Commerce Bancshares Inc: Form 10-Q for the period ended Sep 30, 2024

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 nine months ended September 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 September 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.

Selected Financial Data

* 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.

(Dollars in thousands)

* Intangible assets other than mortgage servicing rights.

Results of Operations

Summary

(Dollars in thousands)

For the quarter ended September 30, 2024, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $138.0 million, an increase of $17.4 million, or 14.4%, compared to the third quarter of the previous year. For the current quarter, the annualized return on average assets was 1.80%, the annualized return on average equity was 16.81%, and the efficiency ratio was 56.31%. Diluted earnings per common share was $1.07 per share in the current quarter, an increase of 16.3% compared to $.92 per share in the third quarter of 2023, and did not change compared to $1.07 per share in the previous quarter.

Compared to the third quarter of last year, net interest income increased $13.8 million, or 5.6%, mainly due to an increase in interest income on loans of $13.8 million and a $10.5 million decrease in interest expense on borrowings. This increase in interest income was partly offset by an increase of $7.6 million in interest expense on deposits. The provision for credit losses decreased $2.5 million, or 21.5%, compared to the same quarter in the prior year. Non-interest income increased $16.1 million, or 11.2%, compared to the third quarter of 2023, mainly due to an increase in trust fees, gains on sales of real estate, capital market fees, and deposit account fees. Net gains on investment securities totaled $3.9 million in the current quarter compared to net gains of $4.3 million in the same quarter of last year. Securities gains in the current quarter primarily resulted from net gains of $2.0 million on sales of private equity investments and net gains in fair value of $7.4 million recorded on private equity investments. These gains were partly offset by net losses of $5.4 million on sales of available for sale debt securities. Non-interest expense increased $9.6 million, or 4.2%, over the third quarter of 2023, mainly due to increases in salaries and benefits expense, data processing and software expense, and marketing expense, partly offset by lower deposit insurance expense.

Net income for the first nine months of 2024 was $390.2 million, an increase of $22.4 million, or 6.1%, from the same period last year. Diluted earnings per common share was $3.00, an increase of 7.1% compared to $2.80 per share in the same period last year. For the first nine months of 2024, the annualized return on average assets was 1.71%, the annualized return on average equity was 16.92%, and the efficiency ratio was 57.92%. Net interest income increased $23.9 million, or 3.2%, over the same period last year. This growth was largely due to an increase of $80.8 million in interest income on loans, an increase of $19.8 million in interest earned on deposits with banks, and a $35.4 million decrease in interest expense on borrowings, partly offset by a $92.9 million increase in interest expense on deposits. The provision for credit losses was $19.4 million for the first nine months of 2024, compared to a provision of $29.6 million in the same period last year. Non-interest income increased $32.0 million, or 7.5%, from the first nine months of last year mainly due to higher trust fees, deposit account fees, and capital market fees. Non-interest expense increased $35.8 million, or 5.3%, over the first nine months of last year mainly due to increases in salaries expense, data processing and software expense, and litigation settlement expense.

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

(In thousands)

Net interest income in the third quarter of 2024 was $262.4 million, an increase of $13.8 million over the third quarter of 2023. On a fully taxable-equivalent (FTE) basis, net interest income totaled $264.6 million in the third quarter of 2024, up $13.7 million over the same period last year and up $60 thousand over the previous quarter. The increase in net interest income compared to the third quarter of 2023 was mainly due to higher interest income earned on loans (FTE) of $14.1 million and lower interest expense on borrowings of $10.6 million, partly offset by higher deposit interest expense of $7.6 million and lower investment securities interest income of $7.0 million. The increase in total interest earned on loans (FTE) was mainly the result of higher loan yields on most loan products, especially commercial loans, many of which have variable rates. Interest income on investment securities declined mainly due to lower 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, partly offset by lower average balances. The Company's net yield on earning assets (FTE) was 3.50% in the current quarter compared to 3.11% in the third quarter of 2023.

Total interest income (FTE) increased $10.7 million over the third quarter of 2023. Interest income on loans (FTE) was $271.8 million during the third quarter of 2024, an increase of $14.1 million, or 5.5%, over the same quarter last year. The increase in interest income over the same quarter of last year was primarily due to an increase of 33 basis points in the average rate earned and growth of $57.6 million in average loan balances. Most of the increase in interest income occurred in the business, personal real estate and consumer loan categories. The largest increase to interest income occurred in business loan interest, which grew $7.4 million due to a 40 basis point increase in the average rate earned, coupled with growth in average balances of $117.6 million, or 2.0%. Personal real estate loan interest income increased $3.3 million due to an increase of 37 basis points in the average rate earned and higher average balances of $55.1 million, or 1.8%. Consumer loan interest income grew $3.9 million due to a 67 basis point increase in the average rate earned and higher average balances of $27.2 million, or 1.3%. Business real estate loan interest income grew $292 thousand due to a 15 basis point increase in the average rate earned, partly offset by a decrease of $61.2 million, or 1.7%, in average loan balances. These increases in interest income were partly offset by a decrease in construction and land loan interest income of $1.4 million due to a decline of $108.3 million, or 7.2%, in average loan balances, partly offset by a 27 basis point increase in the average rate earned.

Interest income on investment securities (FTE) was $63.3 million during the third quarter of 2024, which was a decrease of $7.0 million from the same quarter last year. The decrease in interest income occurred mainly in interest earned on mortgage-backed securities which declined $7.0 million due to a $1.1 billion, or 17.5%, decrease in average balances and an 11 basis point decline in the average rate earned. In addition, the Company recorded a $286 thousand adjustment to premium amortization at September 30, 2024, which decreased income and reflected slightly faster forward prepayment speed estimates on mortgage-backed securities. This was lower than the $1.3 million adjustment increasing income in the same quarter last year. Interest income earned on asset-backed securities declined $3.9 million due to lower average balances of $1.0 billion, or 40.3%, partly offset by a 46 basis point increase in the average rate earned. Interest income earned on state and municipal obligations declined $2.5 million mainly due to a $534.9 million, or 38.4%, decrease in average balances. Interest earned on other securities decreased $5.3 million, mainly due to a $2.3 million dividend from a private equity investment received in the third quarter of 2023, coupled with a decline of $290.3 million, or 56.4%, in average balances of debt securities. These decreases to interest income were partly offset by growth in interest income on U.S. government and federal agency obligations of $11.7 million, driven by a 137 basis point increase in the average rate earned and higher average balances of $902.7 million, or 91.5%. Interest income related to the Company's U.S. Treasury inflation-protected securities, which is tied to the non-seasonally adjusted Consumer Price Index (CPI-U), decreased $1.8 million from the same quarter last year. Additionally, the average rate earned on investment securities during the three months ended September 30, 2024 increased 19 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 $10.0 billion in the third quarter of 2024, compared to $11.9 billion in the third quarter of 2023.

Interest income on securities purchased under agreements to resell increased $475 thousand over the same quarter last year, due to an increase of 145 basis points in the average rate earned, partly offset by a decline of $237.5 million, or 33.3%, in the average balance. Interest income on deposits at the Federal Reserve increased $3.3 million mainly due to an increase of $227.4 million, or 9.7%, in average deposit balances.

The average fully taxable-equivalent yield on total interest earning assets was 4.96% in the third quarter of 2024, up from 4.51% in the third quarter of 2023.

Total interest expense decreased $2.9 million compared to the third quarter of 2023 due to a decrease of $10.6 million in interest expense on borrowings, partly offset by a $7.6 million increase in interest expense on interest bearing deposits. Interest expense on other borrowings decreased $9.2 million due to a decrease of $684.8 million in average Federal Home Loan Bank (FHLB) borrowings. In addition, interest expense on federal funds purchased decreased $4.0 million mainly due to a $302.2 million decrease in the average balance, while interest expense on customer repurchase agreements increased $2.6 million mainly due to a 36 basis point increase in the average rate paid. The increase in deposit interest expense resulted mainly from an increase of $14.4 million in interest expense on interest checking and money market deposit accounts due to a 41 basis point increase in the average rate paid and an increase of $194.2 million, or 1.5%, in average balances. This increase was partly offset by a decrease in interest expense on certificates of deposit of $6.8 million mainly due to a $622.3 million, or 19.8%, decrease in average balances. The overall rate paid on total deposits increased 24 basis over the same quarter last year. The overall average rate incurred on all interest bearing liabilities was 2.22% and 2.12% in the third quarters of 2024 and 2023, respectively.

Net interest income (FTE) for the first nine months of 2024 was $780.5 million compared to $756.1 million for the same period in 2023. For the first nine months of 2024, the net interest margin was 3.46% compared to 3.16% for the same period in 2023.

Total interest income (FTE) for the first nine months of 2024 increased $81.1 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 $81.9 million, or 11.3%, due to a 50 basis point increase in the average rate earned and a $410.7 million, or 2.5%, 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 mostly due to higher average rates earned. Interest income on investment securities (FTE) decreased $16.0 million due to a $2.2 billion decrease in average balances, partly offset by a 28 basis point increase in the average rate earned. Interest earned on mortgage-backed and asset-backed securities decreased $11.8 million and $11.1 million, respectively, due to lower average balances, partly offset by increases in the average rate earned. Interest earned on state and municipal obligations decreased $8.5 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 $17.2 million, due to increases in both the average balance and the average rate earned. Interest income on securities purchased under agreements to resell decreased $3.5 million due to lower average balances, partly offset by higher average rates earned. Interest income on deposits at the Federal Reserve increased $19.8 million due to higher average balances and average rates earned.

Total interest expense for the first nine months of 2024 increased $56.7 million compared to the same period last year. Interest expense on deposits increased $92.9 million, due to a 72 basis point increase in the average rate paid and a $138.3 million increase in average balances. Interest expense on borrowings decreased $36.2 million, mainly due lower FHLB borrowings of $950.9 million. 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 1.74% in the same period last year.

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

Non-Interest Income

(Dollars in thousands)

* Total revenue includes net interest income and non-interest income.

The table below is a summary of net bank card transaction fees for the nine month periods ended September 30, 2024 and 2023.

(Dollars in thousands)

For the third quarter of 2024, total non-interest income amounted to $159.0 million compared to $142.9 million in the same quarter last year, which was an increase of $16.1 million, or 11.2%. The increase was mainly due to higher trust fees, capital market fees, deposit account fees and gains on the sales of real estate. Trust fees increased $5.5 million, or 11.1%, mainly due to growth of $4.5 million in private client trust fees. Bank card transaction fees for the current quarter grew $671 thousand, or 1.4%, over the same period last year. Net credit card fees increased $527 thousand and debit card fees increased $288 thousand mainly due to higher interchange fees and lower rewards expense. Net corporate card fees grew $234 thousand mainly due to lower rewards expense, while net merchant fees decreased $378 thousand mainly due to higher network expense. Compared to the third quarter of last year, deposit account fees increased $2.3 million, or 9.9%, mainly due to higher corporate cash management fees of $2.1 million. Consumer brokerage fees increased $799 thousand, mainly due to higher annuity fees, while capital market fees increased $2.5 million, or 70.1%, mainly due to higher trading securities income. Other non-interest income increased $3.9 million, or 28.9%, mainly due to an increase of $3.4 million in gains on the sales of real estate and an increase of $1.8 million in fair value adjustments was recorded on the Company's deferred compensation plan, which is held in a trust and recorded as both an asset and liability, affecting both other income and other expense. These increases were partly offset by lower tax credit sales income of $1.4 million.

Non-interest income for the first nine months of 2024 was $460.1 million compared to $428.2 million in the first nine months of 2023, which was an increase of $32.0 million, or 7.5%. The increase was mainly due to higher trust fees, deposit account fees and capital market fees. Trust fees increased $16.3 million, or 11.5%, mainly due to higher private client and institutional trust fees. Bank card transaction fees for the current year declined $1.3 million, or .9%, from the same period last year, mainly due to a decrease of $2.6 million in net corporate card fees, partly offset by an increase in net credit card fees of $846 thousand. Deposit account fees increased $7.4 million, or 10.9%, mainly due to higher corporate cash management fees. Capital market fees increased $4.8 million, or 49.0%, mainly due to higher trading securities and underwriting income, while loan fees and sales increased $1.7 million mainly due to higher loan commitment fees and mortgage banking revenue. Other non-interest income increased $3.1 million, or 7.1%, mainly due to higher gains on the sales of assets of $3.3 million and an increase of $1.9 million in cash sweep commissions. These increases were partly offset by declines in letter of credit fees of $2.3 million and swap fees of $1.6 million.

Investment Securities Gains (Losses), Net

(In thousands)

Net gains on investment securities, which were recognized in earnings during the three months ended September 30, 2024 and 2023, are shown in the table above. Net securities gains of $3.9 million were reported in the third quarter of 2024, compared to net gains of $4.3 million in the same period last year. The net gains in the third quarter of 2024 were mainly comprised of net gains in fair value of $7.4 million recorded on private equity investments and net gains of $2.0 million on the sales of private equity investments. These gains were partly offset by net losses of $5.4 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 $5.6 million of net gains in fair value on the Company’s private equity investments, partially offset by a loss of $1.2 million on the sale of private equity investments.

Net gains on investment securities of $6.8 million were recognized in earnings for the nine months ended September 30, 2024, compared to net gains of $7.4 million for the same period in 2023. Net gains in the first nine months of 2024 were mainly comprised of net gains of $178.1 million on equity investments and net gains in fair value of $20.2 million recorded on private equity investments, largely offset by net losses of $192.9 million on sales of available for sale securities. Net gains in the first nine months of 2023 were mainly comprised of net gains in fair value of $16.9 million on private equity investments, due to fair value adjustments, partially offset by 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 $3.4 million during the first nine months of 2024 and expense of $3.3 million during the first nine months of 2023.

The Company's significant gains in equity securities for the three and nine months ended September 30, 2024 primarily relate to gains recorded on its shares of Visa, as described in Note 3, Investment Securities. Likewise, the $192.9 million losses realized on the Company's available for sale debt securities portfolio mainly 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.

Non-Interest Expense

(Dollars in thousands)

Non-interest expense for the third quarter of 2024 amounted to $237.6 million, an increase of $9.6 million, or 4.2%, compared to expense of $228.0 million in the third quarter of last year. The increase in expense over the same period last year was mainly due to higher salaries and benefits expense, data processing and software expense and marketing expense, partly offset by lower deposit insurance expense. Salaries and employee benefits expense increased $6.3 million, or 4.3%, mainly due to higher full-time salaries expense of $3.5 million and incentive compensation expense of $2.2 million. Full-time equivalent employees totaled 4,711 at September 30, 2024, compared to 4,714 at September 30, 2023. Data processing and software expense increased $1.5 million, or 4.7%, mainly due to increased costs for service providers, and marketing expense increased $1.1 million, or 18.0%. Deposit insurance expense decreased $1.1 million which was partly the result of a $525 thousand accrual adjustment in the current quarter to the FDIC's special assessment. Other non-interest expense increased $1.2 million, or 14.6%, mainly due to an increase of $1.8 million in fair value adjustments recorded on the Company's deferred compensation plan.

Non-interest expense amounted to $715.5 million for the first nine months of 2024, an increase of $35.8 million, or 5.3%, over the first nine months of 2023. Salaries and benefits expense increased $17.4 million, or 4.0%, mainly due to higher full-time salaries expense, incentive compensation and payroll taxes. Data processing and software expense increased $7.3 million, or 8.3%, due to increased costs for service providers and higher bank card processing fees. Equipment expense increased $976 thousand, or 6.8%, mainly due to higher depreciation expense, while marketing expense decreased $1.3 million, or 7.4%. Other non-interest expense increased $11.9 million, or 40.5%, mainly due to litigation settlement expense of $10.0 million, net of insurance, and a $5.0 million donation to a related charitable foundation, both recorded in 2024, partly offset by deconversion expense of $2.1 million recorded in 2023.

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

(In thousands)

* as a percentage of average loans (excluding loans held for sale)

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 credit losses to the related loan class at period end.

(Dollars in thousands)

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 third quarter of 2024 amounted to $9.6 million, compared to $9.8 million in the prior quarter and $9.8 million in the third quarter of last year. Compared to the same period last year, total net loan charge-offs in the third quarter of 2024 decreased $205 thousand and decreased $178 thousand from the previous quarter. The decrease over the prior year was mainly driven by a $2.5 million decrease in net charge-offs on business loans, partly offset by higher net charge-offs of $1.6 million and $962 thousand on consumer credit card and consumer loans, respectively. The decrease from the previous quarter was driven by decreases in net charge-offs on consumer credit card and business loans, partly offset by an increase in net charge-offs on consumer loans.

For the three months ended September 30, 2024, annualized net charge-offs on average consumer credit card loans were 4.46%, compared to 4.91% in the previous quarter and 3.32% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .52%, compared to .34% in the prior quarter and .34% in the same period last year. In the third quarter of 2024, total annualized net loan charge-offs were .22%, compared to .23% in the previous quarter and .23% in the same period last year.

The provision for credit losses on loans was $11.9 million, which was a $1.5 million decrease over the $13.3 million provision recorded in the same period last year and a $4.0 million increase over the $7.8 million provision recorded at June 30, 2024. The decrease in the provision for credit losses on loans during the third quarter of 2024 over the same period last year was due to growth in the allowance for credit losses on loans in the third quarter of 2023.

For the nine months ended September 30, 2024, net loan charge-offs amounted to $28.2 million, which was a $5.2 million increase over the first nine months of 2023. The increase in net charge-offs on loans during the first nine months of 2024 was primarily driven by an increase in net charge-offs on consumer credit card and consumer loans, partly offset by lower net charge-offs on business loans. For the nine months ended September 30, 2024, annualized net loan charge-offs on consumer credit card and consumer loans were 4.65% and .41%, respectively, compared to 3.28% and .28%, respectively, for the same period last year. The annualized net charge-offs on loans for the nine months ended September 30, 2024 and 2023, respectively, were .22% and .18%.

For the nine months ended September 30, 2024, the provision for credit losses on loans was $26.7 million, which was an $8.5 million decrease from the $35.2 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 nine months 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 loans in the first nine months 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 nine months of 2024 compared to the same period in the prior year was partly offset by higher net charge-offs recorded in the nine months ended September 30, 2024 compared to the first nine months of 2023.

For the nine months ended September 30, 2024, the allowance for credit losses on loans decreased by $1.6 million, compared to the allowance for credit losses on loans at December 31, 2023. During the nine months ended September 30, 2024, the allowance for credit losses on commercial loans decreased by $1.2 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, decreased $402 thousand. The decrease in the allowance for credit losses on loans during the first nine months of 2024 was primarily the result of a slightly more optimistic economic forecast at September 30, 2024 and a decrease in outstanding loan balances, partially offset by an increase in the allowance related to loans risk-rated special mention, substandard, or non-accrual. The allowance for credit losses on loans was $160.8 million at September 30, 2024 and was .94%, .94% and .95% of total loans at September 30, 2024, December 31, 2023 and September 30, 2023, respectively.

In the current quarter, the provision for credit losses on unfunded lending commitments was a benefit of $2.7 million, compared to a benefit of $1.7 million for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, the provision for credit losses on unfunded commitments was a benefit of $7.3 million compared to a benefit of $5.6 million in the first nine months of 2023. At September 30, 2024, the liability for unfunded lending commitments was $18.0 million, compared to $25.2 million at December 31, 2023 and $27.5 million at September 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 September 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)

Non-accrual loans totaled $18.4 million at September 30, 2024, an increase of $11.1 million from the balance at December 31, 2023. The increase occurred mainly in business real estate non-accrual loans, which increased $14.9 million. The increase was partly offset by a $3.3 million decrease in business non-accrual loans. At September 30, 2024, non-accrual loans were comprised of business real estate (81.1%), revolving home equity (10.7%), personal real estate (6.2%), and business (1.9%) loans. Foreclosed real estate totaled $1.0 million at September 30, 2024, an increase of $780 thousand compared to December 31, 2023. Total loans past due 90 days or more and still accruing interest totaled $22.0 million as of September 30, 2024, an increase of $122 thousand from December 31, 2023. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements.

In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $319.4 million at September 30, 2024 compared with $216.4 million at December 31, 2023, resulting in an increase of $103.0 million, or 47.6%.

(In thousands)

When borrowers are experiencing financial difficulty, the Company may agree to modify the contractual terms of a loan to a borrower in order to assist the borrower in repaying principal and interest owed to the Company. At September 30, 2024, the Company held $184.4 million of loans that had been modified during the nine months ended September 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 September 30, 2024. The largest component of construction and land loans was commercial construction, which decreased $53.8 million during the nine months ended September 30, 2024. At September 30, 2024, multi-family residential construction loans totaled approximately $459.1 million, or 39.3%, of the commercial construction loan portfolio, compared to $414.6 million, or 33.9%, at December 31, 2023.

(Dollars in thousands)

62

Real Estate – Business Loans

Total business real estate loans were $3.6 billion at September 30, 2024 and comprised 21.0% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At September 30, 2024, 33.4% 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)

Information about the credit quality of the Company's business real estate loan portfolio as of September 30, 2024 and December 31, 2023 is provided in the table below.

(Dollars in thousands)

Revolving Home Equity Loans

The Company had $342.4 million in revolving home equity loans at September 30, 2024 that were collateralized by residential real estate. Most of these loans (92.0%) are written with terms requiring interest-only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of September 30, 2024, the outstanding principal of loans with an original LTV higher than 80% was $30.7 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 $4.7 million at September 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 September 30, 2024 and December 31, 2023. The weighted average FICO score for the total portfolio balance at September 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 11% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 82% 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 37.9% of the consumer loan portfolio at September 30, 2024, and outstanding balances for auto loans were $799.7 million and $820.3 million at September 30, 2024 and December 31, 2023, respectively. The balances over 30 days past due amounted to $11.1 million at September 30, 2024 and $9.5 million at December 31, 2023, respectively, and comprised 1.4% of the outstanding balances of these loans at September 30, 2024 and 1.2% at December 31, 2023. For the nine months ended September 30, 2024, $260.6 million of new auto loans were originated, compared to $290.3 million during the first nine months of 2023. At September 30, 2024, the automobile loan portfolio had a weighted average FICO score of 754, and net charge-offs on auto loans were .6% 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 10.8% of the consumer loan portfolio at September 30, 2024. Losses on these loans have historically been low, and the Company saw net recoveries of $78 thousand for the first nine months of 2024. Private banking loans comprised 34.6% of the consumer loan portfolio at September 30, 2024. The Company's private banking loans are generally well-collateralized, and at September 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 $3.2 million in the first nine months of 2024 and were .4% of the average balances of these loans at September 30, 2024.

Consumer Credit Card Loans

The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at September 30, 2024 of $574.7 million in consumer credit card loans outstanding, approximately $116.0 million, or 20.2%, carried a low promotional rate. Within the next six months, $48.2 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 $262.2 million, or 1.5% of total loans at September 30, 2024, a decrease of $9.8 million from December 31, 2023, as shown in the table below.

(In thousands)

Shared National Credits

The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled $1.6 billion and $1.5 billion at September 30, 2024 and December 31, 2023, respectively. Additional unfunded commitments at September 30, 2024 totaled $2.4 billion.

Income Taxes

Income tax expense was $38.2 million in the third quarter of 2024, compared to $38.6 million in the second quarter of 2024 and $33.4 million in the third quarter of 2023. The Company's effective tax rate, including the effect of non-controlling interest, was 21.7% in the third quarter of 2024, unchanged from both the previous quarter, and the third quarter of 2023.

Financial Condition

Balance Sheet

Total assets of the Company were $31.5 billion at September 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 $30.5 billion at September 30, 2024 and $31.1 billion at December 31, 2023, and consisted of 56% in loans and 34% in investment securities at September 30, 2024.

At September 30, 2024, total loans decreased $115.5 million or .7%, 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 $132.3 million, $65.2 million, and $15.2 million, respectively. These decreases were partly offset by an increase of $29.3 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 $17.4 million, while consumer loans, which includes automobile, private banking, health services financing, fixed rate home equity and other consumer loans, increased $30.6 million. Growth in consumer loans was mainly due to increases in private banking and health services financing loans, partially offset by a decline in auto loan balances.

Total available for sale debt securities, excluding fair value adjustments, decreased $950.7 million at September 30, 2024 compared to December 31, 2023. Purchases of available for sale debt securities during this period totaled $2.1 billion, offset by available for sale debt security sales, maturities and pay downs of $3.0 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 $326.2 million, $716.1 million, and $497.1 million, respectively, at September 30, 2024 compared to December 31, 2023. These decreases were partly offset by an increase of $1.5 billion in balances of U.S. government and federal agency obligations. At September 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 September 30, 2024 amounted to $25.2 billion, a decrease of $126.1 million compared to December 31, 2023. The decline in deposits largely resulted from a decrease in demand deposits, mainly in business demand deposits (decrease of $550.2 million). Additionally, certificate of deposit balances decreased $250.6 million while interest checking balances increased $723.2 million over balances at December 31, 2023. The Company’s borrowings totaled $2.2 billion at September 30, 2024, a decrease of $717.8 million from balances at December 31, 2023, mainly due to a decline in securities sold under agreements to repurchase.

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)

65

Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $2.6 billion at September 30, 2024 and increased $403.0 million from December 31, 2023. Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $10 thousand as of September 30, 2024. The fair value of the available for sale debt portfolio was $9.2 billion at September 30, 2024 and included an unrealized net loss of $786.4 million. The total net unrealized loss included net losses of $716.8 million on mortgage-backed and asset-backed securities and $67.2 million on state and municipal obligations.

Resale agreements totaled $475.0 million at September 30, 2024, with $125.0 million to mature in the next 12 months and the remaining amount to mature through 2029. 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 $502.0 million in fair value at September 30, 2024.

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 September 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)

* Includes securities pledged for collateral swaps outstanding at September 30, 2023.

The average loans to deposits ratio is a measure of a bank's liquidity, and the Company’s average loans to deposits ratio was 70.2% for the nine months ended September 30, 2024. Core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts totaled $22.6 billion and represented 89.6% of the Company's total deposits at September 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 increased $124.5 million at September 30, 2024 compared to December 31, 2023, primarily due to an increase in commercial deposits of $675.9 million, partly offset by decreases in consumer and wealth deposits of $286.1 million and $197.4 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 $6.4 billion through advances from the FHLB and the Federal Reserve.

Certificates of deposit of $100,000 or greater totaled $1.5 billion at September 30, 2024. These deposits are normally considered more volatile and higher costing, and comprised 6.0% of total deposits at September 30, 2024.

(In thousands)

66

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. During the third quarter of 2024, the Company issued $100.0 million of brokered certificates of deposit that mature in three months. The Company may occasionally issue brokered certificates of deposit to test the reliability of this potential funding source. 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)

Federal funds purchased, which totaled $113.6 million at September 30, 2024, are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. At September 30, 2024, the Company had approved lines of credit totaling $3.7 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 September 30, 2024 were comprised of non-insured customer funds totaling $2.1 billion, and securities pledged as collateral for these retail agreements totaled $2.1 billion at September 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 September 30, 2024.

The Company pledges certain assets, including loans and investment securities, to both the 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 September 30, 2024.

(In thousands)

67

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:

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 increase in cash, cash equivalents and restricted cash of $462.8 million during the first nine 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 $714.5 million and have historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, provided cash of $968.7 million. Activity in the investment securities portfolio provided cash of $930.8 million 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 $86.1 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 $1.2 billion, largely resulting from a net decrease of $726.6 million in federal funds purchased and securities sold under agreements to repurchase along with net decreases in deposits of $268.5 million during the first nine months of 2024. Additionally, purchases of treasury stock and cash dividends (including distributions to non-controlling interest) used cash of $123.6 million and $110.5 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 September 30, 2024 and December 31, 2023, as shown in the following table.

(Dollars in thousands)

*Under Prompt Corrective Action requirements

The Company is subject to a 2.5% capital conservation buffer, which is an amount above the minimum ratios under capital adequacy guidelines, and is intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, share repurchases, and executive compensation.

In the first quarter of 2020, the interim final rule of the Federal Reserve Bank and other U.S. banking agencies became effective, providing banks that adopted CECL (ASU 2016-13) during the 2020 calendar year the option to delay recognizing the estimated impact on regulatory capital until after a two year deferral period, followed by a three year transition period. In connection with the adoption of CECL on January 1, 2020, the Company elected to utilize this option. As a result, the two year deferral period for the Company extended through December 31, 2021. Beginning on January 1, 2022, the Company was required to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025.

The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and periodically purchases stock in the open market. 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 nine months ended September 30, 2024, the Company purchased 2,191,821 shares at an average price of $56.37 in open market purchases and through stock-based compensation transactions. At September 30, 2024, 3,615,176 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 third 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 September 30, 2024 totaled $15.0 billion (including $5.8 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 $614.6 million and $3.5 million, respectively, at September 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 September 30, 2024, the liability for unfunded lending commitments totaled $18.0 million. See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements.

The Company regularly purchases various state tax credits arising from third party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first nine months of 2024, purchases and sales of tax credits amounted to $89.8 million and $76.1 million, respectively. Fees from sales of tax credits were $3.5 million for the nine months ended September 30, 2024, compared to $3.0 million in the same period last year. At September 30, 2024, the Company expected to fund outstanding purchase commitments of $72.5 million during the remainder of 2024 and had purchase commitments of $495.2 million that it expects to fund from 2025 through 2030.

The Company continued to maintain a strong liquidity position throughout the first nine months of 2024. Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations.

Segment Results

The table below is a summary of segment pre-tax income results for the first nine months of 2024 and 2023.

(Dollars in thousands)

Consumer

For the nine months ended September 30, 2024, income before income taxes for the Consumer segment decreased $48.0 million, or 20.6%, compared to the first nine months of 2023. The decrease in income before income taxes was mainly due to a decline in net interest income of $36.6 million, or 8.7%, and increases in non-interest expense of $5.5 million, or 2.3%, and the provision for credit losses of $7.7 million. Net interest income declined mainly due to a $60.8 million increase in deposit interest expense. This decrease was partly offset by higher loan interest income of $18.1 million and a $6.3 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios. Non-interest income increased $1.8 million, or 2.4%, mainly due to higher net bank card fees (mainly credit and debit card fees), deposit account fees and mortgage banking revenue. Non-interest expense increased over the same period in the previous year mainly due to higher miscellaneous losses and allocated support costs for information technology and retail operations, partly offset by lower allocated management support costs. The increase in the provision for credit losses over the first nine months of 2023 was mainly due to higher consumer credit card and auto loan net charge-offs, partly offset by lower other vehicle and equipment loan net charge-offs.

Commercial

For the nine months ended September 30, 2024, income before income taxes for the Commercial segment decreased $4.9 million, or 1.7%, compared to the same period in the previous year. This decrease was mainly due to lower net interest income and higher non-interest expense, partly offset by higher non-interest income and a decrease in the provision for credit losses. Net interest income decreased $5.9 million, or 1.5%, mainly due to lower net allocated funding credits of $27.4 million, coupled with higher interest expense on deposits and customer repurchase agreements of $28.3 million and $9.1 million, respectively. These decreases to income were partly offset by higher loan interest income of $58.4 million. Non-interest income increased $9.2 million, or 5.0%, over the previous year mainly due to growth in deposit account fees (mainly corporate cash management 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 $10.4 million, or 3.6%, mainly due to higher salaries and benefits expense and allocated servicing and support costs for commercial banking sales and administration, management and bank operations. These increases were partly offset by lower allocated commercial sales and payment support costs. The provision for credit losses declined $2.3 million from the same period last year, mainly due to lower commercial and industrial loan net charge-offs.

Wealth

Wealth segment pre-tax profitability for the nine months ended September 30, 2024 increased $7.3 million, or 6.0%, over the same period in the previous year. Net interest income decreased $10.4 million, or 13.6%, mainly due to a $19.2 million increase in deposit interest expense. This decrease was partly offset by an $8.0 million increase in loan interest income and an $852 thousand increase in net allocated funding credits. Non-interest income increased $17.0 million, or 10.4%, over the prior year largely due to higher private client and institutional trust fees and cash sweep commissions. Non-interest expense decreased $507 thousand, or .4%, mainly due to deconversion expense recorded in the prior year, partly offset by higher salaries and benefits expense. The provision for credit losses decreased $164 thousand from the same period last year due to lower revolving home equity 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 $75.2 million higher than in the same period last year. Unallocated securities gains were $6.8 million in the first nine months of 2024 compared to gains of $7.4 million in 2023. Also, the unallocated provision for credit losses decreased $15.4 million, primarily driven by decreases in the provision for credit losses on loans and the liability for unfunded lending commitments, which are both not allocated to the segments for management reporting purposes. Net charge-offs are allocated to the segments when incurred for management reporting purposes. The provision for credit losses on loans in the first nine months of 2024 was $26.7 million, or $1.6 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 $35.2 million, or $12.1 million higher than net charge-offs, due to an increase in the allowance for credit losses on loans. For the nine months ended September 30, 2024, the Company's provision on unfunded lending commitments was a benefit of $7.3 million. Additionally, net interest income increased $76.9 million and non-interest income increased $3.9 million. The increase in net interest income was driven by decreases in interest expense on borrowings and deposits of $44.2 million and $15.4 million, respectively, and a $20.2 million decrease in net allocated funding credits. These increases to pre-tax profitability were partly offset by higher non-interest expense of $20.4 million.

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 states 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 both June and September 2024 and has an accrual of $14.3 million at September 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.

Impact of Recently Issued Accounting Standards

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.

AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Three Months Ended September 30, 2024 and 2023

(Dollars in thousands)

(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.

AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Nine Months Ended September 30, 2024 and 2023

(Dollars in thousands)

(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.

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest income sensitivity to movement in interest rates. The Company performs monthly simulations that model interest rate movements and risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2023 Annual Report on Form 10-K.

The table below shows the effects of gradual shifts in interest rates over a twelve month period on the Company’s net interest income versus the Company's net interest income in a flat rate scenario. The simulation presents three rising rate scenarios and three falling rate scenarios, and in these scenarios, rates are assumed to change evenly over 12 months, while the balance sheet remains flat.

The Company utilizes this simulation both for monitoring interest rate risk and for liquidity planning purposes. While the future effects of rising and falling rates on deposit balances cannot be known, the Company maintains a practice of running multiple rate scenarios, when relevant, to better understand interest rate risk and its effect on the Company’s performance.

(Dollars in millions)

Under the simulation, in the three rising rate scenarios and three falling rate scenarios, interest rate risk is more asset sensitive when compared to the scenarios in the previous quarter. This change was primarily due to actions taken by the Federal Reserve to reduce short-term interest rates by 50 basis points. As short-term rates fall, deposit rates become less sensitive which resulted in larger declines in interest income in the falling rate scenarios and growth in interest income in the rising rate scenarios.

The comparison above provides insight into potential effects of changes in rates on net interest income. The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of interest rate risk.

An evaluation was performed under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2024. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.