarter of 2021 was mainly due to higher interest income earned on on investment securities (T/E) of $21.3 million, partly offset by lower interest earned on loans (T/E) of $14.4 million and securities purchased under agreements to resell of $5.8 million. The increase in interest earned on investment securities (T/E) was mainly due to higher average balances and rates earned. The decrease in total interest earned on loans (T/E) was the result of declines in average balances and rates earned, while the decrease in securities purchased under agreements to resell declined due to lower average rates, partly offset by higher average balances. The Company's net yield on earning assets (T/E) was 2.45% in the current quarter compared to 2.71% in the first quarter of 2021.
Total interest income (T/E) increased $1.7 million over the first quarter of 2021. Interest income on loans (T/E) was $133.0 million during the first quarter of 2022, a decrease of $14.4 million, or 9.8%, from the same quarter last year. The decrease in interest income from the same quarter last year was primarily due to a decline of $1.1 billion, or 6.8%, in average loan balances, coupled with a decrease of 12 basis points in the average rate earned. Most of the decrease in interest income occurred in the business, consumer credit card, consumer, and personal real estate loan categories. These decreases were partly offset by an increase in interest income in the construction and land loan category. Business loan interest income decreased $11.3 million due to a decline of $1.2 billion in average balances and a decrease of 16 basis points in the average rate earned. The decline in business loan average balances was mainly due to a decrease of $1.3 billion in Paycheck Protection Program (PPP) loans, while interest earned on PPP loans declined $10.0 million from the same quarter last year. Consumer credit card loan interest decreased $1.3 million mainly due to a decline of $67.9 million in average balances, partly offset by a 38 basis point increase in the average rate earned. Consumer loan interest declined $1.2 million due to a decrease of 43 basis points in the average rate earned, partly offset by a $92.9 million, or 4.8%, increase in average balances. Personal real estate loan interest income fell $1.0 million due to a 12 basis point decrease in the average rate earned and lower average balances of $17.1 million. These decreases to interest income (T/E) were partly offset by an increase of $984 thousand in interest earned on construction and land loans, due to an increase of 22 basis points in the average rate earned and growth of $42.9 million, or 3.9%, in average loan balances.
Interest income on investment securities (T/E) was $74.8 million during the first quarter of 2022, which was an increase of $21.3 million over the same quarter last year. The increase in interest income occurred mainly in interest earned on mortgage-backed securities, which increased $11.8 million, partly due to a $7.5 million increase in premium amortization, reflecting slower forward prepayment speed estimates in the current quarter, compared to a premium amortization adjustment increase of $4.1 million in the prior year. In addition, the average rate earned increased 59 basis points and the average balance increased $318.1 million, or 4.5%. Interest on U.S. government and federal agency obligations grew $4.8 million mainly due to an increase in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS). Interest income related to TIPS, which is tied to the Consumer Price Index, increased $4.4 million over the same quarter last year. The average balance of U.S. government and federal agency obligations also increased $378.4 million, or 52.2%. Interest on asset-backed securities rose $3.9 million due to higher average balances of $1.8 billion, partly offset by a decrease of 26 basis points in the average rate earned. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $15.4 billion in the first quarter of 2022, compared to $12.6 billion in the first quarter of 2021.
Interest income on securities purchased under agreements to resell decreased $5.8 million from the same quarter last year, due to a decrease of 407 basis points in the average rate earned, partly offset by growth of $883.9 million in the average balance. Interest income on balances at the Federal Reserve grew $781 thousand due to an increase of $1.1 billion in the average balance invested and an increase of eight basis points in the average rate earned.
The average tax equivalent yield on total interest earning assets was 2.49% in the first quarter of 2022, down from 2.76% in the first quarter of 2021.
Total interest expense decreased $936 thousand compared to the first quarter of 2021 due to a $1.3 million decrease in interest expense on interest bearing deposits, partly offset by a $376 thousand increase in interest expense on borrowings. The decrease in deposit interest expense resulted mainly from a four basis point decline in the overall average rate paid. Interest expense on certificates of deposit (CD's) declined $969 thousand due to an 18 basis point decrease in the average rate paid, coupled with a decrease of $454.7 million in the average balance. Interest expense on interest checking and money market accounts declined $244 thousand, due to a two basis point decrease in the average rate paid, partly offset by higher average balances of $2.0 billion. Interest expense on borrowings was higher due to an increase of four basis points in the average rate paid on customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .06% and .09% in the first quarters of 2022 and 2021, respectively.
Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.
45
Non-Interest Income
| Three Months Ended March 31 | Increase (Decrease) | |||||||||||||
| (Dollars in thousands) | 2022 | 2021 | Amount | % change | ||||||||||
| Bank card transaction fees | $ | 42,045 | $ | 37,695 | $ | 4,350 | 11.5 | % | ||||||
| Trust fees | 47,811 | 44,127 | 3,684 | 8.3 | ||||||||||
| Deposit account charges and other fees | 22,307 | 22,575 | (268) | (1.2) | ||||||||||
| Capital market fees | 4,125 | 4,981 | (856) | (17.2) | ||||||||||
| Consumer brokerage services | 4,446 | 4,081 | 365 | 8.9 | ||||||||||
| Loan fees and sales | 4,235 | 10,184 | (5,949) | (58.4) | ||||||||||
| Other | 6,800 | 12,402 | (5,602) | (45.2) | ||||||||||
| Total non-interest income | $ | 131,769 | $ | 136,045 | $ | (4,276) | (3.1) | % | ||||||
| Non-interest income as a % of total revenue* | 38.7 | % | 39.8 | % | ||||||||||
* Total revenue includes net interest income and non-interest income.
The table below is a summary of net bank card transaction fees for the three month periods ended March 31, 2022 and 2021.
| Three Months Ended March 31 | ||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | $ change | % change | ||||||||||
| Net debit card fees | $ | 9,552 | $ | 9,367 | $ | 185 | 2.0 | % | ||||||
| Net credit card fees | 3,722 | 3,421 | 301 | 8.8 | ||||||||||
| Net merchant fees | 4,980 | 4,614 | 366 | 7.9 | ||||||||||
| Net corporate card fees | 23,791 | 20,293 | 3,498 | 17.2 | ||||||||||
| Total bank card transaction fees | $ | 42,045 | $ | 37,695 | $ | 4,350 | 11.5 | % | ||||||
For the first quarter of 2022, total non-interest income amounted to $131.8 million compared to $136.0 million in the same quarter last year, which was a decrease of $4.3 million, or 3.1%. The decrease was mainly due to lower loan fees and sales and a decline in other non-interest income, partly offset by higher net bank card fees and trust fees. Bank card transaction fees for the current quarter grew $4.4 million, or 11.5%, over the same period last year, due to growth of $3.5 million in net corporate card fees, $366 thousand in net merchant card fees, $301 thousand in net credit card fees, and $185 thousand in net debit card fees. The growth in net corporate, credit and debit card fees was mainly due to higher interchange income, partly offset by higher rewards expense. The growth in net merchant fees was mostly due to higher merchant fees, partly offset by higher network expense. Trust fees for the quarter increased $3.7 million, or 8.3%, over the same quarter last year, resulting from higher private client fees, which were up 10.1%. Compared to the same period last year, deposit account fees decreased $268 thousand, or 1.2%, mainly due to lower personal deposit account fees, partly offset by higher corporate cash management fees. Capital market fees decreased $856 thousand, or 17.2%, while consumer brokerage service fees increased $365 thousand, or 8.9%, due to growth in advisory fees. Loan fees and sales decreased $5.9 million, or 58.4%, compared to the same quarter last year, mainly due to a decline in mortgage banking revenue. Other non-interest income decreased $5.6 million, or 45.2%, mainly due to a gain of $2.4 million on the sale of a branch location recorded last year coupled with a write-down of $965 thousand on a branch location recorded in the current quarter. In addition, swap fees, cash sweep commissions and tax credit sales fees declined $637 thousand, $403 thousand and $394 thousand, respectively. Fair value adjustments on the Company's deferred compensation plan assets, which are held in a trust and recorded as both an asset and a liability, decreased $1.9 million from the same quarter last year, affecting both other income and other expense.
46
Investment Securities Gains (Losses), Net
| Three Months Ended March 31 | ||||||||
| (In thousands) | 2022 | 2021 | ||||||
| Net gains (losses) on sales and fair value adjustments of private equity investments | $ | 7,450 | $ | 9,888 | ||||
| Fair value adjustments on equity securities, net | (287) | (35) | ||||||
| Total investment securities gains, net | $ | 7,163 | $ | 9,853 | ||||
Net gains on investment securities, which were recognized in earnings during the three months ended March 31, 2022 and 2021, are shown in the table above. Net securities gains of $7.2 million were reported in the first quarter of 2022, compared to net gains of $9.9 million in the same period last year. The net gains in the first quarter of 2022 were primarily comprised of $7.5 million of net gains in fair value on the Company’s private equity investments. The net gains on investment securities for the same quarter last year were mainly comprised of a net gain of $1.5 million realized on the sale of a private equity investment and $8.4 million of net gains in fair value on the Company’s private equity investments. The portion of private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in expense of $1.5 million during the first three months of 2022 and expense of $2.0 million during the first three months of 2021.
Non-Interest Expense
| Three Months Ended March 31 | Increase (Decrease) | |||||||||||||
| (Dollars in thousands) | 2022 | 2021 | Amount | % change | ||||||||||
| Salaries and employee benefits | $ | 135,953 | $ | 129,033 | $ | 6,920 | 5.4 | % | ||||||
| Net occupancy | 12,296 | 12,021 | 275 | 2.3 | ||||||||||
| Equipment | 4,568 | 4,353 | 215 | 4.9 | ||||||||||
| Supplies and communication | 4,713 | 4,125 | 588 | 14.3 | ||||||||||
| Data processing and software | 27,016 | 25,463 | 1,553 | 6.1 | ||||||||||
| Marketing | 6,344 | 5,158 | 1,186 | 23.0 | ||||||||||
| Other | 14,758 | 12,420 | 2,338 | 18.8 | ||||||||||
| Total non-interest expense | $ | 205,648 | $ | 192,573 | $ | 13,075 | 6.8 | % | ||||||
Non-interest expense for the first quarter of 2022 amounted to $205.6 million, an increase of $13.1 million, or 6.8%, compared to expense of $192.6 million in the first quarter of last year. The increase in expense was mainly due to higher salaries and benefits expense, data processing and software expense, marketing expense and other non-interest expense. Salaries expense increased $4.4 million, or 4.1%, driven by growth in full-time salary costs and incentive compensation. Employee benefits expense totaled $24.2 million, reflecting growth of $2.5 million, or 11.5%, mainly as a result of higher healthcare expense, payroll taxes and retirement expense. Full-time equivalent employees totaled 4,563 at March 31, 2022, compared to 4,619 at March 31, 2021. Supplies and communication expense increased $588 thousand, or 14.3%, mainly due to higher postage and courier expense, while marketing expense increased $1.2 million, or 23.0%, due to an expansion of marketing efforts in the first quarter of 2022. Data processing and software expense increased $1.6 million, or 6.1%, due to higher software amortization, including expense related to the completed implementation of the Company's new core customer and deposit system placed into service in January 2022, as well as increased costs for service providers and bank card processing fees. Other non-interest expense increased $2.3 million, mainly due to higher travel and entertainment expense of $1.1 million, lower deferred origination costs of $1.1 million, partly offset by a $1.9 million decline in the Company's deferred compensation liability, as previously mentioned.
47
Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments
| Three Months Ended | |||||||||||
| Mar. 31, 2022 | Dec. 31, 2021 | Mar. 31, 2021 | |||||||||
| ALLOWANCE FOR CREDIT LOSSES ON LOANS | |||||||||||
| Balance at beginning of period | $ | 150,044 | $ | 162,775 | $ | 220,834 | |||||
| Provision for credit losses on loans | (10,686) | (8,474) | (10,355) | ||||||||
| Net loan charge-offs (recoveries): | |||||||||||
| Commercial: | |||||||||||
| Business | 77 | 90 | (4) | ||||||||
| Real estate-construction and land | — | — | 1 | ||||||||
| Real estate-business | (7) | 6 | 20 | ||||||||
| Commercial net loan charge-offs (recoveries) | 70 | 96 | 17 | ||||||||
| Personal Banking: | |||||||||||
| Real estate-personal | 22 | (71) | 15 | ||||||||
| Consumer | 808 | 919 | 763 | ||||||||
| Revolving home equity | 18 | (26) | 23 | ||||||||
| Consumer credit card | 3,372 | 2,964 | 8,981 | ||||||||
| Overdrafts | 358 | 375 | 153 | ||||||||
| Personal banking net loan charge-offs (recoveries) | 4,578 | 4,161 | 9,935 | ||||||||
| Total net loan charge-offs | 4,648 | 4,257 | 9,952 | ||||||||
| Balance at end of period | $ | 134,710 | $ | 150,044 | $ | 200,527 | |||||
| LIABILITY FOR UNFUNDED LENDING COMMITMENTS | |||||||||||
| Balance at beginning of period | 24,204 | 22,784 | 38,307 | ||||||||
| Provision for credit losses on unfunded lending commitments | 828 | 1,420 | 4,123 | ||||||||
| Balance at end of period | 25,032 | 24,204 | 42,430 | ||||||||
| ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS | $ | 159,742 | $ | 174,248 | $ | 242,957 | |||||
| Three Months Ended | |||||||||||
| Mar. 31, 2022 | Dec. 31, 2021 | Mar. 31, 2021 | |||||||||
| Annualized net loan charge-offs (recoveries)*: | |||||||||||
| Commercial: | |||||||||||
| Business | .01 | % | .01 | % | — | % | |||||
| Real estate-construction and land | — | — | — | ||||||||
| Real estate-business | — | — | — | ||||||||
| Commercial net loan charge-offs | — | — | — | ||||||||
| Personal Banking: | |||||||||||
| Real estate-personal | — | (.01) | — | ||||||||
| Consumer | .16 | .18 | .16 | ||||||||
| Revolving home equity | .03 | (.04) | .03 | ||||||||
| Consumer credit card | 2.53 | 2.10 | 5.98 | ||||||||
| Overdrafts | 28.04 | 30.20 | 17.50 | ||||||||
| Personal banking net loan charge-offs (recoveries) | .33 | .29 | .71 | ||||||||
| Total annualized net loan charge-offs | .12 | % | .11 | % | .25 | % | |||||
* as a percentage of average loans (excluding loans held for sale)
The Company has an established process to determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, which assesses the risks and losses expected in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded lending commitments, as well as a second, smaller component based on certain individually evaluated loans and unfunded lending commitments. The Company's policies and
48
processes for determining the allowance for credit losses on loans and the liability for unfunded lending commitments are discussed in Note 1 to the consolidated financial statements and in the "Allowance for Credit Losses" discussion within Critical Accounting Estimates and Related Policies in Item 7 of the 2021 Annual Report on Form 10-K.
Net loan charge-offs in the first quarter of 2022 amounted to $4.6 million, compared to $4.3 million in the prior quarter and $10.0 million in the first quarter of last year. During the first quarter of 2022, the Company recorded net charge-offs on commercial loans of $70 thousand, compared to net charge-offs of $96 thousand in the prior quarter. Consumer credit card loan net charge-offs increased $408 thousand in the first quarter of 2022, compared to the prior quarter, but declined $5.6 million compared to the same quarter in the prior year. Compared to the same period last year, net loan charge-offs in the first quarter of 2022 decreased $5.4 million, primarily driven by the decrease in net charge-offs on consumer credit card loans.
For the three months ended March 31, 2022, annualized net charge-offs on average consumer credit card loans totaled 2.53%, compared to 2.10% in the previous quarter and 5.98% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .16%, compared to .18% in the prior quarter and .16% in the same period last year. In the first quarter of 2022, total annualized net loan charge-offs were .12%, compared to .11% in the previous quarter and .25% in the same period last year.
The continued recovery of the provision for credit losses on loans is the result of an improved forecast coupled with lower than projected net charge-offs. For the quarter ended March 31, 2021, the allowance for credit losses on loans decreased $15.3 million, compared to the allowance for credit losses on loans as of December 31, 2021. The decrease was primarily due to the improved economic forecast utilized in the Company's estimate of future credit losses at March 31, 2022, coupled with lower than projected net loan charge-offs during the first quarter of 2022. The allowance for credit losses on commercial loans decreased slightly by $2.9 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, decreased $12.4 million. As a result, the provision for credit losses on loans was a recovery of $10.7 million in the current quarter, which was a $2.2 million increase from the $8.5 million benefit recorded in the prior quarter. The recovery of the provision for credit losses on loans in the current quarter was $331 thousand more than the recovery recorded in the third quarter of 2020.
While the forecast reflects a continued recovery from the COVID-19 pandemic, the allowance considered the uncertainty of disruptions caused by higher inflation, the geopolitical environment, and ongoing supply constraints on the economy and on the consumer and commercial loan portfolios. At March 31, 2022, the allowance for credit losses on loans amounted to $134.7 million, compared to $150.0 million and $200.5 million at December 31, 2021 and March 31, 2021, respectively, and was .87%, .99% and 1.22% of total loans at March 31, 2022, December 31, 2021 and March 31, 2021, respectively.
In the current quarter, the provision for credit losses on unfunded lending commitments was $828 thousand, reflecting a $592 thousand decrease over the provision in the prior quarter and a $3.3 million decrease compared to the first quarter of 2021. At March 31, 2022, the liability for unfunded lending commitments was $25.0 million, compared to $24.2 million at December 31, 2021 and $42.4 million at March 31, 2021. The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans. See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses.
The Company considers the allowance for credit losses on loans and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at March 31, 2022.
The allowance for credit losses on loans and the liability for unfunded lending commitments are estimates that require significant judgment including projections of the macro-economic environment. The Company utilizes a third-party macro-economic forecast that continuously changes due to economic conditions and events. These changes in the forecast cause fluctuations in the allowance for credit losses on loans and the liability for unfunded lending commitments. The Company uses its best judgment to assess the macro-economic forecast and internal loss data in estimating the allowance for credit losses on loans and the liability for unfunded lending commitments. These estimates are subject to periodic refinement based on changes in the underlying external and internal data.
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Risk Elements of Loan Portfolio
The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual.
(Dollars in thousands) | March 31, 2022 | December 31, 2021 | ||||||
| Non-accrual loans | $ | 8,335 | $ | 9,157 | ||||
| Foreclosed real estate | 296 | 115 | ||||||
| Total non-performing assets | $ | 8,631 | $ | 9,272 | ||||
| Non-performing assets as a percentage of total loans | .06 | % | .06 | % | ||||
| Non-performing assets as a percentage of total assets | .02 | % | .03 | % | ||||
| Total loans past due 90 days and still accruing interest | $ | 10,670 | $ | 11,726 | ||||
Non-accrual loans totaled $8.3 million at March 31, 2022, a decrease of $822 thousand from the balance at December 31, 2021. The decrease occurred mainly in business loans which decreased $556 thousand. At March 31, 2022, non-accrual loans were comprised of business (81.1%), personal real estate (16.6%), and business real estate (2.3%) loans. Foreclosed real estate totaled $296 thousand at March 31, 2022, an increase of $181 thousand when compared to December 31, 2021. Total loans past due 90 days or more and still accruing interest were $10.7 million as of March 31, 2022, a decrease of $1.1 million from December 31, 2021. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements.
In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $306.6 million at March 31, 2022 compared with $278.7 million at December 31, 2021, resulting in an increase of $27.9 million, or 10.0%.
(In thousands) | March 31, 2022 | December 31, 2021 | ||||||
| Potential problem loans: | ||||||||
| Business | $ | 50,198 | $ | 37,143 | ||||
| Real estate – construction and land | 55,274 | 40,259 | ||||||
| Real estate – business | 200,631 | 200,766 | ||||||
| Real estate – personal | 533 | 526 | ||||||
| Total potential problem loans | $ | 306,636 | $ | 278,694 | ||||
At March 31, 2022, the Company had $125.8 million of loans whose terms have been modified or restructured under a troubled debt restructuring. These loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession, as defined by accounting guidance, and are further discussed in the "Troubled debt restructurings" section in Note 2 to the consolidated financial statements. This balance includes certain commercial loans totaling $108.8 million which are classified as substandard and included in the table above because of this classification.
Loans with Special Risk Characteristics
Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon.
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Real Estate – Construction and Land Loans
The Company's portfolio of construction and land loans, as shown in the table below, amounted to 7.4% of total loans outstanding at March 31, 2022. The largest component of construction and land loans was commercial construction, which increased $17.1 million during the three months ended March 31, 2022. At March 31, 2022, multi-family residential construction loans totaled approximately $180.5 million, or 19.2%, of the commercial construction loan portfolio, compared to $155.9 million, or 16.9%, at December 31, 2021.
| (Dollars in thousands) | March 31, 2022 | % of Total | % of Total Loans | December 31, 2021 | % of Total | % of Total Loans | ||||||||||||||
| Commercial construction | $ | 939,785 | 82.1 | % | 6.1 | % | $ | 922,654 | 82.5 | % | 6.1 | % | ||||||||
| Residential construction | 115,079 | 10.1 | .7 | 96,618 | 8.6 | .7 | ||||||||||||||
| Commercial land and land development | 45,827 | 4.0 | .3 | 48,481 | 4.3 | .3 | ||||||||||||||
| Residential land and land development | 43,720 | 3.8 | .3 | 50,513 | 4.6 | .3 | ||||||||||||||
| Total real estate - construction and land loans | $ | 1,144,411 | 100.0 | % | 7.4 | % | $ | 1,118,266 | 100.0 | % | 7.4 | % | ||||||||
Real Estate – Business Loans
Total business real estate loans were $3.1 billion at March 31, 2022 and comprised 20.1% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At March 31, 2022, 38.0% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans.
| (Dollars in thousands) | March 31, 2022 | % of Total | % of Total Loans | December 31, 2021 | % of Total | % of Total Loans | ||||||||||||||
| Owner-occupied | $ | 1,180,589 | 38.0 | % | 7.6 | % | $ | 1,188,469 | 38.9 | % | 7.8 | % | ||||||||
| Office | 419,430 | 13.5 | 2.7 | 380,101 | 12.4 | 2.5 | ||||||||||||||
| Multi-family | 350,567 | 11.3 | 2.3 | 354,282 | 11.6 | 2.3 | ||||||||||||||
| Retail | 336,142 | 10.8 | 2.2 | 339,874 | 11.1 | 2.2 | ||||||||||||||
| Hotels | 232,470 | 7.5 | 1.5 | 234,673 | 7.7 | 1.5 | ||||||||||||||
| Farm | 188,130 | 6.0 | 1.2 | 178,780 | 5.8 | 1.2 | ||||||||||||||
| Senior living | 177,534 | 5.7 | 1.1 | 174,871 | 5.7 | 1.2 | ||||||||||||||
| Industrial | 111,467 | 3.6 | .7 | 99,800 | 3.3 | .7 | ||||||||||||||
| Other | 113,339 | 3.6 | .8 | 107,987 | 3.5 | .8 | ||||||||||||||
| Total real estate - business loans | $ | 3,109,668 | 100.0 | % | 20.1 | % | $ | 3,058,837 | 100.0 | % | 20.2 | % | ||||||||
Revolving Home Equity Loans
The Company had $264.4 million in revolving home equity loans at March 31, 2022 that were generally collateralized by residential real estate. Most of these loans (92.8%) are written with terms requiring interest-only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of March 31, 2022, the outstanding principal of loans with an original LTV higher than 80% was $30.7 million, or 11.6% of the portfolio, compared to $30.9 million as of December 31, 2021. Total revolving home equity loan balances over 30 days past due were $1.6 million at March 31, 2022 and December 31, 2021, and there were no revolving home equity loans on non-accrual status at March 31, 2022 or December 31, 2021. The weighted average FICO score for the total current portfolio balance is 790. At maturity, the accounts are re-underwritten, and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of 2022 through 2024, approximately 17% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 81% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels.
Consumer Loans
Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs. Auto loans comprised 40% of the consumer loan portfolio at March 31, 2022, and outstanding balances for auto loans were $830.7 million and $855.4 million at March 31, 2022 and December 31, 2021,
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respectively. The balances over 30 days past due amounted to $6.9 million at March 31, 2022 and $9.0 million at December 31, 2021, respectively and comprised .8% of the outstanding balances of these loans at March 31, 2022 and 1.1% at December 31, 2021, respectively. For the three months ended March 31, 2022, $84.7 million of new auto loans were originated, compared to $106.2 million during the first three months of 2021. At March 31, 2022, the automobile loan portfolio had a weighted average FICO score of 755, and net charge-offs on auto loans were .1% of average auto loans.
The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 11% of the consumer loan portfolio at March 31, 2022. Losses on these loans have historically been low, and the Company saw net recoveries of $28 thousand for the first three months of 2022. Private banking loans comprised 31% of the consumer loan portfolio at March 31, 2022. The Company's private banking loans are generally well-collateralized, and at March 31, 2022 were secured primarily by assets held by the Company's trust department. The remaining portion of the Company's consumer loan portfolio is comprised of health services financing, motorcycles, marine and RV loans. Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $428 thousand in the first three months of 2022 and were .2% of the average balances of these loans at March 31, 2022.
Consumer Credit Card Loans
The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at March 31, 2022 of $544.6 million in consumer credit card loans outstanding, approximately $84.3 million, or 15.5%, carried a low promotional rate. Within the next six months, $32.7 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters.
Oil and Gas Energy Lending
The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $275.8 million, or 1.8% of total loans at March 31, 2022, an increase of $15.1 million from year end 2021, as shown in the table below.
(In thousands) | March 31, 2022 | December 31, 2021 | Unfunded commitments at March 31, 2022 | |||||||||||
| Extraction | $ | 201,185 | $ | 184,840 | $ | 165,853 | ||||||||
| Mid-stream shipping and storage | 38,413 | 36,850 | 67,878 | |||||||||||
| Downstream distribution and refining | 22,067 | 24,915 | 19,899 | |||||||||||
| Support activities | 14,103 | 14,039 | 17,843 | |||||||||||
| Total energy lending portfolio | $ | 275,768 | $ | 260,644 | $ | 271,473 | ||||||||
Information about the credit quality of the Company's energy lending portfolio as of March 31, 2022 and December 31, 2021 is provided in the table below.
| (Dollars in thousands) | March 31, 2022 | % of Energy Lending | December 31, 2021 | % of Energy Lending | ||||||||||
| Pass | $ | 271,368 | 98.4 | % | $ | 256,186 | 98.3 | % | ||||||
| Special mention | 1,999 | .7 | 1,999 | .8 | ||||||||||
| Non-accrual | 2,401 | .9 | 2,459 | .9 | ||||||||||
| Total | $ | 275,768 | 100.0 | % | $ | 260,644 | 100.0 | % | ||||||
Energy lending balances classified as substandard and non-accrual represented 0.9% of total energy lending loan balances at March 31, 2022. The Company saw a small recovery on energy loans during the three months ended March 31, 2022. The Company recorded $10 thousand of recoveries on energy loans for the year ended December 31, 2021.
Shared National Credits
The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans
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totaled $1.2 billion at March 31, 2022 and December 31, 2021. Additional unfunded commitments at March 31, 2022 totaled $1.8 billion.
Income Taxes
Income tax expense was $31.9 million in the first quarter of 2022, compared to $33.8 million in the fourth quarter of 2021 and $32.1 million in the first quarter of 2021. The Company's effective tax rate, including the effect of non-controlling interest, was 21.3% in the first quarter of 2022, compared to 22.7% in the fourth quarter of 2021 and 19.7% in the first quarter of 2021. The effective tax rate in the first quarter has historically been lower than other quarters due to the recognition of share-based excess tax benefits as a reduction to income tax expense. These benefits result from transactions relating to equity award vesting, most of which occur in the first quarter of each year. The effective tax rate in the first quarter of 2022 increased compared to the effective tax rate in the first quarter of 2021 mainly due to executive compensation limitations on stock-based compensation.
Financial Condition
Balance Sheet
Total assets of the Company were $35.0 billion at March 31, 2022 and $36.7 billion at December 31, 2021. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $34.2 billion at March 31, 2022 and $35.5 billion at December 31, 2021, and consisted of 45% in loans and 46% in investment securities at March 31, 2022.
During the first quarter of 2022, average loans totaled $15.2 billion, an increase of $130.1 million over the prior quarter, and declined $1.1 billion, or 6.8%, from the same quarter last year. Compared to the previous quarter, average balances of business loans grew $132.3 million (includes a decline of $132.0 million in Paycheck Protection Program (PPP) average loan balances). Average business real estate loan balances grew $91.6 million, while construction loan balances declined $93.3 million. Period end loans increased $282.7 million compared to the prior quarter, including PPP loan balances that decreased $75.7 million this quarter and totaled $53.4 million at March 31, 2022. Excluding PPP loans, period end business loans increased $280.7 million. As of March 31, 2022, 97% of PPP loan balances have been forgiven. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $55.6 million, compared to $119.3 million in the prior quarter.
Total average available for sale debt securities increased $418.0 million over the previous quarter to $14.9 billion, at fair value. The increase in investment securities was mainly the result of growth in asset-backed securities. During the current quarter, purchases of securities totaled $1.8 billion with a weighted average yield of approximately 2.06%. Maturities and pay downs were $806.5 million. At March 31, 2022, the duration of the investment portfolio was 3.6 years, and maturities and pay downs of approximately $3.1 billion are expected to occur during the next 12 months.
Total average deposits increased $501.7 million this quarter compared to the previous quarter. The increase in deposits mostly resulted from growth in interest checking and money market deposits of $1.1 billion, partially offset by declines in demand deposit and certificates of deposit balances of $374.6 million and $255.3 million, respectively. Compared to the previous quarter, total average consumer and wealth deposits grew $290.2 million and $213.6 million, respectively. The average loans to deposits ratio was 51.9% in the current quarter and 52.4% in the prior quarter. The Company’s average borrowings, which include customer repurchase agreements, were $2.7 billion in the first quarter of 2022 and $2.6 billion in the prior quarter.
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Liquidity and Capital Resources
Liquidity Management
The Company’s most liquid assets are comprised of available for sale debt securities, federal funds sold, securities purchased under agreements to resell (resale agreements), and balances at the Federal Reserve Bank, as follows:
(In thousands) | March 31, 2022 | March 31, 2021 | December 31, 2021 | |||||||||||||||||
| Liquid assets: | ||||||||||||||||||||
| Available for sale debt securities | $ | 14,780,494 | $ | 12,528,203 | $ | 14,450,027 | ||||||||||||||
| Federal funds sold | — | 500 | 2,800 | |||||||||||||||||
| Securities purchased under agreements to resell | 1,825,000 | 850,000 | 1,625,000 | |||||||||||||||||
| Balances at the Federal Reserve Bank | 1,260,813 | 2,017,128 | 3,971,217 | |||||||||||||||||
| Total | $ | 17,866,307 | $ | 15,395,831 | $ | 20,049,044 | ||||||||||||||
There were no federal funds sold at March 31, 2022, which are funds lent to the Company's correspondent bank customers with overnight maturities. Resale agreements, maturing through 2024, totaled $1.8 billion at March 31, 2022. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled $1.9 billion in fair value at March 31, 2022. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $1.3 billion at March 31, 2022. The fair value of the available for sale debt portfolio was $14.8 billion at March 31, 2022 and included an unrealized net loss of $645.5 million.
Approximately $3.1 billion of the available for sale debt portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet new loan demand or help offset potential reductions in the Company's deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows:
(In thousands) | March 31, 2022 | March 31, 2021 | December 31, 2021 | ||||||||
| Investment securities pledged for the purpose of securing: | |||||||||||
| Federal Reserve Bank borrowings | $ | 16,260 | $ | 39,586 | $ | 17,465 | |||||
| FHLB borrowings and letters of credit | 2,798 | 4,874 | 3,218 | ||||||||
| Securities sold under agreements to repurchase * | 2,575,444 | 2,170,744 | 3,475,589 | ||||||||
| Other deposits and swaps | 2,606,141 | 2,477,132 | 2,897,576 | ||||||||
| Total pledged securities | 5,200,643 | 4,692,336 | 6,393,848 | ||||||||
| Unpledged and available for pledging | 8,426,648 | 6,490,351 | 6,913,721 | ||||||||
| Ineligible for pledging | 1,153,203 | 1,345,516 | 1,142,458 | ||||||||
| Total available for sale debt securities, at fair value | $ | 14,780,494 | $ | 12,528,203 | $ | 14,450,027 | |||||
* Includes securities pledged for collateral swaps, as discussed in Note 12 to the consolidated financial statements.
Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At March 31, 2022, such deposits totaled $28.2 billion and represented 96.1% of total deposits. These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources. Certificates of deposit of $100,000 and over totaled $716.3 million at March 31, 2022. These accounts are normally considered more volatile with higher cost and comprised 2.4% of total deposits at March 31, 2022.
(In thousands) | March 31, 2022 | March 31, 2021 | December 31, 2021 | ||||||||
| Core deposit base: | |||||||||||
| Non-interest bearing | $ | 11,428,372 | $ | 11,076,556 | $ | 11,772,374 | |||||
| Interest checking | 3,301,315 | 2,180,434 | 3,227,822 | ||||||||
| Savings and money market | 13,450,317 | 12,391,944 | 13,370,263 | ||||||||
| Total | $ | 28,180,004 | $ | 25,648,934 | $ | 28,370,459 | |||||
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Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company's outside borrowings are mainly comprised of federal funds purchased and repurchase agreements, as follows:
(In thousands) | March 31, 2022 | March 31, 2021 | December 31, 2021 | ||||||||
| Borrowings: | |||||||||||
| Federal funds purchased | $ | 17,315 | $ | 28,490 | $ | 43,385 | |||||
| Securities sold under agreements to repurchase | 2,300,146 | 1,909,620 | 2,979,582 | ||||||||
| Other debt | 9,057 | 3,791 | 12,560 | ||||||||
| Total | $ | 2,326,518 | $ | 1,941,901 | $ | 3,035,527 | |||||
Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Repurchase agreements are collateralized by securities in the Company's investment portfolio and are comprised of non-insured customer funds totaling $2.3 billion, which generally mature overnight. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were no advances outstanding from the FHLB at March 31, 2022.
The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral. Also, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at March 31, 2022.
| March 31, 2022 | |||||||||||
| (In thousands) | FHLB | Federal Reserve | Total | ||||||||
| Collateral value established by FHLB and FRB | $ | 1,949,603 | $ | 1,011,829 | $ | 2,961,432 | |||||
| Letters of credit issued | (199,250) | — | (199,250) | ||||||||
| Available for future advances | $ | 1,750,353 | $ | 1,011,829 | $ | 2,762,182 | |||||
In addition to those mentioned above, several other sources of liquidity are available. No commercial paper has been issued or outstanding during the past ten years. The Company has no subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that through its Capital Markets Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit or privately placed corporate notes or other forms of debt. The Company receives strong outside rankings from both Standard & Poor's and Moody's on both the consolidated company level and its subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise. These ratings are as follows:
| Standard & Poor’s | Moody’s | |||||||
Commerce Bancshares, Inc. | ||||||||
| Issuer rating | A- | |||||||
| Rating outlook | Stable | |||||||
Commerce Bank | ||||||||
| Issuer rating | A | A2 | ||||||
| Baseline credit assessment | a1 | |||||||
| Short-term rating | A-1 | P-1 | ||||||
| Rating outlook | Stable | Stable | ||||||
The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash equivalents and restricted cash of $2.7 billion during the first three months of 2022, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $124.5 million and has historically been a stable source of funds. Investing activities, which occur mainly in the
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loan and investment securities portfolios, used cash of $1.5 billion. Activity in the investment securities portfolio used cash of $1.0 billion from purchases (net of sales, maturities and pay downs), securities purchased under agreements to resell used cash of $200.0 million, and increase in the loan portfolio, which used cash of $287.3 million. Financing activities used cash of $1.3 billion, largely resulting from a decrease in federal funds purchased and securities sold under agreements to repurchase of $705.5 million, paired with a decrease in deposits of $511.6 million.
Capital Management
The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at March 31, 2022 and December 31, 2021, as shown in the following table.
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | Minimum Ratios under Capital Adequacy Guidelines | Minimum Ratios for Well-Capitalized Banks * | ||||||||||
| Risk-adjusted assets | $ | 23,415,739 | $ | 22,483,748 | ||||||||||
| Tier I common risk-based capital | 3,259,861 | 3,225,044 | ||||||||||||
| Tier I risk-based capital | 3,259,861 | 3,225,044 | ||||||||||||
| Total risk-based capital | 3,420,044 | 3,399,880 | ||||||||||||
| Tier I common risk-based capital ratio | 13.92 | % | 14.34 | % | 7.00 | % | 6.50 | % | ||||||
| Tier I risk-based capital ratio | 13.92 | 14.34 | 8.50 | 8.00 | ||||||||||
| Total risk-based capital ratio | 14.61 | 15.12 | 10.50 | 10.00 | ||||||||||
| Tier I leverage ratio | 9.07 | 9.13 | 4.00 | 5.00 | ||||||||||
*Under Prompt Corrective Action requirements
The Company is subject to a 2.5% capital conservation buffer, which is an amount above the minimum ratios under capital adequacy guidelines, and is required under Basel III. The capital conservation buffer is intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, share repurchases, and executive compensation.
In the first quarter of 2020, the interim final rule of the Federal Reserve Bank and other U.S. banking agencies became effective, providing banks that adopt CECL (ASU 2016-13) during the 2020 calendar year the option to delay recognizing the estimated impact on regulatory capital until after a two year deferral period, followed by a three year transition period. In connection with the adoption of CECL on January 1, 2020, the Company elected to utilize this option. As a result, the two year deferral period for the Company extends through December 31, 2021. Beginning on January 1, 2022, the Company began to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025.
The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and normally purchases stock in the open market. During the three months ended March 31, 2022, the Company purchased 795,387 shares at an average price of $70.22 in open market purchases and through stock-based compensation transactions. At March 31, 2022, 941,935 shares remained available for purchase under the Board authorization. On April 20, 2022, the share repurchase authorization was increased to 5,000,000 shares.
The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.265 per share cash dividend on its common stock in the first quarter of 2022, which was a 6.0% increase compared to its 2021 quarterly dividend.
Material Cash Requirements, Commitments, Off-Balance Sheet Arrangements and Contingencies
The Company's material cash requirements include commitments for contractual obligations (both short-term and long-term), commitments to extend credit, and off-balance sheet arrangements. The Company's material cash requirements for the next 12 months are primarily to fund loan growth. Additionally, the Company will utilize cash to fund deposit maturities and withdrawals that may occur in the next 12 months. Other contractual obligations, purchase commitments, lease obligations, and unfunded commitments may require cash payments by the Company, and these are further discussed in the Company's 2021 Annual Report on Form 10-K. There have been no changes in the Company's material cash requirements since December 31, 2021. Further discussion of the Company's longer-term material cash obligations is below.
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In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at March 31, 2022 totaled $13.0 billion (including $5.0 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $502.1 million and $1.4 million, respectively, at March 31, 2022. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to $4.2 million at March 31, 2022. The allowance for these commitments is recorded in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheets. At March 31, 2022, the liability for unfunded commitments totaled $25.0 million. See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements.
During the third quarter of 2020, the Company signed a $106.7 million agreement with U.S. Capital Development to develop a 280,000 square foot commercial office building in a two building complex in Clayton, Missouri, which is expected to be completed near the end of 2022. As of March 31, 2022, the Company has made payments totaling $63.3 million. While the Company intends to occupy a portion of the office building for executive offices, a 15 year lease agreement has been signed by an anchor tenant to lease approximately 50% of the office building.
The Company regularly purchases various state tax credits arising from third party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first three months of 2022, purchases and sales of tax credits amounted to $52.1 million and $22.1 million, respectively. Fees from sales of tax credits were $783 thousand for the three months ended March 31, 2022, compared to $1.2 million in the same period last year. At March 31, 2022, the Company expected to fund outstanding purchase commitments of $167.3 million during the remainder of 2022.
The Company's sound equity base, along with its long-term low debt level, common and preferred stock availability, and excellent debt ratings, provide several alternatives for future financing. Future acquisitions may utilize partial funding through one or more of these options. Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations. The Company is not aware of any trends, events, or commitments that are reasonably likely to increase or decrease its liquidity in a material way.
Segment Results
The table below is a summary of segment pre-tax income results for the first three months of 2022 and 2021.
(Dollars in thousands) | Consumer | Commercial | Wealth | Segment Totals | Other/ Elimination | Consolidated Totals | ||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||
| Net interest income | $ | 79,896 | $ | 109,530 | $ | 18,868 | $ | 208,294 | $ | 492 | $ | 208,786 | ||||||||
| Provision for credit losses | (4,498) | (82) | (26) | (4,606) | 14,464 | 9,858 | ||||||||||||||
| Non-interest income | 28,354 | 53,651 | 53,206 | 135,211 | (3,442) | 131,769 | ||||||||||||||
| Investment securities gains, net | — | — | — | — | 7,163 | 7,163 | ||||||||||||||
| Non-interest expense | (72,994) | (89,524) | (36,286) | (198,804) | (6,844) | (205,648) | ||||||||||||||
| Income before income taxes | $ | 30,758 | $ | 73,575 | $ | 35,762 | $ | 140,095 | $ | 11,833 | $ | 151,928 | ||||||||
| Three Months Ended March 31, 2021 | ||||||||||||||||||||
| Net interest income | $ | 77,939 | $ | 110,565 | $ | 17,457 | $ | 205,961 | $ | (213) | $ | 205,748 | ||||||||
| Provision for credit losses | (9,901) | (27) | 5 | (9,923) | 16,155 | 6,232 | ||||||||||||||
| Non-interest income | 38,248 | 50,728 | 50,985 | 139,961 | (3,916) | 136,045 | ||||||||||||||
| Investment securities gains, net | — | — | — | — | 9,853 | 9,853 | ||||||||||||||
| Non-interest expense | (70,369) | (79,281) | (33,043) | (182,693) | (9,880) | (192,573) | ||||||||||||||
| Income before income taxes | $ | 35,917 | $ | 81,985 | $ | 35,404 | $ | 153,306 | $ | 11,999 | $ | 165,305 | ||||||||
| Increase (decrease) in income before income taxes: | ||||||||||||||||||||
| Amount | $ | (5,159) | $ | (8,410) | $ | 358 | $ | (13,211) | $ | (166) | $ | (13,377) | ||||||||
| Percent | (14.4 | %) | (10.3 | %) | 1.0 | % | (8.6 | %) | (1.4 | %) | (8.1 | %) | ||||||||
Consumer
For the three months ended March 31, 2022, income before income taxes for the Consumer segment decreased $5.2 million, or 14.4%, compared to the first three months of 2021. The decrease in income before income taxes was mainly due to a decline
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in non-interest income of $9.9 million, or 25.9%, and higher non-interest expense of $2.6 million, or 3.7%. These decreases to income were partly offset by growth in net interest income of $2.0 million, or 2.5%, and a decrease in the provision for loan losses of $5.4 million, or 54.6%. Net interest income increased due to a $3.7 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios, and a $968 thousand decrease in deposit interest expense. These increases were partly offset by a $2.7 million decline in loan interest income. Non-interest income decreased mainly due to a decline of $9.5 million in mortgage banking revenue. Personal deposit account fees also declined from the prior year, while net credit and debit card fees were higher. Non-interest expense increased over the same period in the previous year mainly due to higher full-time salaries expense, marketing expense and allocated support costs for information technology. In addition, impairment expense on mortgage servicing rights (MSR) increased, while MSR amortization expense declined. The provision for credit losses totaled $4.5 million, a $5.4 million decrease from the first three months of 2021, mainly due to lower credit card loan net charge-offs.
Commercial
For the three months ended March 31, 2022, income before income taxes for the Commercial segment decreased $8.4 million, or 10.3%, compared to the same period in the previous year. This decrease was mainly due to an increase in non-interest expense and and a decline in net interest income, partly offset by an increase in non-interest income. Net interest income decreased $1.0 million, or .9%, due to lower loan interest income of $11.3 million and higher interest expense on customer repurchase agreements of $378 thousand, partly offset by a $10.5 million increase in net allocated funding credits. Non-interest income increased $2.9 million, or 5.8%, over the previous year mainly due to growth in net bank card fees (mainly corporate card fees) and deposit account fees (mainly corporate cash management fees). These increases were partly offset by declines in capital market fees and swap fees. Non-interest expense increased $10.2 million, or 12.9%, mainly due to higher salaries and benefits expense, data processing and software expense and allocated support costs for information technology, and lower deferred origination costs. The provision for credit losses increased $55 thousand over the same period last year, mainly due to higher commercial card loan net charge-offs.
Wealth
Wealth segment pre-tax profitability for the three months ended March 31, 2022 increased $358 thousand, or 1.0%, over the same period in the previous year. Net interest income increased $1.4 million, or 8.1%, mainly due to a $1.0 million increase in loan interest income. Non-interest income increased $2.2 million, or 4.4%, over the prior year largely due to higher trust fees (mainly private client trust fees) and brokerage fees, partly offset by lower mortgage banking revenue. Non-interest expense increased $3.2 million, or 9.8%, mainly due to higher salaries and benefits expense. In addition, travel and entertainment expense and marketing expense also increased. The provision for credit losses increased $31 thousand over the same period last year, mainly due to higher net charge-offs on personal real estate loans.
The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was lower than in the same period last year by $166 thousand. This decrease was partly due to higher non-interest expense of $3.0 million, partly offset by higher net interest income of $705 thousand and non-interest income of $474 thousand. Unallocated securities gains were $7.2 million in the first three months of 2022 compared to gains of $9.9 million in 2021. Also, the unallocated provision for credit losses increased $1.7 million, primarily driven by an increase in the liability for unfunded lending commitments and an increase in the provision for credit losses on loans, which are both not allocated to the segments for management reporting purposes. Net charge-offs are allocated to the segments when incurred for management reporting purposes. The provision for credit losses on loans was $15.3 million lower than net charge-offs, as the provision was a benefit in 2022, while the provision was $20.3 million lower than net charge-offs, as the provision was also a benefit in 2021. For the three months ended March 31, 2022, the Company's provision on unfunded lending commitments was expense of $828 thousand.
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Impact of Recently Issued Accounting Standards
Reference Rate Reform The FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting", in March 2020, and has been followed by additional clarifying guidance related to derivatives that are modified as a result of reference rate reform. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if they reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Further, the guidance applies to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The expedients and exceptions provided by the new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated for effectiveness after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022. In April 2022, the FASB proposed extending the sunset date under Topic 848 to December 31, 2024. The change is to align the temporary accounting relief guidance with the expected cessation date of LIBOR, which was postponed by administrators earlier this year to June 2023, a year after the current sunset date of ASU 2020-04.
In order to assess the impact of transition and ensure a successful transition process, the Company established a LIBOR Transition Program led by the LIBOR Transition Steering Committee (the Committee), which is an internal, cross-functional team with representatives from all relevant business lines, support functions and legal counsel. A LIBOR impact and risk assessment has been performed, and the Committee has developed and prioritized action items. All financial contracts that reference LIBOR have been identified and LIBOR fallback language has been included in key loan provisions of new and renewed loans in preparation from transition from LIBOR. The Company ceased originating new loans with LIBOR as a reference rate at the end of 2021 and is actively working with customers to modify existing loans that reference LIBOR to a new reference rate. Additionally, changes to the Company's systems have been identified, and the process of installing and testing code was started in the third quarter of 2021. The installation and testing process is expected to be completed in 2022.
Credit Losses The FASB issued ASU 2022-01, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures", in March 2022. This ASU eliminates the troubled debt restructuring recognition and measurement guidance and, instead, requires that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The amendments require that an entity disclose current period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. The guidance is effective January 1, 2023. The Company is evaluating the guidance to determine the impact on the Company's consolidated financial statements.
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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Three Months Ended March 31, 2022 and 2021
First Quarter 2022 | First Quarter 2021 | ||||||||||||||||||||||
(Dollars in thousands) | Average Balance | Interest Income/Expense | Avg. Rates Earned/Paid | Average Balance | Interest Income/Expense | Avg. Rates Earned/Paid | |||||||||||||||||
| ASSETS: | |||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||
Business(A) | $ | 5,324,172 | $ | 38,416 | 2.93 | % | $ | 6,532,921 | $ | 49,698 | 3.09 | % | |||||||||||
| Real estate — construction and land | 1,134,902 | 10,526 | 3.76 | 1,091,969 | 9,542 | 3.54 | |||||||||||||||||
| Real estate — business | 3,095,068 | 25,801 | 3.38 | 3,022,979 | 26,244 | 3.52 | |||||||||||||||||
| Real estate — personal | 2,808,980 | 22,696 | 3.28 | 2,826,112 | 23,698 | 3.40 | |||||||||||||||||
| Consumer | 2,040,200 | 18,084 | 3.59 | 1,947,322 | 19,304 | 4.02 | |||||||||||||||||
| Revolving home equity | 273,859 | 2,347 | 3.48 | 299,371 | 2,495 | 3.38 | |||||||||||||||||
| Consumer credit card | 540,844 | 15,130 | 11.35 | 608,747 | 16,466 | 10.97 | |||||||||||||||||
| Overdrafts | 5,178 | — | — | 3,546 | — | — | |||||||||||||||||
| Total loans | 15,223,203 | 133,000 | 3.54 | 16,332,967 | 147,447 | 3.66 | |||||||||||||||||
| Loans held for sale | 9,383 | 150 | 6.48 | 35,814 | 304 | 3.44 | |||||||||||||||||
| Investment securities: | |||||||||||||||||||||||
| U.S. government and federal agency obligations | 1,103,749 | 9,317 | 3.42 | 725,367 | 4,542 | 2.54 | |||||||||||||||||
| Government-sponsored enterprise obligations | 51,770 | 298 | 2.33 | 50,801 | 295 | 2.36 | |||||||||||||||||
State and municipal obligations(A) | 2,077,600 | 11,708 | 2.29 | 1,958,637 | 11,883 | 2.46 | |||||||||||||||||
| Mortgage-backed securities | 7,316,609 | 35,770 | 1.98 | 6,998,521 | 23,999 | 1.39 | |||||||||||||||||
| Asset-backed securities | 3,933,061 | 10,984 | 1.13 | 2,085,491 | 7,127 | 1.39 | |||||||||||||||||
| Other debt securities | 636,247 | 3,134 | 2.00 | 570,115 | 3,020 | 2.15 | |||||||||||||||||
Trading debt securities(A) | 40,686 | 185 | 1.84 | 32,320 | 86 | 1.08 | |||||||||||||||||
Equity securities(A) | 9,498 | 609 | 26.00 | 4,321 | 528 | 49.56 | |||||||||||||||||
Other securities(A) | 192,311 | 2,802 | 5.91 | 154,030 | 1,997 | 5.26 | |||||||||||||||||
| Total investment securities | 15,361,531 | 74,807 | 1.97 | 12,579,603 | 53,477 | 1.72 | |||||||||||||||||
| Federal funds sold | 1,053 | 1 | .39 | 7 | — | — | |||||||||||||||||
| Securities purchased under agreements to resell | 1,733,887 | 5,300 | 1.24 | 849,999 | 11,128 | 5.31 | |||||||||||||||||
| Interest earning deposits with banks | 2,608,029 | 1,151 | .18 | 1,480,331 | 370 | .10 | |||||||||||||||||
| Total interest earning assets | 34,937,086 | 214,409 | 2.49 | 31,278,721 | 212,726 | 2.76 | |||||||||||||||||
| Allowance for credit losses on loans | (149,685) | (220,512) | |||||||||||||||||||||
| Unrealized gain (loss) on debt securities | (174,297) | 283,511 | |||||||||||||||||||||
| Cash and due from banks | 340,242 | 354,569 | |||||||||||||||||||||
| Premises and equipment, net | 407,000 | 401,230 | |||||||||||||||||||||
| Other assets | 557,158 | 552,306 | |||||||||||||||||||||
| Total assets | $ | 35,917,504 | $ | 32,649,825 | |||||||||||||||||||
| LIABILITIES AND EQUITY: | |||||||||||||||||||||||
| Interest bearing deposits: | |||||||||||||||||||||||
| Savings | $ | 1,563,093 | 178 | .05 | $ | 1,333,177 | 277 | .08 | |||||||||||||||
| Interest checking and money market | 14,949,727 | 1,582 | .04 | 12,970,629 | 1,826 | .06 | |||||||||||||||||
| Certificates of deposit of less than $100,000 | 429,852 | 139 | .13 | 516,728 | 473 | .37 | |||||||||||||||||
| Certificates of deposit of $100,000 and over | 862,232 | 427 | .20 | 1,230,075 | 1,062 | .35 | |||||||||||||||||
| Total interest bearing deposits | 17,804,904 | 2,326 | .05 | 16,050,609 | 3,638 | .09 | |||||||||||||||||
| Borrowings: | |||||||||||||||||||||||
| Federal funds purchased | $ | 23,356 | $ | 7 | .12 | 37,034 | $ | 5 | .05 | ||||||||||||||
| Securities sold under agreements to repurchase | 2,712,468 | 682 | .10 | 2,129,038 | 307 | .06 | |||||||||||||||||
| Other borrowings | 768 | 1 | .53 | 831 | 2 | .98 | |||||||||||||||||
| Total borrowings | 2,736,592 | 690 | .10 | 2,166,903 | 314 | .06 | |||||||||||||||||
| Total interest bearing liabilities | 20,541,496 | 3,016 | .06 | % | 18,217,512 | 3,952 | .09 | % | |||||||||||||||
| Non-interest bearing deposits | 11,544,701 | 10,438,637 | |||||||||||||||||||||
| Other liabilities | 505,644 | 608,212 | |||||||||||||||||||||
| Equity | 3,325,663 | 3,385,464 | |||||||||||||||||||||
| Total liabilities and equity | $ | 35,917,504 | $ | 32,649,825 | |||||||||||||||||||
| Net interest margin (T/E) | $ | 211,393 | $ | 208,774 | |||||||||||||||||||
| Net yield on interest earning assets | 2.45 | % | 2.71 | % | |||||||||||||||||||
(A) Stated on a tax equivalent basis using a federal income tax rate of 21%.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest income sensitivity to movement in interest rates. The Company performs monthly simulations that model interest rate movements and risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2021 Annual Report on Form 10-K.
The tables below show the effects of gradual shifts in interest rates over a twelve month period on the Company’s net interest income versus the Company's net interest income in a flat rate scenario. Simulation A presents three rising rate scenarios and in each scenario, rates are assumed to change evenly over 12 months. In these scenarios, the balance sheet remains flat.
The sensitivity of deposit balances to changes in rates is particularly difficult to estimate in exceptionally low rate environments. Since the future effects of changes in rates on deposit balances cannot be known with certainty, the Company conservatively models alternate scenarios with deposit attrition as rates rise. Simulation B illustrates results from these higher attrition scenarios to provide added perspective on potential effects of higher rates.
The Company utilizes these simulations both for monitoring interest rate risk and for liquidity planning purposes. While the future effects of rising rates on deposit balances cannot be known, the Company maintains a practice of running multiple rate scenarios to better understand interest rate risk and its effect on the Company’s performance.
| Simulation A | March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||
(Dollars in millions) | $ Change in Net Interest Income | % Change in Net Interest Income | Assumed Deposit (Attrition)/Growth | $ Change in Net Interest Income | % Change in Net Interest Income | Assumed Deposit (Attrition)/Growth | |||||||||||||||||||||||
| 300 basis points rising | $ | 75.3 | 9.21 | % | $ | — | $ | 105.2 | 14.44 | % | $ | — | |||||||||||||||||
| 200 basis points rising | 57.5 | 7.03 | — | 76.0 | 10.44 | — | |||||||||||||||||||||||
| 100 basis points rising | 31.5 | 3.86 | — | 39.5 | 5.42 | — | |||||||||||||||||||||||
| Simulation B | March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||
(Dollars in millions) | $ Change in Net Interest Income | % Change in Net Interest Income | Assumed Deposit (Attrition)/Growth | $ Change in Net Interest Income | % Change in Net Interest Income | Assumed Deposit (Attrition)/Growth | |||||||||||||||||||||||
| 300 basis points rising | $ | 7.6 | .94 | % | $ | (2,001.8) | $ | 60.8 | 8.35 | % | $ | (1,611.1) | |||||||||||||||||
| 200 basis points rising | 14.1 | 1.73 | (1,414.9) | 51.8 | 7.11 | (950.7) | |||||||||||||||||||||||
| 100 basis points rising | 12.9 | 1.58 | (673.4) | 33.5 | 4.59 | (263.6) | |||||||||||||||||||||||
Under Simulation A, in the three rising rate scenarios, interest rate risk is less asset sensitive than the previous quarter, which is primarily due to a decrease in interest earning balances at the Federal Reserve coupled with an increase in interest rates. Deposit attrition was removed from the simulation in both the current and previous quarters. The Company did not model a 100 basis point falling scenario due to the already low interest rate environment.
In Simulation B, the assumed levels of deposit attrition were modeled to capture the results of a shrinking balance sheet. Under this Simulation, in the three rising rate scenarios, interest rate risk is less asset sensitive than the previous quarter, also primarily due to a decrease in interest earning balances at the Federal Reserve coupled with an increase in interest rates.
Projecting deposit activity in a period of historically low interest rates is difficult, and the Company cannot predict how deposits will actually react to shifting rates. The comparisons above provide insight into potential effects of changes in rates and deposit levels on net interest income. The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of interest rate risk.
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Item 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2022. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The information required by this item is set forth in Part I, Item 1 under Note 17, Legal and Regulatory Proceedings.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information about the Company's purchases of its $5 par value common stock, its only class of common stock registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as part of Publicly Announced Program | Maximum Number that May Yet Be Purchased Under the Program | |||||||||||||
| January 1 - 31, 2022 | 178,380 | $ | 68.44 | 178,380 | 1,558,942 | ||||||||||||
| February 1 - 28, 2022 | 330,983 | $ | 70.81 | 330,983 | 1,227,959 | ||||||||||||
| March 1 - 31, 2022 | 286,024 | $ | 70.66 | 286,024 | 941,935 | ||||||||||||
| Total | 795,387 | $ | 70.22 | 795,387 | 941,935 | ||||||||||||
The Company's stock purchases shown above were made under authorizations by the Board of Directors. At March 31, 2022, 941,935 shares remained available for purchase. On April 20, 2022, the share repurchase authorization was increased to 5,000,000 shares.
Item 6. EXHIBITS
101 — Interactive data files in Inline XBRL pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
104 — Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMMERCE BANCSHARES, INC. | |||||||||||
| By | /s/ MARGARET M. ROWE | ||||||||||
| Margaret M. Rowe | |||||||||||
Date: May 5, 2022 | Vice President & Secretary | ||||||||||
| By | /s/ PAUL A. STEINER | ||||||||||
| Paul A. Steiner | |||||||||||
| Controller | |||||||||||
Date: May 5, 2022 | (Chief Accounting Officer) | ||||||||||
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