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Item 2. Management’s Discussion and Analysis

2023-11-06 compared with 2023-08-04 · 274 added, 257 removed, 620 unchanged (46% 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 and six months ended June 30, 2023 are not necessarily indicative of results to be attained for any other period.

Results of operations for the three and nine months ended September 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 June 30, 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 September 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 June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2023 2022 2023 2022

47 unchanged sentences

Results of Operations

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

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

2 unchanged sentences

Non-interest income 142,949 138,514 3.2 428,166 409,710 4.5

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

3,086 8,192 (62.3)

Investment securities gains (losses), net 4,298 3,410 26.0 7,384 11,602 (36.4)

Non-interest expense (228,010) (212,884) 7.1 (679,728) (632,037) 7.5

3 unchanged sentences

$ 120,596 $ 122,823 (1.8 %) $ 367,837 $ 356,771 3.1 %

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 quarter ended September 30, 2023, net income attributable to Commerce Bancshares, Inc.

(net income) amounted to $120.6 million, a decrease of $2.2 million, or 1.8%, compared to the third quarter of the previous year.

For the current quarter, the annualized return on average assets was 1.49%, the annualized return on average equity was 17.73%, and the efficiency ratio was 58.15%.

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.

Diluted earnings per common share was $.96 per share in the current quarter, a decrease of 1.0% compared to $0.97 per share in the third quarter of 2022, and decreased 5.9% compared to $1.02 per share in the previous quarter.

Compared to the third quarter of last year, net interest income increased $2.2 million, or .9%, mainly due to increases in interest income on loans and interest income on deposits with banks of $85.0 million and $26.2 million, respectively.

These increases were partly offset by an increase in deposits and borrowings interest expense of $96.3 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.

The provision for credit losses decreased $3.6 million, or 23.8%, compared to the same quarter in the prior year.

Non-interest income increased $4.4 million, or 3.2%, compared to the third quarter of 2022, mainly due to an increase in trust fees and bank card fees, partly offset by lower deposit account charges and consumer brokerage services fees.

Net gains on investment securities totaled $4.3 million in the current quarter compared to net gains of $3.4 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.

Net securities gains in the current quarter primarily resulted from gains of $5.6 million related to fair value adjustments on private equity investments, partly offset by $1.2 million of net losses realized on the sales of private equity investments.

Non-interest expense increased $15.1 million, or 7.1%, over the third quarter of 2022, mainly due to higher salaries and employee benefits expense, higher data processing and software expense and higher FDIC insurance expense.

Net income for the first nine months of 2023 was $367.8 million, an increase of $11.1 million, or 3.1%, from the same period last year.

Diluted earnings per common share was $2.93, an increase of 4.3% compared to $2.81 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%.

For the first nine months of 2023, the annualized return on average assets was 1.53%, the annualized return on average equity was 18.42%, and the efficiency ratio was 57.62%.

Net interest income increased $62.2 million, or 9.0%, 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.

This growth was largely due to an increase of $275.5 million in interest income on loans and an increase in interest on deposits at the Federal Reserve of $61.2 million.

These increases were partly offset by increases in interest expense on deposits and borrowings of $243.9 million.

The provision for credit losses was $29.6 million for the first nine months of 2023, compared to $12.6 million in the same period last year.

Non-interest income increased $18.5 million, or 4.5%, from the first nine months of last year mainly due to higher bank card fees, letters of credit fees, and cash sweep commission fees, partly offset by lower deposit account fees.

Non-interest expense increased $47.7 million, or 7.5%, over the first nine months of last year mainly due to increases in salaries and benefits expense, higher FDIC insurance expense, and higher data processing and software expense.

Net Interest Income

2 unchanged sentences

Analysis of Changes in Net Interest Income

Three Months Ended June 30, 2023 vs.

2022 Six Months Ended June 30, 2023 vs.

Three Months Ended September 30, 2023 vs.

2022 Nine Months Ended September 30, 2023 vs.

Change due to Change due to

37 unchanged sentences

Net interest income, tax equivalent basis $ (2,380) $ 4,605 $ 2,225 $ (22,112) $ 83,102 $ 60,990

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 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.

Net interest income in the third quarter of 2023 was $248.5 million, an increase of $2.2 million over the third quarter of 2022.

On a fully taxable-equivalent (FTE) basis, net interest income totaled $251.0 million in the third quarter of 2023, up $2.2 million over the same period last year and down $795 thousand from the previous quarter.

The increase in net interest income

compared to the third quarter of 2022 was mainly due to higher interest income earned on loans (FTE) of $85.3 million and balances at the Federal Reserve of $26.2 million, partly offset by higher interest expense on deposits and borrowings of $95.9 million.

The increase in interest earned on balances at the Federal Reserve was due to higher rates and 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 3.11% in the current quarter compared to 3.01% in the third quarter of 2022.

Total interest income (FTE) increased $98.2 million over the third quarter of 2022.

Interest income on loans (FTE) was $257.7 million during the third quarter of 2023, an increase of $85.3 million, or 49.5%, 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 165 basis points in the average rate earned and growth of $1.3 billion, or 8.5%, in average loan balances.

5 unchanged sentences

Personal real estate loan interest income grew $4.1 million due to a 37 basis point increase in the average rate earned and growth of $148.1 million, or 5.2%, in average loan balances.

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

Interest income on investment securities (FTE) was $70.3 million during the third quarter of 2023, which was a decrease of $11.0 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 $6.0 million from the same quarter last year.

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

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

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

Interest income earned on state and municipal securities declined $4.9 million due to a $661.4 million, or 32.2%, decrease in average balances and a 32 basis point decline in the average rate earned.

Interest income earned on mortgage-backed securities decreased $1.4 million mainly due to a decline of $686.6 million, or 10.0%, in the average balance.

In addition, a $1.3 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 $1.5 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 earned on asset-backed securities decreased $1.7 million due to lower average balances of $1.3 billion, or 34.0%, partly offset by an increase of 58 basis points in the average rate earned.

These decreases to interest income were partly offset by growth in interest income on other securities of $3.9 million, mainly driven by a $2.3 million dividend from a private equity investment in the third quarter of 2023.

Additionally, the average rate earned on investment securities during the three months ended September 30, 2023 increased 15 basis points over the same period in the prior year.

The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $11.9 billion in the third quarter of 2023, compared to $14.8 billion in the third quarter of 2022.

Interest income on securities purchased under agreements to resell decreased $2.2 million from the same quarter last year, due to a decline of $666.9 million in the average balance, partly offset by an increase of 36 basis points in the average rate earned.

Interest income on balances at the Federal Reserve grew $26.2 million due to an increase of 314 basis points in the average rate earned and an increase of $1.4 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%.

The average fully taxable-equivalent yield on total interest earning assets was 4.51% in the third quarter of 2023, up from 3.21% in the third quarter of 2022.

Total interest expense increased $95.9 million compared to the third quarter of 2022 due to increases of $69.4 million in interest expense on interest bearing deposits and $26.5 million on borrowings.

The increase in deposit interest expense resulted mainly from an increase of $36.2 million in interest expense on interest checking and money market deposit accounts due to a 113 basis point increase in the average rate paid, slightly offset by lower average balances of $1.4 billion, or 9.5%.

In addition, interest expense on certificates of deposit increased $33.2 million mainly due to an increase of 383 basis points in the average rate paid and an increase in average balances of $2.2 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.

The brokered deposits consist of short-term certificates of deposit less than $100 thousand, and $401.3 million were outstanding at September 30, 2023.

Interest expense on borrowings was higher due to an increase of $10.9 million in interest expense on customer repurchase agreements resulting from an increase of 183 basis points in the average rate paid.

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

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).

Interest expense on federal funds purchased increased $6.5 million mainly due to a 292 basis point increase in the average rate paid and a $456.9 million increase in the average balance of federal funds purchased, while

FHLB borrowings increased $684.2 million and resulted in an increase of $9.2 million in interest expense.

The overall average rate incurred on all interest bearing liabilities was 2.12% and .34% in the third quarters of 2023 and 2022, respectively.

Net interest income (FTE) for the first nine months of 2023 was $756.1 million compared to $695.1 million for the same period in 2022.

For the first nine months of 2023, the net interest margin was 3.16% compared to 2.75% for the same period in 2022.

Total interest income (FTE) for the first nine months of 2023 increased $61.0 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 $276.5 million, or 61.6%, due to a 193 basis point increase in the average rate earned and a $1.2 billion, or 8.0%, 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 income on investment securities (FTE) decreased $29.1 million due to a $2.5 billion decrease in average balances, slightly offset by a 12 basis point increase in the average rate earned.

Interest earned on U.S.

government and federal agency obligations decreased $16.0 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 income earned on state and municipal securities declined $11.0 million due to lower average balances and lower interest rates earned.

Interest earned on mortgage-backed securities decreased $7.0 million due to lower average balances, partly offset by higher average rates earned, while interest on asset-backed securities increased $4.5 million due to higher average rates earned, partly offset by lower average balances.

Interest income on securities purchased under agreements to resell decreased $3.9 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 income on balances at the Federal Reserve increased $61.2 million mainly due to higher average rates earned.

Total interest expense for the first nine months of 2023 increased $244.2 million compared to the same period last year.

Interest expense on deposits increased $146.9 million, due to a 116 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.

Interest expense on borrowings increased $97.3 million, mainly due to higher rates paid on federal funds purchased and customer repurchase agreements, as well as and higher average balances and higher rates paid on FHLB borrowings.

The overall cost of total interest bearing liabilities increased to 1.74% compared to .17% in the same period last year.

1 unchanged sentence

Non-Interest Income

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

Three Months Ended September 30 Increase (Decrease) Nine Months Ended September 30 Increase (Decrease)

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

9 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 six month periods ended June 30, 2023 and 2022.

Three Months Ended June 30 Six Months Ended June 30

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

Three Months Ended September 30 Nine Months Ended September 30

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

4 unchanged sentences

Total bank card transaction fees $ 46,899 $ 45,638 $ 1,261 2.8 % $ 143,278 $ 131,556 $ 11,722 8.9 %

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For the third quarter of 2023, total non-interest income amounted to $142.9 million compared to $138.5 million in the same quarter last year, which was an increase of $4.4 million, or 3.2%.

The increase was mainly due to higher trust fees and net bank card fees, partly offset by lower deposit account fees, consumer brokerage services and capital market fees.

Bank card transaction fees for the current quarter grew $1.3 million, or 2.8%, over the same period last year, mainly due to growth of $627 thousand in net merchant fees and $581 thousand in net debit card fees.

The growth in net merchant fees was mainly due to higher interchange fees, and net debit card fees increased mainly due to lower network expense.

Net corporate card fees increased mainly due to lower network and rewards expense, partly offset by lower interchange fees, while net credit card fees decreased due to lower interchange fees.

Trust fees increased $3.8 million, or 8.4%, mainly due to higher private client trust fees.

Compared to the third quarter of last year, deposit account fees decreased $1.4 million, or 5.8%, due to lower overdraft and return item fees, partly offset by higher corporate cash management fees.

Consumer brokerage fees declined $1.3 million due to lower annuity and advisory fees, while capital market fees decreased $983 thousand, or 29.0%.

Other non-interest income increased $3.2 million, or 28.0%, mainly due to growth of $942 thousand in bond underwriting fees and gains on the sale of real estate of $1.3 million recorded in the current quarter.

Non-interest income for the first nine months of 2023 was $428.2 million compared to $409.7 million in the first nine months of 2022, which was an increase of $18.5 million, or 4.5%.

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

Bank card transaction fees for the current quarter grew $11.7 million, or 8.9%, over the same period last year, mainly due to growth of $8.3 million in net corporate card fees and $2.1 million in net debit card fees.

Trust fees increased $1.8 million, or 1.3%, mainly due to higher private client trust fees.

Deposit account fees decreased $4.9 million, or 6.8%, 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.

Capital market fees decreased $2.5 million, or 23.4%, and consumer brokerage fees declined $1.0 million, or 7.0%, due to lower advisory and 12b-1 fees.

Loan fees and sales decreased $2.3 million, or 21.6%, mainly due to lower mortgage banking revenue.

Other non-interest income increased $15.7 million, or 52.8%, mainly due to higher letter of credit fees of $3.1 million, cash sweep commissions of $2.9 million, gains of $2.1 million on the sale of real estate and a write down of $965 thousand on a branch location recorded in 2022.

In addition, increases of $6.0 million in fair value adjustments were recorded on the Company's deferred compensation plan, which is held in a trust and recorded as both an asset and liability, affecting both other income and other expense.

Investment Securities Gains (Losses), Net

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

(In thousands) 2023 2022 2023 2022

4 unchanged sentences

Total investment securities gains (losses), net $ 4,298 $ 3,410 $ 7,384 $ 11,602

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.

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

Net securities gains of $4.3 million were reported in the third quarter of 2023, compared to net gains of $3.4 million in the same period last year.

The net gains in the third quarter of 2023 were primarily driven by the Company's private equity investments, where $5.6 million in net gains in fair value were partially offset by net losses of $1.2 million on sales.

The net gains on investment securities for the same quarter last year were primarily comprised of $14.1 million of net gains in fair value on the Company’s private equity investments, partially offset by a loss of $10.7 million on the sale of an available for sale debt security.

Net gains on investment securities of $7.4 million were recognized in earnings for the nine months ended September 30, 2023, compared to net gains of $11.6 million for the same period in 2022.

Net gains in the first nine months of 2023 were mainly comprised of net gains in fair value of $16.9 million on private equity investments, due to fair value adjustments, partially offset by net losses of $8.4 million on sales of available for sale securities.

Net gains in the first nine months of 2022 were mainly comprised of net gains in fair value of $37.1 million on private equity investments, partly offset by losses of $20.3 million on sales of available for sale securities, net losses of $4.2 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 $3.3 million during the first nine months of 2023 and expense of $6.6 million during the first nine months of 2022.

Non-Interest Expense

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

Three Months Ended September 30 Increase (Decrease) Nine Months Ended September 30 Increase (Decrease)

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

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Total non-interest expense $ 228,010 $ 212,884 $ 15,126 7.1 % $ 679,728 $ 632,037 $ 47,691 7.5 %

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

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

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

Non-interest expense for the third quarter of 2023 amounted to $228.0 million, an increase of $15.1 million, or 7.1%, compared to expense of $212.9 million in the third 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, FDIC insurance expense and occupancy expense.

Salaries expense increased $6.8 million, or 5.8%, due to higher full-time salaries expense of $6.4 million, or 6.9%.

Employee benefits expense totaled $21.5 million, reflecting growth of $2.6 million, or 13.6%, 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.

Full-time equivalent employees totaled 4,714 at September 30, 2023, compared to 4,595 at September 30, 2022.

Data processing and software expense increased $2.7 million, or 9.6%, due to higher bank card processing fees and increased costs for service providers.

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

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

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

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.

Occupancy expense increased $1.4 million, or 11.2%, mainly due to higher depreciation expense and real estate taxes, partly offset by higher external rent income.

Equipment expense decreased $339 thousand, or 6.7%, mainly due to lower equipment depreciation and repairs expense, while supplies and communication expense increased $382 thousand, or 8.3%, mainly due to higher postage, statement, and plastic expense.

Other non-interest expense increased $1.6 million, or 8.6%, mainly due to higher FDIC insurance expense and lower deferred origination costs of $1.3 million and $982 thousand, respectively.

Non-interest expense amounted to $679.7 million for the first nine months of 2023, an increase of $47.7 million, or 7.5%, over the first nine months of 2022.

Salaries and benefits expense increased $21.0 million, or 5.1%, mainly due to higher full-time salaries expense, healthcare expense and payroll taxes, partly offset by lower incentive compensation expense, largely the result of a $5.4 million accrual for special bonuses in 2022 that did not reoccur in 2023.

Data processing and software expense increased $4.9 million, or 5.9%, 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.

Occupancy expense increased $2.4 million, or 6.3%, mainly due to higher depreciation expense and real estate taxes, partly offset by higher external rent income.

Marketing expense decreased $402 thousand, or 2.2%, while supplies and communication expense increased $523 thousand, or 3.8%, mainly due to higher office supplies, data network, and postage expense.

Other non-interest expense increased $19.2 million, or 38.4%, mainly due to higher FDIC insurance expense of $5.4 million and higher travel and entertainment expense, miscellaneous losses and pension plan expense.

In addition, an increase of $6.0 million in fair value equity adjustments were recorded on the Company's deferred compensation plan, and deconversion costs of $2.1 million relating to the transition of Commerce Financial Advisors support to LPL Financial's Institution Services platform were recorded in the second quarter of 2023.

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

Three Months Ended Six Months Ended June 30

June 30, 2023 Mar.

31, 2023 June 30, 2022 2023 2022

Three Months Ended Nine Months Ended September 30

(In thousands) Sept.

30, 2023 June 30, 2023 Sept.

30, 2022 2023 2022

ALLOWANCE FOR CREDIT LOSSES ON LOANS

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ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 189,781 $ 187,920 $ 173,424 $ 189,781 $ 173,424

Three Months Ended Six Months Ended June 30

June 30, 2023 Mar.

31, 2023 June 30, 2022 2023 2022

Three Months Ended Nine Months Ended September 30

30, 2023 June 30, 2023 Sept.

30, 2022 2023 2022

Annualized net loan charge-offs (recoveries)*:

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

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

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

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

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

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

Net loan charge-offs in the third quarter of 2023 amounted to $9.8 million, compared to $6.5 million in the prior quarter and $4.8 million in the third quarter of last year.

Comp ared to the same period last year, total net loan charge-offs in the third quarter of 2023 increased $5.0 million and increased $3.3 million from the previous quarter.

The increase over the prior year was mainly driven by increases in net charge-offs on business, consumer credit cards, and consumer loans of $2.2 million, $1.8 million, and $970 thousand, respectively.

The increase from the previous quarter was driven by the increase in net charge-offs on business and consumer loans.

For the three months ended September 30, 2023, annualized net charge-offs on average consumer credit card loans were 3.32%, compared to 3.38% in the previous quarter and 2.08% in the same period last year.

Consumer loan annualized net charge-offs in the current quarter amounted to .34%, compared to .24% in the prior quarter and .16% in the same period last year.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In the third quarter of 2023 , total annualized net loan charge-offs were .23%, compared to .16% in the previous quarter and .12% in the same period last year.

The provision for credit losses on loans was $13.3 million in the current quarter, which was a $7.5 million increase from the $5.9 million provision recorded in the p rior quarter and a $3.2 million increase from the $10.2 million provision recorded for the three months ended September 30, 2022.

The increase in the provision from the prior quarter was due to growth in the related allowance for credit losses on loans.

For the nine months ended September 30, 2023, net loan charge-offs amounted to $23.0 million, compared to $13.4 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, business, and consumer loans and overdrafts.

Annualized net charge-offs on consumer credit card loans totaled 3.28% and 2.26% for the nine months ended September 30, 2023 and 2022, respectively, while consumer loan annualized net charge-offs were .28% and .15% in the nine months ended September 30, 2023 and 2022, respectively.

Total annualized net loan charge-offs were .18% and .12% for the nine months ended September 30, 2023 and 2022, respectively.

For the nine months ended September 30, 2023, the provision for credit losses on loans was $35.2 million, which was a $28.4 million increase over the $6.8 million provision 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 nine months of 2023 related to an increase in loan net charge-offs as well as a future mild recession forecasted for the fourth quarter of 2023, while the first nine months of 2022 experienced reductions in the related allowance for credit losses primarily related to the improving economic forecast at that time.

For the nine months ended September 30, 2023, the allowance for credit losses on loans increased $12.1 million, compared to the allowance for credit losses on loans at December 31, 2022.

During the nine months ended September 30, 2023, the allowance for credit losses on commercial loans increased by $7.3 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, increased $4.8 million.

Compared to September 30, 2022, the allowance for credit losses on loans at September 30, 2023 increased $18.9 million.

The increase in the allowance for credit losses at September 30, 2023 compared to both September 30, 2022 and December 31, 2022 was primarily the result of applying a slightly more pessimistic forecast at September 30, 2023 than was utilized in the prior year, coupled with loan growth and rising interest rates that extended the estimated lives of certain loan portfolios during 2023.

The allowance for credit losses on loans was $162.2 million at September 30, 2023 and was .95%, .92% and .90% of total loans at September 30, 2023, December 31, 2022 and September 30, 2022, respectively.

In the current quarter, the provision for credit losses on unfunded lending commitments was a benefit of $1.7 million, compared to a provision of $5.1 million at September 30, 2022.

For the nine months ended September 30, 2023, the provision for credit losses on unfunded commitments was a benefit of $5.6 million, compared to a provision of $5.8 million in the first nine months of 2022.

At September 30, 2023, the liability for unfunded lending commitments was $27.5 million, compared to $33.1 million at December 31, 2022 and $30.0 million at September 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 June 30, 2023.

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

9 unchanged sentences

(Dollars in thousands)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Non-accrual loans $ 8,209 $ 8,306

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Total loans past due 90 days and still accruing interest $ 18,580 $ 15,830

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

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

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

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

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

Non-accrual loans totaled $8.2 million at September 30, 2023, a decrease of $97 thousand from the balance at December 31, 2022.

The decrease occurred mainly in business and business real estate loans, which decreased $149 thousand and $113 thousand, respectively.

These decreases were partly offset by a $165 thousand increase in personal real estate non-accrual loans.

At September 30, 2023, non-accrual loans were comprised of business (80.4%), personal real estate (18.7%), and business real estate (0.9%) loans.

Foreclosed real estate totaled $114 thousand at September 30, 2023, a slight increase compared to December 31, 2022.

Total loans past due 90 days or more and still accruing interest were $18.6 million as of September 30, 2023, an increase of $2.8 million 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.

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

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

Such loans totaled $219.4 million at September 30, 2023 compared with $259.7 million at December 31, 2022, resulting in a decrease of $40.4 million, or 15.5%.

(In thousands)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Potential problem loans:

4 unchanged sentences

Total potential problem loans $ 219,372 $ 259,724

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

When borrowers are experiencing financial difficulty, the Company may agree to modify the contractual terms of a loan to a borrower in order to assist the borrower in repaying principal and interest owed to the Company.

At September 30, 2023, the Company held $129.0 million of loans that had been modified during the nine months ended September 30, 2023.

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

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Real Estate – Construction and Land Loans

The Company's portfolio of construction and land loans, as shown in the table below, amounted to 8.6% 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,

The Company's portfolio of construction and land loans, as shown in the table below, amounted to 9.0% of total loans outstanding at September 30, 2023.

The largest component of construction and land loans was commercial construction, which increased $183.3 million during the nine months ended September 30, 2023.

At September 30, 2023, multi-family residential construction loans totaled approximately $376.0 million, or 28.8%, of the commercial construction loan portfolio, compared to $303.5 million, or 27.0%, at December 31, 2022.

(Dollars in thousands) September 30,

December 31, 2022

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Real Estate – Business Loans

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

Total business real estate loans were $3.6 billion at September 30, 2023 and comprised 21.3% of the Company's total loan portfolio.

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

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

(Dollars in thousands) June 30,

At September 30, 2023, 31.0% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans.

(Dollars in thousands) September 30,

December 31, 2022

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Retail 352,477 9.7 2.1 322,971 9.5 2.0

Multi-family 303,323 8.4 1.8 308,156 9.0 1.9

Hotels 293,420 8.0 1.7 230,972 6.8 1.4

Multi-family 281,542 7.7 1.6 308,156 9.0 1.9

Farm 202,050 5.5 1.2 195,920 5.8 1.2

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Total real estate - business loans $ 3,647,168 100.0 % 21.3 % $ 3,406,981 100.0 % 20.9 %

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.

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

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

June 30, 2023

September 30, 2023

Owner-occupied $ 1,110,769 $ 7,510 $ 12,567 $ 76 $ 1,130,922

2 unchanged sentences

Retail 335,143 15,501 1,833 — 352,477

Multi-family 301,377 1,946 — — 303,323

Hotels 282,404 9,373 1,643 — 293,420

Multi-family 280,384 1,158 — — 281,542

Farm 202,050 — — — 202,050

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Retail 321,041 — 1,930 — 322,971

Multi-family 286,202 1,975 19,979 — 308,156

Hotels 174,558 9,725 46,689 — 230,972

Multi-family 286,202 1,975 19,979 — 308,156

Farm 195,685 177 — 58 195,920

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Revolving Home Equity Loans

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

The Company had $305.2 million in revolving home equity loans at September 30, 2023 that were collateralized by residential real estate.

Most of these loans (91.3%) are written with terms requiring interest-only monthly payments.

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

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

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

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

As of September 30, 2023, the outstanding principal of loans with an original LTV higher than 80% was $32.2 million, or 10.5% 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 $5.2 million at September 30, 2023 and $1.9 million at December 31, 2022, and there were no revolving home equity loans on non-accrual status at September 30, 2023 or December 31, 2022.

The weighted average FICO score for the total portfolio balance at September 30, 2023 is 785.

At maturity, the accounts are re-underwritten, and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or convert the outstanding balance to an amortizing loan.

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

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

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

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

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

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.

Auto loans comprised 38.8% of the consumer loan portfolio at September 30, 2023, and outstanding balances for auto loans were $824.7 million and $798.6 million at September 30, 2023 and December 31, 2022, respectively.

The balances over 30 days past due amounted to $8.6 million at September 30, 2023 and $9.9 million at December 31, 2022, respectively, and comprised 1.0% of the outstanding balances of these loans at September 30, 2023 and 1.2% at December 31, 2022, respectively.

For the nine months ended September 30, 2023, $290.3 million of new auto loans were originated, compared to $257.5 million during the first nine months of 2022.

At September 30, 2023, the automobile loan portfolio had a weighted average FICO score of 755, and net charge-offs on auto loans were .5% 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 11.0% of the consumer loan portfolio at September 30, 2023.

Losses on these loans have historically been low, and the Company saw net recoveries of $55 thousand for the first nine months of 2023.

Private banking loans comprised 32.1% of the consumer loan portfolio at September 30, 2023.

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

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

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

Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $1.6 million in the first nine months of 2023 and were .2% of the average balances of these loans at September 30, 2023.

Consumer Credit Card Loans

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

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

Out of a portfolio at September 30, 2023 of $574.8 million in consumer credit card loans outstanding, approximately $111.7 million, or 19.4%, carried a low promotional rate.

Within the next six months, $41.9 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 $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.

The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $257.2 million, or 1.5% of total loans at September 30, 2023, a decrease of $39.3 million from December 31, 2022, as shown in the table below.

(In thousands)

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

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

Extraction $ 204,372 $ 235,933 $ 118,941

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 $1.4 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.

The balance of SNC loans totaled $1.5 billion at September 30, 2023, compared to $1.4 billion at December 31, 2022.

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

Income tax expense was $33.4 million in the third quarter of 2023, compared to $36.0 million in the second quarter of 2023 and $33.9 million in the third quarter of 2022.

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

Financial Condition

Balance Sheet

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

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

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

Total assets of the Company were $31.4 billion at September 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 $31.2 billion at September 30, 2023 and $31.6 billion at December 31, 2022, and consisted of 55% in loans and 38% in investment securities at September 30, 2023.

At September 30, 2023, total loans increased $826.2 million or 5.1%, compared to balances at December 31, 2022.

The increase was mainly due to growth in business, business real estate and construction loans of $246.6 million, $240.2 million, and $178.5 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.

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

Personal real estate loans increased $106.6 million, and consumer loans, which include automobile, marine and RV, fixed rate home equity and other consumer loans, increased $66.7 million, due to growth in auto loans and other consumer loans.

These increases were partially offset by declines in overdrafts and consumer credit card loans of $11.2 million and $9.2 million, respectively.

Total available for sale debt securities, excluding fair value adjustments, decreased $2.3 billion at September 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 $2.4 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 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 $1.1 billion, $583.5 million, and $365.1 million, respectively, at September 30, 2023 compared to December 31, 2022.

At September 30, 2023, the duration of the available for sale investment portfolio was 3.9 years, and maturities and pay downs of approximately $2.1 billion are expected to occur during the next 12 months.

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

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

Total deposits at September 30, 2023 amounted to $25.1 billion, a decrease of $1.1 billion compared to December 31, 2022.

The decline in deposits largely resulted from a decrease in demand deposits, mainly in business demand deposits (decrease of $1.9 billion).

Additionally, money market and savings deposit balances decreased $931.6 million and $157.3 million, respectively, while certificate of deposit balances grew $2.0 billion and interest checking balances increased $116.0 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.

The Company’s borrowings totaled $3.2 billion at September 30, 2023, an increase of $397.4 million over balances at December 31, 2022, mainly due to FHLB advances, which increased $500.0 million during the nine months ended September 30, 2023.

Additionally, federal funds purchased were $346.5 million higher at September 30, 2023 than at December 31, 2022, whereas repurchase agreements declined by $443.0 million during the same period.

Liquidity and Capital Resources

Liquidity Management

The Company’s most liquid assets are comprised of available for sale debt securities, federal funds sold, securities purchased under agreements to resell (resale agreements), and balances at the Federal Reserve Bank, as follows:

(In thousands)

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

September 30, 2023 September 30, 2022 December 31, 2022

Liquid assets:

4 unchanged sentences

Total $ 12,161,204 $ 14,564,473 $ 13,501,961

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

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

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

Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral, and this collateral totaled $866.8 million in fair value at June 30, 2023.

The fair value of the available for sale debt portfolio was $9.9 billion at September 30, 2023 and included an unrealized net loss of $1.6 billion.

Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $2.7 million as of September 30, 2023.

Resale agreements, maturing through 2025, totaled $450.0 million at September 30, 2023.

$325.0 million of the Company's resale agreements will mature in the next 12 months.

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

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.

Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $1.8 billion at September 30, 2023 and increased $1.5 billion over December 31, 2022 balances.

Approximately $2.1 billion of the Company's available for sale debt portfolio is expected to mature or pay down during the next 12 months, and at September 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)

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

September 30, 2023 September 30, 2022 December 31, 2022

Investment securities pledged for the purpose of securing:

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Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts.

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

At September 30, 2023, such deposits totaled $22.1 billion and represented 88.1% of total deposits.

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

Certificates of deposit of $100,000 and over totaled $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.

Certificates of deposit of $100,000 and over totaled $1.8 billion at September 30, 2023.

These accounts are normally considered more volatile with higher cost and comprised 7.0% of total deposits at September 30, 2023.

(In thousands)

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

September 30, 2023 September 30, 2022 December 31, 2022

Core deposit base:

3 unchanged sentences

Total $ 22,115,677 $ 26,483,078 $ 25,193,337

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

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

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

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 $401.3 million were outstanding at September 30, 2023.

At September 30, 2023, the Company's total deposit portfolio was $25.1 billion, compared to $26.2 billion at December 31, 2022.

The Company's uninsured deposits were $10.2 billion, or 40.6% of total deposits at September 30, 2023.

The Company's uninsured deposits include $2.1 billion of affiliate deposits and collateralized deposits.

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

Excluding those affiliate and collateralized deposits, the Company's uninsured deposits at September 30, 2023 were $8.1 billion, or 32.3% of total deposits.

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

The Company's outside borrowings are mainly comprised of federal funds purchased and repurchase agreements, as follows:

The Company's outside borrowings are mainly comprised of federal funds purchased, repurchase agreements, and FHLB advances, as follows:

(In thousands)

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

September 30, 2023 September 30, 2022 December 31, 2022

Federal funds purchased $ 506,355 $ 311,200 $ 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 June 30, 2023, the Company had access to an additional $3.5 billion of overnight, approved federal funds as of that date.

In addition to the amount accessed as of September 30, 2023, the Company had access to an additional $3.8 billion of overnight, approved federal funds as of that date.

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

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

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.

repurchase agreements, which generally mature overnight, are comprised of non-insured customer funds totaling $2.2 billion at September 30, 2023 and are collateralized by securities in the Company's investment portfolio.

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

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

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

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

There were $500.0 million in advances outstanding from the FHLB at September 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 June 30, 2023.

June 30, 2023

September 30, 2023

(In thousands)

19 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 $2.0 billion during the first six 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 $1.3 billion during the first nine 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 $367.7 million and has historically been a stable source of funds.

1 unchanged sentence

Activity in the investment securities portfolio provided cash of $2.3 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 $849.4 million.

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

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

Additionally, repayments of securities purchased under agreements to resell provided cash of $375.0 million.

Financing activities used cash of $775.4 million, largely resulting from net decreases in deposits of $1.0 billion and $1.8 billion in repayments of FHLB advances, partially offset by FHLB advance borrowings of $2.3 billion during the first nine months of 2023.

Capital Management

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

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

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

(Dollars in thousands) September 30, 2023 December 31, 2022 Minimum Capital Requirement Capital Conservation Buffer Minimum Ratios Requirement including Capital Conservation Buffer

Minimum Ratios

7 unchanged sentences

Total risk-based capital ratio 15.90 14.89 8.00 2.50 10.50 10.00

Tier I leverage ratio 10.46 10.34 4.00 5.00

Tier I leverage ratio 10.87 10.34 4.00 N/A 4.00 5.00

*Under Prompt Corrective Action requirements

The Company is subject to a 2.5% capital conservation buffer, which is an amount above the minimum ratios under capital adequacy guidelines, and is required under Basel III.

The capital conservation buffer is intended to absorb losses during periods of economic stress.

The Company is subject to a 2.5% capital conservation buffer, which is an amount above the minimum ratios under capital adequacy guidelines, and is intended to absorb losses during periods of economic stress.

Failure to maintain the buffer will result in constraints on dividends, share repurchases, and executive compensation.

5 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 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.

During the nine months ended September 30, 2023, the Company purchased 941,890 shares at an average price of $59.67 in open market purchases and through stock-based compensation transactions.

At September 30, 2023, 2,170,168 shares remained available for purchase under the current Board authorization.

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

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

The Company paid a $.270 per share cash dividend on its common stock in the third 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

9 unchanged sentences

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 30, 2023.

During the third quarter of 2023, the Company repaid $500.0 million of its FHLB borrowings, resulting in $500.00

million of FHLB borrowings outstanding as of September 30, 2023.

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

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

As of September 30, 2023, the Company had $401.3 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.

1 unchanged sentence

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

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

The most significant of these are loan commitments, which at September 30, 2023 totaled $14.3 billion (including $5.2 billion in unused, approved credit card lines).

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

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

The contractual amount of standby and commercial letters of credit totaled $583.1 million and $5.1 million, respectively, at September 30, 2023.

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

The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to $4.2 million at June 30, 2023.

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

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

At September 30, 2023, the liability for unfunded commitments totaled $27.5 million.

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

1 unchanged sentence

These credits are either resold to third parties at a profit or retained for use by the Company.

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

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

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

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

During the first nine months of 2023, purchases and sales of tax credits amounted to $89.3 million and $52.4 million, respectively.

Fees from sales of tax credits were $3.0 million for the nine months ended September 30, 2023, compared to $4.4 million in the same period last year.

At September 30, 2023, the Company expected to fund outstanding purchase commitments of $55.9 million during the remainder of 2023 and had purchase commitments of $524.7 million that it expects to fund from 2024 through 2029.

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

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

Segment Results

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

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

(Dollars in thousands)

1 unchanged sentence

Consolidated Totals

Six Months Ended June 30, 2023

Nine Months Ended September 30, 2023

Net interest income $ 304,859 $ 355,690 $ 54,193 $ 714,742 $ 34,966 $ 749,708

4 unchanged sentences

Income before income taxes $ 116,857 $ 245,814 $ 97,999 $ 460,670 $ 15,288 $ 475,958

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Net interest income $ 270,561 $ 333,270 $ 56,731 $ 660,562 $ 26,982 $ 687,544

7 unchanged sentences

Percent 7.6 % 7.8 % (9.9 %) 3.4 % (18.7) % 2.5 %

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.

For the nine months ended September 30, 2023, income before income taxes for the Consumer segment increased $8.2 million, or 7.6%, compared to the first nine months of 2022.

The increase in income before income taxes was mainly due to an increase in net interest income of $34.3 million, or 12.7%, partly offset by a decrease in non-interest income of $7.7 million, or 9.3%, and increases in non-interest expense of $11.3 million, or 4.9%, and the provision for credit losses of $7.1 million, or 55.4%.

Net interest income increased due to a $32.8 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and a $31.8 million increase in loan interest income.

These increases were partly offset by higher deposit interest expense of $30.3 million.

1 unchanged sentence

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.

The provision for credit losses totaled $19.8 million, and increased over the first nine months of 2022, mainly due to higher consumer credit card and personal loan net charge-offs.

For the nine months ended September 30, 2023, income before income taxes for the Commercial segment increased $17.8 million, or 7.8%, 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.

1 unchanged sentence

This increase was partly offset by lower net allocated funding credits of $76.2 million and increases of $83.3 million in deposit interest expense and $41.9 million in interest expense on customer repurchase agreements.

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

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

Non-interest income increased $16.7 million, or 10.0%, over the previous year mainly due to growth in net bank card fees (mainly corporate card and merchant 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 $18.7 million, or 6.9%, mainly due to higher salaries and benefits expense, FDIC insurance expense and allocated service and support costs (mainly bank operations, commercial sales and products and credit administration).

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

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

Wealth 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.

The provision for credit losses increased $2.6 million over the same period last year, mainly due to higher business loan net charge-offs.

Wealth segment pre-tax profitability for the nine months ended September 30, 2023 decreased $10.8 million, or 9.9%, from the same period in the previous year.

Net interest income decreased $2.5 million, or 4.5%, mainly due to a $12.3 million decline in net allocated funding credits and a $17.2 million increase in deposit interest expense, partly offset by a $27.0 million increase in loan interest income.

Non-interest income increased $1.8 million, or 1.1%, over the prior year largely due to higher private client trust fees and cash sweep commissions, partly offset by lower brokerage fees.

Non-interest expense increased $10.0 million, or 9.2%, mainly due to higher salaries and benefits expense and the deconversion costs previously mentioned.

2 unchanged sentences

In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category.

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

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

The pre-tax profitability of this category was $3.5 million lower than in the same period last year.

Unallocated securities gains were $7.4 million in the first nine months of 2023 compared to gains of $11.6 million in 2022.

Also, the unallocated provision for credit losses increased $7.4 million, primarily driven by an increase in the provision for credit losses on loans, partly offset by a decrease in the liability for unfunded lending commitments, which are both not allocated to the segments for management reporting purposes.

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

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

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

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

Additionally, non-interest expense decreased $5.7 million.

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

The provision for credit losses on loans in the first nine months of 2023 was $35.2 million, or $12.1 million higher than net charge-offs due to an increase in the allowance for credit losses on loans.

In the comparable period last year, the provision for credit losses on loans was $6.8 million, or $6.7 million lower than net charge-offs, due to a decrease in the allowance for credit losses on loans.

For the nine months ended September 30, 2023, the Company's provision on unfunded lending commitments was a benefit of $5.6 million.

Additionally, non-interest expense increased $7.6 million.

These decreases to pre-tax profitability were partly offset by higher net interest income of $8.0 million, and non-interest income of $7.7 million.

Regulatory Changes

During the second quarter of 2023, the Federal Deposit Insurance Corporation (“FDIC”) issued a proposed rule to impose a special assessment to recover losses to the FDIC’s Deposit Insurance Fund following the failure of two financial institutions.

The proposed rule applies to all insured depository institutions.

Under the proposed rule, the assessment base for would be equal to an insured depository institution’s estimated insured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion of uninsured deposits.

The proposed special assessment would apply an annual rate of 12.5 basis points.

If the final rule is adopted as proposed, the estimated impact of the special assessment on the Company is approximately $14.9 million to be recognized at the time the rule is finalized and paid in eight quarterly installments beginning in the first quarter of 2024.

The actual assessment may vary as a result of the final rule.

In July 2023, the SEC adopted a final rule requiring registrants provide enhanced disclosures regarding cybersecurity incidents as well as reporting on cybersecurity risk management, strategy, and governance.

The final rule requires registrants to disclose on Form 8-K material cybersecurity incidents within four business days after the company determines that the cybersecurity incident is material.

Additionally, registrants are also required to disclose annually on Form 10-K information the Company’s processes for assessing, identifying, and managing material risks from cybersecurity threats, management’s role in assessing and managing material risks from cybersecurity threats, and the board of directors’ oversight of cybersecurity risks.

Companies are required to comply with the Form 8-K incident disclosure requirements beginning December 18, 2023.

The annual disclosures in Form 10-K are required for fiscal years ending on or after December 15, 2023.

Impact of Recently Issued Accounting Standards

6 unchanged sentences

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

Disclosure Improvements The FASB issued ASU 2023-06, "Disclosure Improvements:

Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative," in October 2023.

The amendments in this Update modify the disclosure or presentation requirements of a variety of topics in the Codification.

Certain of the amendments represent clarifications to or technical corrections of the current requirements.

The effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited.

The adoption is not expected to have a significant effect on the Company's consolidated financial statements.

AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Three Months Ended June 30, 2023 and 2022

Second Quarter 2023

Second Quarter 2022

Three Months Ended September 30, 2023 and 2022

Third Quarter 2023

Third Quarter 2022

(Dollars in thousands)

61 unchanged sentences

AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Six Months Ended June 30, 2023 and 2022

Six Months 2023

Six Months 2022

Nine Months Ended September 30, 2023 and 2022

Nine Months 2023

Nine Months 2022

(Dollars in thousands)

61 unchanged sentences

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