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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 2023 Annual Report on Form 10-K. Results of operations for the three and six months ended June 30, 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 June 30, 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. 
 
 
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 Selected Financial Data 
 
 Three Months Ended June 30 Six Months Ended June 30 
 2024 2023 2024 2023 
 Per Share Data 
 Net income per common share — basic $ 1.07 $ .97 * $ 1.94 $ 1.88 * 
 Net income per common share — diluted 1.07 .97 * 1.93 1.88 * 
 Cash dividends on common stock .270 .257 * .540 .514 * 
 Book value per common share 24.48 20.50 * 
 Market price 55.78 46.38 * 
 Selected Ratios 
 (Based on average balance sheets) 
 Loans to deposits (1) 
 70.73 % 66.15 % 70.30 % 65.57 % 
 Non-interest bearing deposits to total deposits 30.05 32.63 30.01 34.35 
 Equity to loans (1) 
 17.64 16.35 17.44 16.05 
 Equity to deposits 12.48 10.81 12.26 10.52 
 Equity to total assets 10.02 8.29 9.82 8.26 
 Return on total assets 1.86 1.56 1.67 1.55 
 
 Return on equity 18.52 18.81 16.98 18.78 
 (Based on end-of-period data) 
 Non-interest income to revenue (2) 
 36.73 37.17 37.06 36.27 
 Efficiency ratio (3) 
 55.95 57.22 58.75 57.35 
 Tier I common risk-based capital ratio 16.19 14.75 
 Tier I risk-based capital ratio 
 16.19 14.75 
 Total risk-based capital ratio 16.96 15.53 
 Tangible common equity to tangible assets ratio (4) 
 9.82 7.70 
 Tier I leverage ratio 
 12.13 10.46 

 * 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. 
 
 
 
 June 30 
 (Dollars in thousands) 2024 2023 
 Total equity $ 3,158,335 $ 2,685,228 
 Less non-controlling interest 20,600 17,870 
 
 Less goodwill 146,539 146,371 
 Less intangible assets* 3,952 4,173 
 Total tangible common equity (a) $ 2,987,244 $ 2,516,814 
 Total assets $ 30,569,358 $ 32,831,262 
 Less goodwill 146,539 146,371 
 Less intangible assets* 3,952 4,173 
 Total tangible assets (b) $ 30,418,867 $ 32,680,718 
 Tangible common equity to tangible assets ratio (a)/(b) 9.82 % 7.70 % 

 * Intangible assets other than mortgage servicing rights. 
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 Results of Operations 
 Summary 
 
 Three Months Ended June 30 Six Months Ended June 30 
 (Dollars in thousands) 2024 2023 % change 2024 2023 % change 
 Net interest income (expense) $ 262,249 $ 249,538 5.1 % $ 511,248 $ 501,161 2.0 % 
 Provision for credit losses (5,468) (6,471) (15.5) (10,255) (17,927) (42.8) 
 Non-interest income 152,244 147,605 3.1 301,092 285,217 5.6 
 Investment securities gains (losses), net 3,233 3,392 (4.7) 2,974 3,086 (3.6) 
 Non-interest expense (232,214) (227,611) 2.0 (477,911) (451,718) 5.8 
 Income taxes (38,602) (35,990) 7.3 (70,254) (68,803) 2.1 
 Non-controlling interest income (expense) (1,889) (2,674) (29.4) (4,678) (3,775) 23.9 
 Net income attributable to Commerce Bancshares, Inc. $ 139,553 $ 127,789 9.2 % $ 252,216 $ 247,241 2.0 % 
 
 

 
 
 For the quarter ended June 30, 2024, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $139.6 million, an increase of $11.8 million, or 9.2%, compared to the second quarter of the previous year. For the current quarter, the annualized return on average assets was 1.86%, the annualized return on average equity was 18.52%, and the efficiency ratio was 55.95%. Diluted earnings per common share was $1.07 per share in the current quarter, an increase of 10.3% compared to $.97 per share in the second quarter of 2023, and increased 24.4% compared to $.86 per share in the previous quarter. 
 
 
 Compared to the second quarter of last year, net interest income increased $12.7 million, or 5.1%, mainly due to an increase in interest income on loans of $26.1 million and a $21.7 million decrease in interest expense on borrowings. This increase was partly offset by an increase of $29.7 million in interest expense on deposits. The provision for credit losses decreased $1.0 million, or 15.5%, compared to the same quarter in the prior year. Non-interest income increased $4.6 million, or 3.1%, compared to the second quarter of 2023, mainly due to an increase in trust fees, capital market fees, and deposit account fees, partly offset by lower letter of credit fees. Net gains on investment securities totaled $3.2 million in the current quarter compared to net gains of $3.4 million in the same quarter of last year. Securities gains in the current quarter primarily resulted from net gains of $178.2 million on equity investments and net gains in fair value of $5.7 million recorded on private equity investments. These gains were largely offset by net losses of $179.1 million on sales of available for sale debt securities. Non-interest expense increased $4.6 million, or 2.0%, over the second quarter of 2023, mainly due to increases in salaries expense and data processing and software expense, partly offset by lower deposit insurance expense and lower marketing expense. 
 
 
 Net income for the first six months of 2024 was $252.2 million, an increase of $5.0 million, or 2.0%, from the same period last year. Diluted earnings per common share was $1.93, an increase of 2.7% compared to $1.88 per share in the same period last year. For the first six months of 2024, the annualized return on average assets was 1.67%, the annualized return on average equity was 16.98%, and the efficiency ratio was 58.75%. Net interest income increased $10.1 million, or 2.0%, over the same period last year. This growth was largely due to an increase of $67.0 million in interest income on loans, an increase of $16.5 million in interest earned on deposits with banks, and a $24.8 million decrease in interest expense on borrowings, largely offset by a $85.3 million increase in interest expense on deposits. The provision for credit losses was $10.3 million for the first six months of 2024, compared to a provision of $17.9 million in the same period last year. Non-interest income increased $15.9 million, or 5.6%, from the first six months of last year mainly due to higher trust and deposit account fees. Non-interest expense increased $26.2 million, or 5.8%, over the first six months of last year mainly due to increases in salaries and data processing and software expense and higher litigation settlement 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 June 30, 2024 vs. 2023 Six Months Ended June 30, 2024 vs. 2023 
 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 $ 3,081 $ 7,665 $ 10,746 $ 5,454 $ 19,893 $ 25,347 
 Real estate - construction and land 420 1,523 1,943 1,571 5,640 7,211 
 Real estate - business 1,855 2,623 4,478 5,404 8,659 14,063 
 Real estate - personal 768 2,683 3,451 1,641 5,499 7,140 
 Consumer 408 4,816 5,224 599 10,691 11,290 
 Revolving home equity 480 87 567 924 660 1,584 
 Consumer credit card (102) 200 98 126 965 1,091 
 Overdrafts — — — — — — 
 Total interest on loans 6,910 19,597 26,507 15,719 52,007 67,726 
 Loans held for sale (108) 3 (105) (210) — (210) 
 Investment securities: 
 U.S. government and federal agency securities 1,414 4,801 6,215 (530) 6,009 5,479 
 Government-sponsored enterprise obligations (1) — (1) (225) (135) (360) 
 State and municipal obligations (2,346) (152) (2,498) (4,963) (1,010) (5,973) 
 Mortgage-backed securities (3,963) (151) (4,114) (6,795) 1,939 (4,856) 
 Asset-backed securities (5,390) 1,829 (3,561) (11,102) 3,899 (7,203) 
 Other securities 5,226 (4,499) 727 4,986 (1,097) 3,889 
 Total interest on investment securities (5,060) 1,828 (3,232) (18,629) 9,605 (9,024) 
 Federal funds sold (82) 4 (78) (567) 10 (557) 
 Securities purchased under agreements to resell (2,580) 902 (1,678) (4,925) 929 (3,996) 
 Interest earning deposits with banks (2,356) 1,732 (624) 11,682 4,790 16,472 
 Total interest income (3,276) 24,066 20,790 3,070 67,341 70,411 
 Interest expense: 
 Deposits: 
 Savings (23) 33 10 (50) 62 12 
 Interest checking and money market 1,298 25,475 26,773 1,845 60,355 62,200 
 Certificates of deposit of less than $100,000 (665) 1,063 398 5,386 3,778 9,164 
 Certificates of deposit of $100,000 and over 170 2,306 2,476 7,602 6,343 13,945 
 Total interest on deposits 780 28,877 29,657 14,783 70,538 85,321 
 Federal funds purchased (3,046) 218 (2,828) (4,896) 901 (3,995) 
 Securities sold under agreements to repurchase 371 1,908 2,279 1,068 5,154 6,222 
 Other borrowings (21,100) (39) (21,139) (27,930) 71 (27,859) 
 Total interest expense (22,995) 30,964 7,969 (16,975) $ 76,664 $ 59,689 
 Net interest income, tax equivalent basis $ 19,719 $ (6,898) $ 12,821 $ 20,045 $ (9,323) $ 10,722 

 
 
 Net interest income in the second quarter of 2024 was $262.2 million, an increase of $12.7 million over the second quarter of 2023. On a fully taxable-equivalent (FTE) basis, net interest income totaled $264.6 million in the second quarter of 2024, up $12.8 million over the same period last year and up $13.3 million over the previous quarter. The increase in net interest income 
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 compared to the second quarter of 2023 was mainly due to higher interest income earned on loans (FTE) of $26.5 million and lower interest expense on borrowings of $21.7 million, partly offset by higher deposit interest expense of $29.7 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. Interest expense on borrowings decreased mainly due to lower average balances, while the increase in deposit interest expense was due to higher average rates paid. The Company's net yield on earning assets (FTE) was 3.55% in the current quarter compared to 3.12% in the second quarter of 2023. 
 
 
 Total interest income (FTE) increased $20.8 million over the second quarter of 2023. Interest income on loans (FTE) was $269.2 million during the second quarter of 2024, an increase of $26.5 million, or 10.9%, 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 46 basis points in the average rate earned and growth of $505.4 million, or 3.0%, 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 $10.7 million due to a 53 basis point increase in the average rate earned, coupled with growth in average balances of $223.0 million, or 3.9%. Business real estate loan interest income increased $4.5 million due to an increase of 30 basis points in the average rate earned and higher average balances of $125.2 million, or 3.5%. Consumer loan interest income grew $5.2 million due to a 93 basis point increase in the average rate earned. In addition, construction and land loan interest income increased $1.9 million due to an increase of 44 basis points in the average rate earned and higher average loan balances of $21.3 million, or 1.5%. Personal real estate loan interest income grew $3.5 million due to a 36 basis point increase in the average rate earned and growth of $84.0 million, or 2.8%, in average loan balances. 
 
 
 Interest income on investment securities (FTE) was $71.4 million during the second quarter of 2024, which was a decrease of $3.2 million from the same quarter last year. The decrease in interest income occurred mainly in interest earned on mortgage-backed securities and asset-backed securities. Interest income earned on mortgage-backed securities declined $4.1 million due to a $762.6 million, or 12.1%, decrease in average balances. In addition, the Company recorded a $740 thousand adjustment to premium amortization at June 30, 2024, which increased income and reflected slower forward prepayment speed estimates on mortgage-backed securities. The adjustment this quarter was lower than the $1.7 million in the same quarter last year. Interest income earned on asset-backed securities declined $3.6 million due to lower average balances of $1.0 billion, or 36.9%, partly offset by a 42 basis point increase in the average rate earned. Interest income earned on state and municipal obligations declined $2.5 million due to a $462.6 million, or 30.2%, decrease in average balances. These decreases to interest income were partly offset by growth in interest income on U.S. government and federal agency obligations of $6.2 million, driven by a 162 basis point increase in the average rate earned and higher average balances of $166.3 million. 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), increased $1.2 million over the same quarter last year. Additionally, the average rate earned on investment securities during the three months ended June 30, 2024 increased 38 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 $10.4 billion in the second quarter of 2024, compared to $12.6 billion in the second quarter of 2023. 
 
 
 Interest income on securities purchased under agreements to resell decreased $1.7 million from the same quarter last year, due to a decline of $521.4 million in the average balance, partly offset by an increase of 122 basis points in the average rate earned. Interest income on balances at the Federal Reserve decreased $624 thousand due to a decrease of $184.4 million in the average balance invested, partly offset by an increase of 34 basis points in the average rate earned. 
 
 
 The average fully taxable-equivalent yield on total interest earning assets was 4.98% in the second quarter of 2024, up from 4.34% in the second quarter of 2023. 
 
 
 Total interest expense increased $8.0 million compared to the second quarter of 2023 due to an increase of $29.7 million in interest expense on interest bearing deposits, partly offset by a $21.7 million decrease in interest expense on borrowings. The increase in deposit interest expense resulted mainly from an increase of $26.8 million in interest expense on interest checking and money market deposit accounts due to an 80 basis point increase in the average rate paid and an increase of $243.7 million in average balances. In addition, interest expense on certificates of deposit increased $2.9 million mainly due to an increase of 55 basis points in the average rate paid. The overall rate paid on total deposits increased 70 basis points over the same quarter last year. Interest expense on other borrowings decreased $21.1 million due to a decrease of $1.6 billion in average Federal Home Loan Bank (FHLB) borrowings. In addition, interest expense on federal funds purchased decreased $2.8 million mainly due to a $242.1 million decrease in the average balance, while interest expense on customer repurchase agreements increased $2.3 million mainly due to a 35 basis point increase in the average rate paid. The overall average rate incurred on all interest bearing liabilities was 2.21% and 1.87% in the second quarters of 2024 and 2023, respectively. 
 
 
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 Net interest income (FTE) for the first six months of 2024 was $515.9 million compared to $505.2 million for the same period in 2023. For the first six months of 2024, the net interest margin was 3.44% compared to 3.18% for the same period in 2023. 
 
 
 Total interest income (FTE) for the first six months of 2024 increased $70.4 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 lower interest income on investment securities (FTE). Loan interest income (FTE) increased $67.7 million, or 14.5%, due to a 59 basis point increase in the average rate earned and a $590.1 million, or 3.6%, increase in average loan balances. Most of the increase occurred in the business, business real estate and consumer 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 $9.0 million due to a $2.3 billion decrease in average balances, partly offset by a 32 basis point increase in the average rate earned. Interest earned on asset-backed and mortgage-backed securities decreased $7.2 million and $4.9 million, respectively, due to lower average balances, partly offset by increases in the average rate earned. Interest earned on state and municipal obligations decreased $6.0 million due to declines in both the average balance and the average rate earned. These decreases in interest income on investment securities were partly offset by an increase in interest earned on U.S. government and federal agency obligations of $5.5 million, mainly due to an increase in the average rate earned. Interest income on securities purchased under agreements to resell decreased $4.0 million due to lower average balances, partly offset by higher average rates earned. Interest income on balances at the Federal Reserve increased $16.5 million due to higher average balances and average rates earned. 
 
 
 Total interest expense for the first six months of 2024 increased $59.7 million compared to the same period last year. Interest expense on deposits increased $85.3 million, due to a 97 basis point increase in the average rate paid and a $493.6 million increase in average balances. Interest expense on borrowings decreased $25.6 million, mainly due lower FHLB borrowings of $1.1 billion. In addition, interest expense on federal funds purchased declined mainly due to lower average balances, while interest expense on customer repurchase agreements increased due to higher average rates and average balances. The overall cost of total interest bearing liabilities increased to 2.21% compared to 1.55% 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 June 30 Increase (Decrease) Six Months Ended June 30 Increase (Decrease) 
 (Dollars in thousands) 2024 2023 Amount % change 2024 2023 Amount % change 
 Trust fees $ 52,291 $ 47,265 $ 5,026 10.6 % $ 103,396 $ 92,593 $ 10,803 11.7 % 
 Bank card transaction fees 47,477 49,725 (2,248) (4.5) 94,407 96,379 (1,972) (2.0) 
 Deposit account charges and other fees 25,325 22,633 2,692 11.9 49,476 44,385 5,091 11.5 
 Consumer brokerage services 4,478 4,677 (199) (4.3) 8,886 9,762 (876) (9.0) 
 Capital market fees 4,760 2,945 1,815 61.6 8,652 6,307 2,345 37.2 
 Loan fees and sales 3,431 2,735 696 25.4 6,572 5,324 1,248 23.4 
 Other 14,482 17,625 (3,143) (17.8) 29,703 30,467 (764) (2.5) 
 Total non-interest income $ 152,244 $ 147,605 $ 4,639 3.1 % $ 301,092 $ 285,217 $ 15,875 5.6 % 
 Non-interest income as a % of total revenue* 36.7 % 37.2 % 37.1 % 36.3 % 

 * Total revenue includes net interest income and non-interest income. 
 
 
 The table below is a summary of net bank card transaction fees for the six month periods ended June 30, 2024 and 2023. 
 
 
 
 Three Months Ended June 30 Six Months Ended June 30 
 (Dollars in thousands) 2024 2023 $ change % change 2024 2023 $ change % change 
 Net debit card fees $ 11,383 $ 11,340 $ 43 .4 % $ 21,788 $ 21,627 $ 161 .7 % 
 Net credit card fees 4,033 3,812 221 5.8 7,805 7,486 319 4.3 
 Net merchant fees 5,865 5,359 506 9.4 11,112 10,710 402 3.8 
 Net corporate card fees 26,196 29,214 (3,018) (10.3) 53,702 56,556 (2,854) (5.0) 
 Total bank card transaction fees $ 47,477 $ 49,725 $ (2,248) (4.5 %) $ 94,407 $ 96,379 $ (1,972) (2.0 %) 

 
 
 For the second quarter of 2024, total non-interest income amounted to $152.2 million compared to $147.6 million in the same quarter last year, which was an increase of $4.6 million, or 3.1%. The increase was mainly due to higher trust fees, deposit account fees and capital market fees, partly offset by lower net bank card fees and letter of credit fees. Trust fees increased $5.0 million, or 10.6%, mainly due to growth of $4.8 million in private client trust fees. Bank card transaction fees for the current quarter declined $2.2 million, or 4.5%, from the same period last year, mainly due to lower net corporate card fees, partly offset by growth in net merchant fees. The decline in net corporate card fees of $3.0 million was mainly due to lower interchange fees and higher rewards expense. Net merchant fees increased $506 thousand mainly due to higher interchange fees, partly offset by higher network expense. Compared to the second quarter of last year, deposit account fees increased $2.7 million, or 11.9%, mainly due to higher corporate cash management fees of $2.4 million. Consumer brokerage fees declined $199 thousand, while capital market fees increased $1.8 million, or 61.6%, mainly due to higher underwriting fees. Other non-interest income decreased $3.1 million, or 17.8%, mainly due to decreases of $2.3 million in letter of credit fees and $919 thousand in swap fees. 
 
 
 Non-interest income for the first six months of 2024 was $301.1 million compared to $285.2 million in the first six months of 2023, which was an increase of $15.9 million, or 5.6%. The increase was mainly due to higher trust fees, deposit account fees and capital market fees, partly offset by lower net bank card fees. Trust fees increased $10.8 million, or 11.7%, mainly due to higher private client and institutional trust fees. Bank card transaction fees for the current year declined $2.0 million, or 2.0%, from the same period last year, mainly due to a decrease of $2.9 million in net corporate card fees, partly offset by an increase in net merchant fees of $402 thousand. Deposit account fees increased $5.1 million, or 11.5%, mainly due to higher corporate cash management fees and overdraft and return item fees. Capital market fees increased $2.3 million, or 37.2%, mainly due to higher underwriting fees, while loan fees and sales increased $1.2 million mainly due to higher loan commitment fees and mortgage banking revenue. Other non-interest income decreased $764 thousand, or 2.5%, mainly due to decreases of $2.2 million in letter of credit fees and $1.4 million in swap fees. These decreases were partly offset by higher tax credit sales income of $1.9 million and cash sweep commissions of $1.3 million. 
 
 
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 Investment Securities Gains (Losses), Net 
 
 Three Months Ended June 30 Six Months Ended June 30 
 (In thousands) 2024 2023 2024 2023 
 Net gains (losses) on sales of available for sale debt securities $ (179,073) $ (5,356) $ (187,543) $ (8,444) 
 
 
 Net gains (losses) on equity securities 178,164 (563) 178,306 (690) 
 Net gains (losses) on sales of private equity investments (1,535) 221 (566) 879 
 Fair value adjustments on private equity investments 5,677 9,090 12,777 11,341 
 
 
 
 Total investment securities gains (losses), net $ 3,233 $ 3,392 $ 2,974 $ 3,086 

 
 
 Net gains on investment securities, which were recognized in earnings during the three months ended June 30, 2024 and 2023, are shown in the table above. Net securities gains of $3.2 million were reported in the second quarter of 2024, compared to net gains of $3.4 million in the same period last year. The net gains in the second quarter of 2024 were mainly comprised of net gains of $178.2 million on equity investments and net gains in fair value of $5.7 million recorded on private equity investments. These gains were largely offset by net losses of $179.1 million on sales of available for sale debt securities. The net gains on investment securities for the same quarter last year were primarily comprised of $9.1 million of net gains in fair value on the Company’s private equity investments, partially offset by losses of $5.4 million on the sale of available for sale securities. 
 
 
 Net gains on investment securities of $3.0 million were recognized in earnings for the six months ended June 30, 2024, compared to net gains of $3.1 million for the same period in 2023. Net gains in the first half of 2024 were mainly comprised of net gains of $178.3 million on equity investments and net gains in fair value of $12.8 million recorded on private equity investments, largely offset by net losses of $187.5 million on sales of available for sale securities. Net gains in the first half of 2023 were mainly comprised of net gains in fair value of $11.3 million on private equity investments, due to fair value adjustments, partially offset by losses of $8.4 million on sales of available for sale debt securities. 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 $1.8 million during the first six months of 2024 and expense of $2.5 million during the first six months of 2023. 
 
 
 The Company's significant gains in equity securities for the three and six months ended June 30, 2024 primarily relate to gains recorded on its shares of Visa, as described in Note 3, Investment Securities. Likewise, the $179.1 million losses realized on the Company's available for sale debt securities portfolio relate to the successful execution of its planned available for sale debt security portfolio repositioning, in which the Company sold bonds with an amortized cost of $1.2 billion and subsequently reinvested the proceeds into higher yielding available for sale debt securities. Additional information about the Company's available for sale debt portfolio repositioning transactions is discussed in Note 3, Investment Securities. 
 
 
 
 
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 Non-Interest Expense 
 
 Three Months Ended June 30 Increase (Decrease) Six Months Ended June 30 Increase (Decrease) 
 (Dollars in thousands) 2024 2023 Amount % change 2024 2023 Amount % change 
 Salaries and employee benefits $ 149,120 $ 145,429 $ 3,691 2.5 % $ 300,921 $ 289,802 $ 11,119 3.8 % 
 Data processing and software 31,529 28,719 2,810 9.8 62,682 56,873 5,809 10.2 
 Net occupancy 12,544 12,995 (451) (3.5) 26,118 25,754 364 1.4 
 Deposit insurance 2,354 4,187 (1,833) (43.8) 10,371 8,830 1,541 17.5 
 Equipment 5,091 4,864 227 4.7 10,101 9,714 387 4.0 
 Marketing 5,356 6,368 (1,012) (15.9) 9,392 11,839 (2,447) (20.7) 
 Supplies and communication 4,636 4,625 11 .2 9,380 9,215 165 1.8 
 Other 21,584 20,424 1,160 5.7 48,946 39,691 9,255 23.3 
 Total non-interest expense $ 232,214 $ 227,611 $ 4,603 2.0 % $ 477,911 $ 451,718 $ 26,193 5.8 % 

 
 
 Non-interest expense for the second quarter of 2024 amounted to $232.2 million, an increase of $4.6 million, or 2.0%, compared to expense of $227.6 million in the second quarter of last year. The increase in expense over the same period last year was mainly due to higher salaries expense, data processing and software expense and other non-interest expense, partly offset by lower marketing and deposit insurance expense. Salaries and employees benefits expense increased $3.7 million, or 2.5%, mainly due to higher full-time salaries expense of $3.8 million and other salaries expense of $1.0 million, partly offset by lower healthcare expense of $1.5 million. Full-time equivalent employees totaled 4,724 at June 30, 2024, compared to 4,680 at June 30, 2023. Data processing and software expense increased $2.8 million, or 9.8%, mainly due to increased costs for service providers. Occupancy expense decreased $451 thousand, or 3.5%, while marketing expense declined $1.0 million, or 15.9%. Deposit insurance expense decreased $1.8 million partly due to a $1.2 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 $1.2 million, or 5.7%, mainly due to a $5.0 million donation to a related charitable foundation, partly offset by deconversion expense of $2.1 million recorded in the same period last year. 
 
 
 Non-interest expense amounted to $477.9 million for the first six months of 2024, an increase of $26.2 million, or 5.8%, over the first six months of 2023. Salaries and benefits expense increased $11.1 million, or 3.8%, mainly due to higher full-time salaries expense, other salaries expense and payroll taxes, partly offset by a decrease in healthcare expense. Data processing and software expense increased $5.8 million, or 10.2%, due to increased costs for service providers and higher bank card processing fees. Occupancy expense increased $364 thousand, or 1.4%, while equipment expense increased $387 thousand, or 4.0%, due to higher depreciation and service contract expense. Marketing expense decreased $2.4 million, or 20.7%, while deposit insurance increased $1.5 million, or 17.5%, due to accrual adjustments in 2024 to the special assessment by the FDIC. Other non-interest expense increased $9.3 million, or 23.3%, mainly due to litigation settlement expense of $10.0 million, net of insurance, and the charitable donation of $5.0 million, partly offset by deconversion expense of $2.1 million recorded in 2023. 
 
 
 
 
 
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 Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments 
 
 Three Months Ended Six Months Ended June 30 
 (In thousands) June 30, 2024 Mar. 31, 2024 June 30, 2023 2024 2023 
 ALLOWANCE FOR CREDIT LOSSES ON LOANS 
 
 
 Balance at beginning of period $ 160,465 $ 162,395 $ 159,317 $ 162,395 $ 150,136 
 Provision for credit losses on loans 7,849 6,947 5,864 $ 14,796 $ 21,812 
 Net loan charge-offs (recoveries): 
 Commercial: 
 Business 622 23 165 645 395 
 Real estate-construction and land — — (115) — (115) 
 Real estate-business (8) (141) (5) (149) (9) 
 Commercial net loan charge-offs (recoveries) 614 (118) 45 496 271 
 Personal Banking: 
 Real estate-personal 79 24 (6) 103 (17) 
 Consumer 1,804 1,983 1,273 3,787 2,548 
 Revolving home equity (7) (4) (20) (11) (46) 
 Consumer credit card 6,746 6,435 4,687 13,181 9,012 
 Overdrafts 521 557 517 1,078 1,495 
 Personal banking net loan charge-offs (recoveries) 9,143 8,995 6,451 18,138 12,992 
 Total net loan charge-offs (recoveries) 9,757 8,877 6,496 18,634 13,263 
 Balance at end of period $ 158,557 $ 160,465 $ 158,685 $ 158,557 $ 158,685 
 LIABILITY FOR UNFUNDED LENDING COMMITMENTS 
 
 
 Balance at beginning of period $ 23,086 $ 25,246 $ 28,628 $ 25,246 $ 33,120 
 Provision for credit losses on unfunded lending commitments (2,381) (2,160) 607 (4,541) (3,885) 
 Balance at end of period 20,705 23,086 29,235 20,705 29,235 
 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 179,262 $ 183,551 $ 187,920 $ 179,262 $ 187,920 

 
 
 
 Three Months Ended Six Months Ended June 30 
 June 30, 2024 Mar. 31, 2024 June 30, 2023 2024 2023 
 Annualized net loan charge-offs (recoveries)*: 
 Commercial: 
 Business .04 % — % .01 % .02 % .01 % 
 Real estate-construction and land — — (.03) — (.02) 
 Real estate-business — (.02) — (.01) — 
 Commercial net loan charge-offs (recoveries) .02 — — .01 .01 
 Personal Banking: 
 Real estate-personal .01 — — .01 — 
 Consumer .34 .38 .24 .36 .25 
 Revolving home equity (.01) — (.03) (.01) (.03) 
 Consumer credit card 4.91 4.60 3.38 4.75 3.27 
 Overdrafts 43.15 29.11 44.79 34.54 66.40 
 Personal banking net loan charge-offs (recoveries) .61 .60 .44 .60 .44 
 Total annualized net loan charge-offs (recoveries) .23 % .21 % .16 % .22 % .16 % 

 * as a percentage of average loans (excluding loans held for sale) 
 
 
 
 
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 The following schedule provides a breakdown of the allowance for credit losses on loans (ACL) by loan class and the percentage of the allowance for loan losses to the related loan class at period end. 
 
 
 
 (Dollars in thousands) June 30, 2024 Mar. 31, 2024 June 30, 2023 
 
 
 
 Credit Loss Allowance Allocation % of ACL to Loan Category Credit Loss Allowance Allocation % of ACL to Loan Category Credit Loss Allowance Allocation % of ACL to Loan Category 
 Business $ 45,060 .74 % $ 43,810 .73 % $ 47,071 .80 % 
 RE — construction and land 29,920 2.14 31,437 2.10 31,013 2.14 
 RE — business 32,237 .90 30,217 .81 29,940 .83 
 RE — personal 9,109 .30 12,266 .40 10,727 .36 
 Consumer 11,086 .52 11,849 .56 11,503 .55 
 Revolving home equity 1,789 .54 1,801 .56 1,572 .52 
 
 Consumer credit card 29,201 5.15 28,940 5.13 26,720 4.65 
 Overdrafts 155 3.70 145 .30 139 1.92 
 
 Total $ 158,557 .92 % $ 160,465 .93 % $ 158,685 .94 % 

 
 
 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 second quarter of 2024 amounted to $9.8 million, compared to $8.9 million in the prior quarter and $6.5 million in the second quarter of last year. Comp ared to the same period last year, total net loan charge-offs in the second quarter of 2024 increased $3.3 million and increased $880 thousand from the previous quarter. The increase over the prior year was mainly driven by increases in net charge-offs on consumer credit card, consumer and business loans of $2.1 million, $531 thousand, and $457 thousand, respectively. The increase from the previous quarter was driven by the increase in net charge-offs on consumer credit card and business loans. 
 
 
 For the three months ended June 30, 2024, annualized net charge-offs on average consumer credit card loans were 4.91%, compared to 4.60% in the previous quarter and 3.38% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .34%, compared to .38% in the prior quarter and .24% in the same period last year. In the second quarter of 2024 , total annualized net loan charge-offs were .23%, compared to .21% in the previous quarter and .16% in the same period last year. 
 
 
 For the three months ended June 30, 2024, the provision for credit losses on loans was $7.8 million which was a $2.0 million increase over the $5.9 million provision recorded in the same period last year and a $902 thousand increase over the $6.9 million provision recorded at March 31, 2024. The increase in the provision for credit losses on loans during the second quarter of 2024 over the same period last year was due to higher net loan charge-offs during the second quarter of 2024, partly offset by a larger reduction in the allowance for credit losses on loans in the current quarter compared to the same period last year. 
 
 
 For the six months ended June 30, 2024, net loan charge-offs amounted to $18.6 million, which was a $5.4 million increase over the first six months of 2023. The increase in net charge-offs on loans during the first six months of 2024 was primarily driven by an increase in net charge-offs on consumer credit card and consumer loans. For the six months ended June 30, 2024, annualized net loan charge-offs on consumer credit card and consumer loans were 4.75% and .36%, respectively, compared to 3.27% and .25%, respectively, for the same period last year. The annualized net charge-offs on loans for the six months ended June 30, 2024 and 2023, respectively, were .22% and .16%. 
 
 
 For the six months ended June 30, 2024, the provision for credit losses on loans was $14.8 million, which was a $7.0 million decrease from the $21.8 million provision recorded in the same period last year. Changes in the provision are driven by changes in the estimate for the allowance for credit losses on loans. The decrease in the provision for credit losses on loans in the first half of 2024 compared to the same period last year was primarily due to a reduction of the allowance for credit losses on loans during 2024, caused in part by an improving economic forecast in 2024, whereas the allowance for credit losses on 
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 loans in the first half of 2023 was increasing due to a weakening economic forecast which included a mild recession. The decrease in the provision for credit losses on loans during the first half of 2024 compared to the same period in the prior year was partly offset by higher net charge-offs recorded in the six months ended June 30, 2024 compared to the first half of 2023. 
 
 
 For the six months ended June 30, 2024, the allowance for credit losses on loans decreased by $3.8 million, compared to the allowance for credit losses on loans at December 31, 2023. During the six months ended June 30, 2024, the allowance for credit losses on commercial loans decreased by $984 thousand, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, decreased $2.9 million. The decrease in the allowance for credit losses on loans during the first half of 2024 was primarily the result of a slightly more optimistic economic forecast at June 30, 2024, coupled with a faster prepayment speed assumption in the personal real estate portfolio compared to the assumptions used at December 31, 2023. The allowance for credit losses on loans was $158.6 million at June 30, 2024 and was .92%, .94% and .94% of total loans at June 30, 2024, December 31, 2023 and June 30, 2023, respectively. 
 
 
 In the current quarter, the provision for credit losses on unfunded lending commitments was a benefit of $2.4 million, compared to a provision of $607 thousand for the three months ended June 30, 2023. For the six months ended June 30, 2024, the provision for credit losses on unfunded commitments was a benefit of $4.5 million compared to a benefit of $3.9 million in the first six months of 2023. At June 30, 2024, the liability for unfunded lending commitments was $20.7 million, compared to $25.2 million at December 31, 2023 and $29.2 million at June 30, 2023. The liability decreased primarily due to decreases in unfunded lending commitment balances, coupled with improvement in loss rate assumptions for the Company's construction loans. The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans. See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses. 
 
 
 The Company considers the allowance for credit losses on loans and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at June 30, 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 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) 
 June 30, 2024 December 31, 2023 
 
 
 
 
 
 
 
 Non-accrual loans $ 19,303 $ 7,312 
 Foreclosed real estate 143 270 
 Total non-performing assets $ 19,446 $ 7,582 
 Non-performing assets as a percentage of total loans .11 % .04 % 
 Non-performing assets as a percentage of total assets .06 % .02 % 
 
 
 
 
 
 
 
 
 Total loans past due 90 days and still accruing interest $ 18,566 $ 21,864 

 
 
 Non-accrual loans totaled $19.3 million at June 30, 2024, an increase of $12.0 million from the balance at December 31, 2023. The increase occurred mainly in business real estate non-accrual loans, which increased $15.0 million. The increase was partly offset by a $3.1 million decrease in business non-accrual loans. At June 30, 2024, non-accrual loans were comprised of business real estate (78.0%), revolving home equity (10.2%), personal real estate (9.2%), and business (2.6%) loans. Foreclosed real estate totaled $143 thousand at June 30, 2024, a decrease of $127 thousand compared to December 31, 2023. Total loans past due 90 days or more and still accruing interest were $18.6 million as of June 30, 2024, a decrease of $3.3 million from 
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 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 $242.2 million at June 30, 2024 compared with $216.4 million at December 31, 2023, resulting in an increase of $25.8 million, or 11.9%. 
 
 
 
 (In thousands) 
 June 30, 2024 December 31, 2023 
 Potential problem loans: 
 Business $ 122,774 $ 74,760 
 Real estate – construction and land 17,452 — 
 Real estate – business 101,549 140,800 
 Real estate – personal 419 827 
 
 Total potential problem loans $ 242,194 $ 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 June 30, 2024, the Company held $84.7 million of loans that had been modified during the six months ended June 30, 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. 
 
 
 Real Estate – Construction and Land Loans 
 The Company's portfolio of construction and land loans, as shown in the table below, amounted to 8.1% of total loans outstanding at June 30, 2024. The largest component of construction and land loans was commercial construction, which decreased $65.2 million during the six months ended June 30, 2024. At June 30, 2024, multi-family residential construction loans totaled approximately $469.2 million, or 40.5%, of the commercial construction loan portfolio, compared to $414.6 million, or 33.9%, at December 31, 2023. 
 
 
 
 (Dollars in thousands) June 30,
2024 
 
 
 
 % of Total 
 % of 
 Total 
 Loans 
 December 31, 2023 
 
 
 % of Total 
 % of 
 Total 
 Loans 
 
 Commercial construction $ 1,157,721 82.9 % 6.7 % $ 1,222,961 84.5 % 7.1 % 
 Residential construction 118,223 8.5 .7 110,687 7.7 .6 
 Residential land and land development 67,469 4.8 .4 62,417 4.3 .4 
 Commercial land and land development 53,102 3.8 .3 50,699 3.5 .3 
 Total real estate - construction and land loans $ 1,396,515 100.0 % 8.1 % $ 1,446,764 100.0 % 8.4 % 

 
 
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 Real Estate – Business Loans 
 Total business real estate loans were $3.6 billion at June 30, 2024 and comprised 20.8% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At June 30, 2024, 33.1% 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) June 30,
2024 
 
 
 
 % of Total 
 % of 
 Total 
 Loans 
 December 31, 2023 
 
 
 
 % of Total 
 % of 
 Total 
 Loans 
 
 Owner-occupied $ 1,184,115 33.1 % 6.9 % $ 1,175,476 31.6 % 6.8 % 
 Office 525,818 14.7 3.1 489,320 13.2 2.8 
 Industrial 465,706 13.0 2.7 630,713 17.0 3.7 
 Retail 320,064 9.0 1.9 366,693 9.9 2.1 
 Hotels 300,677 8.4 1.8 292,941 7.9 1.7 
 Multi-family 292,627 8.2 1.7 256,657 6.9 1.5 
 Farm 195,972 5.5 1.1 195,981 5.3 1.1 
 Senior living 189,194 5.3 1.1 183,778 4.9 1.1 
 Other 98,366 2.8 .5 127,747 3.3 .8 
 Total real estate - business loans $ 3,572,539 100.0 % 20.8 % $ 3,719,306 100.0 % 21.6 % 

 
 
 Information about the credit quality of the Company's business real estate loan portfolio as of June 30, 2024 and December 31, 2023 is provided in the table below. 
 
 
 
 (Dollars in thousands) Pass Special Mention Substandard Non-Accrual Total 
 June 30, 2024 
 Owner-occupied $ 1,160,625 $ 15,975 $ 7,489 $ 26 $ 1,184,115 
 Office 505,315 17,800 2,703 — 525,818 
 Industrial 465,662 44 — — 465,706 
 Retail 303,850 15,500 714 — 320,064 
 Hotels 299,381 — 1,296 — 300,677 
 Multi-family 280,510 10,984 1,133 — 292,627 
 Farm 194,951 691 330 — 195,972 
 Senior living 66,131 20,158 87,881 15,024 189,194 
 Other 98,141 225 — — 98,366 
 Total $ 3,374,566 $ 81,377 $ 101,546 $ 15,050 $ 3,572,539 
 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 $331.4 million in revolving home equity loans at June 30, 2024 that were collateralized by residential real estate. Most of these loans (92.1%) 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 June 30, 2024, the outstanding 
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 principal of loans with an original LTV higher than 80% was $29.9 million, or 9.0% 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 $4.9 million at June 30, 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 June 30, 2024 and December 31, 2023. The weighted average FICO score for the total portfolio balance at June 30, 2024 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 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 38.6% of the consumer loan portfolio at June 30, 2024, and outstanding balances for auto loans were $827.6 million and $820.3 million at June 30, 2024 and December 31, 2023, respectively. The balances over 30 days past due amounted to $9.9 million at June 30, 2024 and $9.5 million at December 31, 2023, respectively, and comprised 1.2% of the outstanding balances of these loans at both June 30, 2024 and December 31, 2023. For the six months ended June 30, 2024, $196.4 million of new auto loans were originated, compared to $210.1 million during the first six months of 2023. At June 30, 2024, the automobile loan portfolio had a weighted average FICO score of 757, and net charge-offs on auto loans were .4% of average auto loans. 
 
 
 The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 10.7% of the consumer loan portfolio at June 30, 2024. Losses on these loans have historically been low, and the Company saw net recoveries of $62 thousand for the first six months of 2024. Private banking loans comprised 34.2% of the consumer loan portfolio at June 30, 2024. The Company's private banking loans are generally well-collateralized, and at June 30, 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 $2.1 million in the first six months of 2024 and were .4% of the average balances of these loans at June 30, 2024. 
 
 
 Consumer Credit Card Loans 
 The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at June 30, 2024 of $566.9 million in consumer credit card loans outstanding, approximately $112.3 million, or 19.8%, carried a low promotional rate. Within the next six months, $50.0 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 $268.8 million, or 1.6% of total loans at June 30, 2024, a decrease of $3.2 million from December 31, 2023, as shown in the table below. 
 
 
 
 (In thousands) 
 June 30, 2024 December 31, 2023 Unfunded commitments at June 30, 2024 
 
 Extraction $ 212,844 $ 219,828 $ 154,932 
 Mid-stream shipping and storage 41,429 35,505 92,647 
 Downstream distribution and refining 7,475 8,890 40,692 
 Support activities 7,080 7,811 8,833 
 Total energy lending portfolio $ 268,828 $ 272,034 $ 297,104 

 
 
 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 
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 communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled $1.6 billion and $1.5 billion at June 30, 2024 and December 31, 2023, respectively. Additional unfunded commitments at June 30, 2024 totaled $2.4 billion. 
 
 
 
 Income Taxes 
 Income tax expense was $38.6 million in the second quarter of 2024, compared to $31.7 million in the first quarter of 2024 and $36.0 million in the second quarter of 2023. The Company's effective tax rate, including the effect of non-controlling interest, was 21.7% in the second quarter of 2024, compared to 21.9% in the first quarter of 2024 and 22.0% in the second quarter of 2023. 
 
 
 
 Financial Condition 
 Balance Sheet 
 Total assets of the Company were $30.6 billion at June 30, 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 June 30, 2024 and $31.1 billion at December 31, 2023, and consisted of 58% in loans and 33% in investment securities at June 30, 2024. 
 
 
 At June 30, 2024, total loans decreased $42.4 million or .25%, compared to balances at December 31, 2023. The decrease was mainly due to declines in business real estate, construction and consumer credit card loans of $146.8 million, $50.2 million, and $23.0 million, respectively. These decreases were partly offset by an increase of $71.7 million in business loans, mainly due to growth in commercial and industrial lending and tax-free loan balances. In addition, personal real estate loans increased $29.1 million, while consumer loans, which includes automobile, marine and RV, fixed rate home equity and other consumer loans, increased $67.9 million, mainly due to growth in other consumer loans. 
 
 
 Total available for sale debt securities, excluding fair value adjustments, decreased $1.3 billion at June 30, 2024 compared to December 31, 2023. Purchases of available for sale debt securities during this period totaled $1.1 billion, offset by available for sale debt security sales, maturities and pay downs of $2.4 billion. The decline in available for sale debit securities was mainly the result of lower balances of mortgage-backed securities, asset-backed securities and state and municipal obligations, which decreased $812.5 million, $554.0 million, and $476.7 million, respectively, at June 30, 2024 compared to December 31, 2023. These decreases were partly offset by an increase of $820.0 million in balances of U.S. government and federal agency obligations. At June 30, 2024, the duration of the available for sale investment portfolio was 4.0 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 deposits at June 30, 2024 amounted to $24.3 billion, a decrease of $1.1 billion compared to December 31, 2023. The decline in deposits largely resulted from a decrease in demand deposits, mainly in business demand deposits (decrease of $660.2 million). Additionally, certificate of deposit balances decreased $456.9 million and interest checking balances decreased $150.3 million from balances at December 31, 2023. The Company’s borrowings totaled $2.6 billion at June 30, 2024, a decrease of $354.8 million from balances at December 31, 2023, mainly due to a decline in FHLB advances, which were repaid in 2023. 
 
 
 
 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) 
 June 30, 2024 June 30, 2023 December 31, 2023 
 Liquid assets: 
 Balances at the Federal Reserve Bank $ 2,215,057 $ 2,568,695 $ 2,239,010 
 Federal funds sold — 2,750 5,025 
 Available for sale debt securities 8,534,271 10,414,625 9,684,760 
 Securities purchased under agreements to resell 475,000 825,000 450,000 
 Total $ 11,224,328 $ 13,811,070 $ 12,378,795 

 
 
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 Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $2.2 billion at June 30, 2024 and decreased $24.0 million from December 31, 2023 balances. At June 30, 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 $8.5 billion at June 30, 2024 and included an unrealized net loss of $1.1 billion. The total net unrealized loss included net losses of $926.9 million on mortgage-backed and asset-backed securities and $93.9 million on state and municipal obligations. 
 
 
 Resale agreements, maturing through 2029, totaled $475.0 million at June 30, 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 $490.3 million in fair value at June 30, 2024. $125.0 million of the Company's resale agreements will mature in the next 12 months. 
 
 
 The Company's available for sale debt securities portfolio has a diverse mix of high quality and liquid investment securities with a duration of 4.0 years at June 30, 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) 
 June 30, 2024 June 30, 2023 December 31, 2023 
 Investment securities pledged for the purpose of securing: 
 Federal Reserve Bank borrowings $ 1,056,405 $ 2,852,481 $ 2,636,523 
 FHLB borrowings and letters of credit 970,083 315,323 301,617 
 Securities sold under agreements to repurchase * 2,354,023 2,630,852 2,710,616 
 Other deposits and swaps 2,131,700 2,340,094 1,818,092 
 Total pledged securities 6,512,211 8,138,750 7,466,848 
 Unpledged and available for pledging 2,020,981 2,263,586 2,211,243 
 Ineligible for pledging 1,079 12,289 6,669 
 Total available for sale debt securities, at fair value $ 8,534,271 $ 10,414,625 $ 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 70.3% for the six months ended June 30, 2024. Core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts totaled $21.9 billion and represented 90.0% of the Company's total deposits at June 30, 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 $627.7 million at June 30, 2024 compared to December 31, 2023, primarily due to decreases in commercial, wealth, and consumer segment deposits of $371.1 million, $225.5 million, and $70.9 million, respectively. 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 $6.3 billion through advances from the FHLB and the Federal Reserve. 
 
 
 Certificates of deposit of $100,000 or greater totaled $1.4 billion at June 30, 2024. These deposits are normally considered more volatile and higher costing, and comprised 5.8% of total deposits at June 30, 2024. 
 
 
 
 (In thousands) 
 June 30, 2024 June 30, 2023 December 31, 2023 
 Core deposit base: 
 Non-interest bearing $ 7,492,751 $ 8,198,849 $ 7,975,935 
 Interest checking 6,870,344 6,790,331 7,020,134 
 Savings and money market 7,497,366 7,628,643 7,492,139 
 Total $ 21,860,461 $ 22,617,823 $ 22,488,208 

 
 
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 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: 
 
 
 
 (In thousands) 
 June 30, 2024 June 30, 2023 December 31, 2023 
 Borrowings: 
 Federal funds purchased $ 254,720 $ 511,400 $ 261,305 
 Securities sold under agreements to repurchase 2,296,679 2,366,621 2,647,510 
 FHLB advances — 1,000,000 — 
 Other debt 3,984 5,613 1,404 
 Total $ 2,555,383 $ 3,883,634 $ 2,910,219 

 
 
 Federal funds purchased, which totaled $254.7 million at June 30, 2024, are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. At June 30, 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 June 30, 2024 were comprised of non-insured customer funds totaling $2.3 billion, and securities pledged as collateral for these retail agreements totaled $2.3 billion at June 30, 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 June 30, 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 June 30, 2024. 
 
 
 
 June 30, 2024 
 (In thousands) 
 
 FHLB 
 Federal Reserve 
 
 Total 
 
 Total collateral value established by FHLB and FRB $ 3,140,120 $ 3,288,661 $ 6,428,781 
 
 Letters of credit issued (115,491) — (115,491) 
 Available for future advances $ 3,024,629 $ 3,288,661 $ 6,313,290 

 
 
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 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 Commercial Tradable Products division 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. 
 
 
 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 $142.5 million during the first six 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 $282.8 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 $1.2 billion. Activity in the investment securities portfolio provided cash of $1.2 billion from sales, maturities, and pay downs (net of purchases). This increase in investing cash flows was further supported by shrinking in the loan portfolio, which provided cash of $23.7 million. These increases were partly offset by purchases of securities under agreements to resell (net of repayments), which used cash of $25.0 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 $1.6 billion, largely resulting from net decreases in deposits of $1.1 billion and a net decrease of $357.4 million in federal funds purchased and securities sold under agreements to repurchase during the first six months of 2024. Additionally, purchases of treasury stock and cash dividends used cash of $79.9 million and $70.1 million, respectively. 
 
 
 Capital Management 
 The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at June 30, 2024 and December 31, 2023, as shown in the following table. 
 
 
 
 (Dollars in thousands) June 30, 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 $ 23,488,263 $ 24,216,527 
 Tier I common risk-based capital 3,803,108 3,693,089 
 Tier I risk-based capital 3,803,108 3,693,089 
 Total risk-based capital 3,982,519 3,881,024 
 Tier I common risk-based capital ratio 16.19 % 15.25 % 4.50 % 2.50 % 7.00 % 6.50 % 
 Tier I risk-based capital ratio 16.19 15.25 6.00 2.50 8.50 8.00 
 Total risk-based capital ratio 16.96 16.03 8.00 2.50 10.50 10.00 
 Tier I leverage ratio 12.13 11.25 4.00 N/A 4.00 5.00 

 *Under Prompt Corrective Action requirements 
 
 
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 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. In April 2024, the Board approved the purchase of additional shares, bringing the total shares authorized for purchase to 5,000,000 at April 17, 2024. During the six months ended June 30, 2024, the Company purchased 1,491,902 shares at an average price of $53.55 in open market purchases and through stock-based compensation transactions. At June 30, 2024, 4,315,095 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 levels and alternative investment options. The Company paid a $.270 per share cash dividend on its common stock in the second 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 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 June 30, 2024 totaled $14.9 billion (including $5.7 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 $619.0 million and $4.9 million, respectively, at June 30, 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 June 30, 2024, the liability for unfunded lending commitments totaled $20.7 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 six months of 2024, purchases and sales of tax credits amounted to $53.7 million and $68.0 million, respectively. Fees from sales of tax credits were $2.9 million for the six months ended June 30, 2024, compared to $1.0 million in the same period last year. At June 30, 2024, the Company expected to fund outstanding purchase commitments of $111.0 million during the remainder of 2024 and had purchase commitments of $484.5 million that it expects to fund from 2025 through 2030. 
 
 
 The Company continued to maintain a strong liquidity position throughout the first six 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. 
 
 
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 Segment Results 
 The table below is a summary of segment pre-tax income results for the first six months of 2024 and 2023. 
 
 
 
 
 
 (Dollars in thousands) 
 Consumer 
 Commercial 
 Wealth 
 Segment 
 Totals 
 Other/ Elimination 
 Consolidated Totals 
 
 Six Months Ended June 30, 2024 
 Net interest income $ 254,391 $ 251,876 $ 45,424 $ 551,691 $ (40,443) $ 511,248 
 Provision for credit losses (17,925) (766) 4 (18,687) 8,432 (10,255) 
 Non-interest income 50,335 128,954 117,999 297,288 3,804 301,092 
 Investment securities gains (losses), net — — — — 2,974 2,974 
 Non-interest expense (162,526) (199,574) (78,453) (440,553) (37,358) (477,911) 
 Income before income taxes $ 124,275 $ 180,490 $ 84,974 $ 389,739 $ (62,591) $ 327,148 
 Six Months Ended June 30, 2023 
 Net interest income $ 285,695 $ 265,145 $ 53,418 $ 604,258 $ (103,097) $ 501,161 
 Provision for credit losses (12,736) (483) (13) (13,232) (4,695) (17,927) 
 Non-interest income 49,834 123,093 107,457 280,384 4,833 285,217 
 Investment securities gains (losses), net — — — — 3,086 3,086 
 Non-interest expense (160,682) (192,094) (80,107) (432,883) (18,835) (451,718) 
 Income before income taxes $ 162,111 $ 195,661 $ 80,755 $ 438,527 $ (118,708) $ 319,819 
 Increase (decrease) in income before income taxes: 
 Amount $ (37,836) $ (15,171) $ 4,219 $ (48,788) $ 56,117 $ 7,329 
 Percent (23.3) % (7.8) % 5.2 % (11.1) % (47.3) % 2.3 % 

 
 Consumer 
 For the six months ended June 30, 2024, income before income taxes for the Consumer segment decreased $37.8 million, or 23.3%, compared to the first six months of 2023. The decrease in income before income taxes was mainly due to a decline in net interest income of $31.3 million, or 11.0%, and increases in non-interest expense of $1.8 million, or 1.1%, and the provision for credit losses of $5.2 million. Net interest income declined mainly due to a $48.1 million increase in deposit interest expense. This decrease was partly offset by higher loan interest income of $13.6 million and a $4.0 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios. Non-interest income increased $501 thousand, or 1.0%, mainly due to higher net bank card fees (mainly credit and debit card fees) and deposit account fees. Non-interest expense increased over the same period in the previous year mainly due to higher allocated costs for information technology and retail support, partly offset by lower marketing expense. The increase in the provision for credit losses over the first six months of 2023 was mainly due to higher consumer credit card loan net charge-offs. 
 
 
 Commercial 
 For the six months ended June 30, 2024, income before income taxes for the Commercial segment decreased $15.2 million, or 7.8%, compared to the same period in the previous year. T his decrease was mainly due to lower net interest income and non-interest expense, partly offset by higher non-interest income. Net interest income decreased $13.3 million, or 5.0%, mainly due to lower net allocated funding credits of $28.2 million, coupled with higher interest expense on deposits and customer repurchase agreements of $28.6 million and $6.4 million, respectively, partly offset by higher loan interest income of $50.8 million. Non-interest income increased $5.9 million, or 4.8%, 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. These increases were partly offset by decreases in net bank card fees (mainly corporate card fees), letter of credit fees and swap fees. Non-interest expense increased $7.5 million, or 3.9%, mainly due to higher salaries and benefits expense and allocated service and support costs for software, electronic banking and management expense. These increases were partly offset by lower allocated commercial sales and payment support costs. The provision for credit losses increased $283 thousand over the same period last year, mainly due to higher commercial credit card and commercial loan net charge-offs. 
 
 
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 Wealth 
 Wealth segment pre-tax profitability for the six months ended June 30, 2024 increased $4.2 million, or 5.2%, over the same period in the previous year. Net interest income decreased $8.0 million, or 15.0%, mainly due to a $15.3 million increase in deposit interest expense. This decrease was partly offset by a $1.6 million increase in net allocated funding credits and a $5.7 million increase in loan interest income. Non-interest income increased $10.5 million, or 9.8%, 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 $1.7 million, or 2.1%, mainly due to deconversion expense recorded in the prior year and lower professional fees, partly offset by higher salaries and benefits expense. The provision for credit losses decreased $17 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 $56.1 million higher than in the same period last year. Unallocated securities gains were $3.0 million in the first six months of 2024 compared to gains of $3.1 million in 2023. Also, the unallocated provision for credit losses decreased $13.1 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 segment s when incurred for management reporting purposes. The provision for credit losses on loans in the first six months of 2024 was $14.8 million, or $3.8 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 $21.8 million, or $8.5 million higher than net charge-offs, due to an increase in the allowance for credit losses on loans. Fo r the six months ended June 30, 2024, the Company's provision on unfunded lending commitments was a benefit of $4.5 million. Additionally, net interest income increased $62.7 million. This increase to pre-tax profitability was partly offset by lower non-interest income of $1.0 million and higher non-interest expense of $18.5 million. 
 
 
 
 
 
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 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 paid $2.0 million towards the special assessment in June 2024 and has an accrual of $16.8 million at June 30, 2024 for FDIC special assessment liabilities. 
 
 
 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. The SEC has not issued an update since April 2024. 
 
 
 
 
 
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 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. 
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 AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS 
 Three Months Ended June 30, 2024 and 2023 
 
 Second Quarter 2024 
 Second 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) 
 $ 5,980,364 $ 90,786 6.11 % $ 5,757,388 $ 80,040 5.58 % 
 Real estate — construction and land 1,471,504 30,588 8.36 1,450,196 28,645 7.92 
 Real estate — business 3,666,057 57,104 6.26 3,540,851 52,626 5.96 
 Real estate — personal 3,044,943 30,590 4.04 2,960,962 27,139 3.68 
 Consumer 2,127,650 34,678 6.56 2,098,523 29,454 5.63 
 Revolving home equity 326,204 6,228 7.68 300,623 5,661 7.55 
 Consumer credit card 552,896 19,186 13.96 555,875 19,088 13.77 
 Overdrafts 4,856 — — 4,630 — — 
 Total loans 17,174,474 269,160 6.30 16,669,048 242,653 5.84 
 Loans held for sale 2,455 46 7.54 5,957 151 10.17 
 Investment securities: 
 U.S. government and federal agency obligations 1,201,954 15,057 5.04 1,035,651 8,842 3.42 
 Government-sponsored enterprise obligations 55,634 330 2.39 55,751 331 2.38 
 State and municipal obligations (A) 
 1,069,934 5,311 2.00 1,532,519 7,809 2.04 
 Mortgage-backed securities 5,553,656 28,816 2.09 6,316,224 32,930 2.09 
 Asset-backed securities 1,785,598 11,105 2.50 2,827,911 14,666 2.08 
 Other debt securities 364,828 1,826 2.01 519,988 2,413 1.86 
 Trading debt securities (A) 
 46,565 573 4.95 46,493 525 4.53 
 Equity securities (A) 
 127,584 893 2.82 12,335 715 23.25 
 Other securities (A) 
 228,403 7,497 13.20 273,587 6,409 9.40 
 Total investment securities 10,434,156 71,408 2.75 12,620,459 74,640 2.37 
 Federal funds sold 1,612 27 6.74 7,484 105 5.63 
 Securities purchased under agreements to resell 303,586 2,421 3.21 824,974 4,099 1.99 
 Interest earning deposits with banks 2,099,777 28,630 5.48 2,284,162 29,254 5.14 
 Total interest earning assets 30,016,060 371,692 4.98 32,412,084 350,902 4.34 
 Allowance for credit losses on loans (159,791) (159,068) 
 Unrealized gain (loss) on debt securities (1,272,127) (1,331,002) 
 Cash and due from banks 267,530 309,789 
 Premises and equipment, net 479,431 449,030 
 Other assets 904,847 1,182,521 
 Total assets $ 30,235,950 $ 32,863,354 
 LIABILITIES AND EQUITY: 
 Interest bearing deposits: 
 Savings $ 1,328,989 196 .06 $ 1,516,887 186 .05 
 Interest checking and money market 13,162,118 56,633 1.73 12,918,399 29,860 .93 
 Certificates of deposit of less than $100,000 1,003,798 10,523 4.22 1,075,110 10,125 3.78 
 Certificates of deposit of $100,000 and over 1,492,592 16,892 4.55 1,472,208 14,416 3.93 
 Total interest bearing deposits 16,987,497 84,244 1.99 16,982,604 54,587 1.29 
 Borrowings: 
 Federal funds purchased $ 265,042 $ 3,569 5.42 507,165 $ 6,397 5.06 
 Securities sold under agreements to repurchase 2,254,849 19,293 3.44 2,206,612 17,014 3.09 
 Other borrowings (B) 
 838 8 3.84 1,617,952 21,147 5.24 
 Total borrowings 2,520,729 22,870 3.65 4,331,729 44,558 4.13 
 Total interest bearing liabilities 19,508,226 107,114 2.21 % 21,314,333 99,145 1.87 % 
 Non-interest bearing deposits 7,297,955 8,224,475 
 Other liabilities 399,080 598,915 
 Equity 3,030,689 2,725,631 
 Total liabilities and equity $ 30,235,950 $ 32,863,354 
 Net interest margin (FTE) $ 264,578 $ 251,757 
 Net yield on interest earning assets 3.55 % 3.12 % 

 (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 
 Six Months Ended June 30, 2024 and 2023 
 
 
 Six Months 2024 
 Six Months 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) 
 $ 5,926,945 $ 179,424 6.09 % $ 5,707,026 $ 154,077 5.44 % 
 Real estate — construction and land 1,472,029 61,342 8.38 1,430,624 54,131 7.63 
 Real estate — business 3,696,850 115,133 6.26 3,509,789 101,070 5.81 
 Real estate — personal 3,038,068 60,365 4.00 2,947,431 53,225 3.64 
 Consumer 2,105,070 67,804 6.48 2,083,040 56,514 5.47 
 Revolving home equity 324,139 12,391 7.69 298,696 10,807 7.30 
 Consumer credit card 557,894 38,936 14.03 556,048 37,845 13.72 
 Overdrafts 6,276 — — 4,540 — — 
 Total loans 17,127,271 535,395 6.29 16,537,194 467,669 5.70 
 Loans held for sale 2,302 86 7.51 5,833 296 10.23 
 Investment securities: 
 U.S. government and federal agency obligations 1,026,805 19,459 3.81 1,067,184 13,980 2.64 
 Government-sponsored enterprise obligations 55,643 661 2.39 71,332 1,021 2.89 
 State and municipal obligations (A) 
 1,200,371 11,830 1.98 1,662,416 17,803 2.16 
 Mortgage-backed securities 5,727,992 60,904 2.14 6,384,934 65,760 2.08 
 Asset-backed securities 1,935,324 23,504 2.44 3,029,713 30,707 2.04 
 Other debt securities 434,016 4,236 1.96 524,440 4,936 1.90 
 Trading debt securities (A) 
 43,524 1,106 5.11 46,127 1,043 4.56 
 Equity securities (A) 
 70,176 1,707 4.89 12,396 1,429 23.25 
 Other securities (A) 
 225,049 14,686 13.12 251,848 10,438 8.36 
 Total investment securities 10,718,900 138,093 2.59 13,050,390 147,117 2.27 
 Federal funds sold 1,105 37 6.73 23,144 594 5.18 
 Securities purchased under agreements to resell 322,260 4,055 2.53 824,987 8,051 1.97 
 Interest earning deposits with banks 2,019,079 55,062 5.48 1,551,121 38,590 5.02 
 Total interest earning assets 30,190,917 732,728 4.88 31,992,669 662,317 4.17 
 Allowance for credit losses on loans (160,841) (154,617) 
 Unrealized gain (loss) on debt securities (1,273,126) (1,358,944) 
 Cash and due from banks 274,570 311,895 
 Premises and equipment, net 478,656 440,208 
 Other assets 930,536 908,403 
 Total assets $ 30,440,712 $ 32,139,614 
 LIABILITIES AND EQUITY: 
 Interest bearing deposits: 
 Savings $ 1,331,486 391 .06 $ 1,533,459 379 .05 
 Interest checking and money market 13,188,694 112,018 1.71 13,090,983 49,818 .77 
 Certificates of deposit of less than $100,000 990,301 20,714 4.21 747,061 11,550 3.12 
 Certificates of deposit of $100,000 and over 1,543,951 34,988 4.56 1,189,372 21,043 3.57 
 Total interest bearing deposits 17,054,432 168,111 1.98 16,560,875 82,790 1.01 
 Borrowings: 
 Federal funds purchased $ 296,629 $ 7,988 5.42 $ 500,480 11,983 4.83 
 Securities sold under agreements to repurchase 2,383,404 40,731 3.44 2,312,083 34,509 3.01 
 Other borrowings (B) 
 457 8 3.52 1,087,556 27,867 5.17 
 Total borrowings 2,680,490 48,727 3.66 3,900,119 74,359 3.84 
 Total interest bearing liabilities 19,734,922 216,838 2.21 % 20,460,994 157,149 1.55 % 
 Non-interest bearing deposits 7,313,278 8,667,035 
 Other liabilities 404,695 356,829 
 Equity 2,987,817 2,654,756 
 Total liabilities and equity $ 30,440,712 $ 32,139,614 
 Net interest margin (FTE) $ 515,890 $ 505,168 
 Net yield on interest earning assets 3.44 % 3.18 % 

 (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
