COMMERCE BANCSHARES INC /MO/ 10-Q

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 2023 Annual Report on Form 10-K. Results of operations for the three months ended March 31, 2024 are not necessarily indicative of results to be attained for any other period. Forward-Looking Information This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2023 Annual Report on Form 10-K. During the quarter ended March 31, 2024, there were no material changes to the Risk Factors disclosed in the Company's 2023 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 2023 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2023. 45 Table of Contents Selected Financial Data Three Months Ended March 31 2024 2023 Per Share Data Net income per common share — basic $ .87 $ .91 * Net income per common share — diluted .86 .91 * Cash dividends on common stock .270 .257 * Book value per common share 22.70 20.49 * Market price 53.20 55.57 * Selected Ratios (Based on average balance sheets) Loans to deposits (1) 69.87 % 64.99 % Non-interest bearing deposits to total deposits 29.97 36.10 Equity to loans (1) 17.24 15.74 Equity to deposits 12.05 10.23 Equity to total assets 9.61 8.22 Return on total assets 1.48 1.54 Return on equity 15.39 18.75 (Based on end-of-period data) Non-interest income to revenue (2) 37.41 35.35 Efficiency ratio (3) 61.67 57.49 Tier I common risk-based capital ratio 15.35 14.47 Tier I risk-based capital ratio 15.35 14.47 Total risk-based capital ratio 16.11 15.26 Tangible common equity to tangible assets ratio (4) 9.24 7.92 Tier I leverage ratio 11.75 10.61 * Restated for the 5% stock dividend distributed in December 2023. (1) Includes loans held for sale. (2) Revenue includes net interest income and non-interest income. (3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue. (4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization. It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP. The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets. March 31 (Dollars in thousands) 2024 2023 Total equity $ 2,963,889 $ 2,682,412 Less non-controlling interest 19,913 16,888 Less goodwill 146,539 138,921 Less intangible assets* 4,005 4,239 Total tangible common equity (a) $ 2,793,432 $ 2,522,364 Total assets $ 30,372,108 $ 32,004,856 Less goodwill 146,539 138,921 Less intangible assets* 4,005 4,239 Total tangible assets (b) $ 30,221,564 $ 31,861,696 Tangible common equity to tangible assets ratio (a)/(b) 9.24 % 7.92 % * Intangible assets other than mortgage servicing rights. 46 Table of Contents Results of Operations Summary Three Months Ended March 31 Increase (Decrease) (Dollars in thousands) 2024 2023 Amount % change Net interest income (expense) $ 248,999 $ 251,623 $ (2,624) (1.0 %) Provision for credit losses (4,787) (11,456) (6,669) (58.2) Non-interest income 148,848 137,612 11,236 8.2 Investment securities gains (losses), net (259) (306) 47 15.4 Non-interest expense (245,697) (224,107) 21,590 9.6 Income taxes (31,652) (32,813) (1,161) (3.5) Non-controlling interest income (expense) (2,789) (1,101) 1,688 N.M. Net income attributable to Commerce Bancshares, Inc. $ 112,663 $ 119,452 $ (6,789) (5.7 %) For the quarter ended March 31, 2024, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $112.7 million, a decrease of $6.8 million, or 5.7%, compared to the first quarter of the previous year. For the current quarter, the annualized return on average assets was 1.48%, the annualized return on average equity was 15.39%, and the efficiency ratio was 61.67%. Diluted earnings per common share was $.86 per share in the current quarter, a decrease of 5.5% compared to $.91 per share in the first quarter of 2023, and increased 2.4% compared to $.84 per share in the previous quarter. Compared to the first quarter of last year, net interest income decreased $2.6 million, or 1.0%, mainly due to an increase in interest expense on interest bearing accounts of $55.7 million. This decrease was mainly offset by an increase in interest income on loans of $40.9 million, and an increase in deposits with banks of $17.1 million. The provision for credit losses decreased $6.7 million, or 58.2%, compared to the same quarter in the prior year. Non-interest income increased $11.2 million, or 8.2%, compared to the first quarter of 2023, mainly due to an increase in trust fees and deposit account fees, partly offset by lower consumer brokerage services fees. Net losses on investment securities totaled $259 thousand in the current quarter compared to net losses of $306 thousand in the same quarter of last year. Net securities losses in the current quarter primarily resulted from losses of $8.5 million related to the sales of available for sale debt securities, partly offset by $7.1 million of fair value adjustments on private equity investments and $969 thousand in gains on sales of private equity investments. Non-interest expense increased $21.6 million, or 9.6%, over the first quarter of 2023, mainly due to increases in salaries and employee benefits expense, data processing expense, Federal Deposit Insurance Corporation ("FDIC") insurance expense and litigation settlement expense. 47 Table of Contents Net Interest Income The following table summarizes the changes in net interest income on a fully taxable-equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate. Analysis of Changes in Net Interest Income Three Months Ended March 31, 2024 vs. 2023 Change due to (In thousands) Average Volume Average Rate Total Interest income, fully taxable equivalent basis: Loans: Business $ 2,405 $ 12,196 $ 14,601 Real estate - construction and land 1,125 4,143 5,268 Real estate - business 3,502 6,083 9,585 Real estate - personal 875 2,814 3,689 Consumer 199 5,867 6,066 Revolving home equity 443 574 1,017 Consumer credit card 227 766 993 Overdrafts — — — Total interest on loans 8,776 32,443 41,219 Loans held for sale (103) (2) (105) Investment securities: U.S. government and federal agency securities (1,169) 433 (736) Government-sponsored enterprise obligations (251) (108) (359) State and municipal obligations (2,601) (874) (3,475) Mortgage-backed securities (2,828) 2,086 (742) Asset-backed securities (5,741) 2,099 (3,642) Other securities (309) 3,471 3,162 Total interest on investment securities (12,899) 7,107 (5,792) Federal funds sold (486) 7 (479) Securities purchased under agreements to resell (2,335) 17 (2,318) Interest earning deposits with banks 13,103 3,993 17,096 Total interest income 6,056 43,565 49,621 Interest expense: Deposits: Savings (27) 29 2 Interest checking and money market 690 34,737 35,427 Certificates of deposit of less than $100,000 2,115 6,651 8,766 Certificates of deposit of $100,000 and over 6,709 4,760 11,469 Total interest on deposits 9,487 46,177 55,664 Federal funds purchased (1,889) 722 (1,167) Securities sold under agreements to repurchase 679 3,264 3,943 Other borrowings (6,776) 56 (6,720) Total interest expense 1,501 50,219 51,720 Net interest income, tax equivalent basis $ 4,555 $ (6,654) $ (2,099) Net interest income in the first quarter of 2024 was $249.0 million, a decrease of $2.6 million from the first quarter of 2023. On a fully taxable-equivalent (FTE) basis, net interest income totaled $251.3 million in the first quarter of 2024, down $2.1 million from the same period last year and up $765 thousand over the previous quarter. The decrease in net interest income 48 Table of Contents compared to the first quarter of 2023 was mainly due to higher deposit interest expense of $55.7 million and lower interest income earned on investment securities (FTE) of $5.8 million, partly offset by higher interest income earned on loans (FTE) of $41.2 million and balances at the Federal Reserve of $17.1 million. The increase in deposit interest expense was mainly due to higher rates paid, while interest earned on investment securities (FTE) declined mainly due to lower average balances. 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 Company's net yield on earning assets (FTE) was 3.33% in the current quarter compared to 3.26% in the first quarter of 2023. Total interest income (FTE) increased $49.6 million over the first quarter of 2023. Interest income on loans (FTE) was $266.2 million during the first quarter of 2024, an increase of $41.2 million, or 18.3%, 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 71 basis points in the average rate earned and growth of $676.2 million, or 4.1%, in average loan balances. Most of the increase in interest income occurred in the business, business real estate and consumer loan categories. The largest increase to interest income occurred in business loan interest, which grew $14.6 million due to a 76 basis point increase in the average rate earned, coupled with growth in average balances of $217.4 million, or 3.84%. Business real estate loan interest income increased $9.6 million due to an increase of 61 basis points in the average rate earned and higher average balances of $249.3 million, or 7.2%. Consumer loan interest income grew $6.1 million due to a 109 basis point increase in the average rate earned. In addition, construction and land loan interest income increased $5.3 million due to an increase of 107 basis points in the average rate earned and higher average loan balances of $61.7 million, or 4.4%. Personal real estate loan interest income grew $3.7 million due to a 34 basis point increase in the average rate earned and growth of $97.4 million, or 3.3%, in average loan balances. Interest income on investment securities (FTE) was $66.7 million during the first quarter of 2024, which was a decrease of $5.8 million from the same quarter last year. The decrease in interest income occurred mainly in interest earned on asset-backed securities and state and municipal securities. Interest income earned on asset-backed securities declined $3.6 million due to a $1.1 billion, or 35.5%, decrease in average balances, partly offset by an increase of 38 basis points in the average rate earned. Interest income earned on state and municipal securities declined $3.5 million due to lower average balances of $462.9 million, or 25.8%, and a 29 basis point decrease in the average rate earned. Interest income earned on U.S. government and federal agency obligations declined $736 thousand due to a $247.4 million, or 22.5%, decrease in average balances, partly offset by an increase of 18 basis points in the average rate earned. Interest income related to the Company's U.S. Treasury inflation-protected securities, which is tied to the non-seasonally adjusted Consumer Price Index (CPI-U), decreased $584 thousand from the same quarter last year. Interest income earned on mortgage-backed securities decreased $742 thousand mainly due to a decline of $552.1 million, or 8.6%, in the average balance. In addition, a $2.0 million increase in premium amortization, reflecting slower forward prepayment speed estimates was recorded in the current year, compared to a premium amortization adjustment increase of $802 thousand in the prior year. These decreases to interest income were partly offset by growth in interest income on other securities of $3.2 million, mainly driven by dividend payments of $3.4 million from the Company's private equity investments in the first quarter of 2024. Additionally, the average rate earned on investment securities during the three months ended March 31, 2024 increased 26 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 $11.0 billion in the first quarter of 2024, compared to $13.5 billion in the first quarter of 2023. Interest income on securities purchased under agreements to resell decreased $2.3 million from the same quarter last year, due to a decline of $484.1 million in the average balance. Interest income on balances at the Federal Reserve grew $17.1 million due to an increase of 81 basis points in the average rate earned and an increase of $1.1 billion in the average balance invested. The average fully taxable-equivalent yield on total interest earning assets was 4.78% in the first quarter of 2024, up from 4.00% in the first quarter of 2023. Total interest expense increased $51.7 million compared to the first quarter of 2023 due to an increase of $55.7 million in interest expense on interest bearing deposits, partly offset by a $3.9 million decrease in interest expense on borrowings. The increase in deposit interest expense resulted mainly from an increase of $35.4 million in interest expense on interest checking and money market deposit accounts due to a 108 basis point increase in the average rate paid. In addition, interest expense on certificates of deposit increased $20.2 million mainly due to an increase of 194 basis points in the average rate paid and an increase in average balances of $1.3 billion. The overall rate paid on total deposits increased 126 basis points over the same quarter last year. Interest expense on customer repurchase agreements increased $3.9 million due to a 50 basis point increase in the average rate paid and a $93.2 million increase in the average balance. These increases to interest expense were partly offset by lower interest expense on other borrowings of $6.7 million due to a decrease of $550.0 million in average Federal Home Loan Bank (FHLB) borrowings. In addition, interest expense on federal funds purchased decreased $1.2 million mainly due to a $165.5 million decrease in the average balance, partly offset by an increase in the average rate paid of 83 basis points. The 49 Table of Contents overall average rate incurred on all interest bearing liabilities was 2.21% and 1.20% in the first quarters of 2024 and 2023, respectively. Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion. Non-Interest Income Three Months Ended March 31 Increase (Decrease) (Dollars in thousands) 2024 2023 Amount % change Trust fees $ 51,105 $ 45,328 $ 5,777 12.7 % Bank card transaction fees 46,930 46,654 276 .6 Deposit account charges and other fees 24,151 21,752 2,399 11.0 Consumer brokerage services 4,408 5,085 (677) (13.3) Capital market fees 3,892 3,362 530 15.8 Loan fees and sales 3,141 2,589 552 21.3 Other 15,221 12,842 2,379 18.5 Total non-interest income $ 148,848 $ 137,612 $ 11,236 8.2 % Non-interest income as a % of total revenue* 37.4 % 35.4 % * Total revenue includes net interest income and non-interest income. The table below is a summary of net bank card transaction fees for the three month periods ended March 31, 2024 and 2023. Three Months Ended March 31 (Dollars in thousands) 2024 2023 $ change % change Net debit card fees $ 10,405 $ 10,287 $ 118 1.1 % Net credit card fees 3,772 3,674 98 2.7 Net merchant fees 5,247 5,351 (104) (1.9) Net corporate card fees 27,506 27,342 164 .6 Total bank card transaction fees $ 46,930 $ 46,654 $ 276 .6 % For the first quarter of 2024, total non-interest income amounted to $148.8 million compared to $137.6 million in the same quarter last year, which was an increase of $11.2 million, or 8.2%. The increase was mainly due to higher trust fees, deposit account fees and tax credit sales income. Trust fees increased $5.8 million, or 12.7%, mainly due to growth of $4.9 million in private client trust fees and $714 thousand in institutional trust fees. Bank card transaction fees for the current quarter grew $276 thousand, or .6%, over the same period last year, mainly due to growth in net corporate card fees and net debit card fees. The growth of $164 thousand in net corporate card fees was mainly due to higher interchange fees, partly offset by higher rewards expense. Net debit card fees increased $118 thousand mainly due to lower network expense. Compared to the first quarter of last year, deposit account fees increased $2.4 million, or 11.0%, mainly due to higher corporate cash management fees of $2.0 million. Consumer brokerage fees declined $677 thousand mainly due to lower variable annuity fees, while capital market fees increased $530 thousand, or 15.8%. Other non-interest income increased $2.4 million, or 18.5%, mainly due to growth of $1.5 million in tax credit sales income and $731 thousand in cash sweep commissions. 50 Table of Contents Investment Securities Gains (Losses), Net Three Months Ended March 31 (In thousands) 2024 2023 Net gains (losses) on sales of available for sale debt securities $ (8,470) $ (3,088) Fair value adjustments on equity securities, net 142 (127) Net gains (losses) on sales of private equity investments 969 658 Fair value adjustments on private equity investments 7,100 2,251 Total investment securities gains (losses), net $ (259) $ (306) Net gains and losses on investment securities, which were recognized in earnings during the three months ended March 31, 2024 and 2023, are shown in the table above. Net securities losses of $259 thousand were reported in the first quarter of 2024, compared to net losses of $306 thousand in the same period last year. The net losses in the first quarter of 2024 were primarily comprised of net losses of $8.5 million realized on the sale of available for sale securities, mostly offset by net gains in fair value of $7.1 million and a gain of $969 thousand on the sale of an investment, both in the Company's private equity investment portfolio. The net losses on investment securities for the same quarter last year were primarily comprised of net losses of $3.1 million realized on the sale of available for sale securities, mostly offset by net gains in fair value of $2.3 million and a gain of $658 thousand on sales of an investment, both in the Company's private equity investment portfolio. The portion of private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in expense of $1.5 million during the first three months of 2024 and expense of $582 thousand during the first three months of 2023. Non-Interest Expense Three Months Ended March 31 Increase (Decrease) (Dollars in thousands) 2024 2023 Amount % change Salaries and employee benefits $ 151,801 $ 144,373 $ 7,428 5.1 % Data processing and software 31,153 28,154 2,999 10.7 Net occupancy 13,574 12,759 815 6.4 Deposit insurance 8,017 4,643 3,374 72.7 Equipment 5,010 4,850 160 3.3 Supplies and communication 4,744 4,590 154 3.4 Marketing 4,036 5,471 (1,435) (26.2) Other 27,362 19,267 8,095 42.0 Total non-interest expense $ 245,697 $ 224,107 $ 21,590 9.6 % Non-interest expense for the first quarter of 2024 amounted to $245.7 million, an increase of $21.6 million, or 9.6%, compared to expense of $224.1 million in the first quarter of last year. The increase in expense over the same period last year was mainly due to litigation settlement expense as well as higher salaries and employee benefits expense, FDIC insurance expense and data processing and software expense, partly offset by lower marketing expense. Salaries and employees benefits expense increased $7.4 million, or 5.1%, mainly due to higher full-time salaries expense of $5.8 million, or 6.2%, and higher employee benefits expense of $1.3 million, or 4.9%. Full-time equivalent employees totaled 4,721 at March 31, 2024, compared to 4,636 at March 31, 2023. Data processing and software expense increased $3.0 million, or 10.7%, due to higher bank card processing fees and increased costs for service providers. Occupancy expense increased $815 thousand, or 6.4%, mainly due to higher depreciation expense and real estate taxes, partly offset by higher rent income, while marketing expense declined $1.4 million, or 26.2%. Deposit insurance increased $3.4 million, due to a $4.0 million accrual adjustment in the current quarter to the special assessment by the FDIC to replenish the Deposit Insurance Fund. Other non-interest expense increased $8.1 million, or 42.0%, mainly due to litigation settlement expense of $10.0 million, net of insurance. 51 Table of Contents Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments Three Months Ended (In thousands) Mar. 31, 2024 Dec. 31, 2023 Mar. 31, 2023 ALLOWANCE FOR CREDIT LOSSES ON LOANS Balance at beginning of period $ 162,395 $ 162,244 $ 150,136 Provision for credit losses on loans 6,947 8,170 15,948 Net loan charge-offs (recoveries): Commercial: Business 23 96 230 Real estate-construction and land — — — Real estate-business (141) 128 (4) Commercial net loan charge-offs (recoveries) (118) 224 226 Personal Banking: Real estate-personal 24 (11) (11) Consumer 1,983 1,903 1,275 Revolving home equity (4) (10) (26) Consumer credit card 6,435 5,325 4,325 Overdrafts 557 588 978 Personal banking net loan charge-offs (recoveries) 8,995 7,795 6,541 Total net loan charge-offs (recoveries) 8,877 8,019 6,767 Balance at end of period $ 160,465 $ 162,395 $ 159,317 LIABILITY FOR UNFUNDED LENDING COMMITMENTS Balance at beginning of period 25,246 27,537 33,120 Provision for credit losses on unfunded lending commitments (2,160) (2,291) (4,492) Balance at end of period 23,086 25,246 28,628 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 183,551 $ 187,641 $ 187,945 Three Months Ended Mar. 31, 2024 Dec. 31, 2023 Mar. 31, 2023 Annualized net loan charge-offs (recoveries)*: Commercial: Business — % .01 % .02 % Real estate-construction and land — — — Real estate-business (.02) .01 — Commercial net loan charge-offs (recoveries) — .01 .01 Personal Banking: Real estate-personal — — — Consumer .38 .36 .25 Revolving home equity — (.01) (.04) Consumer credit card 4.60 3.72 3.15 Overdrafts 29.11 44.37 89.15 Personal banking net loan charge-offs (recoveries) .60 .51 .45 Total annualized net loan charge-offs (recoveries) .21 % .19 % .17 % * as a percentage of average loans (excluding loans held for sale) 52 Table of Contents 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 2023 Annual Report on Form 10-K. Net loan charge-offs in the first quarter of 2024 amounted to $8.9 million, compared to $8.0 million in the prior quarter and $6.8 million in the first quarter of last year. Comp ared to the same period last year, total net loan charge-offs in the first quarter of 2024 increased $2.1 million and increased $858 thousand from the previous quarter. The increase over the prior year was mainly driven by increases in net charge-offs on consumer credit cards and consumer loans of $2.1 million and $708 thousand, respectively. The increase from the previous quarter was driven by the increase in net charge-offs on consumer credit cards and consumer loans. For the three months ended March 31, 2024, annualized net charge-offs on average consumer credit card loans were 4.60%, compared to 3.72% in the previous quarter and 3.15% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .38%, compared to .36% in the prior quarter and .25% in the same period last year. In the first quarter of 2024 , total annualized net loan charge-offs were .21%, compared to .19% in the previous quarter and .17% in the same period last year. The provision for credit losses on loans was $6.9 million in the current quarter, which was a $1.2 million decrease from the $8.2 million provision recorded in the p rior quarter and a $9.0 million decrease from the $15.9 million provision recorded for the three months ended March 31, 2023. The decrease in the provision from the prior quarter was due to decline in the related allowance for credit losses on loans. Compared to the allowance for credit losses at December 31, 2023, the allowance for credit losses at March 31, 2024 decreased $1.9 million. The allowance for credit losses on commercial loans at March 31, 2024 was $2.7 million lower than at December 31, 2023, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, was $807 thousand higher at March 31, 2024 than at December 31, 2023. Compared to March 31, 2023, the allowance for credit losses on loans at March 31, 2024 increased $1.1 million. The decrease in the allowance for credit losses at March 31, 2024 compared to December 31, 2023 was primarily the result of applying a less pessimistic forecast at March 31, 2024 than was utilized at December 31, 2023. The allowance for credit losses on loans was $160.5 million at March 31, 2024 and was .93%, .94% and .96% of total loans at March 31, 2024, December 31, 2023 and March 31, 2023, respectively. In the current quarter, the provision for credit losses on unfunded lending commitments was a benefit of $2.2 million, compared to a benefit of $4.5 million during the three months ended March 31, 2023 and an expense of $2.3 million during the prior quarter. At March 31, 2024, the liability for unfunded lending commitments was $23.1 million, compared to $25.2 million at December 31, 2023 and $28.6 million at March 31, 2023. The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans. See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses. The Company considers the allowance for credit losses on loans and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at March 31, 2024. 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 53 Table of Contents are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual. (Dollars in thousands) March 31, 2024 December 31, 2023 Non-accrual loans $ 5,784 $ 7,312 Foreclosed real estate 206 270 Total non-performing assets $ 5,990 $ 7,582 Non-performing assets as a percentage of total loans .03 % .04 % Non-performing assets as a percentage of total assets .02 % .02 % Total loans past due 90 days and still accruing interest $ 20,281 $ 21,864 Non-accrual loans totaled $5.8 million at March 31, 2024, a decrease of $1.5 million from the balance at December 31, 2023. The decrease occurred mainly in business and personal real estate non-accrual loans, which decreased $2.6 million and $130 thousand, respectively. These decreases were partly offset by a $1.2 million increase in business real estate non-accrual loans. At March 31, 2024, non-accrual loans were comprised of revolving home equity (34.2%), personal real estate (26.3%), business real estate (21.6%), and business (17.9%) loans. Foreclosed real estate totaled $206 thousand at March 31, 2024, a slight decrease compared to December 31, 2023. Total loans past due 90 days or more and still accruing interest were $20.3 million as of March 31, 2024, a decrease of $1.6 million from December 31, 2023. 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 $267.0 million at March 31, 2024 compared with $216.4 million at December 31, 2023, resulting in an increase of $50.6 million, or 23.4%. (In thousands) March 31, 2024 December 31, 2023 Potential problem loans: Business $ 128,170 $ 74,760 Real estate – construction and land 17,252 — Real estate – business 120,679 140,800 Real estate – personal 896 827 Total potential problem loans $ 266,997 $ 216,387 When borrowers are experiencing financial difficulty, the Company may agree to modify the contractual terms of a loan to a borrower in order to assist the borrower in repaying principal and interest owed to the Company. At March 31, 2024, the Company held $32.9 million of loans that had been modified during the three months ended March 31, 2024. These loans are further discussed in the "Modifications for borrowers experiencing financial difficulty" section in Note 2 to the consolidated financial statements. Loans with Special Risk Characteristics Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon. 54 Table of Contents Real Estate – Construction and Land Loans The Company's portfolio of construction and land loans, as shown in the table below, amounted to 8.7% of total loans outstanding at March 31, 2024. The largest component of construction and land loans was commercial construction, which increased $29.5 million during the three months ended March 31, 2024. At March 31, 2024, multi-family residential construction loans totaled approximately $392.1 million, or 31.3%, of the commercial construction loan portfolio, compared to $414.6 million, or 33.9%, at December 31, 2023. (Dollars in thousands) March 31, 2024 % of Total % of Total Loans December 31, 2023 % of Total % of Total Loans Commercial construction $ 1,252,414 83.6 % 7.2 % $ 1,222,961 84.5 % 7.1 % Residential construction 113,662 7.6 .7 110,687 7.7 .6 Residential land and land development 69,764 4.7 .4 62,417 4.3 .4 Commercial land and land development 61,807 4.1 .4 50,699 3.5 .3 Total real estate - construction and land loans $ 1,497,647 100.0 % 8.7 % $ 1,446,764 100.0 % 8.4 % Real Estate – Business Loans Total business real estate loans were $3.7 billion at March 31, 2024 and comprised 21.5% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At March 31, 2024, 32.1% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans. (Dollars in thousands) March 31, 2024 % of Total % of Total Loans December 31, 2023 % of Total % of Total Loans Owner-occupied $ 1,190,591 32.1 % 6.9 % $ 1,175,476 31.6 % 6.8 % Industrial 605,761 16.3 3.5 630,713 17.0 3.7 Office 486,087 13.1 2.8 489,320 13.2 2.8 Retail 351,735 9.5 2.0 366,693 9.9 2.1 Multi-family 294,342 7.9 1.7 256,657 6.9 1.5 Hotels 293,951 7.9 1.7 292,941 7.9 1.7 Farm 193,307 5.2 1.1 195,981 5.3 1.1 Senior living 172,605 4.7 1.0 183,778 4.9 1.1 Other 123,223 3.3 .8 127,747 3.3 .8 Total real estate - business loans $ 3,711,602 100.0 % 21.5 % $ 3,719,306 100.0 % 21.6 % 55 Table of Contents Information about the credit quality of the Company's business real estate loan portfolio as of March 31, 2024 and December 31, 2023 is provided in the table below. (Dollars in thousands) Pass Special Mention Substandard Non-Accrual Total March 31, 2024 Owner-occupied $ 1,160,578 $ 16,514 $ 13,457 $ 42 $ 1,190,591 Industrial 605,704 57 — — 605,761 Office 468,127 17,960 — — 486,087 Retail 335,427 15,500 808 — 351,735 Multi-family 282,217 10,983 1,142 — 294,342 Hotels 282,311 9,132 1,304 1,204 293,951 Farm 193,307 — — — 193,307 Senior living 48,409 20,245 103,951 — 172,605 Other 122,990 233 — — 123,223 Total $ 3,499,070 $ 90,624 $ 120,662 $ 1,246 $ 3,711,602 December 31, 2023 Owner-occupied $ 1,146,112 $ 10,376 $ 18,928 $ 60 $ 1,175,476 Industrial 630,644 69 — — 630,713 Office 489,320 — — — 489,320 Retail 349,321 15,500 1,872 — 366,693 Hotels 282,105 9,253 1,583 — 292,941 Multi-family 255,507 1,150 — — 256,657 Farm 195,981 — — — 195,981 Senior living 69,379 — 114,399 — 183,778 Other 127,505 242 — — 127,747 Total $ 3,545,874 $ 36,590 $ 136,782 $ 60 $ 3,719,306 Revolving Home Equity Loans The Company had $322.5 million in revolving home equity loans at March 31, 2024 that were collateralized by residential real estate. Most of these loans (92.0%) are written with terms requiring interest-only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of March 31, 2024, the outstanding principal of loans with an original LTV higher than 80% was $32.2 million, or 10.0% of the portfolio, compared to $32.3 million as of December 31, 2023. Total revolving home equity loan balances over 30 days past due were $3.8 million at March 31, 2024 and $4.4 million at December 31, 2023, and the outstanding balance of revolving home equity loans on non-accrual status was $2.0 million at both March 31, 2024 and December 31, 2023. The weighted average FICO score for the total portfolio balance at March 31, 2024 is 783. 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 2024 through 2026, approximately 16% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 84% 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 39.0% of the consumer loan portfolio at March 31, 2024, and outstanding balances for auto loans were $826.8 million and $820.3 million at March 31, 2024 and December 31, 2023, respectively. The balances over 30 days past due amounted to $8.5 million at March 31, 2024 and $9.5 million at December 31, 2023, respectively, and comprised 1.0% of the outstanding balances of these loans at March 31, 2024 and 1.2% at December 31, 2023, respectively. For the three months ended March 31, 2024, $101.2 million of new auto loans were originated, compared to $120.0 million during the first three months of 2023. At March 31, 2024, the automobile loan portfolio had a weighted average FICO score of 756, and net charge-offs on auto loans were .47% of average auto loans. 56 Table of Contents 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 March 31, 2024. Losses on these loans have historically been low, and the Company saw net recoveries of $14 thousand for the first three months of 2024. Private banking loans comprised 33.6% of the consumer loan portfolio at March 31, 2024. The Company's private banking loans are generally well-collateralized, and at March 31, 2024 were secured primarily by assets held by the Company's trust department. The remaining portion of the Company's consumer loan portfolio is comprised of health services financing, motorcycles, marine and RV loans. Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $1.0 million in the first three months of 2024 and were .43% of the average balances of these loans at March 31, 2024. Consumer Credit Card Loans The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at March 31, 2024 of $564.4 million in consumer credit card loans outstanding, approximately $113.9 million, or 20.2%, carried a low promotional rate. Within the next six months, $51.0 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 $296.0 million, or 1.7% of total loans at March 31, 2024, an increase of $24.0 million from December 31, 2023, as shown in the table below. (In thousands) March 31, 2024 December 31, 2023 Unfunded commitments at March 31, 2024 Extraction $ 218,821 $ 219,828 $ 161,229 Mid-stream shipping and storage 59,468 35,505 98,762 Downstream distribution and refining 10,323 8,890 30,621 Support activities 7,399 7,811 8,038 Total energy lending portfolio $ 296,011 $ 272,034 $ 298,650 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 both March 31, 2024 and December 31, 2023. Additional unfunded commitments at March 31, 2024 totaled $2.3 billion. Income Taxes Income tax expense was $31.7 million in the first quarter of 2024, compared to $32.3 million in the fourth quarter of 2023 and $32.8 million in the first quarter of 2023. The Company's effective tax rate, including the effect of non-controlling interest, was 21.9% in the first quarter of 2024, compared to 22.8% in the fourth quarter of 2023 and 21.6% in the first quarter of 2023. 57 Table of Contents Financial Condition Balance Sheet Total assets of the Company were $30.4 billion at March 31, 2024 and $31.7 billion at December 31, 2023. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $29.8 billion at March 31, 2024 and $31.1 billion at December 31, 2023, and consisted of 58% in loans and 36% in investment securities at March 31, 2024. During the first quarter of 2024, average loans totaled $17.1 billion, an increase of $22.0 million over the prior quarter, and increased $676.2 million, or 4.1%, over the same quarter last year. Compared to the previous quarter, average balances of business real estate loans grew $83.1 million, while construction and consumer loans declined $51.1 million and $34.8 million, respectively. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $7.4 million, compared to $8.7 million in the prior quarter. Total average available for sale debt securities decreased $116.6 million compared to the previous quarter to $9.5 billion, at fair value. The decrease in debt securities was mainly the result of lower average balances of asset-backed securities. During the first quarter of 2024, the unrealized loss on available for sale securities increased $27.2 million to $1.2 billion, at period end. Also during the first quarter of 2024, purchases of securities totaled $145.7 million with a weighted average yield of approximately 4.65%, and sales, maturities and pay downs were $655.0 million. At March 31, 2024, the duration of the available for sale investment portfolio was 4.2 years, and maturities and pay downs of approximately $1.6 billion are expected to occur during the next 12 months. The Company does not have any investment securities classified as held-to-maturity. Total average deposits decreased $759.5 million this quarter compared to the previous quarter. The decrease in deposits mostly resulted from lower average demand deposits of $420.1 million and lower average certificates of deposit of $364.2 million, which included lower brokered deposits of $225.4 million. Compared to the previous quarter, total average commercial deposits declined $743.8 million, while consumer and wealth deposits increased $138.8 million and $71.8 million, respectively. The average loans to deposits ratio was 69.9% in the current quarter and 67.7% in the prior quarter. The Company’s average borrowings, which included average customer repurchase agreements of $2.5 billion, decreased $280.0 million to $2.8 billion in the first quarter of 2024, mostly due to a decline of $179.3 million in average FHLB borrowings. Liquidity and Capital Resources Liquidity Management The Company’s most liquid assets include balances at the Federal Reserve Bank, federal funds sold, available for sale debt securities, and securities purchased under agreements to resell (resale agreements), as follows: (In thousands) March 31, 2024 March 31, 2023 December 31, 2023 Liquid assets: Balances at the Federal Reserve Bank $ 1,609,614 $ 1,341,854 $ 2,239,010 Federal funds sold — 27,060 5,025 Available for sale debt securities 9,141,695 11,228,616 9,684,760 Securities purchased under agreements to resell 225,000 825,000 450,000 Total $ 10,976,309 $ 13,422,530 $ 12,378,795 Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $1.6 billion at March 31, 2024 and decreased $629.4 million from December 31, 2023 balances. At March 31, 2024, the Company did not have a balance of federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities. The fair value of the available for sale debt portfolio was $9.1 billion at March 31, 2024 and included an unrealized net loss of $1.2 billion. The total net unrealized loss included net losses of $1.0 billion on mortgage-backed and asset-backed securities and $147.5 million on state and municipal obligations. Resale agreements, maturing through 2028, totaled $225.0 million at March 31, 2024. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled $239.2 million in fair value at March 31, 2024. $125.0 million of the Company's resale agreements will mature in the next 12 months. 58 Table of Contents The Company's available for sale debt securities portfolio has a diverse mix of high quality and liquid investment securities with a duration of 4.2 years at March 31, 2024. Approximately $1.6 billion of the Company's available for sale debt portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet either new loan demand or offset potential reductions in the Company's deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the FHLB and the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows: (In thousands) March 31, 2024 March 31, 2023 December 31, 2023 Investment securities pledged for the purpose of securing: Federal Reserve Bank borrowings $ 1,990,347 $ 3,145,959 $ 2,636,523 FHLB borrowings and letters of credit 293,345 294,025 301,617 Securities sold under agreements to repurchase * 2,294,520 2,290,546 2,710,616 Other deposits and swaps 1,975,291 2,409,058 1,818,092 Total pledged securities 6,553,503 8,139,588 7,466,848 Unpledged and available for pledging 2,582,746 3,070,590 2,211,243 Ineligible for pledging 5,446 18,438 6,669 Total available for sale debt securities, at fair value $ 9,141,695 $ 11,228,616 $ 9,684,760 * Includes securities pledged for collateral swaps, as discussed in Note 12 to the consolidated financial statements. The average loans to deposits ratio is a measure of a bank's liquidity, and the Company’s average loans to deposits ratio was 69.9% for the three months ended March 31, 2024. Core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts totaled $22.0 billion and represented 89.9% of the Company's total deposits at March 31, 2024. These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources. Core deposits decreased $511.5 million at March 31, 2024 compared to December 31, 2023, primarily due to decreases in commercial and wealth segment deposits of $473.8 million and $111.7 million, respectively, partially offset by growth in consumer segment deposits. While the Company considers core consumer and wealth management deposits less volatile, corporate deposits could decline if interest rates increase significantly, encouraging corporate customers to increase investing activities, or if the economy deteriorates and companies experience lower cash inflows, reducing deposit balances. If these corporate deposits decline, the Company's funding needs may be met by liquidity supplied by investment security maturities and pay downs expected to total $1.6 billion over the next year, as noted above. In addition, as shown in the table of collateral available for future advances below, the Company has borrowing capacity of $6.6 billion through advances from the FHLB and the Federal Reserve. Certificates of deposit of $100,000 or greater totaled $1.5 billion at March 31, 2024. These deposits are normally considered more volatile and higher costing, and comprised 6.0% of total deposits at March 31, 2024. (In thousands) March 31, 2024 March 31, 2023 December 31, 2023 Core deposit base: Non-interest bearing $ 7,513,464 $ 8,685,234 $ 7,975,935 Interest checking 6,811,384 6,464,948 7,020,134 Savings and money market 7,651,827 7,954,793 7,492,139 Total $ 21,976,675 $ 23,104,975 $ 22,488,208 Amid the banking sector's period of uncertainty during the second quarter of 2023, the Company issued several tranches of short-term brokered certificates of deposit totaling $1.2 billion, which all matured by December 31, 2023. While it is not clear how many brokered certificates of deposit the market would allow the Company to issue, the Company believes brokered certificates of deposits may be an additional, reliable source of liquidity during periods of stress in the banking industry. Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. During 2024, the Company's outside borrowings have mainly been comprised of federal funds purchased and repurchase agreements, as follows: 59 Table of Contents (In thousands) March 31, 2024 March 31, 2023 December 31, 2023 Borrowings: Federal funds purchased $ 264,470 $ 756,470 $ 261,305 Securities sold under agreements to repurchase 2,241,106 2,028,089 2,647,510 FHLB advances — 1,500,000 — Other debt 2,359 7,776 1,404 Total $ 2,507,935 $ 4,292,335 $ 2,910,219 Federal funds purchased, which totaled $264.5 million at March 31, 2024, are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. At March 31, 2024, the Company had approved lines of credit totaling $3.5 billion. Since these borrowings are unsecured and limited by market trading activity, their availability may be less certain than collateralized sources of borrowings. Retail repurchase agreements are offered to customers wishing to earn interest in highly liquid balances and are used by the Company as a funding source considered to be stable, but short-term in nature. Repurchase agreements are collateralized by securities in the Company's investment portfolio. Total repurchase agreements at March 31, 2024 were comprised of non-insured customer funds totaling $2.2 billion at March 31, 2024 and securities pledged as collateral for these retail agreements totaled $2.3 billion at March 31, 2024. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were no advances outstanding from the FHLB at March 31, 2024. 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. Additionally, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The FRB also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at March 31, 2024. March 31, 2024 (In thousands) FHLB Federal Reserve Total Total collateral value established by FHLB and FRB $ 2,536,792 $ 4,186,053 $ 6,722,845 Letters of credit issued (172,416) — (172,416) Available for future advances $ 2,364,376 $ 4,186,053 $ 6,550,429 The Company receives outside ratings from both Standard & Poor’s and Moody’s on both the consolidated company and its subsidiary bank, Commerce Bank. These ratings are as follows: Standard & Poor’s Moody’s Commerce Bancshares, Inc. Issuer rating A- Rating outlook Stable Commerce Bank Issuer rating A A3 Baseline credit assessment a2 Short-term rating A-1 P-1 Rating outlook Stable Stable The Company considers these ratings to be indications of a sound capital base and strong liquidity and believes that these ratings would help ensure the ready marketability of its commercial paper, should the need arise. No commercial paper has been outstanding during the past ten years. The Company has no subordinated or hybrid debt instruments which would affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that through its Capital Markets Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit, privately placed corporate notes or other forms of debt. 60 Table of Contents The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash equivalents and restricted cash of $786.6 million during the first three months of 2024, 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 $135.5 million and have historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, provided cash of $540.9 million. Activity in the investment securities portfolio provided cash of $426.5 million 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 $102.3 million. Additionally, repayments of securities purchased under agreements to resell (net of purchases) provided cash of $225.0 million. Investing activities are somewhat unique to financial institutions in that, while large sums of cash flow are normally used to fund growth in investment securities, loans, or other bank assets, they are normally dependent on the financing activities described below. Financing activities used cash of $1.5 billion, largely resulting from net decreases in deposits of $983.5 million and $403.2 million in federal funds purchased and securities sold under agreements to repurchase during the first three months of 2024. Capital Management The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at March 31, 2024 and December 31, 2023, as shown in the following table. (Dollars in thousands) March 31, 2024 December 31, 2023 Minimum Capital Requirement Capital Conservation Buffer Minimum Ratios Requirement including Capital Conservation Buffer Minimum Ratios for Well-Capitalized Banks * Risk-adjusted assets $ 24,311,459 $ 24,216,527 Tier I common risk-based capital 3,732,487 3,693,089 Tier I risk-based capital 3,732,487 3,693,089 Total risk-based capital 3,916,187 3,881,024 Tier I common risk-based capital ratio 15.35 % 15.25 % 4.50 % 2.50 % 7.00 % 6.50 % Tier I risk-based capital ratio 15.35 15.25 6.00 2.50 8.50 8.00 Total risk-based capital ratio 16.11 16.03 8.00 2.50 10.50 10.00 Tier I leverage ratio 11.75 11.25 4.00 N/A 4.00 5.00 *Under Prompt Corrective Action requirements The Company is subject to a 2.5% capital conservation buffer, which is an amount above the minimum ratios under capital adequacy guidelines, and is intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, share repurchases, and executive compensation. In the first quarter of 2020, the interim final rule of the Federal Reserve Bank and other U.S. banking agencies became effective, providing banks that adopted CECL (ASU 2016-13) during the 2020 calendar year the option to delay recognizing the estimated impact on regulatory capital until after a two year deferral period, followed by a three year transition period. In connection with the adoption of CECL on January 1, 2020, the Company elected to utilize this option. As a result, the two year deferral period for the Company extended through December 31, 2021. Beginning on January 1, 2022, the Company was required to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and periodically purchases stock in the open market. During the three months ended March 31, 2024, the Company purchased 806,217 shares at an average price of $52.13 in open market purchases and through stock-based compensation transactions. At March 31, 2024, 951,030 shares remained available for purchase under the current Board authorization. On April 17, 2024, the share repurchase authorization was increased to 5,000,000 shares. The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital levels and alternative investment options. The Company paid a $.270 per share cash dividend on its common stock in the first quarter of 2024, which was a 5.1% increase compared to its 2023 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 61 Table of Contents next 12 months are primarily to fund loan growth. Additionally, the Company will utilize cash to fund deposit maturities and withdrawals that may occur in the next 12 months. Other contractual obligations, purchase commitments, lease obligations, and unfunded commitments may require cash payments by the Company within the next 12 months, and these are further discussed in the Company's 2023 Annual Report on Form 10-K. Further discussion of the Company's longer-term material cash obligations and sources for fulfilling those obligations is below. In the normal course of business, various commitments and contingent liabilities arise that are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at March 31, 2024 totaled $14.8 billion (including $5.5 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 $622.7 million and $9.6 million, respectively, at March 31, 2024. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The allowance for these commitments is recorded in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheets. At March 31, 2024, the liability for unfunded lending commitments totaled $23.1 million. See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements. The Company regularly purchases various state tax credits arising from third party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first three months of 2024, purchases and sales of tax credits amounted to $32.2 million and $45.6 million, respectively. Fees from sales of tax credits were $2.1 million for the three months ended March 31, 2024, compared to $560.7 thousand in the same period last year. At March 31, 2024, the Company expected to fund outstanding purchase commitments of $146.6 million during the remainder of 2024 and had purchase commitments of $420.2 million that it expects to fund from 2025 through 2030. The Company continued to maintain a strong liquidity position throughout the first three months of 2024. Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations. Segment Results The table below is a summary of segment pre-tax income results for the first three months of 2024 and 2023. (Dollars in thousands) Consumer Commercial Wealth Segment Totals Other/ Elimination Consolidated Totals Three Months Ended March 31, 2024 Net interest income $ 129,676 $ 126,687 $ 24,155 $ 280,518 $ (31,519) $ 248,999 Provision for credit losses (8,888) (41) 1 (8,928) 4,141 (4,787) Non-interest income 24,335 63,802 58,399 146,536 2,312 148,848 Investment securities gains (losses), net — — — — (259) (259) Non-interest expense (80,644) (100,356) (39,551) (220,551) (25,146) (245,697) Income before income taxes $ 64,479 $ 90,092 $ 43,004 $ 197,575 $ (50,471) $ 147,104 Three Months Ended March 31, 2023 Net interest income $ 144,460 $ 137,127 $ 28,025 $ 309,612 $ (57,989) $ 251,623 Provision for credit losses (6,306) (393) (13) (6,712) (4,744) (11,456) Non-interest income 24,303 58,324 52,944 135,571 2,041 137,612 Investment securities gains (losses), net — — — — (306) (306) Non-interest expense (77,370) (93,685) (39,585) (210,640) (13,467) (224,107) Income before income taxes $ 85,087 $ 101,373 $ 41,371 $ 227,831 $ (74,465) $ 153,366 Increase (decrease) in income before income taxes: Amount $ (20,608) $ (11,281) $ 1,633 $ (30,256) $ 23,994 $ (6,262) Percent (24.2) % (11.1) % 3.9 % (13.3) % (32.2) % (4.1) % Consumer For the three months ended March 31, 2024, income before income taxes for the Consumer segment decreased $20.6 million, or 24.2%, compared to the first three months of 2023. The decrease in income before income taxes was mainly due to a decrease in net interest income of $14.8 million, or 10.2%, and increases in non-interest expense of $3.3 million, or 4.2%, and the provision for credit losses of $2.6 million. Net interest income declined due to a $25.8 million increase in deposit interest 62 Table of Contents expense. This decrease was partly offset by a $3.4 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and higher loan interest income of $7.8 million. Non-interest expense increased over the same period in the previous year mainly due to higher allocated support costs for administration and operations, information technology and online banking. These increases were partly offset by lower marketing expense and allocated support costs for the deposit system. The increase in the provision for credit losses over the first three months of 2023, was mainly due to higher consumer credit card and personal loan net charge-offs, partly offset by lower overdraft loan net charge-offs. Commercial For the three months ended March 31, 2024, income before income taxes for the Commercial segment decreased $11.3 million, or 11.1%, compared to the same period in the previous year. This decrease was mainly due to lower net interest income and higher non-interest expense, partly offset by an increase non-interest income. Net interest income decreased $10.4 million, or 7.6%, mainly due to lower net allocated funding credits of $16.8 million, coupled with higher interest expense on deposits and customer repurchase agreements of $21.0 million and $4.0 million, respectively. These decreases were partly offset by an increase of $31.9 million in loan interest income. Non-interest income increased $5.5 million, or 9.4%, over the previous year mainly due to growth in deposit account fees (mainly corporate cash management fees), tax credit sales fees, capital market fees and loan commitment fees. Non-interest expense increased $6.7 million, or 7.1%, mainly due to higher salaries and benefits expense and allocated service and support costs (mainly bank operations, commercial sales and support and management expense). The provision for credit losses decreased $352 thousand from the same period last year, mainly due to lower business and business real estate loan net charge-offs. Wealth Wealth segment pre-tax profitability for the three months ended March 31, 2024 increased $1.6 million, or 3.9%, over the same period in the previous year. Net interest income decreased $3.9 million, or 13.8%, mainly due to an $8.9 million increase in deposit interest expense. This increase was partly offset by a $2.0 million increase in net allocated funding credits and a $3.0 million increase in loan interest income. Non-interest income increased $5.5 million, or 10.3%, over the prior year largely due to higher private client and institutional trust fees and cash sweep commissions, partly offset by lower brokerage fees. Non-interest expense decreased $34 thousand mainly due to lower miscellaneous losses, mostly offset by higher salaries and benefits expense. The provision for credit losses decreased $14 thousand from the same period last year due to lower overdraft loan net charge-offs. The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability in this category was $24.0 million higher than in the same period last year. Unallocated securities losses were $259 thousand in the first three months of 2024 compared to losses of $306 thousand in 2023. Also, the unallocated provision for credit losses decreased $8.9 million, primarily driven by decreases in the provision for credit losses on loans and 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 three months of 2024 was $6.9 million, or $1.9 million lower than net charge-offs due to a decrease in the allowance for credit losses on loans. In the comparable period last year, the provision for credit losses on loans was $15.9 million, or $9.2 million higher than net charge-offs, due to an increase in the allowance for credit losses on loans. For the three months ended March 31, 2024, the Company's provision on unfunded lending commitments was a benefit of $2.2 million. Additionally, net interest income increased $26.5 million and non-interest income increased $271 thousand. These increases to pre-tax profitability were partly offset by higher non-interest expense of $11.7 million. 63 Table of Contents Regulatory Changes Deposit Insurance On November 16, 2023, Federal Deposit Insurance Corporation (“FDIC”) issued a final rule to impose a special assessment to recover losses to the FDIC’s Deposit Insurance Fund following the failure of two financial institutions. The rule applies to all insured depository institutions and stated that the special assessment would be collected at an annual rate of approximately 13.4 basis points for an anticipated total of eight quarterly assessment periods. Because the estimated loss pursuant to the systemic risk determination will be periodically adjusted, the FDIC could: • Cease collection early, if it has collected enough to recover actual or estimated losses; • Extend the special assessment collection period one or more quarters beyond the initial eight-quarter collection period, if actual or estimated losses exceed the amounts collected; and • Impose a final shortfall special assessment on a one-time basis after the receiverships for certain failed banks terminate, if actual losses exceed the amounts collected. During the first quarter of 2024, the FDIC increased its estimate of losses to the Deposit Insurance Fund and in turn increased its estimated special assessment, announcing that the special assessment would come in the form of a June 2024 invoice based on its March 31, 2024 estimate loss in the Deposit Insurance Fund. The Company has accrued $20.1 million FDIC special assessment liabilities at the end of March 31, 2024. SEC Climate Disclosure Rule On March 6, 2024, the Securities and Exchange Commission adopted rules to enhance and standardize climate-related disclosures by public companies and in public offerings. This climate-related disclosure rule will have significant disclosure impact to the public companies affected, including the Company. Among many other items, this rule requires companies to disclose: • Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition; • The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook; • If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities; • Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices; • Scope 1 and Scope 2 greenhouse gas (GHG) emissions, when material; and • Capitalized costs, expenditures, charges, and losses incurred as a result of severe weather events or other natural conditions. However, in April 2024, the SEC issued an order to stay the rules pending judicial review, due to legal challenges to this mandate. 64 Table of Contents Impact of Recently Issued Accounting Standards 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. Segment Reporting The FASB issued ASU 2023-07, "Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures", in November 2023. The amendments require disclosure of significant segment expenses and other segment items on an annual and interim basis. Public entities are required to disclose significant expense categories and amounts for each reportable segment, as well as the amount and a description of the composition of other segment items. Significant expense categories are derived from expenses that are regularly provided to an entity’s chief operating decision-maker (“CODM”), and included in a segment’s reported measures of profit or loss. Public entities are also required to disclose the title and position of the CODM and explain how the CODM uses the reported measures of profit or loss in assessing segment performance and deciding how to allocate resources. This Update requires interim disclosures of certain segment-related disclosures that previously were only required annually. This Update requires annual disclosures for fiscal years beginning January 1, 2024 and interim disclosures for fiscal years beginning January 1, 2025. Early adoption is permitted. The Company is required to apply the amendments in this Update retrospectively to all prior periods presented in the financial statements. Other than the inclusion of additional disclosures, the adoption of this ASU is not expected to have a significant effect on the Company's consolidated financial statements. Income Taxes The FASB issued ASU 2023-09, "Income Taxes (Topic 740) - Improvements to Income Tax Disclosures", in December 2023. The amendments in this Update require additional disclosures regarding the rate reconciliation and income taxes paid. This Update also removed certain existing disclosure requirements. This Update is effective for annual periods beginning January 1, 2025. Early adoption is permitted. The amendments in this Update should be applied on a prospective basis, though retrospective application is permitted. Other than the inclusion of additional disclosures, the adoption is not expected to have a significant effect on the Company's consolidated financial statements. 65 Table of Contents AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS Three Months Ended March 31, 2024 and 2023 First Quarter 2024 First Quarter 2023 (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) $ 5,873,525 $ 88,638 6.07 % $ 5,656,104 $ 74,037 5.31 % Real estate — construction and land 1,472,554 30,754 8.40 1,410,835 25,486 7.33 Real estate — business 3,727,643 58,029 6.26 3,478,382 48,444 5.65 Real estate — personal 3,031,193 29,775 3.95 2,933,750 26,086 3.61 Consumer 2,082,490 33,126 6.40 2,067,385 27,060 5.31 Revolving home equity 322,074 6,163 7.70 296,748 5,146 7.03 Consumer credit card 562,892 19,750 14.11 556,223 18,757 13.68 Overdrafts 7,696 — — 4,449 — — Total loans 17,080,067 266,235 6.27 16,403,876 225,016 5.56 Loans held for sale 2,149 40 7.49 5,708 145 10.30 Investment securities: U.S. government and federal agency obligations 851,656 4,402 2.08 1,099,067 5,138 1.90 Government-sponsored enterprise obligations 55,652 331 2.39 87,086 690 3.21 State and municipal obligations (A) 1,330,808 6,519 1.97 1,793,756 9,994 2.26 Mortgage-backed securities 5,902,328 32,088 2.19 6,454,408 32,830 2.06 Asset-backed securities 2,085,050 12,399 2.39 3,233,757 16,041 2.01 Other debt securities 503,204 2,410 1.93 528,941 2,523 1.93 Trading debt securities (A) 40,483 533 5.30 45,757 518 4.59 Equity securities (A) 12,768 814 25.64 12,458 714 23.24 Other securities (A) 221,695 7,189 13.04 229,867 4,029 7.11 Total investment securities 11,003,644 66,685 2.44 13,485,097 72,477 2.18 Federal funds sold 599 10 6.71 38,978 489 5.09 Securities purchased under agreements to resell 340,934 1,634 1.93 825,000 3,952 1.94 Interest earning deposits with banks 1,938,381 26,432 5.48 809,935 9,336 4.67 Total interest earning assets 30,365,774 361,036 4.78 31,568,594 311,415 4.00 Allowance for credit losses on loans (161,891) (150,117) Unrealized gain (loss) on debt securities (1,274,125) (1,387,196) Cash and due from banks 281,610 314,024 Premises and equipment, net 477,881 431,288 Other assets 956,225 631,239 Total assets $ 30,645,474 $ 31,407,832 LIABILITIES AND EQUITY: Interest bearing deposits: Savings $ 1,333,983 195 .06 $ 1,550,215 193 .05 Interest checking and money market 13,215,270 55,385 1.69 13,265,485 19,958 .61 Certificates of deposit of less than $100,000 976,804 10,191 4.20 415,367 1,425 1.39 Certificates of deposit of $100,000 and over 1,595,310 18,096 4.56 903,393 6,627 2.98 Total interest bearing deposits 17,121,367 83,867 1.97 16,134,460 28,203 .71 Borrowings: Federal funds purchased $ 328,216 $ 4,419 5.42 493,721 $ 5,586 4.59 Securities sold under agreements to repurchase 2,511,959 21,438 3.43 2,418,726 17,495 2.93 Other borrowings (B) 76 — — 551,267 6,720 4.94 Total borrowings 2,840,251 25,857 3.66 3,463,714 29,801 3.49 Total interest bearing liabilities 19,961,618 109,724 2.21 % 19,598,174 58,004 1.20 % Non-interest bearing deposits 7,328,603 9,114,512 Other liabilities 410,310 112,052 Equity 2,944,943 2,583,094 Total liabilities and equity $ 30,645,474 $ 31,407,832 Net interest margin (FTE) $ 251,312 $ 253,411 Net yield on interest earning assets 3.33 % 3.26 % (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. 66 Table of Contents