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Item 2. Management’s Discussion and Analysis

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
 RESULTS OF OPERATIONS 
 
 
 The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2022 Annual Report on Form 10-K. Results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of results to be attained for any other period. 
 
 
 
 Forward-Looking Information 
 This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, the effects of the COVID-19 pandemic, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2022 Annual Report on Form 10-K. During the quarter ended 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 
 The Company has identified certain policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates and related policies are the Company's allowance for credit losses and fair value measurement policies. A discussion of these estimates and related policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2022 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2022. 
 
 
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 Selected Financial Data 
 
 Three Months Ended September 30 Nine Months Ended September 30 
 2023 2022 2023 2022 
 Per Share Data 
 Net income per common share — basic $ .96 $ .97 * $ 2.94 $ 2.81 * 
 Net income per common share — diluted .96 .97 * 2.93 2.81 * 
 Cash dividends on common stock .270 .252 * .810 .757 * 
 Book value per common share 20.90 18.91 * 
 Market price 47.98 63.01 * 
 Selected Ratios 
 (Based on average balance sheets) 
 Loans to deposits (1) 
 66.39 % 56.40 % 65.85 % 54.05 % 
 Non-interest bearing deposits to total deposits 31.05 38.76 33.23 39.04 
 Equity to loans (1) 
 15.90 17.45 16.00 19.19 
 Equity to deposits 10.55 9.84 10.53 10.37 
 Equity to total assets 8.40 8.31 8.31 8.66 
 Return on total assets 1.49 1.48 1.53 1.39 
 
 Return on equity 17.73 17.84 18.42 16.08 
 (Based on end-of-period data) 
 Non-interest income to revenue (2) 
 36.51 35.99 36.35 37.34 
 Efficiency ratio (3) 
 58.15 55.19 57.62 57.48 
 Tier I common risk-based capital ratio 15.11 13.97 
 Tier I risk-based capital ratio 
 15.11 13.97 
 Total risk-based capital ratio 15.90 14.69 
 Tangible common equity to tangible assets ratio (4) 
 7.78 6.80 
 Tier I leverage ratio 
 10.87 9.87 

 * Restated for the 5% stock dividend distributed in December 2022. 
 (1) Includes loans held for sale. 
 (2) Revenue includes net interest income and non-interest income. 
 (3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue. 
 (4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization. 
 It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP. 
 
 
 The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets. 
 
 
 
 September 30 
 (Dollars in thousands) 2023 2022 
 Total equity $ 2,599,266 $ 2,371,107 
 Less non-controlling interest 17,861 19,513 
 
 Less goodwill 146,539 138,921 
 Less intangible assets* 4,111 4,371 
 Total tangible common equity (a) $ 2,430,755 $ 2,208,302 
 Total assets $ 31,376,692 $ 32,602,596 
 Less goodwill 146,539 138,921 
 Less intangible assets* 4,111 4,371 
 Total tangible assets (b) $ 31,226,042 $ 32,459,304 
 Tangible common equity to tangible assets ratio (a)/(b) 7.78 % 6.80 % 

 * Intangible assets other than mortgage servicing rights. 
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 Results of Operations 
 Summary 
 
 Three Months Ended September 30 Nine Months Ended September 30 
 (Dollars in thousands) 2023 2022 % change 2023 2022 % change 
 Net interest income (expense) $ 248,547 $ 246,373 .9 % $ 749,708 $ 687,544 9.0 % 
 Provision for credit losses (11,645) (15,290) 23.8 (29,572) (12,594) (134.8) 
 Non-interest income 142,949 138,514 3.2 428,166 409,710 4.5 
 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 
 Income taxes (33,439) (33,936) (1.5) (102,242) (97,859) 4.5 
 Non-controlling interest income (expense) (2,104) (3,364) (37.5) (5,879) (9,595) (38.7) 
 Net income attributable to Commerce Bancshares, Inc. $ 120,596 $ 122,823 (1.8 %) $ 367,837 $ 356,771 3.1 % 
 
 

 
 
 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 $.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 $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 $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 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 $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. 
 
 
 
 
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 Net Interest Income 
 The following table summarizes the changes in net interest income on a fully taxable-equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate. 
 
 
 Analysis of Changes in Net Interest Income 
 
 Three Months Ended September 30, 2023 vs. 2022 Nine Months Ended September 30, 2023 vs. 2022 
 Change due to Change due to 
 
(In thousands) Average
Volume Average
Rate 
 Total Average
Volume Average
Rate 
 Total 
 Interest income, fully taxable equivalent basis: 
 Loans: 
 Business $ 5,165 $ 27,126 $ 32,291 $ 10,565 $ 94,985 $ 105,550 
 Real estate - construction and land 2,924 11,013 13,937 7,920 37,133 45,053 
 Real estate - business 4,257 15,858 20,115 10,958 55,253 66,211 
 Real estate - personal 1,254 2,807 4,061 3,361 8,186 11,547 
 Consumer 7 9,513 9,520 526 28,727 29,253 
 Revolving home equity 281 2,253 2,534 743 7,744 8,487 
 Consumer credit card 425 2,434 2,859 1,372 9,032 10,404 
 Overdrafts — — — — — — 
 Total interest on loans 14,313 71,004 85,317 35,445 241,060 276,505 
 Loans held for sale (33) 26 (7) (94) 72 (22) 
 Investment securities: 
 U.S. government and federal agency securities (1,445) (5,469) (6,914) (2,325) (13,696) (16,021) 
 Government-sponsored enterprise obligations — (1) (1) 205 185 390 
 State and municipal obligations (3,788) (1,147) (4,935) (8,795) (2,234) (11,029) 
 Mortgage-backed securities (3,340) 1,959 (1,381) (11,733) 4,740 (6,993) 
 Asset-backed securities (5,379) 3,726 (1,653) (11,045) 15,503 4,458 
 Other securities 391 3,467 3,858 3,422 (3,370) 52 
 Total interest on investment securities (13,561) 2,535 (11,026) (30,271) 1,128 (29,143) 
 Federal funds sold (75) 26 (49) 180 345 525 
 Securities purchased under agreements to resell (2,891) 647 (2,244) (8,007) 4,129 (3,878) 
 Interest earning deposits with banks 7,699 18,468 26,167 1,192 59,986 61,178 
 Total interest income 5,452 92,706 98,158 (1,555) 306,720 305,165 
 Interest expense: 
 Deposits: 
 Savings (16) 33 17 (27) 88 61 
 Interest checking and money market (2,054) 38,287 36,233 (2,844) 85,192 82,348 
 Certificates of deposit of less than $100,000 196 14,892 15,088 224 26,070 26,294 
 Certificates of deposit of $100,000 and over 2,153 15,918 18,071 1,251 36,966 38,217 
 Total interest on deposits 279 69,130 69,409 (1,396) 148,316 146,920 
 Federal funds purchased 2,776 3,742 6,518 3,821 14,449 18,270 
 Securities sold under agreements to repurchase 287 10,568 10,855 (392) 42,372 41,980 
 Other borrowings 4,490 4,661 9,151 18,524 18,481 37,005 
 Total interest expense 7,832 88,101 95,933 20,557 $ 223,618 $ 244,175 
 Net interest income, tax equivalent basis $ (2,380) $ 4,605 $ 2,225 $ (22,112) $ 83,102 $ 60,990 

 
 
 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 
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 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 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. 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. Most of the increase in interest income occurred in the business, business real estate and construction loan categories. The largest increase to interest income occurred in business loan interest, which grew $32.3 million due to a 183 basis point increase in the average rate earned, coupled with growth in average balances of $531.5 million, or 10.0%. Business real estate loan interest income increased $20.1 million due to an increase of 173 basis points in the average rate earned and higher average balances of $383.9 million, or 11.8%. Construction and land loan interest grew $13.9 million due to a 290 basis point increase in the average rate earned and growth of $220.1 million, or 17.1%, in average loan balances. In addition, consumer loan interest increased $9.5 million due to an increase of 180 basis points in the average rate earned, while consumer credit card loan increased $2.9 million mainly due to a 172 basis point increase in the average rate earned. 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 $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. government and federal agency obligations, which declined $6.9 million due to a decrease in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS). Interest income related to TIPS, which is tied to the non-seasonally adjusted Consumer Price Index (CPI-U), decreased $6.0 million from the same quarter last year. 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. 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 4.51% 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 $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 $6.5 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 
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 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 average loan balances. 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 $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 $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 $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. 
 
 
 Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion. 
 
 
 
 
 
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 Non-Interest Income 
 
 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 
 Bank card transaction fees $ 46,899 $ 45,638 $ 1,261 2.8 % $ 143,278 $ 131,556 $ 11,722 8.9 % 
 Trust fees 49,207 45,406 3,801 8.4 141,800 140,009 1,791 1.3 
 Deposit account charges and other fees 23,090 24,521 (1,431) (5.8) 67,475 72,392 (4,917) (6.8) 
 Consumer brokerage services 3,820 5,085 (1,265) (24.9) 13,582 14,599 (1,017) (7.0) 
 Capital market fees 2,410 3,393 (983) (29.0) 8,311 10,845 (2,534) (23.4) 
 Loan fees and sales 2,966 3,094 (128) (4.1) 8,290 10,575 (2,285) (21.6) 
 Other 14,557 11,377 3,180 28.0 45,430 29,734 15,696 52.8 
 Total non-interest income $ 142,949 $ 138,514 $ 4,435 3.2 % $ 428,166 $ 409,710 $ 18,456 4.5 % 
 Non-interest income as a % of total revenue* 36.5 % 36.0 % 36.4 % 37.3 % 

 * Total revenue includes net interest income and non-interest income. 
 
 
 The table below is a summary of net bank card transaction fees for the three 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 
 Net debit card fees $ 11,089 $ 10,508 $ 581 5.5 % $ 32,716 $ 30,593 $ 2,123 6.9 % 
 Net credit card fees 3,430 3,597 (167) (4.6) 10,916 11,031 (115) (1.0) 
 Net merchant fees 5,859 5,232 627 12.0 16,569 15,146 1,423 9.4 
 Net corporate card fees 26,521 26,301 220 .8 83,077 74,786 8,291 11.1 
 Total bank card transaction fees $ 46,899 $ 45,638 $ 1,261 2.8 % $ 143,278 $ 131,556 $ 11,722 8.9 % 

 
 
 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 $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. 
 
 
 
 
 
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 Investment Securities Gains (Losses), Net 
 
 Three Months Ended September 30 Nine Months Ended September 30 
 (In thousands) 2023 2022 2023 2022 
 Net gains (losses) on sales of available for sale debt securities $ — $ (10,692) $ (8,444) $ (20,274) 
 
 Fair value adjustments on equity securities, net (67) (25) (757) (1,048) 
 Net gains (losses) on sales of private equity investments (1,240) 77 (361) (4,209) 
 Fair value adjustments on private equity investments 5,605 14,050 16,946 37,133 
 
 
 
 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 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. 
 
 
 
 
 
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 Non-Interest Expense 
 
 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 
 Salaries and employee benefits $ 146,805 $ 137,393 $ 9,412 6.9 % $ 436,607 $ 415,589 $ 21,018 5.1 % 
 Data processing and software 30,744 28,050 2,694 9.6 87,617 82,701 4,916 5.9 
 Net occupancy 13,948 12,544 1,404 11.2 39,702 37,343 2,359 6.3 
 Marketing 6,167 6,228 (61) (1.0) 18,006 18,408 (402) (2.2) 
 Equipment 4,697 5,036 (339) (6.7) 14,411 14,338 73 .5 
 Supplies and communication 4,963 4,581 382 8.3 14,178 13,655 523 3.8 
 Other 20,686 19,052 1,634 8.6 69,207 50,003 19,204 38.4 
 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 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 4,714 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 $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 $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. 
 
 
 
 
 
 
 
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 Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments 
 
 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 
 
 
 Balance at beginning of period $ 158,685 $ 159,317 $ 138,039 $ 150,136 $ 150,044 
 Provision for credit losses on loans 13,343 5,864 10,150 $ 35,155 $ 6,751 
 Net loan charge-offs (recoveries): 
 Commercial: 
 Business 2,613 165 461 3,008 557 
 Real estate-construction and land — (115) — (115) — 
 Real estate-business (15) (5) (8) (24) (16) 
 Commercial net loan charge-offs (recoveries) 2,598 45 453 2,869 541 
 Personal Banking: 
 Real estate-personal (9) (6) (15) (26) (34) 
 Consumer 1,797 1,273 827 4,345 2,268 
 Revolving home equity (1) (20) (38) (47) (34) 
 Consumer credit card 4,716 4,687 2,882 13,728 9,191 
 Overdrafts 683 517 703 2,178 1,486 
 Personal banking net loan charge-offs (recoveries) 7,186 6,451 4,359 20,178 12,877 
 Total net loan charge-offs (recoveries) 9,784 6,496 4,812 23,047 13,418 
 Balance at end of period $ 162,244 $ 158,685 $ 143,377 $ 162,244 $ 143,377 
 LIABILITY FOR UNFUNDED LENDING COMMITMENTS 
 
 
 Balance at beginning of period 29,235 28,628 24,907 33,120 24,204 
 Provision for credit losses on unfunded lending commitments (1,698) 607 5,140 (5,583) 5,843 
 Balance at end of period 27,537 29,235 30,047 27,537 30,047 
 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 Nine Months Ended September 30 
 Sept. 30, 2023 June 30, 2023 Sept. 30, 2022 2023 2022 
 Annualized net loan charge-offs (recoveries)*: 
 Commercial: 
 Business .18 % .01 % .03 % .07 % .01 % 
 Real estate-construction and land — (.03) — (.01) — 
 Real estate-business — — — — — 
 Commercial net loan charge-offs (recoveries) .09 — .02 .04 .01 
 Personal Banking: 
 Real estate-personal — — — — — 
 Consumer .34 .24 .16 .28 .15 
 Revolving home equity — (.03) (.05) (.02) (.02) 
 Consumer credit card 3.32 3.38 2.08 3.28 2.26 
 Overdrafts 50.73 44.79 62.85 60.54 39.39 
 Personal banking net loan charge-offs (recoveries) .48 .44 .30 .46 .30 
 Total annualized net loan charge-offs (recoveries) .23 % .16 % .12 % .18 % .12 % 

 * as a percentage of average loans (excluding loans held for sale) 
 
 
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 To determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, the Company has an established process which assesses the risks and losses expected in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded lending commitments, as well as a second, smaller component based on certain individually evaluated loans and unfunded lending commitments. The Company's policies and processes for determining the allowance for credit losses on loans and the liability for unfunded lending commitments are discussed in Note 1 to the consolidated financial statements and in the " Allowance for Credit Losses" discussion within Critical Accounting Estimates and Related Policies in Item 7 of the 2022 Annual Report on Form 10-K. 
 
 
 Net loan charge-offs in the 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 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. 
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 The Company considers the allowance for credit losses on loans and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at September 30, 2023. 
 
 
 The allowance for credit losses on loans and the liability for unfunded lending commitments are estimates that require significant judgment including projections of the macro-economic environment. The Company utilizes a third-party macro-economic forecast that continuously changes due to economic conditions and events. These changes in the forecast cause fluctuations in the allowance for credit losses on loans and the liability for unfunded lending commitments. The Company uses judgment to assess the macro-economic forecast and internal loss data in estimating the allowance for credit losses on loans and the liability for unfunded lending commitments. These estimates are subject to periodic refinement based on changes in the underlying external and internal data. 
 
 
 
 Risk Elements of Loan Portfolio 
 The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual. 
 
 
 
 (Dollars in thousands) 
 September 30, 2023 December 31, 2022 
 
 
 
 
 
 
 
 Non-accrual loans $ 8,209 $ 8,306 
 Foreclosed real estate 114 96 
 Total non-performing assets $ 8,323 $ 8,402 
 Non-performing assets as a percentage of total loans .05 % .05 % 
 Non-performing assets as a percentage of total assets .03 % .03 % 
 
 
 
 
 
 
 
 
 Total loans past due 90 days and still accruing interest $ 18,580 $ 15,830 

 
 
 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. 
 
 
 In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $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) 
 September 30, 2023 December 31, 2022 
 Potential problem loans: 
 Business $ 52,642 $ 29,455 
 Real estate – construction and land 4,027 47,493 
 Real estate – business 162,134 182,526 
 Real estate – personal 569 250 
 
 Total potential problem loans $ 219,372 $ 259,724 

 
 
 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. These loans 
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 are further discussed in the "Modifications for borrowers experiencing financial difficulty" section in Note 2 to the consolidated financial statements. 
 
 
 Loans with Special Risk Characteristics 
 Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon. 
 
 
 Real Estate – Construction and Land Loans 
 The Company's portfolio of construction and land loans, as shown in the table below, amounted to 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,
2023 
 
 
 
 % of Total 
 % of 
 Total 
 Loans 
 December 31, 2022 
 
 
 % of Total 
 % of 
 Total 
 Loans 
 
 Commercial construction $ 1,305,397 84.8 % 7.6 % $ 1,122,105 82.4 % 6.9 % 
 Residential construction 126,941 8.2 .8 138,311 10.2 .8 
 Residential land and land development 67,279 4.4 .4 50,012 3.7 .3 
 Commercial land and land development 39,949 2.6 .2 50,667 3.7 .3 
 Total real estate - construction and land loans $ 1,539,566 100.0 % 9.0 % $ 1,361,095 100.0 % 8.3 % 

 
 
 Real Estate – Business Loans 
 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 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,
2023 
 
 
 
 % of Total 
 % of 
 Total 
 Loans 
 December 31, 2022 
 
 
 
 % of Total 
 % of 
 Total 
 Loans 
 
 Owner-occupied $ 1,130,922 31.0 % 6.6 % $ 1,136,189 33.3 % 7.0 % 
 Industrial 585,716 16.1 3.4 478,534 14.0 2.9 
 Office 509,493 14.0 3.0 497,601 14.6 3.1 
 Retail 352,477 9.7 2.1 322,971 9.5 2.0 
 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 
 Senior living 165,073 4.5 1.0 131,217 3.9 .8 
 Other 126,475 3.5 .7 105,421 3.1 .6 
 Total real estate - business loans $ 3,647,168 100.0 % 21.3 % $ 3,406,981 100.0 % 20.9 % 

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 Information about the credit quality of the Company's business real estate loan portfolio as of September 30, 2023 and December 31, 2022 is provided in the table below. 
 
 
 
 (Dollars in thousands) Pass Special Mention Substandard Non-Accrual Total 
 September 30, 2023 
 Owner-occupied $ 1,110,769 $ 7,510 $ 12,567 $ 76 $ 1,130,922 
 Industrial 585,634 82 — — 585,716 
 Office 506,196 — 3,297 — 509,493 
 Retail 335,143 15,501 1,833 — 352,477 
 Hotels 282,404 9,373 1,643 — 293,420 
 Multi-family 280,384 1,158 — — 281,542 
 Farm 202,050 — — — 202,050 
 Senior living 22,464 — 142,609 — 165,073 
 Other 126,224 251 — — 126,475 
 Total $ 3,451,268 $ 33,875 $ 161,949 $ 76 $ 3,647,168 
 December 31, 2022 
 Owner-occupied $ 1,129,343 $ 632 $ 6,084 $ 130 $ 1,136,189 
 Industrial 478,534 — — — 478,534 
 Office 494,169 3,432 — — 497,601 
 Retail 321,041 — 1,930 — 322,971 
 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 
 Senior living 23,514 — 107,702 1 131,217 
 Other 105,144 277 — — 105,421 
 Total $ 3,208,190 $ 16,218 $ 182,384 $ 189 $ 3,406,981 

 
 
 Revolving Home Equity Loans 
 The Company had $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. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. 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. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of 2023 through 2025, approximately 13% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 86% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels. 
 
 
 Consumer Loans 
 Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs. Auto loans comprised 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. 
 
 
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 The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 11.0% 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 $1.6 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 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. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters. 
 
 
 Oil and Gas Energy Lending 
 The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $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) 
 September 30, 2023 December 31, 2022 Unfunded commitments at September 30, 2023 
 
 Extraction $ 204,372 $ 235,933 $ 118,941 
 Mid-stream shipping and storage 35,357 43,432 99,375 
 Downstream distribution and refining 9,718 7,675 12,590 
 Support activities 7,726 9,387 5,032 
 Total energy lending portfolio $ 257,173 $ 296,427 $ 235,938 

 
 
 Shared National Credits 
 The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled $1.5 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 Taxes 
 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. 
 
 
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 Financial Condition 
 Balance Sheet 
 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 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 $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 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 $3.2 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 deposit balances at the Federal Reserve Bank, as follows: 
 
 
 
 (In thousands) 
 September 30, 2023 September 30, 2022 December 31, 2022 
 Liquid assets: 
 Available for sale debt securities $ 9,860,828 $ 12,632,510 $ 12,238,316 
 Federal funds sold 2,735 14,020 49,505 
 Securities purchased under agreements to resell 450,000 1,275,000 825,000 
 Balances at the Federal Reserve Bank 1,847,641 642,943 389,140 
 Total $ 12,161,204 $ 14,564,473 $ 13,501,961 

 
 
 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. 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 $479.7 million in fair value 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 $1.8 billion at September 30, 2023 and increased $1.5 billion over December 31, 2022 balances. 
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 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. Total investment securities pledged for these purposes were as follows: 
 
 
 
 (In thousands) 
 September 30, 2023 September 30, 2022 December 31, 2022 
 Investment securities pledged for the purpose of securing: 
 Federal Reserve Bank borrowings $ 2,700,426 $ 13,446 $ 11,469 
 FHLB borrowings and letters of credit 301,406 2,033 1,817 
 Securities sold under agreements to repurchase * 2,500,400 2,275,924 2,950,240 
 Other deposits and swaps 2,082,807 2,483,636 1,772,974 
 Total pledged securities 7,585,039 4,775,039 4,736,500 
 Unpledged and available for pledging 2,264,732 6,905,006 6,545,695 
 Ineligible for pledging 11,057 952,465 956,121 
 Total available for sale debt securities, at fair value $ 9,860,828 $ 12,632,510 $ 12,238,316 

 * Includes securities pledged for collateral swaps, as discussed in Note 12 to the consolidated financial statements. 
 
 
 Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At 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 $1.8 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) 
 September 30, 2023 September 30, 2022 December 31, 2022 
 Core deposit base: 
 Non-interest bearing $ 7,961,402 $ 10,468,591 $ 10,066,356 
 Interest checking 6,656,356 3,236,160 1,854,336 
 Savings and money market 7,497,919 12,778,327 13,272,645 
 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 $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 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, repurchase agreements, and FHLB advances, as follows: 
 
 
 
 (In thousands) 
 September 30, 2023 September 30, 2022 December 31, 2022 
 Borrowings: 
 Federal funds purchased $ 506,355 $ 311,200 $ 159,860 
 Securities sold under agreements to repurchase 2,238,826 2,003,390 2,681,874 
 FHLB advances 500,000 — — 
 Other debt 3,589 1,831 9,672 
 Total $ 3,248,770 $ 2,316,421 $ 2,851,406 

 
 
 Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. In addition to the amount accessed as of 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 
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 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 $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. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral and enables the FHLB to issue letters of credit in favor of public fund depositors of the Company. The FRB also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at September 30, 2023. 
 
 
 
 September 30, 2023 
 (In thousands) 
 
 FHLB 
 Federal Reserve 
 
 Total 
 
 Total collateral value established by FHLB and FRB $ 2,501,198 $ 4,950,839 $ 7,452,037 
 Advances outstanding (500,000) — (500,000) 
 Letters of credit issued (399,541) — (399,541) 
 Available for future advances $ 1,601,657 $ 4,950,839 $ 6,552,496 

 
 
 In addition to those mentioned above, several other sources of liquidity are available. No commercial paper has been issued or outstanding during the past ten years. The Company has no subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that through its Capital Markets Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit or privately placed corporate notes or other forms of debt. The Company receives strong outside ratings from both Standard & Poor's and Moody's on both the consolidated company level and its subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise. These ratings are as follows: 
 
 
 
 Standard & Poor’s Moody’s 
 Commerce Bancshares, Inc. 
 
 Issuer rating A- 
 
 Rating outlook Stable 
 
 Commerce Bank 
 
 Issuer rating A A3 
 Baseline credit assessment a2 
 Short-term rating A-1 P-1 
 Rating outlook Stable Stable 

 
 
 The cash flows from the operating, investing and financing activities of the Company resulted in a net increase in cash, cash equivalents and restricted cash of $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. Investing activities, which occur mainly in the loan and investment securities portfolios, provided cash of $1.7 billion. 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. 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. 
 
 
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 Capital Management 
 The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at 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
for
Well-Capitalized
Banks * 
 Risk-adjusted assets $ 24,042,838 $ 24,178,423 
 Tier I common risk-based capital 3,632,429 3,417,223 
 Tier I risk-based capital 3,632,429 3,417,223 
 Total risk-based capital 3,822,504 3,600,920 
 Tier I common risk-based capital ratio 15.11 % 14.13 % 4.50 % 2.50 % 7.00 % 6.50 % 
 Tier I risk-based capital ratio 15.11 14.13 6.00 2.50 8.50 8.00 
 Total risk-based capital ratio 15.90 14.89 8.00 2.50 10.50 10.00 
 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 intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, share repurchases, and executive compensation. 
 
 
 In the first quarter of 2020, the interim final rule of the Federal Reserve Bank and other U.S. banking agencies became effective, providing banks that adopt CECL (ASU 2016-13) during the 2020 calendar year the option to delay recognizing the estimated impact on regulatory capital until after a two year deferral period, followed by a three year transition period. In connection with the adoption of CECL on January 1, 2020, the Company elected to utilize this option. As a result, the two year deferral period for the Company extended through December 31, 2021. Beginning on January 1, 2022, the Company began to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. 
 
 
 The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and normally purchases stock in the open market. During the 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 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 
 The Company's material cash requirements include commitments for contractual obligations (both short-term and long-term), commitments to extend credit, and off-balance sheet arrangements. The Company's material cash requirements for the next 12 months are primarily to fund loan commitments, deposit maturities and deposit withdrawals that may occur; repay borrowings; and fund loan growth. Other contractual obligations, purchase commitments, lease obligations, and unfunded commitments may require cash payments by the Company, and these are further discussed in the Company's 2022 Annual Report on Form 10-K. Further discussion of the Company's longer-term material cash obligations and sources for fulfilling those obligations is below. 
 
 
 Events impacting the banking industry during the first few months of 2023, including the failure of Silicon Valley Bank and Signature Bank, have resulted in decreased confidence in banks among consumer and commercial customers, investors, and other counterparties. Additionally, rapidly rising interest rates have resulted in unrealized losses in the Company's available for sale debt securities portfolio. In response to these industry events, the Company sought additional borrowings of $1.3 billion during the first quarter of 2023, and as a result, the Company had outstanding borrowings of $1.5 billion from the FHLB as of March 31, 2023. During the second quarter of 2023, the Company initially borrowed an additional $500.0 million but subsequently repaid $1.0 billion of its FHLB borrowings, resulting in $1.0 billion of FHLB borrowings outstanding as of June 30, 2023. During the third quarter of 2023, the Company repaid $500.0 million of its FHLB borrowings, resulting in $500.00 
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 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 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. Further discussion of the Company's longer-term material cash obligations and sources for fulfilling those obligations is below. 
 
 
 In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at 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. 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 $3.4 million at September 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 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. 
 
 
 The Company regularly purchases various state tax credits arising from third party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first 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 nine months of 2023 and 2022. 
 
 
 
 
 
 (Dollars in thousands) 
 Consumer 
 Commercial 
 Wealth 
 Segment 
 Totals 
 Other/ Elimination 
 Consolidated Totals 
 
 Nine Months Ended September 30, 2023 
 Net interest income $ 304,859 $ 355,690 $ 54,193 $ 714,742 $ 34,966 $ 749,708 
 Provision for credit losses (19,784) (3,204) (14) (23,002) (6,570) (29,572) 
 Non-interest income 74,773 184,288 162,835 421,896 6,270 428,166 
 Investment securities gains (losses), net — — — — 7,384 7,384 
 Non-interest expense (242,991) (290,960) (119,015) (652,966) (26,762) (679,728) 
 Income before income taxes $ 116,857 $ 245,814 $ 97,999 $ 460,670 $ 15,288 $ 475,958 
 Nine Months Ended September 30, 2022 
 Net interest income $ 270,561 $ 333,270 $ 56,731 $ 660,562 $ 26,982 $ 687,544 
 Provision for credit losses (12,727) (651) 2 (13,376) 782 (12,594) 
 Non-interest income 82,464 167,581 161,051 411,096 (1,386) 409,710 
 Investment securities gains (losses), net — — — — 11,602 11,602 
 Non-interest expense (231,683) (272,219) (108,967) (612,869) (19,168) (632,037) 
 Income before income taxes $ 108,615 $ 227,981 $ 108,817 $ 445,413 $ 18,812 $ 464,225 
 Increase (decrease) in income before income taxes: 
 Amount $ 8,242 $ 17,833 $ (10,818) $ 15,257 $ (3,524) $ 11,733 
 Percent 7.6 % 7.8 % (9.9 %) 3.4 % (18.7) % 2.5 % 

 
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 Consumer 
 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. Non-interest income decreased mainly due to lower deposit account fees (mainly overdraft and return item fees) and mortgage banking revenue, partly offset by growth in net debit card fees. Non-interest expense increased over the same period in the previous year mainly due to higher salaries and benefits expense, FDIC insurance expense and allocated support costs for consumer administration and operations, partly offset by lower marketing expense. The provision for credit losses totaled $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. 
 
 
 Commercial 
 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. Net interest income increased $22.4 million, or 6.7%, mainly due to higher loan interest income of $223.5 million. 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 $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 $2.6 million over the same period last year, mainly due to higher business loan net charge-offs. 
 
 
 Wealth 
 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. The provision for credit losses increased $16 thousand over the same period last year. 
 
 
 The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio, brokered deposits, and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was $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 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. 
 
 
 
 
 
 
 
 
 
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 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 
 Reference Rate Reform The Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting", in March 2020, and has been followed by additional clarifying guidance related to derivatives that are modified as a result of reference rate reform. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if they reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Further, the guidance applies to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The expedients and exceptions provided by the new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated for effectiveness after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which extended the sunset date under Topic 848 to December 31, 2024. The change is to align the temporary accounting relief guidance with the expected cessation date of LIBOR, which was postponed by administrators in 2021 to June 2023, a year after the current sunset date of ASU 2020-04. The Company's LIBOR Transition Steering Committee completed the Company's transition from LIBOR during the first half of 2023. 
 
 
 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. 
 
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 AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS 
 Three Months Ended September 30, 2023 and 2022 
 
 Third Quarter 2023 
 Third Quarter 2022 
 
 (Dollars in thousands) 
 Average Balance 
 Interest Income/Expense 
 Avg. Rates Earned/Paid 
 Average Balance Interest Income/Expense Avg. Rates Earned/Paid 
 ASSETS: 
 Loans: 
 Business (A) 
 $ 5,849,227 $ 85,104 5.77 % $ 5,317,696 $ 52,813 3.94 % 
 Real estate — construction and land 1,508,850 31,070 8.17 1,288,721 17,133 5.27 
 Real estate — business 3,642,010 56,236 6.13 3,258,128 36,121 4.40 
 Real estate — personal 2,992,500 28,126 3.73 2,844,376 24,065 3.36 
 Consumer 2,102,281 31,630 5.97 2,101,622 22,110 4.17 
 Revolving home equity 304,055 5,947 7.76 280,923 3,413 4.82 
 Consumer credit card 564,039 19,570 13.77 550,058 16,711 12.05 
 Overdrafts 5,341 — — 4,438 — — 
 Total loans 16,968,303 257,683 6.02 15,645,962 172,366 4.37 
 Loans held for sale 5,714 152 10.55 7,170 159 8.80 
 Investment securities: 
 U.S. government and federal agency obligations 986,284 5,750 2.31 1,113,442 12,664 4.51 
 Government-sponsored enterprise obligations 55,676 331 2.36 55,753 332 2.36 
 State and municipal obligations (A) 
 1,391,541 6,823 1.95 2,052,908 11,758 2.27 
 Mortgage-backed securities 6,161,348 31,942 2.06 6,847,912 33,323 1.93 
 Asset-backed securities 2,553,562 14,129 2.20 3,870,953 15,782 1.62 
 Other debt securities 514,787 2,268 1.75 587,026 2,852 1.93 
 Trading debt securities (A) 
 35,044 451 5.11 35,621 246 2.74 
 Equity securities (A) 
 12,230 711 23.06 8,838 604 27.11 
 Other securities (A) 
 237,518 7,859 13.13 208,708 3,729 7.09 
 Total investment securities 11,947,990 70,264 2.33 14,781,161 81,290 2.18 
 Federal funds sold 2,722 45 6.56 13,486 94 2.77 
 Securities purchased under agreements to resell 712,472 3,740 2.08 1,379,341 5,984 1.72 
 Interest earning deposits with banks 2,337,744 31,738 5.39 980,273 5,571 2.25 
 Total interest earning assets 31,974,945 363,622 4.51 32,807,393 265,464 3.21 
 Allowance for credit losses on loans (158,335) (137,833) 
 Unrealized gain (loss) on debt securities (1,458,141) (1,064,534) 
 Cash and due from banks 295,711 310,713 
 Premises and equipment, net 463,828 408,884 
 Other assets 990,683 536,901 
 Total assets $ 32,108,691 $ 32,861,524 
 LIABILITIES AND EQUITY: 
 Interest bearing deposits: 
 Savings $ 1,436,149 194 .05 $ 1,595,857 177 .04 
 Interest checking and money market 13,048,199 43,601 1.33 14,423,713 7,368 .20 
 Certificates of deposit of less than $100,000 1,423,965 15,499 4.32 397,071 411 .41 
 Certificates of deposit of $100,000 and over 1,718,126 18,942 4.37 578,158 871 .60 
 Total interest bearing deposits 17,626,439 78,236 1.76 16,994,799 8,827 .21 
 Borrowings: 
 Federal funds purchased $ 508,851 $ 6,833 5.33 51,929 $ 315 2.41 
 Securities sold under agreements to repurchase 2,283,020 18,431 3.20 2,199,866 7,576 1.37 
 Other borrowings (B) 
 685,222 9,160 5.30 2,010 9 1.78 
 Total borrowings 3,477,093 34,424 3.93 2,253,805 7,900 1.39 
 Total interest bearing liabilities 21,103,532 112,660 2.12 % 19,248,604 16,727 .34 % 
 Non-interest bearing deposits 7,939,190 10,758,353 
 Other liabilities 367,741 123,691 
 Equity 2,698,228 2,730,876 
 Total liabilities and equity $ 32,108,691 $ 32,861,524 
 Net interest margin (FTE) $ 250,962 $ 248,737 
 Net yield on interest earning assets 3.11 % 3.01 % 

 (A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%. 
 (B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above. 
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 AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS 
 Nine Months Ended September 30, 2023 and 2022 
 
 
 Nine Months 2023 
 Nine Months 2022 
 
 (Dollars in thousands) 
 Average Balance 
 Interest Income/Expense 
 Avg. Rates Earned/Paid 
 Average Balance Interest Income/Expense Avg. Rates Earned/Paid 
 ASSETS: 
 Loans: 
 Business (A) 
 $ 5,754,947 $ 239,181 5.56 % $ 5,342,326 $ 133,631 3.34 % 
 Real estate — construction and land 1,456,986 85,201 7.82 1,216,860 40,148 4.41 
 Real estate — business 3,554,347 157,306 5.92 3,172,832 91,095 3.84 
 Real estate — personal 2,962,619 81,351 3.67 2,826,441 69,804 3.30 
 Consumer 2,089,524 88,144 5.64 2,071,019 58,891 3.80 
 Revolving home equity 300,502 16,754 7.45 275,713 8,267 4.01 
 Consumer credit card 558,741 57,415 13.74 542,895 47,011 11.58 
 Overdrafts 4,810 — — 5,044 — — 
 Total loans 16,682,476 725,352 5.81 15,453,130 448,847 3.88 
 Loans held for sale 5,793 448 10.34 8,154 470 7.71 
 Investment securities: 
 U.S. government and federal agency obligations 1,039,921 19,730 2.54 1,112,201 35,751 4.30 
 Government-sponsored enterprise obligations 66,056 1,352 2.74 54,443 962 2.36 
 State and municipal obligations (A) 
 1,571,132 24,626 2.10 2,085,539 35,655 2.29 
 Mortgage-backed securities 6,309,586 97,702 2.07 7,105,874 104,695 1.97 
 Asset-backed securities 2,869,252 44,836 2.09 3,947,148 40,378 1.37 
 Other debt securities 521,187 7,204 1.85 622,065 9,143 1.97 
 Trading debt securities (A) 
 42,392 1,494 4.71 40,052 700 2.34 
 Equity securities (A) 
 12,340 2,140 23.19 9,141 1,823 26.66 
 Other securities (A) 
 247,019 18,297 9.90 198,763 17,417 11.72 
 Total investment securities 12,678,885 217,381 2.29 15,175,226 246,524 2.17 
 Federal funds sold 16,262 639 5.25 6,315 114 2.41 
 Securities purchased under agreements to resell 787,070 11,791 2.00 1,604,300 15,669 1.31 
 Interest earning deposits with banks 1,816,210 70,328 5.18 1,606,452 9,150 .76 
 Total interest earning assets 31,986,696 1,025,939 4.29 33,853,577 720,774 2.85 
 Allowance for credit losses on loans (155,870) (140,686) 
 Unrealized gain (loss) on debt securities (1,392,373) (699,908) 
 Cash and due from banks 306,441 321,994 
 Premises and equipment, net 448,168 405,856 
 Other assets 936,131 538,438 
 Total assets $ 32,129,193 $ 34,279,271 
 LIABILITIES AND EQUITY: 
 Interest bearing deposits: 
 Savings $ 1,500,666 573 .05 $ 1,589,668 512 .04 
 Interest checking and money market 13,076,565 93,419 .96 14,738,322 11,071 .10 
 Certificates of deposit of less than $100,000 975,175 27,049 3.71 412,739 755 .24 
 Certificates of deposit of $100,000 and over 1,367,560 39,985 3.91 695,332 1,768 .34 
 Total interest bearing deposits 16,919,966 161,026 1.27 17,436,061 14,106 .11 
 Borrowings: 
 Federal funds purchased $ 503,301 $ 18,816 5.00 $ 62,909 546 1.16 
 Securities sold under agreements to repurchase 2,302,289 52,940 3.07 2,388,295 10,960 .61 
 Other borrowings (B) 
 951,971 37,027 5.20 1,607 22 1.83 
 Total borrowings 3,757,561 108,783 3.87 2,452,811 11,528 .63 
 Total interest bearing liabilities 20,677,527 269,809 1.74 % 19,888,872 25,634 .17 % 
 Non-interest bearing deposits 8,421,754 11,168,031 
 Other liabilities 360,506 255,041 
 Equity 2,669,406 2,967,327 
 Total liabilities and equity $ 32,129,193 $ 34,279,271 
 Net interest margin (FTE) $ 756,130 $ 695,140 
 Net yield on interest earning assets 3.16 % 2.75 % 

 (A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%. 
 (B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above. 
 
 
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 Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
COMMERCE BANCSHARES INC /MO/ 10-Q

Item 2. Management’s Discussion and Analysis
