What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-04 · 361 added, 233 removed, 516 unchanged (54% of the section changed)

2 unchanged sentences

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2022 Annual Report on Form 10-K.

Results of operations for the three month periods ended March 31, 2023 are not necessarily indicative of results to be attained for any other period.

Results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of results to be attained for any other period.

Forward-Looking Information

10 unchanged sentences

changes in economic conditions in the Company's market area, the effects of the COVID-19 pandemic, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2022 Annual Report on Form 10-K.

During the quarter ended March 31, 2023, there were no material changes to the Risk Factors disclosed in the Company's 2022 Annual Report on Form 10-K.

During the quarter ended June 30, 2023, there were no material changes to the Risk Factors disclosed in the Company's 2022 Annual Report on Form 10-K.

Critical Accounting Estimates and Related Policies

4 unchanged sentences

Selected Financial Data

Three Months Ended March 31

Three Months Ended June 30 Six Months Ended June 30

2023 2022 2023 2022

Per Share Data

10 unchanged sentences

Equity to loans (1)

16.35 18.41 16.05 20.10

Equity to deposits 10.81 9.93 10.52 10.63

4 unchanged sentences

Non-interest income to revenue (2)

37.17 37.50 36.27 38.07

Efficiency ratio (3)

57.22 57.29 57.35 58.72

Tier I common risk-based capital ratio 14.75 13.95

24 unchanged sentences

Results of Operations

Three Months Ended March 31 Increase (Decrease)

(Dollars in thousands) 2023 2022 Amount % change

Net interest income $ 251,623 $ 208,786 $ 42,837 20.5 %

Three Months Ended June 30 Six Months Ended June 30

(Dollars in thousands) 2023 2022 % change 2023 2022 % change

Net interest income (expense) $ 249,538 $ 232,385 7.4 % $ 501,161 $ 441,171 13.6 %

Provision for credit losses (6,471) (7,162) 9.6 (17,927) 2,696 764.9

Non-interest income 147,605 139,427 5.9 285,217 271,196 5.2

Investment securities gains (losses), net (306) 7,163 (7,469) (104.3)

Investment securities gains (losses), net 3,392 1,029 N.M.

3,086 8,192 (62.3)

Non-interest expense (227,611) (213,505) 6.6 (451,718) (419,153) 7.8

3 unchanged sentences

$ 127,789 $ 115,794 10.4 % $ 247,241 $ 233,948 5.7 %

For the quarter ended March 31, 2023, net income attributable to Commerce Bancshares, Inc.

(net income) amounted to $119.5 million, an increase of $1.3 million, or 1.1%, compared to the first quarter of the previous year.

For the quarter ended June 30, 2023, net income attributable to Commerce Bancshares, Inc.

(net income) amounted to $127.8 million, an increase of $12.0 million, or 10.4%, compared to the second quarter of the previous year.

For the current quarter, the annualized return on average assets was 1.56%, the annualized return on average equity was 18.81%, and the efficiency ratio was 57.22%.

Diluted earnings per common share was $.95, an increase of 3.3% compared to $.92 per share in the first quarter of 2022, and decreased 8.7% compared to $1.04 per share in the previous quarter.

Compared to the first quarter of last year, net interest income increased $42.8 million, or 20.5%, mainly due to an increase of $91.7 million in interest income on loans, partly offset by an increase in deposits and borrowings interest expense of $54.2 million.

The provision for credit losses increased $21.3 million mainly due to an increase in the estimate of the allowance for credit losses on loans and higher net loan charge-offs, partly offset by a decrease in the liability for unfunded lending commitments.

Non-interest income increased $5.8 million, or 4.4%, compared to the first quarter of 2022, mainly due to increases in net bank card fees and cash sweep commissions, partly offset by lower trust fees and loan fees and sales.

Net losses on investment securities totaled $306 thousand in the current quarter compared to net gains of $7.2 million in the same quarter of last year.

Net securities losses in the current quarter primarily resulted from losses of $3.1 million realized on the sales of available for sale debt securities, mostly offset by net fair value gains of $2.3 million and a gain of $653 thousand on the sale of an investment, both in the Company's private equity investment portfolio.

Non-interest expense increased $18.5 million, or 9.0%, over the first quarter of 2022 mainly due to higher salaries and employee benefits expense, data processing and software expense, miscellaneous losses and travel and entertainment expense.

Diluted earnings per common share was $1.02 per share in the current quarter, an increase of 10.9% compared to $0.92 per share in the second quarter of 2022, and increased 7.4% compared to $0.95 per share in the previous quarter.

Compared to the second quarter of last year, net interest income increased $17.2 million, or 7.4%, mainly due to increases in interest income on loans and interest income on deposits with banks of $98.8 million and $26.8 million, respectively.

These increases were partly offset by an increase in deposits and borrowings interest expense of $93.4 million.

The provision for credit losses decreased $691 thousand, or 9.6%, compared to the same quarter in the prior year.

Non-interest income increased $8.2 million, or 5.9%, compared to the second quarter of 2022, mainly due to an increase in net bank card fees and letters of credit fees, partly offset by lower deposit account charges.

Net gains on investment securities totaled $3.4 million in the current quarter compared to net gains of $1.0 million in the same quarter of last year.

Net securities gains in the current quarter primarily resulted from gains of $9.1 million related to fair value adjustments on private equity investments, partly offset by $5.4 million of net losses realized on the sales of available for sale debt securities.

Non-interest expense increased $14.1 million, or 6.6%, over the second quarter of 2022, mainly due to higher salaries and employee benefits expense and higher FDIC insurance expense.

Net income for the first six months of 2023 was $247.2 million, an increase of $13.3 million, or 5.7%, from the same period last year.

Diluted earnings per common share was $1.97, an increase of 7.1% compared to $1.84 per share in the same period last year.

For the first six months of 2023, the annualized return on average assets was 1.55%, the annualized return on average equity was 18.78%, and the efficiency ratio was 57.35%.

Net interest income increased $60.0 million, or 13.6%, over the same period last year.

This growth was largely due to an increase of $190.5 million in interest income on loans, partly offset by increases in interest expense on deposits and borrowings of $147.6 million.

The provision for credit losses was $17.9 million for the first six months of 2023, compared to a recovery of $2.7 million in the same period last year.

Non-interest income increased $14.0 million, or 5.2%, from the first six months of last year mainly due to higher bank card fees, cash sweep commission fees, and letters of credit fees.

Non-interest expense increased $32.6 million, or 7.8%, over the first six months of last year mainly due to increases in salaries and benefits expense and and higher FDIC insurance expense.

Net Interest Income

2 unchanged sentences

Analysis of Changes in Net Interest Income

Three Months Ended March 31, 2023 vs.

Change due to

Three Months Ended June 30, 2023 vs.

2022 Six Months Ended June 30, 2023 vs.

Change due to Change due to

(In thousands) Average

Volume Average

Total Average

Volume Average

Interest income, fully taxable equivalent basis:

32 unchanged sentences

Net interest income, tax equivalent basis $ (19,682) $ 36,429 $ 16,747 $ (29,690) $ 88,455 $ 58,765

Net interest income in the first quarter of 2023 was $251.6 million, an increase of $42.8 million over the first quarter of 2022.

On a fully taxable-equivalent (FTE) basis, net interest income totaled $253.4 million in the first quarter of 2023, up $42.0 million over the same period last year and down $3.3 million from the previous quarter.

Net interest income in the second quarter of 2023 was $249.5 million, an increase of $17.2 million over the second quarter of 2022.

On a fully taxable-equivalent (FTE) basis, net interest income totaled $251.8 million in the second quarter of 2023, up $16.7 million over the same period last year and down $1.7 million from the previous quarter.

The increase in net interest

income compared to the first quarter of 2022 was mainly due to higher interest income earned on loans (FTE) of $92.0 million, partly offset by higher interest expense on deposits and borrowings of $55.0 million.

The increase in total interest earned on loans (FTE) was the result of higher loan yields on all loan products, especially commercial loans, many of which have variable rates, coupled with higher average balances, while the increase in interest expense was due to higher rates paid on deposits and borrowings.

The Company's net yield on earning assets (FTE) was 3.26% in the current quarter compared to 2.45% in the first quarter of 2022.

Total interest income (FTE) increased $97.0 million over the first quarter of 2022.

Interest income on loans (FTE) was $225.0 million during the first quarter of 2023, an increase of $92.0 million, or 69.2%, over the same quarter last year.

income compared to the second quarter of 2022 was mainly due to higher interest income earned on loans (FTE) of $99.2 million, partly offset by higher interest expense on deposits and borrowings of $93.3 million.

The increase in total interest earned on loans (FTE) was the result of higher loan yields on all loan products, especially commercial loans, many of which have variable rates, coupled with higher average balances, while the increase in interest expense was mainly due to higher rates paid on deposits and borrowings.

The Company's net yield on earning assets (FTE) was 3.12% in the current quarter compared to 2.79% in the second quarter of 2022.

Total interest income (FTE) increased $110.0 million over the second quarter of 2022.

Interest income on loans (FTE) was $242.7 million during the second quarter of 2023, an increase of $99.2 million, or 69.1%, over the same quarter last year.

The increase in interest income over the same quarter of last year was primarily due to an increase of 212 basis points in the average rate earned and growth of $1.2 billion, or 7.6%, in average loan balances.

1 unchanged sentence

The largest increase to interest income occurred in business loan interest, which grew $37.6 million due to a 242 basis point increase in the average rate earned, coupled with growth in average balances of $372.2 million, or 6.9%.

Business real estate loan interest income increased $22.6 million due to an increase of 227 basis points in the average rate earned and higher average balances of $383.3 million.

Business real estate loan interest income increased $23.5 million due to an increase of 226 basis points in the average rate earned and higher average balances of $377.3 million, or 11.9%.

Construction and land loan interest grew $16.2 million due to a 383 basis point increase in the average rate earned and growth of $224.9 million, or 18.4%, in average loan balances.

1 unchanged sentence

Personal real estate loan interest income grew $4.1 million due to a 41 basis point increase in the average rate earned and growth of $135.4 million, or 4.8%, in average loan balances.

Interest income on investment securities (FTE) was $72.5 million during the first quarter of 2023, which was a decrease of $2.3 million from the same quarter last year.

Interest income on investment securities (FTE) was $74.6 million during the second quarter of 2023, which was a decrease of $15.8 million from the same quarter last year.

The decrease in interest income occurred mainly in interest earned on U.S.

2 unchanged sentences

Interest income related to TIPS, which is tied to the non-seasonally adjusted Consumer Price Index (CPI-U), decreased $4.5 million from the same quarter last year.

Interest income earned on mortgage-backed securities decreased $2.9 million mainly due to a decline of $862.2 million, or 11.8%, in the average balance.

In addition, an $802 thousand increase in premium amortization, reflecting slower forward prepayment speed estimates was recorded in the current quarter, compared to a premium amortization adjustment increase of $7.5 million in the prior year.

These decreases were partly offset by an increase of eight basis points in the average rate earned.

Interest income earned on state and municipal securities declined $4.4 million mainly due to a $593.9 million, or 27.9%, decrease in average balances.

These decreases to interest income were partly offset by growth of $5.1 million in interest earned on asset-backed securities, due to an increase of 88 basis points in the average rate earned, partly offset by lower average balances of $699.3 million, or 17.8%.

The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $13.5 billion in the first quarter of 2023, compared to $15.4 billion in the first quarter of 2022.

Interest income on securities purchased under agreements to resell decreased $1.3 million from the same quarter last year, due to a decline of $908.9 million in the average balance, partly offset by an increase of 70 basis points in the average rate earned.

Interest income on balances at the Federal Reserve grew $8.2 million due to an increase of 449 basis points in the average rate earned, partly offset by a decrease of $1.8 billion in the average balance invested.

The average fully taxable-equivalent yield on total interest earning assets was 4.00% in the first quarter of 2023, up from 2.49% in the first quarter of 2022.

Total interest expense increased $55.0 million compared to the first quarter of 2022 due to increases in interest expense of $25.9 million on interest bearing deposits and $29.1 million on borrowings.

The increase in deposit interest expense resulted mainly from an increase of $18.4 million in interest expense on interest checking and money market deposit accounts due to a 57 basis point increase in the average rate paid.

In addition, interest expense on certificates of deposit increased $7.5 million, due to an increase of 230 basis points in the average rate paid.

Interest income on other securities decreased $4.9 million, mainly due the receipt of $6.5 million in non-accrual interest on the sale of a private equity investment recorded in the second quarter of 2022.

This increase was partly offset by an increase in the average balance of Federal Home Loan Bank (FHLB) stock.

Interest income earned on mortgage-backed securities decreased $2.7 million mainly due to a decline of $842.0 million, or 11.8%, in the average balance.

In addition, a $1.7 million increase in premium amortization, reflecting slower forward prepayment speed estimates was recorded in the current quarter, compared to a premium amortization adjustment increase of $5.0 million in the prior year.

These decreases were partly offset by an increase of ten basis points in the average rate earned.

These decreases to interest income were partly offset by growth of $1.1 million in interest earned on asset-backed securities, due to an increase of 73 basis points in the average rate earned, partly offset by lower average balances of $1.2 billion, or 30.0%.

The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $12.6 billion in the second quarter of 2023, compared to $15.4 billion in the second quarter of 2022.

Interest income on securities purchased under agreements to resell decreased $286 thousand from the same quarter last year, due to a decline of $878.6 million in the average balance, partly offset by an increase of 96 basis points in the average rate earned.

Interest income on balances at the Federal Reserve grew $26.8 million due to an increase of 436 basis points in the average rate earned and an increase of $1.0 billion in the average balance invested.

The average fully taxable-equivalent yield on total interest earning assets was 4.34% in the second quarter of 2023, up from 2.86% in the second quarter of 2022.

Total interest expense increased $93.3 million compared to the second quarter of 2022 due to increases in interest expense of $51.6 million on interest bearing deposits and $41.6 million on borrowings.

The increase in deposit interest expense resulted mainly from an increase of $27.7 million in interest expense on interest checking and money market deposit accounts due to an 87 basis point increase in the average rate paid, slightly offset by lower average balances of $1.9 billion, or 13.0%.

In addition, interest expense on certificates of deposit increased $23.9 million mainly due to an increase of 361 basis points in the average rate paid and an increase in average balances of $1.5 billion.

A portion of this increase was due to brokered deposits added by the Company during the second quarter of 2023.

The brokered deposits consist of short-term certificates of deposit less than $100 thousand, and $903.9 million were outstanding at June 30, 2023.

Interest expense on borrowings was higher due to an increase of $14.3 million in interest expense on customer repurchase agreements resulting from an increase of 261 basis points in the average rate paid.

Interest expense on Federal funds purchased increased $5.6 million mainly due to a 447 basis point increase in the average rate paid, while Federal Home Loan Bank (FHLB) borrowings increased $550.0 million and resulted in an increase of $6.7 million in interest expense.

The overall average rate incurred on all interest bearing liabilities was 1.20% and .06% in the first quarters of 2023 and 2022, respectively.

Interest expense on federal funds purchased increased $6.2 million mainly due to a 427 basis point increase in the average rate paid, while FHLB borrowings increased $1.6 billion and resulted in an increase of $21.1 million in

interest expense.

The overall average rate incurred on all interest bearing liabilities was 1.87% and .12% in the second quarters of 2023 and 2022, respectively.

Net interest income (FTE) for the first six months of 2023 was $505.2 million compared to $446.4 million for the same period in 2022.

For the first six months of 2023, the net interest margin was 3.18% compared to 2.62% for the same period in 2022.

Total interest income (FTE) for the first six months of 2023 increased $58.8 million over the same period last year mainly due to higher interest income on loans (FTE) and balances at the Federal Reserve, partly offset by higher interest expense on deposit and borrowings and lower interest income on investment securities (FTE).

Loan interest income (FTE) increased $191.2 million, or 69.2%, due to a 207 basis point increase in the average rate earned and a $1.2 billion, or 7.7%, increase in average loan balances.

Most of the increase occurred in the business, business real estate and construction loan categories, but interest income in all loan categories increased due to higher average rates earned and higher average loan balances.

Interest income on investment securities (FTE) decreased $18.1 million due to a $2.3 billion decrease in average balances, slightly offset by a ten basis point increase in the average rate earned.

Interest earned on U.S.

government and federal agency obligations decreased $9.1 million, mainly due to lower TIPS interest income.

Interest income earned on state and municipal securities declined $6.1 million mainly due to lower average balances and interest rates earned.

Interest earned on mortgage-backed securities decreased $5.6 million due to lower average balances, partly offset by higher average rates earned, while interest on asset-backed securities increased $6.1 million due to higher average rates earned, partly offset by lower average balances.

Interest income on securities purchased under agreements to resell decreased $1.6 million due to lower average balances, partly offset higher average rates earned.

Interest income on balances at the Federal Reserve increased $35.0 million due to higher average rates earned.

Total interest expense for the first six months of 2023 increased $148.2 million compared to the same period last year.

Interest expense on deposits increased $77.5 million, due to a 95 basis point increase in the average rate paid.

Interest expense on borrowings increased $70.7 million, mainly due to higher rates paid on federal funds purchased and customer repurchase agreements and higher average balances of FHLB borrowings.

The overall cost of total interest bearing liabilities increased to 1.55% compared to .09% in the same period last year.

Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.

Non-Interest Income

Three Months Ended March 31 Increase (Decrease)

(Dollars in thousands) 2023 2022 Amount % change

Trust fees $ 45,328 $ 47,811 $ (2,483) (5.2) %

Three Months Ended June 30 Increase (Decrease) Six Months Ended June 30 Increase (Decrease)

(Dollars in thousands) 2023 2022 Amount % change 2023 2022 Amount % change

Bank card transaction fees $ 49,725 $ 43,873 $ 5,852 13.3 % $ 96,379 $ 85,918 $ 10,461 12.2 %

Trust fees 47,265 46,792 473 1.0 92,593 94,603 (2,010) (2.1)

Deposit account charges and other fees 22,633 25,564 (2,931) (11.5) 44,385 47,871 (3,486) (7.3)

6 unchanged sentences

* 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, 2023 and 2022.

Three Months Ended March 31

(Dollars in thousands) 2023 2022 $ change % change

The table below is a summary of net bank card transaction fees for the six month periods ended June 30, 2023 and 2022.

Three Months Ended June 30 Six Months Ended June 30

(Dollars in thousands) 2023 2022 $ change % change 2023 2022 $ change % change

Net debit card fees $ 11,340 $ 10,533 $ 807 7.7 % $ 21,627 $ 20,085 $ 1,542 7.7 %

3 unchanged sentences

Total bank card transaction fees $ 49,725 $ 43,873 $ 5,852 13.3 % $ 96,379 $ 85,918 $ 10,461 12.2 %

For the first quarter of 2023, total non-interest income amounted to $137.6 million compared to $131.8 million in the same quarter last year, which was an increase of $5.8 million, or 4.4%.

The increase was mainly due to higher net bank card fees and cash sweep commissions, partly offset by lower trust fees and loan fees and sales.

Trust fees for the quarter decreased $2.5 million, or 5.2%, from the same quarter last year, as a result of lower private client fees (down 4.8%) and institutional trust fees (down 6.0%).

For the second quarter of 2023, total non-interest income amounted to $147.6 million compared to $139.4 million in the same quarter last year, which was an increase of $8.2 million, or 5.9%.

The increase was mainly due to higher net bank card fees and other income, partly offset by lower deposit account fees.

Bank card transaction fees for the current quarter grew $5.9 million, or 13.3%, over the same period last year, mainly due to growth of $4.5 million in net corporate card fees.

The growth in net corporate card fees was mainly due to higher interchange income.

Compared to the first quarter of last year, deposit account fees decreased $555 thousand, or 2.5%, mainly due to lower overdraft and return item fees of $2.7 million, partly offset by higher personal deposit account fees and corporate cash management fees of $1.0 million and $959 thousand, respectively.

Consumer brokerage service fees increased $639 thousand, or 14.4%, due to growth in annuity fees, partly offset by lower advisory fees.

Capital market fees decreased $763 thousand, or 18.5%, while loan fees and sales decreased $1.6 million, or 38.9%, due to a decline in mortgage banking revenue.

Other non-interest income increased $6.0 million, or 88.9%, mainly due to higher cash sweep commissions of $2.6 million, a write down on a branch location of $965 thousand recorded in the first quarter of 2022 and income of $524 thousand from a life insurance death benefit.

In addition, a $2.0 million increase in fair value adjustments was recorded on the Company's deferred compensation plan assets, which are held in a trust, recorded as both an asset and liability, and affect both other income and other expense.

The growth in net corporate card fees was mainly due to higher interchange income and lower rewards and network expense.

Debit card fees increased mainly due to lower network expense, while merchant fees increased due to higher interchange fees.

Compared to the second quarter of last year, deposit account fees decreased $2.9 million, or 11.5%, due to lower overdraft and return item fees.

Trust fees increased $473 thousand due to higher private client trust fees, while consumer brokerage fees declined $391 thousand due to lower advisory and annuity fees.

Capital market fees decreased $788 thousand, or 23.7% and loan fees and sales decreased $511 thousand, or 15.7%, mainly due to a decline in mortgage banking revenue.

Other non-interest income increased $6.5 million, or 56.0%, mainly due to higher letter of credit fees of $2.9 million, swap fees of $1.1 million, cash sweep commissions of $855 thousand and a gain on the sale of real estate of $1.1 million recorded in the current quarter.

In addition, an increase of $3.4 million in fair value adjustments was recorded on the Company's deferred compensation plan assets, which are held in a trust, recorded as both an asset and liability, and affect both other income and other expense.

These increases were partly offset by a decrease in tax credit sales fees of $1.5 million and the receipt of a $2.2 million life insurance death benefit recorded in the second quarter of 2022.

Non-interest income for the first six months of 2023 was $285.2 million compared to $271.2 million in the first six months of 2023, which was an increase of $14.0 million, or 5.2%.

The increase was mainly due to higher net bank card fees and other income, partly offset by lower deposit account fees, trust fees and loan fees and sales.

Bank card transaction fees for the current quarter grew $10.5 million, or 12.2%, over the same period last year, mainly due to growth of $8.1 million in net corporate card fees.

Trust fees increased $2.0 million, or 2.1%, mainly due to higher private client and institutional trust fees.

Deposit account fees decreased $3.5 million, or 7.3%, mainly due to lower overdraft and return item fees, partly offset by higher corporate cash management fees and personal deposit account fees.

Capital market fees decreased $1.6 million, or 20.8%, while loan fees and sales decreased $2.2 million mainly due to lower mortgage banking revenue.

Other non-interest income increased $12.5 million, or 68.2%, mainly due to higher cash sweep commissions of $3.5 million, letter of credit fees of $2.8 million, the $1.1 million gain on the sale of real estate mentioned above and a write-down of $965 thousand on a branch location recorded in 2022.

In addition, fair value adjustments on the Company's deferred compensation plan assets increased $5.4 million.

These increases were partly offset by lower tax credit sales fees of $1.7 million and income of $2.2 million from a life insurance death benefit recorded in 2022.

Investment Securities Gains (Losses), Net

Three Months Ended March 31

Three Months Ended June 30 Six Months Ended June 30

(In thousands) 2023 2022 2023 2022

4 unchanged sentences

Total investment securities gains (losses), net $ 3,392 $ 1,029 $ 3,086 $ 8,192

Net gains on investment securities, which were recognized in earnings during the three months ended March 31, 2023 and 2022, are shown in the table above.

Net securities losses of $306 thousand were reported in the first quarter of 2023, compared to net gains of $7.2 million in the same period last year.

The net losses in the first quarter of 2023 were primarily comprised of net losses of $3.1 million on the sale of available for sale securities, mostly offset by net gains in fair value of $2.3 million and a gain of $653 thousand on the sale of an investment, both in the Company’s private equity investment portfolio.

The net gains on investment securities for the same quarter last year were mainly comprised of $7.5 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 $582 thousand during the first three months of 2023 and expense of $1.5 million during the first three months of 2022.

Net gains on investment securities, which were recognized in earnings during the three months ended June 30, 2023 and 2022, are shown in the table above.

Net securities gains of $3.4 million were reported in the second quarter of 2023, compared to net gains of $1.0 million in the same period last year.

The net gains in the second quarter of 2023 were primarily comprised of $9.1 million of net gains in fair value on the Company’s private equity investments, due to fair value adjustments, partially offset by net losses of $5.4 million on the sale of available for sale securities.

The net gains on investment securities for the same quarter last year were primarily comprised of $15.6 million of net gains in fair value on the Company’s private equity investments, partially offset by losses of $9.6 million and $4.3 million on sales of available for sale securities and a private equity investment, respectively.

Net gains on investment securities of $3.1 million were recognized in earnings for the six months ended June 30, 2023, compared to net gains of $8.2 million for the same period in 2022.

Net gains in the first half of 2023 were mainly comprised of net gains in fair value of $11.3 million on private equity investments, due to fair value adjustments, partially offset by losses of $8.4 million on sales of available for sale securities.

Net gains in the first half of 2022 were mainly comprised of net gains in fair value of $23.1 million on private equity investments, offset by losses of $9.6 million on sales of available for sale securities, net losses of $4.3 million on sales of private equity investments, and net losses in fair value of $1.0 million on equity investments.

The portion of private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in expense of $2.5 million during the first six months of 2023 and expense of $3.8 million during the first six months of 2022.

Non-Interest Expense

Three Months Ended March 31 Increase (Decrease)

(Dollars in thousands) 2023 2022 Amount % change

Three Months Ended June 30 Increase (Decrease) Six Months Ended June 30 Increase (Decrease)

(Dollars in thousands) 2023 2022 Amount % change 2023 2022 Amount % change

Salaries and employee benefits $ 145,429 $ 142,243 $ 3,186 2.2 % $ 289,802 $ 278,196 $ 11,606 4.2 %

1 unchanged sentence

Net occupancy 12,995 12,503 492 3.9 25,754 24,799 955 3.9

Marketing 6,368 5,836 532 9.1 11,839 12,180 (341) (2.8)

Equipment 4,864 4,734 130 2.7 9,714 9,302 412 4.4

Supplies and communication 4,625 4,361 264 6.1 9,215 9,074 141 1.6

Marketing 5,471 6,344 (873) (13.8)

Other 24,611 16,193 8,418 52.0 48,521 30,951 17,570 56.8

Total non-interest expense $ 227,611 $ 213,505 $ 14,106 6.6 % $ 451,718 $ 419,153 $ 32,565 7.8 %

Non-interest expense for the first quarter of 2023 amounted to $224.1 million, an increase of $18.5 million, or 9.0%, compared to expense of $205.6 million in the first quarter of last year.

Non-interest expense for the second quarter of 2023 amounted to $227.6 million, an increase of $14.1 million, or 6.6%, compared to expense of $213.5 million in the second quarter of last year.

The increase in expense over the same period last year was mainly due to higher salaries and employee benefits expense, data processing and software expense and other non-interest expense.

Salaries and benefits expense increased $8.4 million, or 6.2%, due to higher full-time salaries expense of $7.6 million, or 8.9%, and employee benefits expense of $1.4 million, or 5.9%, partly offset by lower incentive compensation expense of $957 thousand.

Full-time equivalent employees totaled 4,636 at March 31, 2023, compared to 4,563 at March 31, 2022.

Salaries expense increased $929 thousand, or .8%, due to higher full-time salaries expense of $6.9 million, or 7.6%, partly offset by lower incentive compensation expense of $5.7 million, largely the result of a $5.4 million accrual for special bonuses in 2022 that did not reoccur in 2023.

Employee benefits expense totaled $25.7 million, reflecting growth of $2.3 million, or 11.4%, mainly due to higher healthcare expense.

Full-time equivalent employees totaled 4,680 at June 30, 2023, compared to 4,579 at June 30, 2022.

Data processing and software expense increased $1.1 million, or 3.9%, due to higher bank card processing fees and increased costs for service providers.

Occupancy expense increased $463 thousand, or 3.8%, mainly due to higher depreciation and utilities expense, while marketing expense decreased $873 thousand, or 13.8%.

Other non-interest expense increased $9.2 million, or 62.0%, mainly due to higher FDIC insurance, deferred compensation (previously mentioned), miscellaneous losses and travel and entertainment expense of $2.3 million, $2.0 million, $1.3 million and $1.1 million, respectively.

Occupancy expense increased $492 thousand, or 3.9%, mainly due to higher depreciation expense and real estate taxes, partly offset by higher rent income.

Marketing expense increased $532 thousand, or 9.1%, and supplies and communication expense increased $264 thousand, or 6.1%, mainly due to higher postage expense.

Other non-interest expense increased $8.4 million, or 52.0%, mainly due to higher deferred compensation adjustments (previously mentioned), FDIC insurance and travel and entertainment expense of $3.4 million, $1.8

million and $797 thousand, respectively.

Additionally, the Company recorded deconversion expense of $2.1 million relating to the transition of Commerce Financial Advisors support to LPL Financial's Institution Services platform.

Non-interest expense amounted to $451.7 million for the first six months of 2023, an increase of $32.6 million, or 7.8%, over the first six months of 2022.

Salaries and benefits expense increased $11.6 million, or 4.2%, mainly due to higher full-time salaries expense, healthcare expense and payroll taxes, partly offset by a decrease in incentive compensation, mainly the special bonus accrual in 2022 mentioned above.

Data processing and software expense increased $2.2 million, or 4.1%, due to increased costs for service providers and higher bank card processing fees.

Occupancy expense increased $1.0 million, or 3.9%, mainly due to higher depreciation and utilities expense, partly offset by higher external rent income.

Marketing expense decreased $341 thousand, or 2.8%, while equipment expense increased $412 thousand, or 4.4%, due to higher furniture and equipment service contracts and rental expense.

Other non-interest expense increased $17.6 million, or 56.8%, mainly due to higher FDIC insurance expense, travel and entertainment expense, miscellaneous losses and pension plan expense, in addition to the previously mentioned deconversion costs of $2.1 million and the fair value equity adjustments of $5.4 million on the Company's deferred compensation plan assets.

Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments

Three Months Ended

31, 2023 Dec.

31, 2022 Mar.

Three Months Ended Six Months Ended June 30

June 30, 2023 Mar.

31, 2023 June 30, 2022 2023 2022

ALLOWANCE FOR CREDIT LOSSES ON LOANS

20 unchanged sentences

ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 187,920 $ 187,945 $ 162,946 $ 187,920 $ 162,946

Three Months Ended

31, 2023 Dec.

31, 2022 Mar.

Three Months Ended Six Months Ended June 30

June 30, 2023 Mar.

31, 2023 June 30, 2022 2023 2022

Annualized net loan charge-offs (recoveries)*:

15 unchanged sentences

The Company's policies and processes for determining the allowance for credit losses on loans and the liability for unfunded lending commitments are discussed in Note 1 to the consolidated financial statements and in the " Allowance for Credit Losses" discussion within Critical Accounting Estimates and Related Policies in Item 7 of the 2022 Annual Report on Form 10-K.

Net loan charge-offs in the first quarter of 2023 amounted to $6.8 million, compared to $5.6 million in the prior quarter and $4.6 million in the first quarter of last year.

During the first quarter of 2023, the Company recorded net charge-offs on commercial loans of $226 thousand, compared to net charge-offs of $492 thousand in the prior quarter and $70 thousand in the first quarter of 2022.

Comp ared to the same period last year, total net loan charge-offs in the first quarter of 2023 increased $2.1 million and increased $1.1 million over the previous quarter.

The increase over the prior year was mainly driven by increases in net charge-offs on consumer credit cards, overdrafts, and consumer loans of $953 thousand, $620 thousand, and $467 thousand, respectively.

The increase over the previous quarter was driven by increases in net charge-offs on consumer credit card loans and overdrafts, party offset by decreases in net charge-offs on business and consumer loans.

For the three months ended March 31, 2023, annualized net charge-offs on average consumer credit card loans totaled 3.15%, compared to 2.46% in the previous quarter and 2.53% in the same period last year.

Net loan charge-offs in the second quarter of 2023 amounted to $6.5 million, compared to $6.8 million in the prior quarter and $4.0 million in the second quarter of last year.

Comp ared to the same period last year, total net loan charge-offs in the second quarter of 2023 increased $2.5 million and decreased $271 thousand from the previous quarter.

The increase over the prior year was mainly driven by increases in net charge-offs on consumer credit cards, consumer, and business loans of $1.8 million, $640 thousand, and $146 thousand, respectively.

The decrease from the previous quarter was driven by decreases in net charge-offs on overdrafts and construction loans, partly offset by an increase in net charge-offs on consumer credit card loans.

For the three months ended June 30, 2023, annualized net charge-offs on average consumer credit card loans were 3.38%, compared to 3.15% in the previous quarter and 2.19% in the same period last year.

Consumer loan annualized net charge-offs in the current quarter amounted to .24%, compared to .25% in the prior quarter and .12% in the same period last year.

In the first quarter of 2023, total annualized net loan charge-offs were .17%, compared to .14% in the previous quarter and .12% in the same period last year.

The provision for credit losses on loans was $15.9 million in the current quarter, which was a $3.5 million increase over the $12.4 million provision recorded in the p rior quarter and a $26.6 million increase over the $10.7 million benefit recorded for the three months ended March 31,2022.

The increase in the provision from the prior quarter was due to a slightly less optimistic forecast, which includes a mild recession in the first half of 2023.

The provision for credit losses on loans for the first quarter of the prior year reflected lower than projected net charge-offs and an improved forecast at that point in time, resulting in the release of reserves established for uncertainties related to the pandemic during that quarter.

For the three months ended March 31, 2023, the allowance for credit losses on loans increased $9.2 million, compared to December 31, 2022.

The increase was primarily the result of applying a slightly more pessimistic forecast compared to the forecast used at December 31, 2022.

The allowance for credit losses on commercial loans increa sed by $5.3 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, increased $3.9 million.

Compared to March 31, 2022, the allowance for credit losses on loans increased $24.6 million, mainly due to a slightly less optimistic forecast, as described above.

The allowance for credit losses on loans was $159.3 million at March 31, 2023 and was .96%, .92% and .87% of total loans at March 31, 2023, December 31, 2022 and March 31, 2022, respectively.

In the current quarter, the provision for credit losses on unfunded lending commitments was a benefit of $4.5 million, compared to a provision of $3.1 million in the prior quarter and $828 thousand in the first quarter of 2022.

At March 31, 2023, the liability for unfunded lending commitments was $28.6 million, compared to $33.1 million at December 31, 2022 and $25.0 million at March 31, 2022.

In the second quarter of 2023 , total annualized net loan charge-offs were .16%, compared to .17% in the previous quarter and .10% in the same period last year.

The provision for credit losses on loans was $5.9 million in the current quarter, which was a $10.1 million decrease from the $15.9 million provision recorded in the p rior quarter and a $1.4 million decrease from the $7.3 million provision recorded for the three months ended June 30, 2022.

The decrease in the provision from the prior quarter was due to growth in the related allowance for credit losses on loans experienced in the first quarter of 2023, which was not repeated in the second quarter.

For the six months ended June 30, 2023, net loan charge-offs amounted to $13.3 million, compared to $8.6 million for the same period in the prior year.

The increase in net loan charge-offs over the prior year was driven mainly by increases in consumer credit card and consumer loans and overdrafts.

Annualized net charge-offs on consumer credit card loans totaled 3.27% and 2.36% for the six months ended June 30, 2023 and 2022, respectively.

Consumer loan annualized net charge-offs were .25% and .14% in the six months ended June 30, 2023 and 2022, respectively, while annualized net charge-offs on overdrafts were 66.40% and 29.50% for the first half of 2023 and 2022, respectively.

Total annualized net loan charge-offs were .16% and .11% for the six months ended June 30, 2023 and 2022, respectively.

For the six months ended June 30, 2023, the provision for credit losses on loans was $21.8 million, which was a $25.2 million increase over the $3.4 million benefit recorded in the same period last year.

The increase in the provision over the prior year was due to the buildup of the related allowance for credit losses in the first six months of 2023 related to forecasting a future mild recession, while the first six months of 2022 experienced reductions in the related allowance for credit losses primarily related to the improving economic forecast at that time.

For the six months ended June 30, 2023, the allowance for credit losses on loans increased $8.5 million, compared to the allowance for credit losses on loans at December 31, 2022.

During the six months ended June 30, 2023, the allowance for credit losses on commercial loans increased by $4.7 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, increased $3.8 million.

The increase was primarily the result of applying a slightly more pessimistic forecast compared to the forecast used at December 31, 2022, coupled with raising interest rates that extended the estimate lives of certain loan portfolios.

Compared to June 30, 2022, the allowance for credit losses on loans at June 30, 2023 increased $20.6 million, mainly due to a less optimistic forecast that reflected a future mild recession.

The allowance for credit losses on loans was $158.7 million at June 30, 2023 and was .94%, .92% and .88% of total loans at June 30, 2023, December 31, 2022 and June 30, 2022, respectively.

In the current quarter, the provision for credit losses on unfunded lending commitments was $607 thousand, compared to a benefit of $125 thousand at June 30, 2022.

For the six months ended June 30, 2023, the provision for credit losses on unfunded commitments was a benefit of $3.9 million, compared to a provision of $703 thousand in the first six months of 2022.

At June 30, 2023, the liability for unfunded lending commitments was $29.2 million, compared to $33.1 million at December 31, 2022 and $24.9 million at June 30, 2022.

The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans.

See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses.

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, 2023.

The allowance for credit losses on loans and the liability for unfunded lending commitments are estimates that require significant judgment including projections of the macro-economic environment.

9 unchanged sentences

(Dollars in thousands)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Non-accrual loans $ 6,161 $ 8,306

4 unchanged sentences

Total loans past due 90 days and still accruing interest $ 15,351 $ 15,830

Non-accrual loans totaled $7.8 million at March 31, 2023, a decrease of $505 thousand from the balance at December 31, 2022.

The decrease occurred mainly in business loans which decreased $390 thousand.

At March 31, 2023, non-accrual loans were comprised of business (81.5%), personal real estate (16.3%), and business real estate (2.2%) loans.

Foreclosed real estate totaled $167 thousand at March 31, 2023, an increase of $71 thousand when compared to December 31, 2022.

Total loans past due 90 days or more and still accruing interest were $14.8 million as of March 31, 2023, a decrease of $1.0 million from December 31, 2022.

Non-accrual loans totaled $6.2 million at June 30, 2023, a decrease of $2.1 million from the balance at December 31, 2022.

The decrease occurred mainly in business loans which decreased $2.0 million.

At June 30, 2023, non-accrual loans were comprised of business (76.8%), personal real estate (20.7%), and business real estate (2.5%) loans.

Foreclosed real estate totaled $94 thousand at June 30, 2023, a slight decrease compared to December 31, 2022.

Total loans past due 90 days or more and still accruing interest were $15.4 million as of June 30, 2023, a decrease of $479 thousand from December 31, 2022.

Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements.

3 unchanged sentences

Although these loans are generally identified as potential problem loans, they may never become non-performing.

Such loans totaled $234.8 million at March 31, 2023 compared with $259.7 million at December 31, 2022, resulting in a decrease of $24.9 million, or 9.6%.

Such loans totaled $228.8 million at June 30, 2023 compared with $259.7 million at December 31, 2022, resulting in a decrease of $30.9 million, or 11.9%.

(In thousands)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Potential problem loans:

4 unchanged sentences

Total potential problem loans $ 228,811 $ 259,724

At March 31, 2023, the Company had $28.8 million of loans modified to a borrower experiencing financial difficulty and are further discussed in the "Modifications for borrowers experiencing financial difficulty" section in Note 2 to the consolidated financial statements.

At June 30, 2023, the Company had $72.7 million of loans modified to a borrower experiencing financial difficulty, and these loans are further discussed in the "Modifications for borrowers experiencing financial difficulty" section in Note 2 to the consolidated financial statements.

Loans with Special Risk Characteristics

5 unchanged sentences

Real Estate – Construction and Land Loans

The Company's portfolio of construction and land loans, as shown in the table below, amounted to 8.7% of total loans outstanding at March 31, 2023.

The largest component of construction and land loans was commercial construction, which increased $81.3 million during the three months ended March 31, 2023.

At March 31, 2023, multi-family residential construction loans totaled approximately $330.5 million, or 27.5%, of the commercial construction loan portfolio, compared to $303.5 million, or 27.0%, at December 31, 2022.

(Dollars in thousands) March 31,

The Company's portfolio of construction and land loans, as shown in the table below, amounted to 8.6% of total loans outstanding at June 30, 2023.

The largest component of construction and land loans was commercial construction, which increased $96.1 million during the six months ended June 30, 2023.

At June 30, 2023, multi-family residential construction loans totaled approximately $370.3 million, or 30.4%, of the commercial construction loan portfolio, compared to $303.5 million, or 27.0%, at December 31, 2022.

(Dollars in thousands) June 30,

December 31, 2022

5 unchanged sentences

Real Estate – Business Loans

Total business real estate loans were $3.5 billion at March 31, 2023 and comprised 21.1% of the Company's total loan portfolio.

Total business real estate loans were $3.6 billion at June 30, 2023 and comprised 21.4% of the Company's total loan portfolio.

These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties.

At March 31, 2023, 33.2% 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,

At June 30, 2023, 31.7% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans.

(Dollars in thousands) June 30,

December 31, 2022

Owner-occupied $ 1,146,899 31.7 % 6.8 % $ 1,136,189 33.3 % 7.0 %

Office 500,524 14.4 3.0 497,601 14.6 3.1

Industrial 566,197 15.6 3.3 478,534 14.0 2.9

Office 502,774 13.9 3.0 497,601 14.6 3.1

Retail 358,048 9.9 2.1 322,971 9.5 2.0

5 unchanged sentences

Total real estate - business loans $ 3,621,222 100.0 % 21.4 % $ 3,406,981 100.0 % 20.9 %

Information about the credit quality of the Company's business real estate loan portfolio as of March 31, 2023 and December 31, 2022 is provided in the table below.

Information about the credit quality of the Company's business real estate loan portfolio as of June 30, 2023 and December 31, 2022 is provided in the table below.

(Dollars in thousands) Pass Special Mention Substandard Non-Accrual Total

March 31, 2023

June 30, 2023

Owner-occupied $ 1,131,420 $ 8,446 $ 6,939 $ 94 $ 1,146,899

Office 497,137 3,387 — — 500,524

Industrial 566,103 94 — — 566,197

Office 499,432 — 3,342 — 502,774

Retail 356,182 — 1,866 — 358,048

7 unchanged sentences

Owner-occupied $ 1,129,343 $ 632 $ 6,084 $ 130 $ 1,136,189

Office 494,169 3,432 — — 497,601

Industrial 478,534 — — — 478,534

Office 494,169 3,432 — — 497,601

Retail 321,041 — 1,930 — 322,971

6 unchanged sentences

Revolving Home Equity Loans

The Company had $295.5 million in revolving home equity loans at March 31, 2023 that were generally collateralized by residential real estate.

The Company had $303.8 million in revolving home equity loans at June 30, 2023 that were generally collateralized by residential real estate.

Most of these loans (91.0%) are written with terms requiring interest-only monthly payments.

1 unchanged sentence

LTV up to 80%, 80% to 90%, and 90% to 100%.

As of March 31, 2023, the outstanding principal of loans with an original LTV higher than 80% was $32.8 million, or 11.1% of the portfolio, compared to $32.4 million as of December 31, 2022.

Total revolving home equity loan balances over 30 days past due were $1.7 million at March 31, 2023 and $1.9 million at December 31, 2022, and there were no revolving home equity loans on non-accrual status at March 31, 2023 or December 31, 2022.

As of June 30, 2023, the outstanding principal of loans with an original LTV higher than 80% was $33.8 million, or 11.1% of the portfolio, compared to $32.4 million as of December 31, 2022.

Total revolving home equity loan balances over 30 days past due were $3.5 million at June 30, 2023 and $1.9 million at December 31, 2022, and there were no revolving home equity loans on non-accrual status at June 30, 2023 or December 31, 2022.

The weighted average FICO score for the total current portfolio balance is 788.

6 unchanged sentences

Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs.

Auto loans comprised 39.8% of the consumer loan portfolio at March 31, 2023, and outstanding balances for auto loans were $832.8 million and $798.6 million at March 31, 2023 and December 31, 2022, respectively.

The balances over 30 days past due amounted to $8.3 million at March 31, 2023 and $9.9 million at December 31, 2022, respectively and comprised 1.0% of the outstanding balances of these loans at March 31, 2023 and 1.2% at December 31, 2022, respectively.

For the three months ended March 31, 2023, $120.0 million of new auto loans were originated, compared to $84.7 million during the first three months of 2022.

At March 31, 2023, the automobile loan portfolio had a weighted average FICO score of 756, and net charge-offs on auto loans were .3% 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 11.2% of the consumer loan portfolio at March 31, 2023.

Losses on these loans have historically been low, and the Company saw net recoveries of $22 thousand for the first three months of 2023.

Private banking loans comprised 31.7% of the consumer loan portfolio at March 31, 2023.

The Company's private banking loans are generally well-collateralized, and at March 31, 2023 were secured primarily by assets held by the Company's trust department.

Auto loans comprised 39.3% of the consumer loan portfolio at June 30, 2023, and outstanding balances for auto loans were $829.7 million and $798.6 million at June 30, 2023 and December 31, 2022, respectively.

The balances over 30 days past due amounted to $8.2 million at June 30, 2023 and $9.9 million at December 31, 2022, respectively and comprised 1.0% of the outstanding balances of these loans at June 30, 2023 and 1.2% at December 31, 2022, respectively.

For the six months ended June 30, 2023, $210.1 million of new auto loans were originated, compared to $153.5 million during the first six months of 2022.

At June 30, 2023, the automobile loan portfolio had a weighted average FICO score of 757, and net charge-offs on auto loans were .4% of average auto loans.

The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 11.3% of the consumer loan portfolio at June 30, 2023.

Losses on these loans have historically been low, and the Company saw net recoveries of $29 thousand for the first six months of 2023.

Private banking loans comprised 32.9% of the consumer loan portfolio at June 30, 2023.

The Company's private banking loans are generally well-collateralized, and at June 30, 2023 were secured primarily by assets held by the Company's trust department.

The remaining portion of the Company's consumer loan portfolio is comprised of health services financing, motorcycles, marine and RV loans.

Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $610 thousand in the first three months of 2023 and were .2% of the average balances of these loans at March 31, 2023.

Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $1.0 million in the first six months of 2023 and were .4% of the average balances of these loans at June 30, 2023.

Consumer Credit Card Loans

The Company offers low promotional rates on selected consumer credit card products.

Out of a portfolio at March 31, 2023 of $558.7 million in consumer credit card loans outstanding, approximately $103.2 million, or 18.5%, carried a low promotional rate.

Out of a portfolio at June 30, 2023 of $574.8 million in consumer credit card loans outstanding, approximately $110.9 million, or 19.3%, carried a low promotional rate.

Within the next six months, $44.1 million of these loans are scheduled to convert to the ongoing higher contractual rate.

2 unchanged sentences

Oil and Gas Energy Lending

The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $285.1 million, or 1.7% of total loans at March 31, 2023, a decrease of $11.3 million from year end 2022, as shown in the table below.

The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $238.2 million, or 1.4% of total loans at June 30, 2023, a decrease of $58.3 million from year end 2022, as shown in the table below.

(In thousands)

March 31, 2023 December 31, 2022 Unfunded commitments at March 31, 2023

June 30, 2023 December 31, 2022 Unfunded commitments at June 30, 2023

Extraction $ 191,884 $ 235,933 $ 160,598

7 unchanged sentences

The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present.

The balance of SNC loans totaled $1.5 billion at March 31, 2023, compared to $1.4 billion at December 31, 2022.

Additional unfunded commitments at March 31, 2023 totaled $2.0 billion.

Income tax expense was $32.8 million in the first quarter of 2023, compared to $34.5 million in the fourth quarter of 2022 and $31.9 million in the first quarter of 2022.

The Company's effective tax rate, including the effect of non-controlling interest, was 21.6% in the first quarter of 2023, compared to 20.8% in the fourth quarter of 2022 and 21.3% in the first quarter of 2022.

The balance of SNC loans totaled $1.4 billion at June 30, 2023, compared to $1.4 billion at December 31, 2022.

Additional unfunded commitments at June 30, 2023 totaled $2.1 billion.

Income tax expense was $36.0 million in the second quarter of 2023, compared to $32.8 million in the first quarter of 2023 and $32.0 million in the second quarter of 2022.

The Company's effective tax rate, including the effect of non-controlling interest, was 22.0% in the second quarter of 2023, compared to 21.6% in the first quarter of 2023 and 21.7% in the second quarter of 2022.

Financial Condition

Balance Sheet

Total assets of the Company were $32.0 billion at March 31, 2023 and $31.9 billion at December 31, 2022.

Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $31.6 billion at March 31, 2023 and at December 31, 2022, and consisted of 52% in loans and 41% in investment securities at March 31, 2023.

During the first quarter of 2023, average loans totaled $16.4 billion, an increase of $518.9 million over the prior quarter, and $1.2 billion, or 7.8%, over the same quarter last year.

Compared to the previous quarter, average balances of business, business real estate, and construction loans grew $177.9 million, $177.7 million, and $141.9, respectively.

Personal real estate loans also increased $47.1 million, while consumer loans declined $22.5 million.

During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $3.2 million, compared to $2.4 million in the prior quarter.

Total average available for sale debt securities decreased $591.1 million compared to the previous quarter to $11.8 billion, at fair value.

The decrease in investment securities was mainly the result of lower balances of mortgage-backed, other asset-backed, and state and municipal securities.

During the first quarter of 2023, the unrealized loss on available for sale securities decreased $190.0 million to $1.3 billion and sales, maturities and pay downs were $1.3 billion at period end.

At March 31, 2023, the duration of the available for sale investment portfolio was 3.9 years and maturities and pay downs of approximately $2.0 billion are expected to occur during the next 12 months.

Total assets of the Company were $32.8 billion at June 30, 2023 and $31.9 billion at December 31, 2022.

Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $32.5 billion at June 30, 2023 and $31.6 billion at December 31, 2022, and consisted of 52% in loans and 37% in investment securities at June 30, 2023.

At June 30, 2023, total loans increased $653.4 million or 4.0%, compared to balances at December 31, 2022.

The increase was mainly due to growth in business, business real estate and construction loans of $244.8 million, $214.2 million, and $90.7 million, respectively.

The growth in business loans was mainly the result of increased commercial and industrial lending and higher tax free and lease loan balances.

Personal real estate loans increased $62.5 million.

Consumer loans, which includes automobile, marine and RV, fixed rate home equity and other consumer loans, increased $51.5 million, due to growth in auto loans and other consumer loans.

These increases were slightly offset by a decline in consumer credit card loans of $9.2 million.

Total available for sale debt securities, excluding fair value adjustments, decreased $1.9 billion at June 30, 2023 compared to December 31, 2022.

Purchases of securities during this period totaled $87.4 million, offset by sales, maturities and pay downs of $2.0 billion.

The decline in investment securities was mainly the result of lower balances of asset-backed securities, state and municipal securities, and agency mortgage-backed securities, which decreased $941.2 million, $563.4 million, and $238.7 million, respectively, at June 30, 2023 compared to December 31, 2022.

At June 30, 2023, the duration of the available for sale investment portfolio was 3.9 years, and maturities and pay downs of approximately $2.0 billion are expected to occur during the next 12 months.

The Company does not have any investment securities classified as held-to-maturity.

Total average deposits decreased $1.4 billion this quarter compared to the previous quarter.

The decrease in deposits mostly resulted from lower demand deposits and interest checking and money market deposits of $1.2 billion and $428.5 million, respectively, partly offset by higher certificate of deposit balances of $333.8 million.

Compared to the previous quarter, total average commercial and consumer deposits declined $868.9 million and $530.1 million, respectively, while average wealth deposits increased $39.8 million.

The average loans to deposits ratio was 65.0% in the current quarter and 59.7% in the prior quarter.

The Company’s average borrowings, which included customer repurchase agreements of $2.4 million, were $3.5 billion in the first quarter of 2023 and $2.6 billion in the prior quarter.

Total deposits at June 30, 2023 amounted to $25.9 billion, a decrease of $318.0 million compared to December 31, 2022.

The decline in deposits largely resulted from a decrease in demand deposits, mainly in business demand deposits (decrease of $1.7 billion).

Additionally, money market and savings deposit balances decreased $887.4 million and $70.9 million, respectively, while certificate of deposit balances grew $2.3 billion and interest checking balances increased $250.2 million over balances at December 31, 2022.

The Company’s borrowings totaled $3.9 billion at June 30, 2023, an increase of $1.0 billion over balances at December 31, 2022, mainly due to an increase in FHLB advances.

Liquidity and Capital Resources

2 unchanged sentences

(In thousands)

March 31, 2023 March 31, 2022 December 31, 2022

June 30, 2023 June 30, 2022 December 31, 2022

Liquid assets:

4 unchanged sentences

Total $ 13,811,070 $ 15,861,302 $ 13,501,961

Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $27.1 million as of March 31, 2023.

Resale agreements, maturing through 2025, totaled $825.0 million at March 31, 2023.

Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral, and this collateral totaled $870.8 million in fair value at March 31, 2023.

The fair value of the available for sale debt portfolio was $10.4 billion at June 30, 2023 and included an unrealized net loss of $1.4 billion.

Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $2.8 million as of June 30, 2023.

Resale agreements, maturing through 2025, totaled $825.0 million at June 30, 2023.

$700.0 million of the Company's resale agreements will mature in the next 12 months.

Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $1.3 billion at March 31, 2023 and increased $952.7 million over December 31, 2022 balances.

The fair value of the available for sale debt portfolio was $11.2 billion at March 31, 2023 and included an unrealized net loss of $1.3 billion.

Approximately $2.0 billion of the Company's available for sale debt portfolio is expected to mature or pay down during the next 12 months, and at March 31, 2023, the duration of the Company's available for sale debt securities portfolio was 3.9 years.

Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $2.6 billion at June 30, 2023 and increased $2.2 billion over December 31, 2022 balances.

Approximately $2.0 billion of the Company's available for sale debt portfolio is expected to mature or pay down during the next 12 months, and at June 30, 2023, the duration of the Company's available for sale debt securities portfolio was 3.9 years.

The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank.

1 unchanged sentence

(In thousands)

March 31, 2023 March 31, 2022 December 31, 2022

June 30, 2023 June 30, 2022 December 31, 2022

Investment securities pledged for the purpose of securing:

9 unchanged sentences

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, 2023, such deposits totaled $23.1 billion and represented 93.6% of total deposits.

At June 30, 2023, such deposits totaled $22.6 billion and represented 87.4% of total deposits.

These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources.

Certificates of deposit of $100,000 and over totaled $1.1 billion at March 31, 2023.

These accounts are normally considered more volatile with higher cost and comprised 4.5% of total deposits at March 31, 2023.

Certificates of deposit of $100,000 and over totaled $1.7 billion at June 30, 2023.

These accounts are normally considered more volatile with higher cost and comprised 6.6% of total deposits at June 30, 2023.

(In thousands)

March 31, 2023 March 31, 2022 December 31, 2022

June 30, 2023 June 30, 2022 December 31, 2022

Core deposit base:

3 unchanged sentences

Total $ 22,617,823 $ 27,165,649 $ 25,193,337

During January 2023, the Company's deposit portfolio declined $964.6 million.

At March 31, 2023, the Company's deposit portfolio was $24.7 billion, compared to $26.2 billion at December 31, 2022.

The Company's uninsured deposits were $9.8 billion, or 39.7% of total deposits at March 31, 2023.

During the second quarter of 2023, the Company added brokered deposits in the form of short-term certificates of deposit less than $100 thousand, and $903.9 million were outstanding at June 30, 2023.

At June 30, 2023, the Company's total deposit portfolio was $25.9 billion, compared to $26.2 billion at December 31, 2022.

The Company's uninsured deposits were $10.4 billion, or 40.2% of total deposits at June 30, 2023.

The Company's uninsured deposits include $2.2 billion of affiliate deposits and collateralized deposits.

Excluding those affiliate and collateralized deposits, the Company's uninsured deposits at March 31, 2023 were $7.8 billion, or 31.6% of total deposits.

Excluding those affiliate and collateralized deposits, the Company's uninsured deposits at June 30, 2023 were $8.2 billion, or 31.7% of total deposits.

Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit.

1 unchanged sentence

(In thousands)

March 31, 2023 March 31, 2022 December 31, 2022

June 30, 2023 June 30, 2022 December 31, 2022

Federal funds purchased $ 511,400 $ 7,750 $ 159,860

4 unchanged sentences

Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit.

In addition to the amount accessed as of March 31, 2023, the Company had access to an additional $3.9 billion of overnight, approved Federal funds as of that date.

In addition to the amount accessed as of June 30, 2023, the Company had access to an additional $3.5 billion of overnight, approved federal funds as of that date.

Repurchase agreements are borrowings by the Company from its customers in the form of securities sold under agreements to repurchase.

These repurchase agreements, which generally mature overnight, are comprised of non-insured customer funds totaling $2.0 billion at March 31, 2023 and are collateralized by securities in the Company's investment portfolio.

At March 31, 2023, the value of the

collateral pledged for the benefit of customers was $2.1 billion.

These repurchase agreements, which generally mature overnight, are comprised of non-insured customer funds totaling $2.4 billion at

June 30, 2023 and are collateralized by securities in the Company's investment portfolio.

At June 30, 2023, the value of the collateral pledged for the benefit of customers was $2.4 billion.

The Company also borrows on a secured basis through advances from the FHLB.

The advances are generally short-term, fixed interest rate borrowings.

There were $1.5 billion advances outstanding from the FHLB at March 31, 2023.

There were $1.0 billion advances outstanding from the FHLB at June 30, 2023.

The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank (FRB) and the FHLB as security to establish lines of credit and borrow from these entities.

1 unchanged sentence

The FRB also establishes a collateral value of assets pledged and permits borrowings from the discount window.

The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at March 31, 2023.

March 31, 2023

June 30, 2023

(In thousands)

8 unchanged sentences

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.

The Company receives strong outside ratings from both Standard & Poor's and Moody's on both the consolidated company level and its subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise.

These ratings are as follows:

8 unchanged sentences

Rating outlook Stable Stable

The cash flows from the operating, investing and financing activities of the Company resulted in a net increase in cash, cash equivalents and restricted cash of $822.3 million during the first three months of 2023, as reported in the consolidated statements of cash flows in this report.

The cash flows from the operating, investing and financing activities of the Company resulted in a net increase in cash, cash equivalents and restricted cash of $2.0 billion during the first six months of 2023, as reported in the consolidated statements of cash flows in this report.

Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $220.9 million and has historically been a stable source of funds.

Investing activities, which occur mainly in the loan and investment securities portfolios, provided cash of $888.2 million.

Investing activities, which occur mainly in the loan and investment securities portfolios, provided cash of $1.1 billion.

Activity in the investment securities portfolio provided cash of $1.9 billion from sales, maturities, and pay downs (net of purchases), but this increase in investing cash flows was partially offset by growth in the loan portfolio, which used cash of $666.7 million.

Financing activities used cash of $182.0 million, largely resulting from a decrease in deposits of $1.6 billion, paired with a decrease in federal funds purchased and securities sold under agreements to repurchase of $57.2 million.

Borrowings, including FHLB advances during the first three months of 2023, increased financing cash flows by $1.5 billion.

Financing activities provided cash of $678.8 million, largely resulting from borrowings, including FHLB advances during the first six months of 2023 which increased financing cash flows by $2.3 billion.

Partly offsetting this cash inflow were repayments of $1.3 billion of FHLB borrowings and decreases of $249.4 million in deposits.

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, 2023 and December 31, 2022, as shown in the following table.

(Dollars in thousands) March 31, 2023 December 31, 2022 Minimum Ratios under Capital Adequacy Guidelines

The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at June 30, 2023 and December 31, 2022, as shown in the following table.

(Dollars in thousands) June 30, 2023 December 31, 2022 Minimum Ratios under Capital Adequacy Guidelines

Minimum Ratios

18 unchanged sentences

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, 2023, the Company purchased 547,381 shares at an average price of $65.93 in open market purchases and through stock-based compensation transactions.

At March 31, 2023, 2,564,677 shares remained available for purchase under the current Board authorization.

During the six months ended June 30, 2023, the Company purchased 553,586 shares at an average price of $65.78 in open market purchases and through stock-based compensation transactions.

At June 30, 2023, 2,558,472 shares remained available for purchase under the current Board authorization.

The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options.

The Company paid a $.270 per share cash dividend on its common stock in the first quarter of 2023, which was a 7.1% increase compared to its 2022 quarterly dividend.

The Company paid a $.270 per share cash dividend on its common stock in the second quarter of 2023, which was a 7.1% increase compared to its 2022 quarterly dividend.

Material Cash Requirements, Commitments, Off-Balance Sheet Arrangements and Contingencies

7 unchanged sentences

Additionally, rapidly rising interest rates have resulted in unrealized losses in the Company's available for sale debt securities portfolio.

In response to these industry events, the Company sought additional borrowings during the first quarter of 2023, and as a result, the Company’s borrowings increased by $1.4 billion.

Other than the repayment of these additional borrowings, the Company’s material cash requirements have not changed significantly since December 31, 2022.

In response to these industry events, the Company sought additional borrowings of $1.3 billion during the first quarter of 2023, and as a result, the Company had outstanding borrowings of $1.5 billion from the FHLB as of March 31, 2023.

During the second quarter of 2023, the Company initially borrowed an additional $500.0 million but subsequently repaid $1.0 billion of its FHLB borrowings, resulting in $1.0 billion of FHLB borrowings outstanding as of June

Additionally, the Company added short-term brokered certificates of deposit during the second quarter of 2023 to provide additional liquidity.

As of June 30, 2023, the Company had $903.9 million of brokered deposits that are scheduled to mature prior to December 31, 2023.

Other than the repayment of these additional borrowings and deposits, the Company’s material cash requirements have not changed significantly since December 31, 2022.

Further discussion of the Company's longer-term material cash obligations and sources for fulfilling those obligations is below.

In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet.

The most significant of these are loan commitments, which at March 31, 2023 totaled $14.2 billion (including $5.2 billion in unused, approved credit card lines).

The most significant of these are loan commitments, which at June 30, 2023 totaled $14.2 billion (including $5.2 billion in unused, approved credit card lines).

In addition, the Company enters into standby and commercial letters of credit.

These contracts totaled $588.8 million (net of conveyances to other institutions) and $4.8 million, respectively, at March 31, 2023.

These contracts totaled $590.3 million (net of conveyances to other institutions) and $5.7 million, respectively, at June 30, 2023.

As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements.

The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to $4.9 million at March 31, 2023.

The allowance for these commitments is recorded in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheets.

At March 31, 2023, the liability for unfunded commitments totaled $28.6 million.

At June 30, 2023, the liability for unfunded commitments totaled $29.2 million.

See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements.

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 was placed in service at the beginning of March 2023.

As of March 31, 2023, the Company has made payments totaling $105.7 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 2023, purchases and sales of tax credits amounted to $22.2 million and $6.7 million, respectively.

Fees from sales of tax credits were $561 thousand for the three months ended March 31, 2023, compared to $783 thousand in the same period last year.

At March 31, 2023, the Company expected to fund outstanding purchase commitments of $93.1 million during the remainder of 2023.

The Company continued to maintain a strong liquidity position throughout the first three months of 2023.

During the first six months of 2023, purchases and sales of tax credits amounted to $55.5 million and $15.3 million, respectively.

Fees from sales of tax credits were $1.0 million for the six months ended June 30, 2023, compared to $2.7 million in the same period last year.

At June 30, 2023, the Company expected to fund outstanding purchase commitments of $91.4 million during the remainder of 2023.

The Company continued to maintain a strong liquidity position throughout the first six months of 2023.

Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations.

Segment Results

The table below is a summary of segment pre-tax income results for the first three months of 2023 and 2022.

The table below is a summary of segment pre-tax income results for the first six months of 2023 and 2022.

(Dollars in thousands)

1 unchanged sentence

Consolidated Totals

Three Months Ended March 31, 2023

Six Months Ended June 30, 2023

Net interest income $ 198,406 $ 232,628 $ 34,564 $ 465,598 $ 35,563 $ 501,161

4 unchanged sentences

Income before income taxes $ 74,747 $ 163,188 $ 61,900 $ 299,835 $ 19,984 $ 319,819

Three Months Ended March 31, 2022

Six Months Ended June 30, 2022

Net interest income $ 177,379 $ 219,135 $ 38,091 $ 434,605 $ 6,566 $ 441,171

7 unchanged sentences

Percent 4.9 % 9.8 % (14.6 %) 2.5 % 70.8 % 5.2 %

For the three months ended March 31, 2023, income before income taxes for the Consumer segment increased $3.6 million, or 10.7%, compared to the first three months of 2022.

The increase in income before income taxes was mainly due to an increase in net interest income of $10.0 million, or 11.6%, partly offset by a decrease in non-interest income of $2.1 million, or

8.0%, and higher non-interest expense of $2.5 million, or 3.3%.

Net interest income increased due to a $4.8 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and a $9.2 million increase in loan interest income.

For the six months ended June 30, 2023, income before income taxes for the Consumer segment increased $3.5 million, or 4.9%, compared to the first six months of 2022.

The increase in income before income taxes was mainly due to an increase in net interest income of $21.0 million, or 11.9%, partly offset by a decrease in non-interest income of $4.9 million, or 9.0%, and higher non-interest expense of $8.3 million, or 5.4%.

Net interest income increased due to a $13.7 million increase in net

allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and a $20.8 million increase in loan interest income.

These increases were partly offset by higher deposit interest expense of $13.5 million.

Non-interest income decreased mainly due to lower mortgage banking revenue and deposit account fees, partly offset by growth in debit card fees.

Deposit account fees decreased due to lower overdraft and return item fees, partly offset by higher personal deposit account fees.

Non-interest expense increased over the same period in the previous year mainly due to higher salaries and benefits expense, FDIC insurance expense and occupancy expense, partly offset by lower marketing expense and allocated support costs for information technology.

The provision for credit losses totaled $6.3 million, a $1.8 million increase over the first three months of 2022, mainly due to higher credit card, overdraft and personal loan net charge-offs.

For the three months ended March 31, 2023, income before income taxes for the Commercial segment increased $7.5 million, or 10.2%, compared to the same period in the previous year.

This increase was mainly due to growth in non-interest income and net interest income, partly offset by higher non-interest expense.

Non-interest income decreased mainly due to lower deposit account fees (mainly overdraft and return item fees) and mortgage banking revenue, partly offset by growth in net debit card fees.

Non-interest expense increased over the same period in the previous year mainly due to higher salaries and benefits expense, FDIC insurance expense and allocated support costs for consumer administration and operations, partly offset by lower marketing expense.

The provision for credit losses totaled $12.7 million, a $4.3 million increase over the first six months of 2022, mainly due to higher credit card, personal and overdraft loan net charge-offs.

For the six months ended June 30, 2023, income before income taxes for the Commercial segment increased $14.6 million, or 9.8%, compared to the same period in the previous year.

This increase was mainly due to growth in net interest income and non-interest income, partly offset by higher non-interest expense.

Net interest income increased $13.5 million, or 6.2%, mainly due to higher loan interest income of $154.1 million.

This increase was partly offset by lower net allocated funding credits of $61.4 million and increases of $48.6 million in deposit interest expense and $31.3 million in interest expense on customer repurchase agreements.

Non-interest income increased $4.7 million, or 8.7%, over the previous year mainly due to growth in net bank card fees (mainly corporate card fees), deposit account fees (mainly corporate cash management fees) and cash sweep commissions, partly offset by a decline capital market fees.

Non-interest expense increased $4.1 million, or 4.6%, mainly due to higher data processing expense, FDIC insurance expense and allocated service and support costs (mainly bank operations and commercial products and payments).

Non-interest income increased $12.6 million, or 11.4%, over the previous year mainly due to growth in net bank card fees (mainly corporate card fees), deposit account fees (mainly corporate cash management fees), letters of credit fees and cash sweep commissions, partly offset by a decline in capital market fees.

Non-interest expense increased $11.2 million, or 6.2%, mainly due to higher salaries and benefits expense, FDIC insurance expense and allocated service and support costs (mainly bank operations and commercial products and payments).

These increases were partly offset by lower allocated support costs for information technology.

The provision for credit losses increased $311 thousand over the same period last year, mainly due to higher overdraft and commercial credit card loan net charge-offs.

Wealth segment pre-tax profitability for the three months ended March 31, 2023 decreased $4.9 million, or 13.8%, from the same period in the previous year.

Net interest income decreased $1.3 million, or 7.0%, mainly due to an $8.0 million decline in net allocated funding credits and a $2.9 million increase in deposit interest expense, partly offset by a $9.6 million increase in loan interest income.

Non-interest income decreased $262 thousand, or .5%, from the prior year largely due lower private client and institutional trust fees, partly offset by higher cash sweep commissions and consumer brokerage service fees.

Non-interest expense increased $3.3 million, or 9.2%, mainly due to higher salaries and benefits expense and miscellaneous losses.

The provision for credit losses decreased $13 thousand from the same period last year, due to lower personal real estate loan net charge-offs.

The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments.

The provision for credit losses increased $338 thousand over the same period last year, mainly due to higher commercial credit card and overdraft loan net charge-offs.

Wealth segment pre-tax profitability for the six months ended June 30, 2023 decreased $10.6 million, or 14.6%, from the same period in the previous year.

Net interest income decreased $3.5 million, or 9.3%, mainly due to a $14.2 million decline in net allocated funding credits and an $8.7 million increase in deposit interest expense, partly offset by a $19.4 million increase in loan interest income.

Non-interest income increased $268 thousand, or .3%, over the prior year largely due to higher cash sweep commissions, partly offset by lower private client and institutional trust fees.

Non-interest expense increased $7.3 million, or 10.1%, mainly due to higher salaries and benefits expense and the deconversion costs previously mentioned.

The provision for credit losses increased $10 thousand over the same period last year.

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 $4.7 million lower than in the same period last year.

Unallocated securities losses were $306 thousand in the first three months of 2023 compared to gains of $7.2 million in 2022.

The pre-tax profitability of this category was $8.3 million higher than in the same period last year.

Unallocated securities gains were $3.1 million in the first six months of 2023 compared to gains of $8.2 million in 2022.

Also, the unallocated provision for credit losses increased $16.0 million, primarily driven by an increase in the provision for credit losses on loans, partly offset by a decrease in the liability for unfunded lending commitments, which are both not allocated to the segments for management reporting purposes.

Net charge-offs are allocated to the segments when incurred for management reporting purposes.

The provision for credit losses on loans was $9.2 million higher than net charge-offs in 2023, while the provision was $15.3 million lower than net charge-offs, as the provision was a benefit in 2022.

For the three months ended March 31, 2023, the Company's provision on unfunded lending commitments was a benefit of $4.5 million.

The provision for credit losses on loans in the first six months of 2023 was $21.8 million, or $8.5 million higher than net charge-offs due to an increase in the allowance for credit losses on loans.

In the comparable period last year, the provision for credit losses on loans was a benefit of $3.4 million, or $12.0 million lower than net charge-offs, due to a decrease in the allowance for credit losses on loans.

For the six months ended June 30, 2023, the Company's provision on unfunded lending commitments was a benefit of $3.9 million.

Additionally, non-interest expense decreased $5.7 million.

These decreases to pre-tax profitability were partly offset by higher net interest income of $26.9 million, and non-interest income of $3.5 million.

These decreases to pre-tax profitability were offset by higher net interest income of $29.0 million, and non-interest income of $6.0 million.

Impact of Recently Issued Accounting Standards

5 unchanged sentences

The change is to align the temporary accounting relief guidance with the expected cessation date of LIBOR, which was postponed by administrators in 2021 to June 2023, a year after the current sunset date of ASU 2020-04.

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 was performed, and the Committee developed and prioritized action items.

All LIBOR-based loans must be converted to an alternative index by June 30, 2023, as LIBOR will no longer be published after June 30, 2023.

All of the Company's 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 of the transition from LIBOR.

The Company ceased originating new loans with LIBOR as a reference rate at the end of 2021 and is actively working with customers to modify existing loans that reference LIBOR to a new reference rate.

The Company is nearly finished transitioning the impacted loans.

The Company's LIBOR Transition Steering Committee completed the Company's transition from LIBOR during the first half of 2023.

AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Three Months Ended March 31, 2023 and 2022

First Quarter 2023

First Quarter 2022

Three Months Ended June 30, 2023 and 2022

Second Quarter 2023

Second Quarter 2022

(Dollars in thousands)

34 unchanged sentences

Allowance for credit losses on loans (159,068) (134,670)

Unrealized loss on debt securities (1,387,196) (174,297)

Unrealized gain (loss) on debt securities (1,331,002) (851,110)

Cash and due from banks 309,789 315,352

23 unchanged sentences

(B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above.

AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Six Months Ended June 30, 2023 and 2022

Six Months 2023

Six Months 2022

(Dollars in thousands)

Average Balance

Interest Income/Expense

Rates Earned/Paid

Average Balance Interest Income/Expense Avg.

Rates Earned/Paid

$ 5,707,026 $ 154,077 5.44 % $ 5,354,845 $ 80,818 3.04 %

Real estate — construction and land 1,430,624 54,131 7.63 1,180,334 23,015 3.93

Real estate — business 3,509,789 101,070 5.81 3,129,477 54,974 3.54

Real estate — personal 2,947,431 53,225 3.64 2,817,325 45,739 3.27

Consumer 2,083,040 56,514 5.47 2,055,464 36,781 3.61

Revolving home equity 298,696 10,807 7.30 273,065 4,854 3.58

Consumer credit card 556,048 37,845 13.72 539,254 30,300 11.33

Overdrafts 4,540 — — 5,352 — —

Total loans 16,537,194 467,669 5.70 15,355,116 276,481 3.63

Loans held for sale 5,833 296 10.23 8,654 311 7.25

Investment securities:

government and federal agency obligations 1,067,184 13,980 2.64 1,111,570 23,087 4.19

Government-sponsored enterprise obligations 71,332 1,021 2.89 53,777 630 2.36

State and municipal obligations (A)

1,662,416 17,803 2.16 2,102,125 23,897 2.29

Mortgage-backed securities 6,384,934 65,760 2.08 7,236,993 71,372 1.99

Asset-backed securities 3,029,713 30,707 2.04 3,985,877 24,596 1.24

Other debt securities 524,440 4,936 1.90 639,875 6,291 1.98

Trading debt securities (A)

46,127 1,043 4.56 42,304 454 2.16

Equity securities (A)

12,396 1,429 23.25 9,295 1,219 26.45

Other securities (A)

251,848 10,438 8.36 193,708 13,688 14.25

Total investment securities 13,050,390 147,117 2.27 15,375,524 165,234 2.17

Federal funds sold 23,144 594 5.18 2,670 20 1.51

Securities purchased under agreements to resell 824,987 8,051 1.97 1,718,644 9,685 1.14

Interest earning deposits with banks 1,551,121 38,590 5.02 1,924,731 3,579 .37

Total interest earning assets 31,992,669 662,317 4.17 34,385,339 455,310 2.67

Allowance for credit losses on loans (154,617) (142,136)

Unrealized gain (loss) on debt securities (1,358,944) (514,573)

Cash and due from banks 311,895 327,728

Premises and equipment, net 440,208 404,317

Other assets 908,403 539,219

Total assets $ 32,139,614 $ 34,999,894

LIABILITIES AND EQUITY:

Interest bearing deposits:

Savings $ 1,533,459 379 .05 $ 1,586,522 335 .04

Interest checking and money market 13,090,983 49,818 .77 14,898,234 3,703 .05

Certificates of deposit of less than $100,000 747,061 11,550 3.12 420,703 344 .16

Certificates of deposit of $100,000 and over 1,189,372 21,043 3.57 754,890 897 .24

Total interest bearing deposits 16,560,875 82,790 1.01 17,660,349 5,279 .06

Federal funds purchased $ 500,480 $ 11,983 4.83 $ 68,490 231 .68

Securities sold under agreements to repurchase 2,312,083 34,509 3.01 2,484,071 3,384 .27

Other borrowings (B)

1,087,556 27,867 5.17 1,402 13 1.87

Total borrowings 3,900,119 74,359 3.84 2,553,963 3,628 .29

Total interest bearing liabilities 20,460,994 157,149 1.55 % 20,214,312 8,907 .09 %

Non-interest bearing deposits 8,667,035 11,376,265

Other liabilities 356,829 321,805

Equity 2,654,756 3,087,512

Total liabilities and equity $ 32,139,614 $ 34,999,894

Net interest margin (FTE) $ 505,168 $ 446,403

Net yield on interest earning assets 3.18 % 2.62 %

(A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%.

(B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis