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COMMERCE BANCSHARES INC /MO/ - Quarter Report: 2023 September (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
________________________________________________________

For the quarterly period ended September 30, 2023

OR
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
____________________________________________________________

For the transition period from           to   
       
Commission File No. 001-36502
COMMERCE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Missouri43-0889454
(State of Incorporation)(IRS Employer Identification No.)
1000 Walnut
Kansas City,MO64106
(Address of principal executive offices)(Zip Code)
        
(816) 234-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of classTrading symbol(s)Name of exchange on which registered
$5 Par Value Common StockCBSHNASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No 
As of November 2, 2023, the registrant had outstanding 124,288,417 shares of its $5 par value common stock, registrant’s only class of common stock.




Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q
Page
INDEX
Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022

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PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS

September 30,
2023
December 31, 2022
(Unaudited)
(In thousands)
ASSETS
Loans$17,129,326 $16,303,131 
  Allowance for credit losses on loans(162,244)(150,136)
Net loans16,967,082 16,152,995 
Loans held for sale (including $366,000 and $— of residential mortgage loans carried at fair value at September 30, 2023 and December 31, 2022, respectively)
5,120 4,964 
Investment securities: 
Available for sale debt, at fair value (amortized cost of $11,457,305,000 and $13,738,206,000 at
   September 30, 2023 and December 31, 2022, respectively, and allowance for credit losses of $—
   at both September 30, 2023 and December 31, 2022)
9,860,828 12,238,316 
Trading debt35,564 43,523 
Equity12,212 12,304 
Other230,792 225,034 
Total investment securities10,139,396 12,519,177 
Federal funds sold2,735 49,505 
Securities purchased under agreements to resell450,000 825,000 
Interest earning deposits with banks1,847,641 389,140 
Cash and due from banks358,010 452,496 
Premises and equipment – net460,830 418,909 
Goodwill146,539 138,921 
Other intangible assets – net14,432 15,234 
Other assets984,907 909,590 
Total assets$31,376,692 $31,875,931 
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits: 
   Non-interest bearing$7,961,402 $10,066,356 
   Savings, interest checking and money market14,154,275 15,126,981 
   Certificates of deposit of less than $100,0001,210,169 387,336 
   Certificates of deposit of $100,000 and over1,764,611 606,767 
Total deposits25,090,457 26,187,440 
Federal funds purchased and securities sold under agreements to repurchase2,745,181 2,841,734 
Other borrowings503,589 9,672 
Other liabilities438,199 355,508 
Total liabilities28,777,426 29,394,354 
Commerce Bancshares, Inc. stockholders’ equity: 
   Common stock, $5 par value
 
Authorized 190,000,000 at September 30, 2023 and 140,000,000 at December 31, 2022; issued 125,863,879 shares at September 30, 2023 and December 31, 2022
629,319 629,319 
   Capital surplus2,924,211 2,932,959 
   Retained earnings298,297 31,620 
   Treasury stock of 1,233,706 shares at September 30, 2023
     and 605,142 shares at December 31, 2022, at cost
(76,888)(41,743)
   Accumulated other comprehensive income (loss)(1,193,534)(1,086,864)
Total Commerce Bancshares, Inc. stockholders' equity2,581,405 2,465,291 
Non-controlling interest17,861 16,286 
Total equity2,599,266 2,481,577 
Total liabilities and equity$31,376,692 $31,875,931 
See accompanying notes to consolidated financial statements.
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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands, except per share data)2023202220232022
(Unaudited)
INTEREST INCOME
Interest and fees on loans$256,242 $171,272 $721,385 $445,873 
Interest and fees on loans held for sale152 159 448 470 
Interest on investment securities69,245 79,586 214,091 241,326 
Interest on federal funds sold45 94 639 114 
Interest on securities purchased under agreements to resell3,740 5,984 11,791 15,669 
Interest on deposits with banks31,738 5,571 70,328 9,150 
Total interest income361,162 262,666 1,018,682 712,602 
INTEREST EXPENSE
Interest on deposits:
   Savings, interest checking and money market43,795 7,545 93,992 11,583 
   Certificates of deposit of less than $100,00015,499 411 27,049 755 
   Certificates of deposit of $100,000 and over18,942 871 39,985 1,768 
Interest on federal funds purchased6,833 315 18,816 546 
Interest on securities sold under agreements to repurchase18,431 7,576 52,940 10,960 
Interest on other borrowings9,115 (425)36,192 (554)
Total interest expense112,615 16,293 268,974 25,058 
Net interest income248,547 246,373 749,708 687,544 
Provision for credit losses11,645 15,290 29,572 12,594 
Net interest income after credit losses236,902 231,083 720,136 674,950 
NON-INTEREST INCOME
Bank card transaction fees46,899 45,638 143,278 131,556 
Trust fees49,207 45,406 141,800 140,009 
Deposit account charges and other fees23,090 24,521 67,475 72,392 
Consumer brokerage services3,820 5,085 13,582 14,599 
Capital market fees2,410 3,393 8,311 10,845 
Loan fees and sales2,966 3,094 8,290 10,575 
Other14,557 11,377 45,430 29,734 
Total non-interest income142,949 138,514 428,166 409,710 
INVESTMENT SECURITIES GAINS (LOSSES), NET4,298 3,410 7,384 11,602 
NON-INTEREST EXPENSE
Salaries and employee benefits146,805 137,393 436,607 415,589 
Data processing and software30,744 28,050 87,617 82,701 
Net occupancy13,948 12,544 39,702 37,343 
Marketing6,167 6,228 18,006 18,408 
Equipment4,697 5,036 14,411 14,338 
Supplies and communication4,963 4,581 14,178 13,655 
Other20,686 19,052 69,207 50,003 
Total non-interest expense228,010 212,884 679,728 632,037 
Income before income taxes156,139 160,123 475,958 464,225 
Less income taxes33,439 33,936 102,242 97,859 
Net income 122,700 126,187 373,716 366,366 
Less non-controlling interest expense (income)2,104 3,364 5,879 9,595 
Net income attributable to Commerce Bancshares, Inc.$120,596 $122,823 $367,837 $356,771 
Net income per common share — basic$.96 $.97 $2.94 $2.81 
Net income per common share — diluted$.96 $.97 $2.93 $2.81 
See accompanying notes to consolidated financial statements.
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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands)2023202220232022
(Unaudited)
Net income$122,700 $126,187 $373,716 $366,366 
Other comprehensive income (loss):
Net unrealized gains (losses) on available for sale debt securities(133,024)(345,565)(72,440)(1,181,031)
Change in pension loss199 302 738 947 
Unrealized gains (losses) on cash flow hedge derivatives(24,414)(7,187)(34,968)(16,340)
Other comprehensive income (loss)(157,239)(352,450)(106,670)(1,196,424)
Comprehensive income (loss)(34,539)(226,263)267,046 (830,058)
Less non-controlling interest (income) expense2,104 3,364 5,879 9,595 
Comprehensive income (loss) attributable to Commerce Bancshares, Inc.$(36,643)$(229,627)$261,167 $(839,653)
See accompanying notes to consolidated financial statements.













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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Three Months Ended September 30, 2023 and 2022
Commerce Bancshares, Inc. Shareholders
 
 

(In thousands, except per share data)
Common StockCapital SurplusRetained EarningsTreasury StockAccumulated Other Comprehensive Income (Loss)Non-Controlling InterestTotal
(Unaudited)
Balance June 30, 2023
$629,319 $2,921,365 $211,358 $(58,389)$(1,036,295)$17,870 $2,685,228 
Net income120,596 2,104 122,700 
Other comprehensive income (loss)(157,239)(157,239)
Distributions to non-controlling interest(2,105)(2,105)
Purchases of treasury stock(19,978)(19,978)
Sale of non-controlling interest of subsidiary8 (8) 
Issuance under stock purchase and equity
    compensation plans
(1,479)1,479  
Stock-based compensation4,317 4,317 
Cash dividends paid on common stock
     ($0.270 per share)
(33,657)(33,657)
Balance September 30, 2023
$629,319 $2,924,211 $298,297 $(76,888)$(1,193,534)$17,861 $2,599,266 
Balance June 30, 2022
$610,804 $2,682,161 $262,363 $(129,588)$(766,894)$16,467 $2,675,313 
Net Income122,823 3,364 126,187 
Other comprehensive income (loss)(352,450)(352,450)
Distributions to non-controlling interest(318)(318)
Purchases of treasury stock(50,116)(50,116)
Issuance under stock purchase and equity
     compensation plans
(2,762)2,761 (1)
Stock-based compensation4,232 4,232 
Cash dividends paid on common stock
     ($.252 per share)
(31,740)(31,740)
Balance September 30, 2022
$610,804 $2,683,631 $353,446 $(176,943)$(1,119,344)$19,513 $2,371,107 
See accompanying notes to consolidated financial statements.
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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Nine Months Ended September 30, 2023 and 2022
Commerce Bancshares, Inc. Shareholders
 
 

(In thousands, except per share data)
Common StockCapital SurplusRetained EarningsTreasury StockAccumulated Other Comprehensive Income (Loss)Non-Controlling InterestTotal
(Unaudited)
Balance December 31, 2022
$629,319 $2,932,959 $31,620 $(41,743)$(1,086,864)$16,286 $2,481,577 
Net income367,837 5,879 373,716 
Other comprehensive income (loss)(106,670)(106,670)
Distributions to non-controlling interest(4,250)(4,250)
Purchases of treasury stock(56,541)(56,541)
Sale of non-controlling interest of subsidiary54 (54) 
Issuance under stock purchase and equity compensation plans(21,396)21,396  
Stock-based compensation12,594 12,594 
Cash dividends paid on common stock ($.810 per share)
(101,160)(101,160)
Balance September 30, 2023
$629,319 $2,924,211 $298,297 $(76,888)$(1,193,534)$17,861 $2,599,266 
Balance December 31, 2021
$610,804 $2,689,894 $92,493 $(32,973)$77,080 $11,026 $3,448,324 
Net income 356,771 9,595 366,366 
Other comprehensive income (loss)(1,196,424)(1,196,424)
Distributions to non-controlling interest(1,108)(1,108)
Purchases of treasury stock(163,321)(163,321)
Issuance under stock purchase and equity compensation plans(18,904)19,351 447 
Stock-based compensation12,641 12,641 
Cash dividends paid on common stock ($.757 per share)
(95,818)(95,818)
Balance September 30, 2022
$610,804 $2,683,631 $353,446 $(176,943)$(1,119,344)$19,513 $2,371,107 
See accompanying notes to consolidated financial statements.



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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30
(In thousands)20232022
(Unaudited)
OPERATING ACTIVITIES:
Net income$373,716 $366,366 
Adjustments to reconcile net income to net cash provided by operating activities:
  Provision for credit losses29,572 12,594 
  Provision for depreciation and amortization36,661 35,350 
  Amortization of investment security premiums, net13,345 8,565 
  Investment securities (gains) losses, net (A)(7,384)(11,602)
  Net (gains) losses on sales of loans held for sale (705)(2,607)
  Originations of loans held for sale(40,470)(114,765)
  Proceeds from sales of loans held for sale40,775 116,421 
  Net (increase) decrease in trading debt securities, excluding unsettled transactions14,354 14,080 
  Purchase of interest rate floor derivative contracts(54,449)(16,849)
  Stock-based compensation12,594 12,641 
  (Increase) decrease in interest receivable (7,861)(21,959)
  Increase (decrease) in interest payable41,622 1,097 
  Increase (decrease) in income taxes payable (52)168 
  Other changes, net(83,973)70,285 
Net cash provided by (used in) operating activities367,745 469,785 
INVESTING ACTIVITIES:
Cash paid in acquisition, net of cash received(6,365)— 
Distributions received from equity-method investment1,434 400 
Proceeds from sales of investment securities (A)1,141,949 55,690 
Proceeds from maturities/pay downs of investment securities (A)1,315,175 2,079,939 
Purchases of investment securities (A)(190,637)(1,951,694)
Net (increase) decrease in loans(849,375)(736,474)
Securities purchased under agreements to resell (200,000)
Repayments of securities purchased under agreements to resell375,000 550,000 
Purchases of premises and equipment(72,563)(46,636)
Sales of premises and equipment3,751 1,613 
Net cash provided by (used in) investing activities1,718,369 (247,162)
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits(2,995,739)(2,078,327)
Net increase (decrease) in certificates of deposit1,980,677 (454,376)
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase(96,553)(708,377)
FHLB short-term borrowings2,250,000 — 
Repayments of FHLB borrowings(1,750,000)— 
Net increase (decrease) in other borrowings(6,083)(10,729)
Purchases of treasury stock(56,541)(163,321)
Cash dividends paid on common stock(101,160)(95,818)
Other, net 447 
Net cash provided by (used in) financing activities(775,399)(3,510,501)
Increase (decrease) in cash, cash equivalents and restricted cash1,310,715 (3,287,878)
Cash, cash equivalents and restricted cash at beginning of year897,801 4,296,954 
Cash, cash equivalents and restricted cash at September 30
$2,208,516 $1,009,076 
Income tax payments, net$97,018 $92,646 
Interest paid on deposits and borrowings$227,352 $23,961 
Loans transferred to foreclosed real estate$133 $457 
(A) Available for sale debt securities, equity securities, and other securities.
See accompanying notes to consolidated financial statements.

Restricted cash is comprised of cash collateral posted by the Company to secure interest rate swap agreements. This balance is included in other assets in the consolidated balance sheets and totaled $130 thousand at September 30, 2023 and $7.9 million at September 30, 2022.
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Commerce Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023 (Unaudited)
1. Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2022 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and revenues and expenses for the periods. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the nine month period ended September 30, 2023 are not necessarily indicative of results to be attained for the full year or any other interim period.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company's most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto.

The Company adopted ASU 2022-02 Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023, using the prospective transition method. This ASU eliminates the troubled debt restructuring recognition and measurement guidance and requires an entity to present gross write-offs by year of origination. The amendments also enhance disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. With the exception of enhanced disclosures, there was no material impact to the consolidated financial statements from adoption of this ASU. As of the Company's adoption date, all restructurings are evaluated to determine whether they are modifications to a borrower experiencing financial difficulty. Loans that were accounted for under the troubled debt restructuring method as of December 31, 2022 will continue to be accounted for under that method until they are paid off or modified.

The following significant accounting policies have been updated since the Company's 2022 Annual Report on Form 10-K to reflect the adoption of ASU 2022-02.

Troubled Debt Restructurings
Prior to the Company's adoption of ASU 2022-02, a loan was accounted for as a troubled debt restructuring if the Company, for economic or legal reasons related to the borrower's financial difficulties, granted a concession to the borrower that it would not otherwise consider. A troubled debt restructuring typically involves (1) modification of terms such as a reduction of the stated interest rate, loan principal, or accrued interest, (2) a loan renewal at a stated interest rate lower than the current market rate for a new loan with similar risk, or (3) debt that was not reaffirmed in bankruptcy. Business, business real estate, construction and land real estate and personal real estate troubled debt restructurings with impairment charges are placed on non-accrual status. The Company measures the impairment loss of a troubled debt restructuring at the time of modification based on the present value of expected future cash flows. Subsequent to modification, troubled debt restructurings are subject to the Company’s allowance for credit loss model, which is discussed below and in Note 2, Loans and Allowance for Credit Losses. Troubled debt restructurings that are performing under their contractual terms continue to accrue interest, which is recognized in current earnings. Loans that were accounted as troubled debt restructurings at of December 31, 2022 will continue to be accounted for under that method until they are either paid off or modified.

Modifications for Borrowers Experiencing Financial Difficulty
The Company may renegotiate the terms of existing loans for a variety of reasons. When refinancing or restructuring a loan, the Company evaluates whether the borrower is experiencing financial difficulty. In making this determination, the Company considers whether the borrower is currently in default on any of its debt. In addition, the Company evaluates whether it is probable that the borrower would be in payment default on any of its debt in the foreseeable future without the modification and if the borrower (without the current modification) could obtain equivalent financing from another creditor at a market rate for similar debt. Modifications of loans to borrowers in these situations may indicate that the borrower is facing financial difficulty.
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Modifications of loans to borrowers experiencing financial difficulty that are in the form of principal forgiveness, interest rate reductions, other-than-insignificant payment delays, or a term extension (or a combination thereof) require disclosure. The Company's disclosures are included in Note 2, Loans and Allowance for Credit Losses.

2. Loans and Allowance for Credit Losses
Major classifications within the Company’s held for investment loan portfolio at September 30, 2023 and December 31, 2022 are as follows:

(In thousands)
September 30, 2023December 31, 2022
Commercial:
Business$5,908,330 $5,661,725 
Real estate – construction and land1,539,566 1,361,095 
Real estate – business3,647,168 3,406,981 
Personal Banking:
Real estate – personal3,024,639 2,918,078 
Consumer2,125,804 2,059,088 
Revolving home equity305,237 297,207 
Consumer credit card574,829 584,000 
Overdrafts3,753 14,957 
Total loans$17,129,326 $16,303,131 

Accrued interest receivable totaled $72.5 million and $55.5 million at September 30, 2023 and December 31, 2022, respectively, and was included within other assets on the consolidated balance sheets. For the three months ended September 30, 2023, the Company wrote-off accrued interest by reversing interest income of $237 thousand and $1.2 million in the Commercial and Personal Banking portfolios, respectively. Similarly, for the nine months ended September 30, 2023, the Company wrote-off accrued interest of $313 thousand and $3.4 million in the Commercial and Personal Banking portfolios, respectively. For the three months ended September 30, 2022, the Company reversed interest income of $48 thousand and $699 thousand in the Commercial and Personal Banking portfolios, respectively, and in the nine months ended September 30, 2022, reversed $103 thousand and $2.4 million in the Commercial and Personal Banking portfolios.

At September 30, 2023, loans of $3.5 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $3.1 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

Allowance for credit losses
The allowance for credit losses is measured using an average historical loss model which incorporates relevant information about past events (including historical credit loss experience on loans with similar risk characteristics), current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily large loans on non-accrual status, are evaluated on an individual basis.

For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using the Company’s historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and outstanding loan balances during a lookback period. Lookback periods can be different based on the individual pool and represent management’s credit expectations for the pool of loans over the remaining contractual life. In certain loan pools, if the Company’s own historical loss rate is not reflective of the loss expectations, the historical loss rate is augmented by industry and peer data. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given a single path economic forecast of key macroeconomic variables including GDP, disposable income, various interest rates, unemployment rate, consumer price index (CPI) inflation rate, housing price index (HPI), commercial real estate price index (CREPI) and market volatility. The adjustments are based on results from various regression models projecting the impact of the macroeconomic variables to loss rates. The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method. The forecast adjusted loss rate is applied to the amortized cost of loans over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions (except for contractual extensions at the option of the customer), renewals and modifications. Credit cards and certain similar consumer
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lines of credit do not have stated maturities and therefore, for these loan classes, remaining contractual lives are determined by estimating future cash flows expected to be received from customers until payments have been fully allocated to outstanding balances. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.

Key assumptions in the Company’s allowance for credit loss model include the economic forecast, the reasonable and supportable period, forecasted macro-economic variables, prepayment assumptions and qualitative factors applied for portfolio composition changes, underwriting practices, or significant unique events or conditions. The assumptions utilized in estimating the Company’s allowance for credit losses at September 30, 2023 and June 30, 2023 are discussed below.

Key AssumptionSeptember 30, 2023June 30, 2023
Overall economic forecast
Mild recession starting in the fourth quarter of 2023
Risks remain tilted toward another rate hike if progress on inflation and labor markets reverse course
Consumer spending is expected to be short lived, and growth is expected to fall
Mild recession in the second half of 2023
Assume the Federal Reserve will pause increasing interest rates through year end
Mild recession is expected to weaken employment
Reasonable and supportable period and related reversion period
Reasonable and supportable period of one year
Reversion to historical average loss within two quarters using straight-line method
Reasonable and supportable period of one year
Reversion to historical average loss within two quarters using straight-line method
Forecasted macro-economic variables
Unemployment rate ranges from 3.9% to 5.0% during the supportable forecast period
Real GDP growth ranges from (.29)% to 1.5%
BBB corporate yield from 4.8% to 5.8%
Housing Price Index from 291.0 to 296.1
Unemployment rate ranges from 3.9% to 5.3% during the supportable forecast period
Real GDP growth ranges from (.27)% to 1.2%
BBB corporate yield from 4.9% to 5.5%
Housing Price Index from 282.1 to 284.5
Prepayment assumptions
Commercial loans
5% for most loan pools
Personal banking loans
Ranging from 8.0% to 22.8% for most loan pools
Consumer credit cards 67.3%
Commercial loans
5% for most loan pools
Personal banking loans
Ranging from 7.93% to 22.9% for most loan pools
Consumer credit cards 67.6%
Qualitative factors
Added qualitative factors related to:
Changes in the composition of the loan portfolios
Certain stressed industries within the portfolio
Certain portfolios sensitive to unusually high rate of inflation and supply chain issues
Loans downgraded to special mention, substandard, or non-accrual status
Added qualitative factors related to:
Changes in the composition of the loan portfolios
Certain stressed industries within the portfolio
Certain portfolios sensitive to unusually high rate of inflation and supply chain issues
Loans downgraded to special mention, substandard, or non-accrual status

The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans, however, the liability for unfunded lending commitments incorporates an assumption for the portion of unfunded commitments that are expected to be funded.

Sensitivity in the Allowance for Credit Loss model
The allowance for credit losses is an estimate that requires significant judgment including projections of the macro-economic environment. The forecasted macro-economic environment continuously changes which can cause fluctuations in estimated expected credit losses.

The current forecast projects a mild recession starting in the fourth quarter of 2023 as the economy continues to face high inflation, higher interest rates and a weaker job market. The impacts of the market's response to unusual events or trends including high inflation, supply chain stresses, trends in health conditions and changes in the geopolitical environment could significantly modify economic projections used in the estimation of the allowance for credit losses.

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A summary of the activity in the allowance for credit losses on loans and the liability for unfunded lending commitments during the three and nine months ended September 30, 2023 and 2022, respectively, follows:

For the Three Months Ended September 30, 2023
For the Nine Months Ended September 30, 2023
(In thousands)CommercialPersonal Banking

Total
CommercialPersonal Banking

Total
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period$108,024 $50,661 $158,685 $103,293 $46,843 $150,136 
Provision for credit losses on loans5,201 8,142 13,343 10,203 24,952 35,155 
Deductions:
   Loans charged off2,664 9,262 11,926 3,263 26,549 29,812 
   Less recoveries on loans66 2,076 2,142 394 6,371 6,765 
Net loan charge-offs (recoveries)2,598 7,186 9,784 2,869 20,178 23,047 
Balance September 30, 2023$110,627 $51,617 $162,244 $110,627 $51,617 $162,244 
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at beginning of period$27,842 $1,393 $29,235 $31,743 $1,377 $33,120 
Provision for credit losses on unfunded lending commitments(1,724)26 (1,698)(5,625)42 (5,583)
Balance September 30, 2023$26,118 $1,419 $27,537 $26,118 $1,419 $27,537 
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS$136,745 $53,036 $189,781 $136,745 $53,036 $189,781 

For the Three Months Ended September 30, 2022
For the Nine Months Ended September 30, 2022
(In thousands)CommercialPersonal Banking

Total
CommercialPersonal Banking

Total
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period$99,525 $38,514 $138,039 $97,776 $52,268 $150,044 
Provision for credit losses on loans4,014 6,136 10,150 5,851 900 6,751 
Deductions:
   Loans charged off509 6,721 7,230 893 20,539 21,432 
   Less recoveries on loans56 2,362 2,418 352 7,662 8,014 
Net loan charge-offs (recoveries)453 4,359 4,812 541 12,877 13,418 
Balance September 30, 2022$103,086 $40,291 $143,377 $103,086 $40,291 $143,377 
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at beginning of period$23,617 $1,290 $24,907 $23,271 $933 $24,204 
Provision for credit losses on unfunded lending commitments5,182 (42)5,140 5,528 315 5,843 
Balance September 30, 2022$28,799 $1,248 $30,047 $28,799 $1,248 $30,047 
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS$131,885 $41,539 $173,424 $131,885 $41,539 $173,424 
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Delinquent and non-accrual loans
The Company considers loans past due on the day following the contractual repayment date, if the contractual repayment was not received by the Company as of the end of the business day. The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at September 30, 2023 and December 31, 2022.




(In thousands)
Current or Less Than 30 Days Past Due

30 – 89
Days Past Due
90 Days Past Due and Still AccruingNon-accrual



Total
September 30, 2023
Commercial:
Business$5,899,303 $1,726 $699 $6,602 $5,908,330 
Real estate – construction and land1,539,345 221   1,539,566 
Real estate – business3,646,573 519  76 3,647,168 
Personal Banking:
Real estate – personal 3,003,094 13,578 6,436 1,531 3,024,639 
Consumer2,095,230 28,509 2,065  2,125,804 
Revolving home equity300,018 2,539 2,680  305,237 
Consumer credit card561,534 6,595 6,700  574,829 
Overdrafts3,395 358   3,753 
Total $17,048,492 $54,045 $18,580 $8,209 $17,129,326 
December 31, 2022
Commercial:
Business$5,652,710 $1,759 $505 $6,751 $5,661,725 
Real estate – construction and land1,361,095 — — — 1,361,095 
Real estate – business3,406,207 585 — 189 3,406,981 
Personal Banking:
Real estate – personal 2,895,742 14,289 6,681 1,366 2,918,078 
Consumer2,031,827 25,089 2,172 — 2,059,088 
Revolving home equity295,303 1,201 703 — 297,207 
Consumer credit card572,213 6,238 5,549 — 584,000 
Overdrafts14,090 647 220 — 14,957 
Total $16,229,187 $49,808 $15,830 $8,306 $16,303,131 

At September 30, 2023, the Company had $2.6 million in non-accrual business loans that had no allowance for credit loss, compared to $3.8 million in non-accrual business loans that had no allowance for credit loss at December 31, 2022. The Company did not record any interest income on non-accrual loans during the nine months ended September 30, 2023 and 2022, respectively.

Credit quality indicators
The following table provides information about the credit quality of the Commercial loan portfolio. The Company utilizes an internal risk rating system comprised of a series of grades to categorize loans according to perceived risk associated with the expectation of debt repayment based on borrower specific information including, but not limited to, current financial information, historical payment experience, industry information, collateral levels and collateral types. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. A loan is assigned the risk rating at origination and then monitored throughout the contractual term for possible risk rating changes. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.

All loans are analyzed for risk rating updates annually. For larger loans, rating assessments may be more frequent if relevant information is obtained earlier through debt covenant monitoring or overall relationship management. Smaller loans
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are monitored as identified by the loan officer based on the risk profile of the individual borrower or if the loan becomes past due related to credit issues. Loans rated Special Mention, Substandard or Non-accrual are subject to quarterly review and monitoring processes. In addition to the regular monitoring performed by the lending personnel and credit committees, loans are subject to review by a credit review department which verifies the appropriateness of the risk ratings for the loans chosen as part of its risk-based review plan.

The risk category of loans in the Commercial portfolio as of September 30, 2023 and December 31, 2022 are as follows:

Term Loans Amortized Cost Basis by Origination Year
(In thousands)20232022202120202019PriorRevolving Loans Amortized Cost BasisTotal
September 30, 2023
Business
    Risk Rating:
       Pass$1,277,612 $944,231 $585,620 $302,672 $281,949 $281,170 $2,101,284 $5,774,538 
       Special mention22,310 4,513 20,926 7,223 282 2,530 16,783 74,567 
       Substandard68 5,675 9,511 14,799 465 10,726 11,379 52,623 
       Non-accrual— 2,524 1,462 — — 2,616 — 6,602 
   Total Business:$1,299,990 $956,943 $617,519 $324,694 $282,696 $297,042 $2,129,446 $5,908,330 
Gross write-offs for the nine months ended September 30, 2023
$— $2,241 $56 $41 $— $— $924 $3,262 
Real estate-construction
    Risk Rating:
       Pass$344,977 $638,963 $467,912 $46,827 $469 $2,984 $29,907 $1,532,039 
       Special mention3,532 — — — — — — 3,532 
       Substandard— 3,995 — — — — — 3,995 
    Total Real estate-construction:$348,509 $642,958 $467,912 $46,827 $469 $2,984 $29,907 $1,539,566 
Gross write-offs for the nine months ended September 30, 2023
$— $— $— $— $— $— $— $— 
Real estate-business
    Risk Rating:
       Pass$610,274 $1,120,900 $515,022 $457,778 $331,537 $344,130 $71,627 $3,451,268 
       Special mention4,107 15,582 3,032 895 9,373 886 — 33,875 
       Substandard— 20,299 25,477 17,318 11,807 86,784 264 161,949 
       Non-accrual— — — — — 76 — 76 
   Total Real estate-business:$614,381 $1,156,781 $543,531 $475,991 $352,717 $431,876 $71,891 $3,647,168 
Gross write-offs for the nine months ended September 30, 2023
$— $— $— $— $— $$— $
Commercial loans
    Risk Rating:
       Pass$2,232,863 $2,704,094 $1,568,554 $807,277 $613,955 $628,284 $2,202,818 $10,757,845 
       Special mention29,949 20,095 23,958 8,118 9,655 3,416 16,783 111,974 
       Substandard68 29,969 34,988 32,117 12,272 97,510 11,643 218,567 
       Non-accrual— 2,524 1,462 — — 2,692 — 6,678 
   Total Commercial loans:$2,262,880 $2,756,682 $1,628,962 $847,512 $635,882 $731,902 $2,231,244 $11,095,064 
Gross write-offs for the nine months ended September 30, 2023
$— $2,241 $56 $41 $— $$924 $3,263 

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Term Loans Amortized Cost Basis by Origination Year
(In thousands)20222021202020192018PriorRevolving Loans Amortized Cost BasisTotal
December 31, 2022
Business
    Risk Rating:
       Pass$1,456,476 $782,409 $464,201 $360,844 $180,375 $219,053 $2,146,380 $5,609,738 
       Special mention3,113 2,548 7,757 1,063 67 — 1,319 15,867 
       Substandard5,752 10,004 685 37 810 10,342 1,739 29,369 
       Non-accrual195 1,987 — 792 3,776 — 6,751 
   Total Business:$1,465,536 $796,948 $472,643 $361,945 $182,044 $233,171 $2,149,438 $5,661,725 
Real estate-construction
    Risk Rating:
       Pass$538,022 $596,465 $129,632 $27,331 $1,305 $2,029 $18,559 $1,313,343 
       Special mention352 — — — — — — 352 
       Substandard— 19,494 — — 14,766 13,140 — 47,400 
    Total Real estate-construction:$538,374 $615,959 $129,632 $27,331 $16,071 $15,169 $18,559 $1,361,095 
Real estate- business
    Risk Rating:
       Pass$1,085,379 $616,516 $555,648 $424,641 $163,628 $271,579 $90,799 $3,208,190 
       Special mention4,608 — 618 9,737 976 279 — 16,218 
       Substandard2,795 30,944 61,141 10,490 30,782 46,232 — 182,384 
       Non-accrual14 45 — — 124 — 189 
   Total Real-estate business:$1,092,796 $647,505 $617,407 $444,868 $195,510 $318,096 $90,799 $3,406,981 
Commercial loans
    Risk Rating:
       Pass$3,079,877 $1,995,390 $1,149,481 $812,816 $345,308 $492,661 $2,255,738 $10,131,271 
       Special mention8,073 2,548 8,375 10,800 1,043 279 1,319 32,437 
       Substandard8,547 60,442 61,826 10,527 46,358 69,714 1,739 259,153 
       Non-accrual209 2,032 — 916 3,782 — 6,940 
   Total Commercial loans:$3,096,706 $2,060,412 $1,219,682 $834,144 $393,625 $566,436 $2,258,796 $10,429,801 


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The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided as of September 30, 2023 and December 31, 2022 below.

Term Loans Amortized Cost Basis by Origination Year
(In thousands)20232022202120202019PriorRevolving Loans Amortized Cost BasisTotal
September 30, 2023
Real estate-personal
       Current to 90 days past due$384,542 $462,127 $546,460 $728,286 $266,678 $619,916 $8,663 $3,016,672 
       Over 90 days past due49 1,299 1,499 1,071 — 2,518 — 6,436 
       Non-accrual— 161 — — 160 1,210 — 1,531 
   Total Real estate-personal:$384,591 $463,587 $547,959 $729,357 $266,838 $623,644 $8,663 $3,024,639 
Gross write-offs for the nine months ended September 30, 2023
$— $18 $— $— $— $23 $— $41 
Consumer
       Current to 90 days past due$452,731 $368,897 $279,652 $143,995 $66,217 $59,466 $752,781 $2,123,739 
       Over 90 days past due293 392 200 28 66 378 708 2,065 
    Total Consumer:$453,024 $369,289 $279,852 $144,023 $66,283 $59,844 $753,489 $2,125,804 
Gross write-offs for the nine months ended September 30, 2023
$392 $1,968 $1,541 $658 $310 $297 $788 $5,954 
Revolving home equity
       Current to 90 days past due$— $— $— $— $— $— $302,557 $302,557 
       Over 90 days past due— — — — — — 2,680 2,680 
   Total Revolving home equity:$— $— $— $— $— $— $305,237 $305,237 
Gross write-offs for the nine months ended September 30, 2023
$— $— $— $— $— $— $11 $11 
Consumer credit card
       Current to 90 days past due$— $— $— $— $— $— $568,129 $568,129 
       Over 90 days past due— — — — — — 6,700 6,700 
   Total Consumer credit card:$— $— $— $— $— $— $574,829 $574,829 
Gross write-offs for the nine months ended September 30, 2023
$— $— $— $— $— $— $17,602 $17,602 
Overdrafts
       Current to 90 days past due$3,753 $— $— $— $— $— $— $3,753 
    Total Overdrafts:$3,753 $— $— $— $— $— $— $3,753 
Gross write-offs for the nine months ended September 30, 2023
$2,941 $— $— $— $— $— $— $2,941 
Personal banking loans
       Current to 90 days past due$841,026 $831,024 $826,112 $872,281 $332,895 $679,382 $1,632,130 $6,014,850 
       Over 90 days past due342 1,691 1,699 1,099 66 2,896 10,088 17,881 
       Non-accrual— 161 — — 160 1,210 — 1,531 
   Total Personal banking loans:$841,368 $832,876 $827,811 $873,380 $333,121 $683,488 $1,642,218 $6,034,262 
Gross write-offs for the nine months ended September 30, 2023
$3,333 $1,986 $1,541 $658 $310 $320 $18,401 $26,549 
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Term Loans Amortized Cost Basis by Origination Year
(In thousands)20222021202020192018PriorRevolving Loans Amortized Cost BasisTotal
December 31, 2022
Real estate-personal
       Current to 90 days past due$535,283 $589,658 $783,651 $290,580 $132,305 $568,380 $10,174 $2,910,031 
       Over 90 days past due514 967 1,338 81 1,388 2,393 — 6,681 
       Non-accrual— — 52 169 102 1,043 — 1,366 
   Total Real estate-personal:$535,797 $590,625 $785,041 $290,830 $133,795 $571,816 $10,174 $2,918,078 
Consumer
       Current to 90 days past due$536,429 $378,118 $205,849 $106,733 $36,096 $62,255 $731,436 $2,056,916 
       Over 90 days past due326 251 203 58 267 228 839 2,172 
    Total Consumer:$536,755 $378,369 $206,052 $106,791 $36,363 $62,483 $732,275 $2,059,088 
Revolving home equity
       Current to 90 days past due$— $— $— $— $— $— $296,504 $296,504 
       Over 90 days past due— — — — — — 703 703 
   Total Revolving home equity:$— $— $— $— $— $— $297,207 $297,207 
Consumer credit card
       Current to 90 days past due$— $— $— $— $— $— $578,451 $578,451 
       Over 90 days past due— — — — — — 5,549 5,549 
   Total Consumer credit card:$— $— $— $— $— $— $584,000 $584,000 
Overdrafts
       Current to 90 days past due$14,737 $— $— $— $— $— $— $14,737 
       Over 90 days past due220 — — — — — — 220 
    Total Overdrafts:$14,957 $— $— $— $— $— $— $14,957 
Personal banking loans
       Current to 90 days past due$1,086,449 $967,776 $989,500 $397,313 $168,401 $630,635 $1,616,565 $5,856,639 
       Over 90 days past due1,060 1,218 1,541 139 1,655 2,621 7,091 15,325 
       Non-accrual— — 52 169 102 1,043 — 1,366 
   Total Personal banking loans:$1,087,509 $968,994 $991,093 $397,621 $170,158 $634,299 $1,623,656 $5,873,330 

Collateral-dependent loans
The Company's collateral-dependent loans are comprised of large loans on non-accrual status. The Company requires that collateral-dependent loans are either over-collateralized or carry collateral equal to the amortized cost of the loan. The following table presents the amortized cost basis of collateral-dependent loans as of September 30, 2023 and December 31, 2022.

(In thousands)Business AssetsOil & Gas AssetsTotal
September 30, 2023
Commercial:
  Business$3,792 $1,345 $5,137 
Total$3,792 $1,345 $5,137 
December 31, 2022
Commercial:
Business$2,778 $1,824 $4,602 
Total$2,778 $1,824 $4,602 

Other Personal Banking loan information
As noted above, the credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above section on "Credit quality indicators." In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history and is considered supplementary information utilized by the Company, as management does not consider this information in evaluating the allowance for credit losses on loans. The Bank normally obtains a FICO score at the loan's origination and
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renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain personal real estate loans for which FICO scores are not obtained because the loans generally pertain to commercial customer activities and are often underwritten with other collateral considerations. These loans totaled $170.2 million at September 30, 2023 and $179.2 million at December 31, 2022. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $210.0 million at September 30, 2023 and $197.5 million at December 31, 2022. As the healthcare loans are guaranteed by the hospital, customer FICO scores are not obtained for these loans. The personal real estate loans and consumer loans excluded below totaled less than 7% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at September 30, 2023 and December 31, 2022 by FICO score.

   Personal Banking Loans
% of Loan Category
Real Estate - PersonalConsumerRevolving Home EquityConsumer Credit Card
September 30, 2023
FICO score:
Under 6001.8 %2.8 %1.8 %4.4 %
600 - 6592.3 4.6 3.3 12.1 
660 - 7198.3 13.1 9.7 29.5 
720 - 77922.2 26.2 23.2 27.6 
780 and over65.4 53.3 62.0 26.4 
Total100.0 %100.0 %100.0 %100.0 %
December 31, 2022
FICO score:
Under 6001.4 %2.2 %1.5 %3.4 %
600 - 6592.2 4.2 2.8 11.4 
660 - 7198.1 14.5 9.7 30.8 
720 - 77923.7 26.7 21.4 27.1 
780 and over64.6 52.4 64.6 27.3 
Total100.0 %100.0 %100.0 %100.0 %

Modifications for borrowers experiencing financial difficulty
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.

The Company's modifications of loans to borrowers experiencing financial difficulty are generally in the form of term extensions, repayment plans, payment deferrals, forbearance agreements, interest rate reductions, forgiveness of interest and/or fees, or any combination thereof. Commercial loans modified to borrowers experiencing financial difficulty are primarily loans that are substandard or non-accrual, where the maturity date was extended. Modifications on personal real estate loans are primarily those placed on forbearance plans, repayment plans, or deferral plans where monthly payments are suspended for a period of time or past due amounts are paid off over a certain period of time in the future or set up as a balloon payment at maturity. Modifications to certain credit card and other small consumer loans are often modified under debt counseling programs that can reduce the contractual rate or, in certain instances, forgive certain fees and interest charges. Other consumer loans modified to borrowers experiencing financial difficulty consist of various other workout arrangements with consumer customers.


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The following tables present the amortized cost at September 30, 2023 of loans that were modified during the three and nine months ended September 30, 2023.

For the Three Months Ended September 30, 2023



(Dollars in thousands)
Term ExtensionPayment DelayInterest Rate ReductionInterest/Fees Forgiven
Other
Total% of Total Loan Category
September 30, 2023
Commercial:
Business$3,792 $ $ $ $ $3,792 0.1 %
Real estate – business56,552     56,552 1.6 
Personal Banking:
Real estate – personal 45 773    818  
Consumer  49  31 80  
Consumer credit card  935 72  1,007 0.2 
Total $60,389 $773 $984 $72 $31 $62,249 0.4 %

For the Nine Months Ended September 30, 2023



(Dollars in thousands)
Term ExtensionPayment DelayInterest Rate ReductionInterest/Fees Forgiven
Other
Total% of Total Loan Category
September 30, 2023
Commercial:
Business$16,705 $ $ $ $ $16,705 0.3 %
Real estate – business106,034     106,034 2.9 
Personal Banking:
Real estate – personal 289 3,313    3,602 0.1 
Consumer30 70 69  86 255  
Consumer credit card  1,967 485  2,452 0.4 
Total $123,058 $3,383 $2,036 $485 $86 $129,048 0.8 %

The estimate of lifetime expected losses utilized in the allowance for credit losses model is developed using average historical experience on loans with similar risk characteristics, which includes losses from modifications of loans to borrowers experiencing financial difficulty. As a result, a change to the allowance for credit losses is generally not recorded upon modification. For modifications to loans made to borrowers experiencing financial difficulty that are placed on non-accrual status, the Company determines the allowance for credit losses on an individual evaluation, using the same process that it utilizes for other loans on non-accrual status. Modifications made to commercial loans which are not on non-accrual status for borrowers experiencing financial difficulty are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience, and current economic factors. Modifications made to borrowers experiencing financial difficulty for personal banking loans which are not on non-accrual status are collectively evaluated based on loan type, delinquency, historical experience, and current economic factors.

If a loan to a borrower experiencing financial difficulty is modified and subsequently deemed uncollectible, the allowance for credit losses continues to be based on individual evaluation, if that loan is already on non-accrual status. For those loans, the allowance for credit losses is estimated using discounted expected cash flows or the fair value of collateral. If an accruing loan made to a borrower experiencing financial difficulty is modified and subsequently deemed uncollectible, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for credit losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begin.

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The following tables summarize the financial impact of loan modifications and payment deferrals during the three and nine months ended September 30, 2023.

Term Extension
Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
Commercial:
Business
Extended maturity by a weighted average of 3 months.
Extended maturity by a weighted average of 8 months.
Real estate – business
Extended maturity by a weighted average of 12 months.
Extended maturity by a weighted average of 13 months.
Personal Banking:
Real estate – personal
Extended maturity by a weighted average of 6 months.
Extended maturity by a weighted average of 7 months.
Consumer
Extended maturity by 10 years.


Payment Delay
Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
Personal Banking:
Real estate – personal
Deferred certain payments by a weighted average of 22 years.
Deferred certain payments by a weighted average of 20 years.
Consumer
Deferred certain payments by a weighted average of 71 months.


Interest Rate Reduction
Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
Personal Banking:
ConsumerReduced contractual interest from weighted average 21% to 6%.Reduced contractual interest from weighted average 21% to 6%.
Consumer credit cardReduced contractual interest from weighted average 21% to 6%.Reduced contractual interest from weighted average 21% to 6%.


Forgiveness of Interest/Fees
Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
Personal Banking:
Consumer credit cardApproximately $5 thousand of interest and fees forgiven.Approximately $33 thousand of interest and fees forgiven.

The Company had commitments of $9.1 million at September 30, 2023 to lend additional funds to borrowers experiencing financial difficulty and for whom the Company has modified the terms of loans in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension during the current reporting period.

The following table provides the amortized cost basis of loans to borrowers experiencing financial difficulty that had a payment default during the three and nine months ended September 30, 2023 and were modified on or after January 1, 2023 (the date we adopted ASU 2022-02) through September 30, 2023. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal. In addition to the loans below, the Company charged off $2.2 million and $327 thousand of business and consumer credit card loans, respectively, during the nine months ended September 30, 2023 that were modified during the period.


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For the Three Months Ended September 30, 2023For the Nine Months Ended September 30, 2023


(Dollars in thousands)
Payment DelayInterest Rate ReductionInterest/Fees ForgivenTotalPayment DelayInterest Rate ReductionInterest/Fees ForgivenTotal
September 30, 2023
Personal Banking:
Real estate – personal $802 $ $ $802 $1,007 $ $ $1,007 
Consumer 19  19  30  30 
Consumer credit card 235 157 392  274 158 432 
Total $802 $254 $157 $1,213 $1,007 $304 $158 $1,469 

The following table presents the amortized cost basis at September 30, 2023 of loans that have been modified on or after January 1, 2023 (the date we adopted ASU 2022-02) through September 30, 2023.



(In thousands)
Current
30-89 Days Past Due
90 Days Past DueTotal
September 30, 2023
Commercial:
Business$16,705 $ $ $16,705 
Real estate – business106,034   106,034 
Personal Banking:
Real estate – personal 2,203 597 802 3,602 
Consumer209 27 19 255 
Consumer credit card1,534 526 392 2,452 
Total $126,685 $1,150 $1,213 $129,048 

Troubled debt restructuring disclosures prior to the Company's adoption of ASU 2022-02
Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected. Commercial performing restructured loans are primarily comprised of certain business, construction and business real estate loans classified as substandard but renewed at rates judged to be non-market. These loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card and other small consumer loans under various debt management and assistance programs. Modifications to these loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. Certain personal real estate, revolving home equity, and consumer loans were classified as consumer bankruptcy troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments. Other consumer loans classified as troubled debt restructurings consist of various other workout arrangements with consumer customers.

(In thousands)December 31, 2022
Accruing restructured loans:
Commercial
$184,388 
Assistance programs
5,156 
Other consumer
4,049 
Non-accrual loans
5,078 
Total troubled debt restructurings
$198,671 
Section 4013 of the CARES Act was signed into law on March 27, 2020, and included a provision that short-term modifications are not troubled debt restructurings, if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to December 31, 2019. The Company elected such option under the CARES Act when determining if a customer’s modification is subject to troubled debt restructuring classification. The initial guidance issued under the CARES Act was due to expire on December 31, 2020. During January 2021, the Consolidated Appropriations Act, 2021 was enacted and extended through the end of 2021 the relief offered under the CARES Act related to the accounting and disclosure requirements for troubled debt restructurings as a result of COVID-19. The Company elected to extend its application of this guidance through December 31, 2021. During the period covered by the CARES Act, if it was deemed that the loan
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modification was not short-term, not COVID-19 related or the customer does not meet the criteria under the guidance to be scoped out of troubled debt restructuring classification, the Company evaluated the loan modifications under its existing framework and accounted for the modification as a troubled debt restructuring.

The table below shows the balance of troubled debt restructurings by loan classification at December 31, 2022, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.

(In thousands)December 31, 2022Balance at December 31, 2022 that was 90 days past due at any time during previous 12 months
Commercial:
Business$12,311 $— 
Real estate - construction and land57,547 — 
Real estate - business118,654 — 
Personal Banking:
Real estate - personal2,809 419 
Consumer2,250 268 
Revolving home equity17 — 
Consumer credit card5,083 452 
Total troubled debt restructurings$198,671 $1,139 

For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. However, the effects of modifications to loans under various debt management and assistance programs at December 31, 2022 were estimated to decrease interest income by approximately $661 thousand on an annual, pre-tax basis, compared to amounts contractually owed. Other modifications to consumer loans mainly involve extensions and other small modifications that did not include the forgiveness of principal or interest.

The allowance for credit losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms. Performing commercial loans having no other concessions granted other than being renewed at non-market interest rates are judged to have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.

If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for credit losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing troubled debt restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for credit losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begin.

The Company had commitments of $12.6 million at December 31, 2022 to lend additional funds to borrowers with restructured loans.

Loans held for sale
The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 11. The loans are primarily sold to Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA). At September 30, 2023, the fair value of these loans was $366 thousand, and the unpaid principal balance was $360 thousand.
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The Company also designates certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which at September 30, 2023 totaled $4.5 million.

At September 30, 2023, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing interest.
Foreclosed real estate/repossessed assets
The Company’s holdings of foreclosed real estate totaled $114 thousand and $96 thousand at September 30, 2023 and December 31, 2022, respectively, and included in those amounts were $114 thousand and $96 thousand at September 30, 2023 and December 31, 2022, respectively, of foreclosed residential real estate properties held as a result of obtaining physical possession. Personal property acquired in repossession, generally autos, totaled $1.6 million at both September 30, 2023 and December 31, 2022. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.

3. Investment Securities
Investment securities consisted of the following at September 30, 2023 and December 31, 2022.

(In thousands)September 30, 2023December 31, 2022
Available for sale debt securities$9,860,828 $12,238,316 
Trading debt securities35,564 43,523 
Equity securities:
Readily determinable fair value5,453 6,210 
No readily determinable fair value6,759 6,094 
Other:
Federal Reserve Bank stock35,070 34,795 
Federal Home Loan Bank stock30,400 10,678 
Equity method investments 1,434 
Private equity investments165,322 178,127 
Total investment securities (1)
$10,139,396 $12,519,177 
(1)Accrued interest receivable totaled $29.4 million and $38.8 million at September 30, 2023 and December 31, 2022, respectively, and was included within other assets on the consolidated balance sheets.

The Company has elected to measure equity securities with no readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. This portfolio includes the Company's holdings of Visa Class B shares, which have a carrying value of zero, as there have not been observable price changes in orderly transactions for identical or similar investments of the same issuer. During the nine months ended September 30, 2023, the Company did not record any impairment or other adjustments to the carrying amount of its portfolio of equity securities with no readily determinable fair value.

Other investment securities include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, equity method investments, and investments in portfolio concerns held by the Company's private equity subsidiary. FRB stock and FHLB stock are held for debt and regulatory purposes. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the asset size of the borrowing bank and the level of borrowings from the FHLB. These holdings are carried at cost. Additionally, the Company's equity method investments are carried at cost, adjusted to reflect the Company's portion of income, loss, or dividends of the investee. These adjustments are included in non-interest income on the Company's consolidated statements of income. The Company's private equity investments are carried at estimated fair value.

The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in accumulated other comprehensive income (AOCI). A summary of the available for sale debt securities by maturity groupings as of September 30, 2023 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as FHLMC, FNMA, and Government National Mortgage Association (GNMA), in addition to non-agency mortgage-backed securities, which have no guarantee but are
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collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.
(In thousands)Amortized
Cost
Fair
Value
U.S. government and federal agency obligations:
Within 1 year$599,278 $588,709 
After 1 but within 5 years211,650 199,843 
After 5 but within 10 years177,247 159,424 
Total U.S. government and federal agency obligations988,175 947,976 
Government-sponsored enterprise obligations:
After 5 but within 10 years4,948 4,293 
After 10 years50,718 36,300 
Total government-sponsored enterprise obligations55,666 40,593 
State and municipal obligations:
Within 1 year76,664 75,389 
After 1 but within 5 years373,467 338,785 
After 5 but within 10 years792,381 648,198 
After 10 years139,062 116,042 
Total state and municipal obligations1,381,574 1,178,414 
Mortgage and asset-backed securities:
  Agency mortgage-backed securities4,722,758 3,792,567 
  Non-agency mortgage-backed securities1,353,003 1,137,448 
  Asset-backed securities2,441,736 2,313,545 
Total mortgage and asset-backed securities8,517,497 7,243,560 
Other debt securities:
Within 1 year50,120 48,876 
After 1 but within 5 years206,375 190,217 
After 5 but within 10 years244,638 200,148 
After 10 years13,260 11,044 
Total other debt securities514,393 450,285 
Total available for sale debt securities$11,457,305 $9,860,828 

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $391.7 million, at fair value, at September 30, 2023. Interest earned on these securities increases with inflation and decreases with deflation, as measured by the non-seasonally adjusted Consumer Price Index (CPI-U). At maturity, the principal paid is the greater of an inflation-adjusted principal or the original principal.

Allowance for credit losses on available for sale debt securities
Securities for which fair value is less than amortized cost are reviewed for impairment. Special emphasis is placed on securities whose credit rating has fallen below Baa3 (Moody's) or BBB- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price, or which have been identified based on management’s judgment. These securities are placed on a watch list and cash flow analyses are prepared on an individual security basis. Certain securities are analyzed using a projected cash flow model, discounted to present value, and compared to the current amortized cost bases of the securities. The model uses input factors such as cash flow projections, contractual payments required, expected delinquency rates, credit support from other tranches, prepayment speeds, collateral loss severity rates (including loan to values), and various other information related to the underlying collateral. Securities not analyzed using the cash flow model are analyzed by reviewing risk ratings, credit support agreements, and industry knowledge to project future cash flows and any possible credit impairment.

At September 30, 2023, the fair value of securities on this watch list was $2.8 billion compared to $1.3 billion at December 31, 2022. The majority of the securities included on the Company's watch list in the current quarter were experiencing unrealized loss positions due to the significant increase in interest rates and were analyzed outside of the cash flow model. At September 30, 2023, the securities on the Company's watch list that were not deemed to be solely related to increasing interest rates were securities backed by government-guaranteed student loans and are expected to perform as contractually required. As of September 30, 2023, the Company did not identify any securities for which a credit loss exists, and for the nine months ended September 30, 2023 and 2022, the Company did not recognize a credit loss expense on any available for sale debt securities.
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The table below summarizes debt securities available for sale in an unrealized loss position, aggregated by length of loss period, for which an allowance for credit losses has not been recorded at September 30, 2023 and December 31, 2022. Unrealized losses on these available for sale securities have not been recognized into income because after review, the securities were deemed not to be impaired. The unrealized losses on these securities are primarily attributable to changes in interest rates and current market conditions. At September 30, 2023, the Company does not intend to sell the securities, nor is it anticipated that it would be required to sell any of these securities at a loss.

Less than 12 months12 months or longerTotal
 
(In thousands)
   Fair ValueUnrealized
Losses
Fair ValueUnrealized
Losses
Fair ValueUnrealized
Losses
September 30, 2023
U.S. government and federal agency obligations$48,996 $2,838 $898,980 $37,361 $947,976 $40,199 
Government-sponsored enterprise obligations   40,593 15,073 40,593 15,073 
State and municipal obligations43,228 2,050 1,130,491 201,110 1,173,719 203,160 
Mortgage and asset-backed securities:
   Agency mortgage-backed securities9,762 218 3,766,485 930,086 3,776,247 930,304 
   Non-agency mortgage-backed securities809 5 1,131,284 215,658 1,132,093 215,663 
   Asset-backed securities20,020 149 2,287,893 128,061 2,307,913 128,210 
Total mortgage and asset-backed securities30,591 372 7,185,662 1,273,805 7,216,253 1,274,177 
Other debt securities864 136 449,421 63,972 450,285 64,108 
Total $123,679 $5,396 $9,705,147 $1,591,321 $9,828,826 $1,596,717 
December 31, 2022
U.S. government and federal agency obligations$605,840 $17,490 $380,573 $25,940 $986,413 $43,430 
Government-sponsored enterprise obligations25,068 4,650 18,040 7,971 43,108 12,621 
State and municipal obligations814,799 26,708 875,329 171,385 1,690,128 198,093 
Mortgage and asset-backed securities:
   Agency mortgage-backed securities1,323,938 125,330 2,966,851 654,327 4,290,789 779,657 
   Non-agency mortgage-backed securities135,984 16,736 1,069,222 195,218 1,205,206 211,954 
   Asset-backed securities1,331,055 50,056 2,006,188 140,424 3,337,243 190,480 
Total mortgage and asset-backed securities2,790,977 192,122 6,042,261 989,969 8,833,238 1,182,091 
Other debt securities166,040 9,690 308,818 54,707 474,858 64,397 
Total $4,402,724 $250,660 $7,625,021 $1,249,972 $12,027,745 $1,500,632 

The entire available for sale debt portfolio included $9.8 billion of securities that were in a loss position at September 30, 2023, compared to $12.0 billion at December 31, 2022.  The total amount of unrealized loss on these securities was $1.6 billion at September 30, 2023, an increase of $96.1 million compared to the unrealized loss at December 31, 2022.  Securities with significant unrealized losses are discussed in the "Allowance for credit losses on available for sale debt securities" section above.

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For debt securities classified as available for sale, the following table shows the amortized cost, fair value, and allowance for credit losses of securities available for sale at September 30, 2023 and December 31, 2022, and the corresponding amounts of gross unrealized gains and losses (pre-tax) in AOCI, by security type.

 
 
(In thousands)
Amortized CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for Credit Losses
Fair Value
September 30, 2023
U.S. government and federal agency obligations$988,175 $ $(40,199)$ $947,976 
Government-sponsored enterprise obligations55,666  (15,073) 40,593 
State and municipal obligations1,381,574  (203,160) 1,178,414 
Mortgage and asset-backed securities:
  Agency mortgage-backed securities4,722,758 113 (930,304) 3,792,567 
  Non-agency mortgage-backed securities1,353,003 108 (215,663) 1,137,448 
  Asset-backed securities2,441,736 19 (128,210) 2,313,545 
Total mortgage and asset-backed securities8,517,497 240 (1,274,177) 7,243,560 
Other debt securities514,393  (64,108) 450,285 
Total$11,457,305 $240 $(1,596,717)$ $9,860,828 
December 31, 2022
U.S. government and federal agency obligations$1,078,807 $29 $(43,430)$— $1,035,406 
Government-sponsored enterprise obligations55,729 — (12,621)— 43,108 
State and municipal obligations1,965,028 174 (198,093)— 1,767,109 
Mortgage and asset-backed securities:
  Agency mortgage-backed securities5,087,893 191 (779,657)— 4,308,427 
  Non-agency mortgage-backed securities1,423,469 92 (211,954)— 1,211,607 
  Asset-backed securities3,588,025 256 (190,480)— 3,397,801 
Total mortgage and asset-backed securities10,099,387 539 (1,182,091)— 8,917,835 
Other debt securities539,255 — (64,397)— 474,858 
Total$13,738,206 $742 $(1,500,632)$— $12,238,316 

The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.

For the Nine Months Ended September 30
(In thousands)20232022
Proceeds from sales of securities:
Available for sale debt securities
$1,101,782 $85,023 
Other investments
40,167 3,907 
Total proceeds
$1,141,949 $88,930 
Investment securities gains (losses), net:
Available for sale debt securities:
Gains realized on sales$143 $— 
Losses realized on sales(8,587)(20,274)
Equity securities:
 Fair value adjustments, net
(757)(1,048)
Other:
 Gains realized on sales
884 104 
 Losses realized on sales
(1,245)(4,313)
Fair value adjustments, net 16,946 37,133 
Total investment securities gains (losses), net$7,384 $11,602 

Net losses on investment securities for the nine months ended September 30, 2023 were mainly comprised of net losses of $8.4 million on sales of available for sale securities, net losses in fair value of $757 thousand on equity investments, and net
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losses of $361 thousand on sales of private equity securities, offset by net gains in private equity securities due to fair value adjustments of $16.9 million.

At September 30, 2023, securities totaling $7.6 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB, compared to $4.7 billion at December 31, 2022. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $207.1 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of the U.S. Treasury and various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.



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4. Goodwill and Other Intangible Assets
The following table presents information about the Company's intangible assets which have estimable useful lives.

September 30, 2023December 31, 2022
 
 
(In thousands)
Gross Carrying AmountAccumulated AmortizationValuation AllowanceNet AmountGross Carrying AmountAccumulated AmortizationValuation AllowanceNet Amount
Amortizable intangible assets:
Core deposit premium$5,550 $(5,039)$ $511 $31,270 $(30,565)$— $705 
Mortgage servicing rights22,438 (12,117) 10,321 22,187 (11,258)— 10,929 
Total $27,988 $(17,156)$ $10,832 $53,457 $(41,823)$— $11,634 

Aggregate amortization expense on intangible assets was $344 thousand and $456 thousand for the three month periods ended September 30, 2023 and 2022, respectively, and $1.1 million and $1.6 million for the nine month periods ended September 30, 2023 and 2022, respectively. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of September 30, 2023. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.

 (In thousands)
2023$1,380 
20241,272 
20251,129 
2026989 
2027853 

During the first quarter of 2023, the Company wrote off $25.7 million of core deposit intangible assets that were fully amortized. During the second quarter of 2023, the Company acquired L.J. Hart & Company, a municipal bond underwriter and advisor, and the acquisition resulted in goodwill of $7.6 million. Changes in the carrying amount of goodwill and other intangible assets for the nine month period ended September 30, 2023 are as follows:

(In thousands)GoodwillEasementCore Deposit PremiumMortgage Servicing Rights
Balance January 1, 2023
$138,921 $3,600 $705 $10,929 
Acquisition7,618 — — — 
Originations, net of disposals— — — 251 
Amortization— — (194)(859)
Balance September 30, 2023$146,539 $3,600 $511 $10,321 

Goodwill allocated to the Company’s operating segments at September 30, 2023 and December 31, 2022 is shown below.

(In thousands)September 30, 2023December 31, 2022
Consumer segment$70,721 $70,721 
Commercial segment75,072 67,454 
Wealth segment746 746 
Total goodwill$146,539 $138,921 

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5. Guarantees
The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured, and in the event of nonperformance by customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.

Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At September 30, 2023, that net liability was $3.4 million, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $594.2 million at September 30, 2023.

The Company periodically enters into credit risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral and at September 30, 2023, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 2 years to 15 years. At September 30, 2023, the fair value of the Company's guarantee liabilities for RPAs was $44 thousand, and the notional amount of the underlying swaps was $446.2 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default.


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6. Leases
The Company has net investments in direct financing and sales-type leases to commercial, industrial, and tax-exempt entities. These leases are included within business loans on the Company's consolidated balance sheets. The Company primarily leases various types of equipment, trucks and trailers, and office furniture and fixtures. Lease agreements may include options for the lessee to renew or purchase the leased equipment at the end of the lease term. The Company has elected to adopt the lease component expedient in which the lease and nonlease components are combined into the total lease receivable. The Company also leases office space to third parties, and these leases are classified as operating leases. The leases may include options to renew or expand the leased space, and currently the leases have remaining terms of 1 month to 15 years.

The following table provides the components of lease income.

For the Three Months Ended September 30For the Nine Months Ended September 30
(in thousands)2023202220232022
Direct financing and sales-type leases$8,160 $5,477 $22,456 $15,838 
Operating leases(a)
3,399 2,175 9,215 6,517 
Total lease income$11,559 $7,652 $31,671 $22,355 
(a) Includes rent from Tower Properties Company, a related party, of $19 thousand for both of the three month periods ended September 30, 2023 and 2022 and $58 thousand for both of the nine month periods ended September 30, 2023 and 2022.


7. Pension
The amount of net pension cost is shown in the table below:

For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands)2023202220232022
Service cost$120 $128 $352 $391 
Interest cost on projected benefit obligation1,146 713 3,461 2,043 
Expected return on plan assets(1,035)(1,135)(3,037)(3,386)
Amortization of prior service cost(68)(68)(203)(203)
Amortization of unrecognized net loss332 470 1,186 1,465 
Net periodic pension cost $495 $108 $1,759 $310 

All benefits accrued under the Company’s defined benefit pension plan have been frozen since January 1, 2011. During the first nine months of 2023, the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets.


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8. Common Stock *
Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that pay nonforfeitable common stock dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 13.

For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands, except per share data)2023202220232022
Basic income per common share:
Net income attributable to Commerce Bancshares, Inc.$120,596 $122,823 $367,837 $356,771 
Less income allocated to nonvested restricted stock1,073 1,119 3,257 3,241 
  Net income allocated to common stock$119,523 $121,704 $364,580 $353,530 
Weighted average common shares outstanding123,718 124,840 123,868 125,600 
    Basic income per common share$.96 $.97 $2.94 $2.81 
Diluted income per common share:
Net income attributable to Commerce Bancshares, Inc.$120,596 $122,823 $367,837 $356,771 
Less income allocated to nonvested restricted stock1,072 1,118 3,254 3,236 
  Net income allocated to common stock$119,524 $121,705 $364,583 $353,535 
Weighted average common shares outstanding123,718 124,840 123,868 125,600 
Net effect of the assumed exercise of stock-based awards - based on the treasury stock method using the average market price for the respective periods100 277 158 288 
Weighted average diluted common shares outstanding123,818 125,117 124,026 125,888 
    Diluted income per common share$.96 $.97 $2.93 $2.81 

Unexercised stock appreciation rights of 539 thousand and 175 thousand for the three month periods ended September 30, 2023 and 2022, respectively, and 342 thousand and 159 thousand for the nine month periods ended September 30, 2023 and 2022, respectively, were excluded from the computation of diluted income per common share because their inclusion would have been anti-dilutive.

In the Annual Meeting of the Shareholders, held on April 19, 2023, a proposal to increase the shares of the Company's common stock authorized for issuance under its articles of incorporation was approved. This approval increased the authorized shares from 140,000,000 to 190,000,000.

* All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December 2022.

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9. Accumulated Other Comprehensive Income
The table below shows the activity and accumulated balances for components of other comprehensive income. Information about unrealized gains and losses on securities can be found in Note 3, and information about unrealized gains and losses on cash flow hedge derivatives is located in Note 11.

Unrealized Gains (Losses) on Securities (1)Pension Loss Unrealized Gains (Losses) on Cash Flow Hedge Derivatives (2)Total Accumulated Other Comprehensive Income (Loss)
(In thousands)
Balance January 1, 2023
$(1,124,915)$(17,186)$55,237 $(1,086,864)
Other comprehensive income (loss) before reclassifications to current earnings(105,030) (34,530)(139,560)
Amounts reclassified to current earnings from accumulated other comprehensive income 8,444 983 (12,093)(2,666)
 Current period other comprehensive income (loss), before tax(96,586)983 (46,623)(142,226)
Income tax (expense) benefit24,146 (245)11,655 35,556 
 Current period other comprehensive income (loss), net of tax(72,440)738 (34,968)(106,670)
Balance September 30, 2023
$(1,197,355)$(16,448)$20,269 $(1,193,534)
Balance January 1, 2022
$23,174 $(20,668)$74,574 $77,080 
Other comprehensive income (loss) before reclassifications to current earnings(1,594,981)— (3,464)(1,598,445)
Amounts reclassified to current earnings from accumulated other comprehensive income20,274 1,262 (18,322)3,214 
 Current period other comprehensive income (loss), before tax(1,574,707)1,262 (21,786)(1,595,231)
Income tax (expense) benefit393,676 (315)5,446 398,807 
 Current period other comprehensive income (loss), net of tax(1,181,031)947 (16,340)(1,196,424)
Balance September 30, 2022
$(1,157,857)$(19,721)$58,234 $(1,119,344)
(1) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "investment securities gains (losses), net" in the consolidated statements of income.
(2) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "interest and fees on loans" in the consolidated statements of income.


10. Segments
The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial and Wealth. The Consumer segment consists of various consumer loan and deposit products offered through its retail branch network of approximately 140 locations.  This segment also includes indirect and other consumer loan financing businesses, along with debit and credit card loan and fee businesses.  In order to reflect a change in the Company's management of its portfolio of residential mortgage loans that it retains, the Company began including those loans in the Consumer segment on January 1, 2023. These loans had previously been included in the Other/Elimination column. As a result of this change, approximately $1.9 billion of loans were reclassified from the Other/Elimination column into the Consumer segment, and prior periods presented below were restated to also reflect this change.

The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, and international services, along with business and governmental deposit products and commercial cash management services.  This segment also includes both merchant and commercial bank card products as well as the Capital Markets Group, which sells fixed income securities and provides securities safekeeping and accounting services to its business and correspondent bank customers.  The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management, and brokerage services.  This segment also provides various loan and deposit related services to its private banking customers.

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The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues between the three segments. Management periodically makes changes to methods of assigning costs and income to its business segments to better reflect operating results. If appropriate, these changes are reflected in prior year information presented below.


(In thousands)
ConsumerCommercialWealthSegment TotalsOther/EliminationConsolidated Totals
Three Months Ended September 30, 2023
Net interest income$106,453 $123,062 $19,629 $249,144 $(597)$248,547 
Provision for credit losses(7,048)(2,721)(1)(9,770)(1,875)(11,645)
Non-interest income24,939 61,195 55,378 141,512 1,437 142,949 
Investment securities gains (losses), net    4,298 4,298 
Non-interest expense(82,234)(98,910)(38,907)(220,051)(7,959)(228,010)
Income before income taxes$42,110 $82,626 $36,099 $160,835 $(4,696)$156,139 
Nine Months Ended September 30, 2023
Net interest income$304,859 $355,690 $54,193 $714,742 $34,966 $749,708 
Provision for credit losses(19,784)(3,204)(14)(23,002)(6,570)(29,572)
Non-interest income74,773 184,288 162,835 421,896 6,270 428,166 
Investment securities gains (losses), net    7,384 7,384 
Non-interest expense(242,991)(290,960)(119,015)(652,966)(26,762)(679,728)
Income before income taxes$116,857 $245,814 $97,999 $460,670 $15,288 $475,958 
Three Months Ended September 30, 2022
Net interest income$93,182 $114,135 $18,640 $225,957 $20,416 $246,373 
Provision for loan losses(4,314)(506)(4,815)(10,475)(15,290)
Non-interest income27,709 57,115 53,862 138,686 (172)138,514 
Investment securities gains (losses), net— — — — 3,410 3,410 
Non-interest expense(79,230)(91,397)(36,188)(206,815)(6,069)(212,884)
Income before income taxes$37,347 $79,347 $36,319 $153,013 $7,110 $160,123 
Nine Months Ended September 30, 2022
Net interest income$270,561 $333,270 $56,731 $660,562 $26,982 $687,544 
Provision for credit losses(12,727)(651)(13,376)782 (12,594)
Non-interest income82,464 167,581 161,051 411,096 (1,386)409,710 
Investment securities gains (losses), net— — — — 11,602 11,602 
Non-interest expense(231,683)(272,219)(108,967)(612,869)(19,168)(632,037)
Income before income taxes$108,615 $227,981 $108,817 $445,413 $18,812 $464,225 

The information presented above was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting procedures and methods, which have been developed to reflect the underlying economics of the businesses. The methodologies are applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided by) assets and liabilities based on their maturity, prepayment and/or repricing characteristics.

The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column include activity not related to the segments, such as that relating to administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. The provision for credit losses in this category contains the difference between net loan charge-offs assigned directly to the segments and the recorded provision for credit loss expense. Included in this category’s net interest income are earnings of the investment portfolio, which are not allocated to a segment. Additionally, interest expense on the Company's brokered deposits is included in this column, as the Company's brokered deposits are not allocated to a segment.

The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities.

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11. Derivative Instruments
The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. With the exception of the interest rate floors (discussed below), the Company's derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings.


(In thousands)
September 30, 2023December 31, 2022
Interest rate swaps$2,199,242 $1,981,821 
Interest rate floors2,000,000 1,000,000 
Interest rate caps172,784 152,784 
Credit risk participation agreements613,822 579,925 
Foreign exchange contracts38,234 27,991 
 Mortgage loan commitments
1,834 — 
Forward TBA contracts2,000 — 
Total notional amount$5,027,916 $3,742,521 

The largest group of notional amounts relate to interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. The customers are engaged in a variety of businesses, including real estate, manufacturing, retail product distribution, education, and retirement communities. These interest rate swap contracts with customers are offset by matching interest rate swap contracts purchased by the Company from other financial institutions (dealers). Contracts with dealers that require central clearing are novated to a clearing agency who becomes the Company's counterparty. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings.

Many of the Company’s interest rate swap contracts with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions or instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.

As of September 30, 2023, the Company held four interest rate floors indexed to 1-month SOFR to hedge the risk of declining interest rates on certain floating rate commercial loans. The floors have a combined notional value of $2.0 billion and are forward-starting. Each of the four interest rate floors has a six-year term and a notional amount of $500.0 million. In the event that the index rate falls below zero, the maximum rate that the Company can earn on the notional amount of each floor is limited to the strike rate. Information about the floors is provided in the table below.

Strike RateEffective DateMaturity Date
3.50 %July 1, 2024July 1, 2030
3.25 %November 1, 2024November 1, 2030
3.00 %March 1, 2025March 1, 2031
2.75 %July 1, 2025July 1, 2031

The premium paid for the floors totaled $90.2 million, which includes a $28.5 million premium paid during the third quarter of 2023 and $25.9 million paid during the first six months ended June 30, 2023. The maximum length of time over which the Company is hedging its exposure to lower rates is approximately 7 years. These interest rate floors qualified and were designated as cash flow hedges and were assessed for effectiveness using regression analysis. The change in the fair value of these interest rate floors is recorded in AOCI, net of the amortization of the premiums paid, which are recorded against interest and fees on loans in the consolidated statements of income. As of September 30, 2023, net deferred losses on the interest rate floors totaled $30.1 million (pre-tax) and were recorded in AOCI in the consolidated balance sheet. As of September 30, 2023, it is expected that $10.8 million (pre-tax) interest rate floor premium amortization will be reclassified from AOCI into earnings over the next 12 months for the outstanding interest rate floors.

During the year ended December 31, 2020, the Company monetized three interest rate floors that were previously classified as cash flow hedges with a combined notional balance of $1.5 billion and an asset fair value of $163.2 million. As of
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September 30, 2023, the total realized gains on the monetized cash flow hedges remaining in AOCI was $57.1 million (pre-tax), which will be reclassified into interest income over the next 3.2 years. The estimated amount of net gains related to the cash flow hedges remaining in AOCI at September 30, 2023 that is expected to be reclassified into income within the next 12 months is $22.6 million.

The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further discussed in Note 5 on Guarantees. In addition, the Company enters into foreign exchange contracts, which are mainly comprised of contracts with customers to purchase or deliver specific foreign currencies at specific future dates.

Under its program to sell residential mortgage loans in the secondary market, the Company designates certain newly-originated residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments and forward loan sale contracts. Changes in the fair values of the loan commitments and funded loans prior to sale that are due to changes in interest rates are economically hedged with forward contracts to sell residential mortgage-backed securities in the to-be-announced (TBA) market. These forward TBA contracts are also considered to be derivatives and are settled in cash at the security settlement date. In late 2022, the Company temporarily paused sales of these loans and halted entering into the forward contracts, as lower demand for mortgage loans coupled with volatility in the TBA market made it difficult to effectively hedge the Company's mortgage loan production. The Company resumed sales during the first quarter of 2023.

The fair values of the Company's derivative instruments, whose notional amounts are listed above, are shown in the table below. Information about the valuation methods used to determine fair value is provided in Note 15 on Fair Value Measurements.

The Company's policy is to present its derivative assets and derivative liabilities on a gross basis on its consolidated balance sheets, and these are reported in other assets and other liabilities. Certain collateral posted to and from the Company's clearing counterparty has been applied to the fair values of the cleared swaps, such that in the table below, the positive fair values of cleared swaps were reduced by $27.8 million at December 31, 2022. There was no reduction to positive fair values of cleared swaps at September 30, 2023.

 Asset DerivativesLiability Derivatives
Sept. 30, 2023Dec. 31, 2022Sept. 30, 2023Dec. 31, 2022
(In thousands)    
  Fair Value  Fair Value
Derivatives designated as hedging instruments:
   Interest rate floors$53,289 $33,371 $ $— 
Total derivatives designated as hedging instruments$53,289 $33,371 $ $— 
Derivative instruments not designated as hedging instruments:
   Interest rate swaps$56,635 $23,894 $(56,635)$(51,742)
   Interest rate caps1,752 2,705 (1,752)(2,705)
   Credit risk participation agreements11 34 (44)(119)
   Foreign exchange contracts449 488 (287)(418)
   Mortgage loan commitments35 —  — 
   Forward TBA contracts11 —  — 
Total derivatives not designated as hedging instruments$58,893 $27,121 $(58,718)$(54,984)
Total$112,182 $60,492 $(58,718)$(54,984)
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The Company made an election to exclude the initial premiums paid on the interest rate floors from the hedge effectiveness measurement. Those initial premiums are amortized over the periods between the premium payment month and the contract maturity month. The pre-tax effects of the gains and losses (both the included and excluded amounts for hedge effectiveness assessment) recognized in the other comprehensive income from the cash flow hedging instruments and the amounts reclassified from accumulated other comprehensive income into income (both included and excluded amounts for hedge effectiveness measurement) are shown in the table below.



Amount of Gain or (Loss) Recognized in OCI
Location of Gain (Loss) Reclassified from AOCI into IncomeAmount of Gain (Loss) Reclassified from AOCI into Income
(In thousands)TotalIncluded ComponentExcluded ComponentTotalIncluded ComponentExcluded Component
For the Three Months Ended September 30, 2023
Derivatives in cash flow hedging relationships:
Interest rate floors$(29,007)$ $(29,007)Interest and fees on loans$3,543 $7,459 $(3,916)
Total$(29,007)$ $(29,007)Total$3,543 $7,459 $(3,916)
For the Nine Months Ended September 30, 2023
Derivatives in cash flow hedging relationships:
Interest rate floors$(34,530)$ $(34,530)Interest and fees on loans$12,093 $22,358 $(10,265)
Total$(34,530)$ $(34,530)Total$12,093 $22,358 $(10,265)
For the Three Months Ended September 30, 2022
Derivatives in cash flow hedging relationships:
Interest rate floors$(3,464)$— $(3,464)Interest and fees on loans$6,118 $7,745 $(1,627)
Total$(3,464)$— $(3,464)Total$6,118 $7,745 $(1,627)
For the Nine Months Ended September 30, 2022
Derivatives in cash flow hedging relationships:
Interest rate floors$(3,464)$— $(3,464)Interest and fees on loans$18,322 $22,998 $(4,676)
Total$(3,464)$— $(3,464)Total$18,322 $22,998 $(4,676)

The gain and loss recognized through various derivative instruments on the consolidated statements of income are shown in the table below.



Location of Gain or (Loss) Recognized in Consolidated Statements of Income Amount of Gain or (Loss) Recognized in Income on Derivatives

For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands)2023202220232022
Derivative instruments:
  Interest rate swapsOther non-interest income$365 $88 $2,861 $1,770 
  Interest rate capsOther non-interest income23 — 23 16 
  Credit risk participation agreementsOther non-interest income123 122 107 30 
  Foreign exchange contractsOther non-interest income122 93 
  Mortgage loan commitmentsLoan fees and sales(23)(230)35 (764)
  Mortgage loan forward sale contractsLoan fees and sales  
  Forward TBA contractsLoan fees and sales63 117 113 1,783 
Total$673 $105 $3,232 $2,839 

The following table shows the extent to which assets and liabilities relating to derivative instruments have been offset in the consolidated balance sheets. It also provides information about these instruments which are subject to an enforceable master netting arrangement, irrespective of whether they are offset, and the extent to which the instruments could potentially be offset. Also shown is collateral received or pledged in the form of other financial instruments, which is generally cash or marketable securities. The collateral amounts in this table are limited to the outstanding balances of the related asset or liability (after
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netting is applied); thus, amounts of excess collateral are not shown. Most of the derivatives in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.

While the Company is party to master netting arrangements with most of its swap derivative counterparties, the Company does not offset derivative assets and liabilities under these agreements on its consolidated balance sheets. Collateral exchanged between the Company and dealer bank counterparties is generally subject to thresholds and transfer minimums, and usually consists of marketable securities. By contract, these may be sold or re-pledged by the secured party until recalled at a subsequent valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash or securities to its clearing agent. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below.

Gross Amounts Not Offset in the Balance Sheet
(In thousands)Gross Amount RecognizedGross Amounts Offset in the Balance SheetNet Amounts Presented in the Balance SheetFinancial Instruments Available for OffsetCollateral
Received/
Pledged
Net Amount
September 30, 2023
Assets:
Derivatives subject to master netting agreements
$112,028 $ $112,028 $(93)$(111,060)$875 
Derivatives not subject to master netting agreements
154  154 
Total derivatives$112,182 $ $112,182 
Liabilities:
Derivatives subject to master netting agreements
$58,491 $ $58,491 $(93)$ $58,398 
Derivatives not subject to master netting agreements
227  227 
Total derivatives$58,718 $ $58,718 
December 31, 2022
Assets:
Derivatives subject to master netting agreements
$60,270 $— $60,270 $(1,007)$(56,816)$2,447 
Derivatives not subject to master netting agreements
222 — 222 
Total derivatives$60,492 $— $60,492 
Liabilities:
Derivatives subject to master netting agreements
$54,609 $— $54,609 $(1,007)$— $53,602 
Derivatives not subject to master netting agreements
375 — 375 
Total derivatives$54,984 $— $54,984 

12. Resale and Repurchase Agreements
The Company regularly enters into resale and repurchase agreement transactions with other financial institutions and with its own customers. Resale and repurchase agreements are agreements to purchase/sell securities subject to an obligation to resell/repurchase the same or similar securities. They are accounted for as secured lending and collateralized borrowing (e.g. financing transactions), not as true sales and purchases of the underlying collateral securities. Some of the resale and repurchase agreements were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default. The security collateral accepted or pledged in resale and repurchase agreements with other financial institutions may be sold or re-pledged by the secured party, but is usually delivered to and held by third party trustees. The Company generally retains custody of securities pledged for repurchase agreements with its customers.

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The Company is party to agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase and resale agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the consolidated balance sheets, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $200.0 million at September 30, 2023 and December 31, 2022. At September 30, 2023, the Company had posted collateral of $206.9 million in marketable securities, consisting of agency mortgage-backed bonds, and had accepted $209.8 million in agency mortgage-backed bonds.

The following table shows the extent to which resale agreement assets and repurchase agreement liabilities with the same counterparty have been offset on the consolidated balance sheets, in addition to the extent to which they could potentially be offset. Also shown is collateral received or pledged, which consists of marketable securities. The collateral amounts in the table are limited to the outstanding balances of the related asset or liability (after offsetting is applied); thus amounts of excess collateral are not shown.

Gross Amounts Not Offset in the Balance Sheet
(In thousands)Gross Amount RecognizedGross Amounts Offset in the Balance SheetNet Amounts Presented in the Balance SheetFinancial Instruments Available for OffsetSecurities Collateral Received/PledgedUnsecured Amount
September 30, 2023
Total resale agreements, subject to master netting arrangements
$650,000 $(200,000)$450,000 $ $(450,000)$ 
Total repurchase agreements, subject to master netting arrangements
2,438,826 (200,000)2,238,826  (2,238,826) 
December 31, 2022
Total resale agreements, subject to master netting arrangements
$1,025,000 $(200,000)$825,000 $— $(825,000)$— 
Total repurchase agreements, subject to master netting arrangements
2,881,874 (200,000)2,681,874 — (2,681,874)— 
The table below shows the remaining contractual maturities of repurchase agreements outstanding at September 30, 2023 and December 31, 2022, in addition to the various types of marketable securities that have been pledged by the Company as collateral for these borrowings.

Remaining Contractual Maturity of the Agreements
(In thousands)Overnight and continuousUp to 90 daysGreater than 90 daysTotal
September 30, 2023
Repurchase agreements, secured by:
  U.S. government and federal agency obligations$137,949 $13,015 $4,500 $155,464 
  Agency mortgage-backed securities1,426,015 221,604 18,700 1,666,319 
  Non-agency mortgage-backed securities9,100   9,100 
  Asset-backed securities572,135   572,135 
  Other debt securities35,808   35,808 
   Total repurchase agreements, gross amount recognized$2,181,007 $234,619 $23,200 $2,438,826 
December 31, 2022
Repurchase agreements, secured by:
  U.S. government and federal agency obligations$488,053 $26,928 $12,460 $527,441 
  Agency mortgage-backed securities1,792,314 21,744 204,500 2,018,558 
  Non-agency mortgage-backed securities40,950 — — 40,950 
  Asset-backed securities293,001 — — 293,001 
  Other debt securities1,924 — — 1,924 
   Total repurchase agreements, gross amount recognized$2,616,242 $48,672 $216,960 $2,881,874 


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13. Stock-Based Compensation
The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights (SARs). Historically, most of the awards have been issued during the first quarter of each year. The stock-based compensation expense charged against income was $4.3 million and $4.2 million in the three months ended September 30, 2023 and 2022 respectively, and $12.6 million in the nine months ended September 30, 2023 and 2022, respectively.

Nonvested stock awards granted generally vest in 4 to 7 years and contain restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant. A summary of the status of the Company’s nonvested share awards as of September 30, 2023, and changes during the nine month period then ended, is presented below.

 
 
 

Shares Weighted Average Grant Date Fair Value
Nonvested at January 1, 20231,148,873 $58.20
Granted311,275 62.29
Vested(315,761)50.67
Forfeited(25,539)60.44
Nonvested at September 30, 20231,118,848 $61.41

SARs are granted with exercise prices equal to the market price of the Company’s stock at the date of grant. SARs vest ratably over 4 years of continuous service and have contractual terms of 10 years. All SARs must be settled in stock under provisions of the plan. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs on date of grant. The current year per share average fair value and the model assumptions are shown in the table below.

Weighted per share average fair value at grant date$18.65 
Assumptions:
Dividend yield
1.6 %
Volatility
27.9 %
Risk-free interest rate
3.9 %
Expected term
5.8 years

A summary of SAR activity during the first nine months of 2023 is presented below.

 
 
 
 
(Dollars in thousands, except per share data)
Rights
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value
Outstanding at January 1, 2023948,727 $46.82 
Granted89,829 65.64 
Forfeited(4,337)63.62 
Expired(5,781)52.13 
Exercised(49,866)26.83 
Outstanding at September 30, 2023
978,572 $49.46 5.1 years$4,468 


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14. Revenue from Contracts with Customers
Revenue from contracts with customers, Accounting Standard Codification 606 ("ASC 606"), requires revenue recognition for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For the nine months ended September 30, 2023, approximately 64% of the Company’s total revenue was comprised of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services.

The following table disaggregates revenue from contracts with customers by major product line.

Three Months Ended September 30Nine Months Ended September 30
(In thousands)2023202220232022
Bank card transaction fees$46,899 $45,638 $143,278 $131,556 
Trust fees49,207 45,406 141,800 140,009 
Deposit account charges and other fees23,090 24,521 67,475 72,392 
Consumer brokerage services3,820 5,085 13,582 14,599 
Other non-interest income11,912 9,360 29,737 24,605 
Total non-interest income from contracts with customers134,928 130,010 395,872 383,161 
Other non-interest income (1)
8,021 8,504 32,294 26,549 
Total non-interest income$142,949 $138,514 $428,166 $409,710 
(1) This revenue is not within the scope of ASC 606, and includes fees relating to capital market activities, loan fees and sales, derivative instruments, standby letters of credit and various other transactions.

For bank card transaction fees, nearly all of debit and credit card fees are earned in the Consumer segment, while corporate card and merchant fees are earned in the Commercial segment. The Consumer and Commercial segments contributed approximately 33% and 67%, respectively, of the Company's deposit account charge revenue. All trust fees and nearly all consumer brokerage services income were earned in the Wealth segment.    

The following table presents the opening and closing receivable balances for the nine month periods ended September 30, 2023 and 2022 for the Company’s significant revenue from contracts with customers.

(In thousands)September 30, 2023December 31, 2022September 30, 2022December 31, 2021
Bank card transaction fees$15,160 $17,254 $14,167 $16,424 
Trust fees1,886 2,038 2,073 2,222 
Deposit account charges and other fees5,762 6,631 5,658 6,702 
Consumer brokerage services74 949 632 391 

For these revenue categories, none of the transaction price has been allocated to performance obligations that are unsatisfied as of the end of a reporting period.


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15. Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale debt securities, equity securities, trading debt securities, certain investments relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or fair value accounting or write-downs of individual assets.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.
The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value Measurements note in the Company's 2022 Annual Report on Form 10-K. There have been no significant changes in these methodologies since then.

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Instruments Measured at Fair Value on a Recurring Basis
The table below presents the September 30, 2023 and December 31, 2022 carrying values of assets and liabilities measured at fair value on a recurring basis. There were no transfers among levels during the first nine months of 2023 or the year ended December 31, 2022.

Fair Value Measurements Using
(In thousands)Total Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
September 30, 2023
Assets:
  Residential mortgage loans held for sale$366 $ $366 $ 
  Available for sale debt securities:
     U.S. government and federal agency obligations947,976 947,976   
     Government-sponsored enterprise obligations40,593  40,593  
     State and municipal obligations1,178,414  1,177,476 938 
     Agency mortgage-backed securities3,792,567  3,792,567  
     Non-agency mortgage-backed securities1,137,448  1,137,448  
     Asset-backed securities2,313,545  2,313,545  
     Other debt securities450,285  450,285  
  Trading debt securities35,564  35,564  
  Equity securities5,453 5,453   
  Private equity investments165,322   165,322 
  Derivatives *112,182  112,136 46 
  Assets held in trust for deferred compensation plan18,859 18,859   
  Total assets10,198,574 972,288 9,059,980 166,306 
Liabilities:
  Derivatives *
58,718  58,674 44 
Liabilities held in trust for deferred compensation plan
18,859 18,859   
  Total liabilities$77,577 $18,859 $58,674 $44 
December 31, 2022
Assets:
  Residential mortgage loans held for sale$— $— $— $— 
  Available for sale debt securities:
     U.S. government and federal agency obligations1,035,406 1,035,406 — — 
     Government-sponsored enterprise obligations43,108 — 43,108 — 
     State and municipal obligations1,767,109 — 1,765,268 1,841 
     Agency mortgage-backed securities4,308,427 — 4,308,427 — 
     Non-agency mortgage-backed securities1,211,607 — 1,211,607 — 
     Asset-backed securities3,397,801 — 3,397,801 — 
     Other debt securities474,858 — 474,858 — 
  Trading debt securities43,523 — 43,523 — 
  Equity securities6,210 6,210 — — 
  Private equity investments178,127 — — 178,127 
  Derivatives *60,492 — 60,458 34 
  Assets held in trust for deferred compensation plan17,856 17,856 — — 
  Total assets12,544,524 1,059,472 11,305,050 180,002 
Liabilities:
  Derivatives *
54,984 — 54,865 119 
Liabilities held in trust for deferred compensation plan
17,856 17,856 — — 
  Total liabilities$72,840 $17,856 $54,865 $119 
* The fair value of each class of derivative is shown in Note 11.

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The changes in the Company's significant Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)


(In thousands)
State and Municipal Obligations
Private Equity
Investments
Total
For the three months ended September 30, 2023
Balance June 30, 2023
$920 $172,732 $173,652 
Total gains or losses (realized/unrealized):
Included in earnings 5,605 5,605 
Included in other comprehensive income *18  18 
Sale/pay down of private equity investments (13,342)(13,342)
Capitalized interest/dividends 327 327 
Balance September 30, 2023$938 $165,322 $166,260 
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2023
$ $5,605 $5,605 
*Total gains or losses for the three months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2023
$17 $ $17 
For the nine months ended September 30, 2023
Balance January 1, 2023
$1,841 $178,127 $179,968 
Total gains or losses (realized/unrealized):
Included in earnings 16,946 16,946 
Included in other comprehensive income *49  49 
Investment securities called(1,000) (1,000)
Discount accretion48  48 
Purchases of private equity investments 10,756 10,756 
Sale/pay down of private equity investments (40,834)(40,834)
Capitalized interest/dividends 327 327 
Balance September 30, 2023$938 $165,322 $166,260 
Total gains or losses for the nine months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2023
$ $17,446 $17,446 
*Total gains or losses for the nine months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2023
$27 $ $27 

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Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)


(In thousands)
State and Municipal Obligations
Private Equity
Investments
Total
For the three months ended September 30, 2022
Balance June 30, 2022
$1,816 $161,771 $163,587 
Total gains or losses (realized/unrealized):
Included in earnings— 14,050 14,050 
Included in other comprehensive income *40 — 40 
Discount accretion— 
Purchases of private equity investments— 899 899 
Sale/pay down of private equity investments— (423)(423)
Capitalized interest/dividends— 44 44 
Balance September 30, 2022
$1,858 $176,341 $178,199 
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2022
$— $14,050 $14,050 
*Total gains or losses for the three months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2022
$40 $— $40 
For the nine months ended September 30, 2022
Balance January 1, 2022
$1,984 $147,406 $149,390 
Total gains or losses (realized/unrealized):
Included in earnings— 37,133 37,133 
Included in other comprehensive income *(130)— (130)
Discount accretion— 
Purchases of private equity investments— 2,021 2,021 
Sale/pay down of private equity investments— (10,263)(10,263)
Capitalized interest/dividends— 44 44 
Balance September 30, 2022
$1,858 $176,341 $178,199 
Total gains or losses for the nine months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2022
$— $37,083 $37,083 
*Total gains or losses for the nine months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2022
$(130)$— $(130)
* Included in "net unrealized gains (losses) on available for sale debt securities" in the consolidated statements of comprehensive income.

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Gains and losses included in earnings for the Company's significant Level 3 assets and liabilities in the previous table are reported in the following line items in the consolidated statements of income:

(In thousands)Investment Securities Gains (Losses), Net
For the three months ended September 30, 2023
Total gains or losses included in earnings$5,605 
Change in unrealized gains or losses relating to assets still held at September 30, 2023
$5,605 
For the nine months ended September 30, 2023
Total gains or losses included in earnings $16,946 
Change in unrealized gains or losses relating to assets still held at September 30, 2023
$17,446 
For the three months ended September 30, 2022
Total gains or losses included in earnings $14,050 
Change in unrealized gains or losses relating to assets still held at September 30, 2022
$14,050 
For the nine months ended September 30, 2022
Total gains or losses included in earnings$37,133 
Change in unrealized gains or losses relating to assets still held at September 30, 2022
$37,083 


Level 3 Inputs
The Company's significant Level 3 measurements at September 30, 2023, which employ unobservable inputs that are readily quantifiable, pertain to investments in portfolio concerns held by the Company's private equity subsidiaries. Information about these inputs is presented in the table below.

Quantitative Information about Level 3 Fair Value MeasurementsWeighted
Valuation TechniqueUnobservable InputRangeAverage*
Private equity investmentsMarket comparable companiesEBITDA multiple4.0-6.05.1
* Unobservable inputs were weighted by the relative fair value of the instruments.

Instruments Measured at Fair Value on a Nonrecurring Basis
For assets measured at fair value on a nonrecurring basis during the first nine months of 2023 and 2022, and still held as of September 30, 2023 and 2022, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation inputs used to determine each adjustment, and the carrying value of the related individual assets or portfolios at September 30, 2023 and 2022.

Fair Value Measurements Using
(In thousands)

Fair Value
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total Gains (Losses) Recognized During the Nine Months Ended September 30
September 30, 2023
Collateral dependent loans$4,029 $ $ $4,029 $(2,059)
Long-lived assets1,894   1,894 (164)
September 30, 2022
Collateral dependent loans$200 $— $— $200 $(394)
Mortgage servicing rights11,228 — — 11,228 304 
Long- lived assets480 — — 480 (965)



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16. Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as follows at September 30, 2023 and December 31, 2022:

Carrying Amount
Estimated Fair Value at September 30, 2023

(In thousands)

Level 1Level 2Level 3Total
Financial Assets
Loans:
Business$5,908,330 $ $ $5,733,548 $5,733,548 
Real estate - construction and land
1,539,566   1,520,702 1,520,702 
Real estate - business
3,647,168   3,486,455 3,486,455 
Real estate - personal
3,024,639   2,652,514 2,652,514 
Consumer
2,125,804   2,059,484 2,059,484 
Revolving home equity305,237   302,428 302,428 
Consumer credit card574,829   540,766 540,766 
Overdrafts
3,753   3,667 3,667 
Total loans17,129,326   16,299,564 16,299,564 
Loans held for sale5,120  5,120  5,120 
Investment securities10,132,637 953,429 8,947,478 231,730 10,132,637 
Federal funds sold2,735 2,735   2,735 
Securities purchased under agreements to resell450,000   439,056 439,056 
Interest earning deposits with banks1,847,641 1,847,641   1,847,641 
Cash and due from banks358,010 358,010   358,010 
Derivative instruments112,182  112,136 46 112,182 
Assets held in trust for deferred compensation plan18,859 18,859   18,859 
       Total$30,056,510 $3,180,674 $9,064,734 $16,970,396 $29,215,804 
Financial Liabilities
Non-interest bearing deposits$7,961,402 $7,961,402 $ $ $7,961,402 
Savings, interest checking and money market deposits14,154,275 14,154,275  — 14,154,275 
Certificates of deposit2,974,780   3,003,240 3,003,240 
Federal funds purchased506,355 506,355  — 506,355 
Securities sold under agreements to repurchase2,238,826   2,241,706 2,241,706 
Other borrowings503,547  3,547 500,000 503,547 
Derivative instruments58,718  58,674 44 58,718 
Liabilities held in trust for deferred compensation plan18,859 18,859  — 18,859 
       Total$28,416,762 $22,640,891 $62,221 $5,744,990 $28,448,102 
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Carrying Amount
Estimated Fair Value at December 31, 2022

(In thousands)
Level 1Level 2Level 3Total
Financial Assets
Loans:
Business$5,661,725 $— $— $5,506,128 $5,506,128 
Real estate - construction and land
1,361,095 — — 1,347,328 1,347,328 
Real estate - business
3,406,981 — — 3,289,655 3,289,655 
Real estate - personal
2,918,078 — — 2,654,423 2,654,423 
Consumer
2,059,088 — — 1,999,788 1,999,788 
Revolving home equity297,207 — — 295,005 295,005 
Consumer credit card584,000 — — 538,268 538,268 
Overdrafts
14,957 — — 14,666 14,666 
Total loans16,303,131 — — 15,645,261 15,645,261 
Loans held for sale4,964 — 4,964 — 4,964 
Investment securities12,511,649 1,041,616 11,244,592 225,441 12,511,649 
Federal funds sold49,505 49,505 — — 49,505 
Securities purchased under agreements to resell825,000 — — 795,574 795,574 
Interest earning deposits with banks389,140 389,140 — — 389,140 
Cash and due from banks452,496 452,496 — — 452,496 
Derivative instruments60,492 — 60,458 34 60,492 
Assets held in trust for deferred compensation plan17,856 17,856 — — 17,856 
       Total$30,614,233 $1,950,613 $11,310,014 $16,666,310 $29,926,937 
Financial Liabilities
Non-interest bearing deposits$10,066,356 $10,066,356 $— $— $10,066,356 
Savings, interest checking and money market deposits15,126,981 15,126,981 — — 15,126,981 
Certificates of deposit994,103 — — 982,613 982,613 
Federal funds purchased159,860 159,860 — — 159,860 
Securities sold under agreements to repurchase2,681,874 — — 2,684,471 2,684,471 
Other borrowings8,831 — 8,831 — 8,831 
Derivative instruments54,984 — 54,865 119 54,984 
Liabilities held in trust for deferred compensation plan17,856 17,856 — — 17,856 
       Total$29,110,845 $25,371,053 $63,696 $3,667,203 $29,101,952 

17. Legal and Regulatory Proceedings
The Company has various legal proceedings pending at September 30, 2023, arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at early stages of the legal process. The Company records a loss accrual for all legal and regulatory matters for which it deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet progressed to the point where a loss amount can be determined to be probable and estimable.

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Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2022 Annual Report on Form 10-K. Results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of results to be attained for any other period.

Forward-Looking Information
This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, the effects of the COVID-19 pandemic, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2022 Annual Report on Form 10-K. During the quarter ended September 30, 2023, there were no material changes to the Risk Factors disclosed in the Company's 2022 Annual Report on Form 10-K.

Critical Accounting Estimates and Related Policies
The Company has identified certain policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates and related policies are the Company's allowance for credit losses and fair value measurement policies. A discussion of these estimates and related policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2022 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2022.

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Selected Financial Data
Three Months Ended September 30Nine Months Ended September 30
 2023202220232022
Per Share Data
   Net income per common share — basic$.96 $.97 *$2.94 $2.81 *
   Net income per common share — diluted.96 .97 *2.93 2.81 *
   Cash dividends on common stock.270 .252 *.810 .757 *
   Book value per common share20.90 18.91 *
   Market price47.98 63.01 *
Selected Ratios
(Based on average balance sheets)
   Loans to deposits (1)
66.39 %56.40 %65.85 %54.05 %
   Non-interest bearing deposits to total deposits31.05 38.76 33.23 39.04 
   Equity to loans (1)
15.90 17.45 16.00 19.19 
   Equity to deposits10.55 9.84 10.53 10.37 
   Equity to total assets8.40 8.31 8.31 8.66 
   Return on total assets1.49 1.48 1.53 1.39 
   Return on equity17.73 17.84 18.42 16.08 
(Based on end-of-period data)
   Non-interest income to revenue (2)
36.51 35.99 36.35 37.34 
   Efficiency ratio (3)
58.15 55.19 57.62 57.48 
   Tier I common risk-based capital ratio15.11 13.97 
   Tier I risk-based capital ratio
15.11 13.97 
   Total risk-based capital ratio 15.90 14.69 
   Tangible common equity to tangible assets ratio (4)
7.78 6.80 
   Tier I leverage ratio
10.87 9.87 
* Restated for the 5% stock dividend distributed in December 2022.
(1) Includes loans held for sale.
(2) Revenue includes net interest income and non-interest income.
(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.
(4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization.
It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP.

The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets.

September 30
(Dollars in thousands)20232022
Total equity$2,599,266 $2,371,107 
Less non-controlling interest17,861 19,513 
Less goodwill 146,539 138,921 
Less intangible assets*4,111 4,371 
Total tangible common equity (a)$2,430,755 $2,208,302 
Total assets$31,376,692 $32,602,596 
Less goodwill146,539 138,921 
Less intangible assets*4,111 4,371 
Total tangible assets (b)$31,226,042 $32,459,304 
Tangible common equity to tangible assets ratio (a)/(b)7.78 %6.80 %
* Intangible assets other than mortgage servicing rights.
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Results of Operations
Summary
  Three Months Ended September 30Nine Months Ended September 30
(Dollars in thousands)20232022% change20232022% change
Net interest income (expense)$248,547 $246,373 .9 %$749,708 $687,544 9.0 %
Provision for credit losses(11,645)(15,290)23.8 (29,572)(12,594)(134.8)
Non-interest income142,949 138,514 3.2 428,166 409,710 4.5 
Investment securities gains (losses), net4,298 3,410 26.0 7,384 11,602 (36.4)
Non-interest expense(228,010)(212,884)7.1 (679,728)(632,037)7.5 
Income taxes(33,439)(33,936)(1.5)(102,242)(97,859)4.5 
Non-controlling interest income (expense)(2,104)(3,364)(37.5)(5,879)(9,595)(38.7)
Net income attributable to Commerce Bancshares, Inc.$120,596 $122,823 (1.8 %)$367,837 $356,771 3.1 %

For the quarter ended September 30, 2023, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $120.6 million, a decrease of $2.2 million, or 1.8%, compared to the third quarter of the previous year. For the current quarter, the annualized return on average assets was 1.49%, the annualized return on average equity was 17.73%, and the efficiency ratio was 58.15%. Diluted earnings per common share was $.96 per share in the current quarter, a decrease of 1.0% compared to $0.97 per share in the third quarter of 2022, and decreased 5.9% compared to $1.02 per share in the previous quarter.

Compared to the third quarter of last year, net interest income increased $2.2 million, or .9%, mainly due to increases in interest income on loans and interest income on deposits with banks of $85.0 million and $26.2 million, respectively. These increases were partly offset by an increase in deposits and borrowings interest expense of $96.3 million. The provision for credit losses decreased $3.6 million, or 23.8%, compared to the same quarter in the prior year. Non-interest income increased $4.4 million, or 3.2%, compared to the third quarter of 2022, mainly due to an increase in trust fees and bank card fees, partly offset by lower deposit account charges and consumer brokerage services fees. Net gains on investment securities totaled $4.3 million in the current quarter compared to net gains of $3.4 million in the same quarter of last year. Net securities gains in the current quarter primarily resulted from gains of $5.6 million related to fair value adjustments on private equity investments, partly offset by $1.2 million of net losses realized on the sales of private equity investments. Non-interest expense increased $15.1 million, or 7.1%, over the third quarter of 2022, mainly due to higher salaries and employee benefits expense, higher data processing and software expense and higher FDIC insurance expense.

Net income for the first nine months of 2023 was $367.8 million, an increase of $11.1 million, or 3.1%, from the same period last year. Diluted earnings per common share was $2.93, an increase of 4.3% compared to $2.81 per share in the same period last year. For the first nine months of 2023, the annualized return on average assets was 1.53%, the annualized return on average equity was 18.42%, and the efficiency ratio was 57.62%. Net interest income increased $62.2 million, or 9.0%, over the same period last year. This growth was largely due to an increase of $275.5 million in interest income on loans and an increase in interest on deposits at the Federal Reserve of $61.2 million. These increases were partly offset by increases in interest expense on deposits and borrowings of $243.9 million. The provision for credit losses was $29.6 million for the first nine months of 2023, compared to $12.6 million in the same period last year. Non-interest income increased $18.5 million, or 4.5%, from the first nine months of last year mainly due to higher bank card fees, letters of credit fees, and cash sweep commission fees, partly offset by lower deposit account fees. Non-interest expense increased $47.7 million, or 7.5%, over the first nine months of last year mainly due to increases in salaries and benefits expense, higher FDIC insurance expense, and higher data processing and software expense.


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Net Interest Income
The following table summarizes the changes in net interest income on a fully taxable-equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.

Analysis of Changes in Net Interest Income
Three Months Ended September 30, 2023 vs. 2022Nine Months Ended September 30, 2023 vs. 2022
 Change due toChange due to
 
(In thousands)
Average
Volume
Average
Rate

Total
Average
Volume
Average
Rate

Total
Interest income, fully taxable equivalent basis:
Loans:
  Business$5,165 $27,126 $32,291 $10,565 $94,985 $105,550 
  Real estate - construction and land2,924 11,013 13,937 7,920 37,133 45,053 
  Real estate - business4,257 15,858 20,115 10,958 55,253 66,211 
  Real estate - personal1,254 2,807 4,061 3,361 8,186 11,547 
  Consumer9,513 9,520 526 28,727 29,253 
  Revolving home equity281 2,253 2,534 743 7,744 8,487 
  Consumer credit card425 2,434 2,859 1,372 9,032 10,404 
  Overdrafts— — — — — — 
     Total interest on loans14,313 71,004 85,317 35,445 241,060 276,505 
Loans held for sale(33)26 (7)(94)72 (22)
Investment securities:
  U.S. government and federal agency securities(1,445)(5,469)(6,914)(2,325)(13,696)(16,021)
  Government-sponsored enterprise obligations— (1)(1)205 185 390 
  State and municipal obligations(3,788)(1,147)(4,935)(8,795)(2,234)(11,029)
  Mortgage-backed securities(3,340)1,959 (1,381)(11,733)4,740 (6,993)
  Asset-backed securities(5,379)3,726 (1,653)(11,045)15,503 4,458 
  Other securities391 3,467 3,858 3,422 (3,370)52 
     Total interest on investment securities(13,561)2,535 (11,026)(30,271)1,128 (29,143)
Federal funds sold(75)26 (49)180 345 525 
Securities purchased under agreements to resell(2,891)647 (2,244)(8,007)4,129 (3,878)
Interest earning deposits with banks7,699 18,468 26,167 1,192 59,986 61,178 
Total interest income5,452 92,706 98,158 (1,555)306,720 305,165 
Interest expense:
Deposits:
  Savings(16)33 17 (27)88 61 
  Interest checking and money market(2,054)38,287 36,233 (2,844)85,192 82,348 
  Certificates of deposit of less than $100,000196 14,892 15,088 224 26,070 26,294 
  Certificates of deposit of $100,000 and over2,153 15,918 18,071 1,251 36,966 38,217 
     Total interest on deposits279 69,130 69,409 (1,396)148,316 146,920 
Federal funds purchased2,776 3,742 6,518 3,821 14,449 18,270 
Securities sold under agreements to repurchase287 10,568 10,855 (392)42,372 41,980 
Other borrowings4,490 4,661 9,151 18,524 18,481 37,005 
Total interest expense7,832 88,101 95,933 20,557 $223,618 $244,175 
Net interest income, tax equivalent basis$(2,380)$4,605 $2,225 $(22,112)$83,102 $60,990 

Net interest income in the third quarter of 2023 was $248.5 million, an increase of $2.2 million over the third quarter of 2022. On a fully taxable-equivalent (FTE) basis, net interest income totaled $251.0 million in the third quarter of 2023, up $2.2 million over the same period last year and down $795 thousand from the previous quarter. The increase in net interest income
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compared to the third quarter of 2022 was mainly due to higher interest income earned on loans (FTE) of $85.3 million and balances at the Federal Reserve of $26.2 million, partly offset by higher interest expense on deposits and borrowings of $95.9 million. The increase in total interest earned on loans (FTE) was the result of higher loan yields on all loan products, especially commercial loans, many of which have variable rates, coupled with higher average balances. The increase in interest earned on balances at the Federal Reserve was due to higher rates and average balances, while the increase in interest expense was mainly due to higher rates paid on deposits and borrowings. The Company's net yield on earning assets (FTE) was 3.11% in the current quarter compared to 3.01% in the third quarter of 2022.

Total interest income (FTE) increased $98.2 million over the third quarter of 2022. Interest income on loans (FTE) was $257.7 million during the third quarter of 2023, an increase of $85.3 million, or 49.5%, over the same quarter last year. The increase in interest income over the same quarter of last year was primarily due to an increase of 165 basis points in the average rate earned and growth of $1.3 billion, or 8.5%, in average loan balances. Most of the increase in interest income occurred in the business, business real estate and construction loan categories. The largest increase to interest income occurred in business loan interest, which grew $32.3 million due to a 183 basis point increase in the average rate earned, coupled with growth in average balances of $531.5 million, or 10.0%. Business real estate loan interest income increased $20.1 million due to an increase of 173 basis points in the average rate earned and higher average balances of $383.9 million, or 11.8%. Construction and land loan interest grew $13.9 million due to a 290 basis point increase in the average rate earned and growth of $220.1 million, or 17.1%, in average loan balances. In addition, consumer loan interest increased $9.5 million due to an increase of 180 basis points in the average rate earned, while consumer credit card loan increased $2.9 million mainly due to a 172 basis point increase in the average rate earned. Personal real estate loan interest income grew $4.1 million due to a 37 basis point increase in the average rate earned and growth of $148.1 million, or 5.2%, in average loan balances.

Interest income on investment securities (FTE) was $70.3 million during the third quarter of 2023, which was a decrease of $11.0 million from the same quarter last year. The decrease in interest income occurred mainly in interest earned on U.S. government and federal agency obligations, which declined $6.9 million due to a decrease in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS). Interest income related to TIPS, which is tied to the non-seasonally adjusted Consumer Price Index (CPI-U), decreased $6.0 million from the same quarter last year. Interest income earned on state and municipal securities declined $4.9 million due to a $661.4 million, or 32.2%, decrease in average balances and a 32 basis point decline in the average rate earned. Interest income earned on mortgage-backed securities decreased $1.4 million mainly due to a decline of $686.6 million, or 10.0%, in the average balance. In addition, a $1.3 million increase in premium amortization, reflecting slower forward prepayment speed estimates was recorded in the current quarter, compared to a premium amortization adjustment increase of $1.5 million in the prior year. Interest earned on asset-backed securities decreased $1.7 million due to lower average balances of $1.3 billion, or 34.0%, partly offset by an increase of 58 basis points in the average rate earned. These decreases to interest income were partly offset by growth in interest income on other securities of $3.9 million, mainly driven by a $2.3 million dividend from a private equity investment in the third quarter of 2023. Additionally, the average rate earned on investment securities during the three months ended September 30, 2023 increased 15 basis points over the same period in the prior year. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $11.9 billion in the third quarter of 2023, compared to $14.8 billion in the third quarter of 2022.

Interest income on securities purchased under agreements to resell decreased $2.2 million from the same quarter last year, due to a decline of $666.9 million in the average balance, partly offset by an increase of 36 basis points in the average rate earned. Interest income on balances at the Federal Reserve grew $26.2 million due to an increase of 314 basis points in the average rate earned and an increase of $1.4 billion in the average balance invested.

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

Total interest expense increased $95.9 million compared to the third quarter of 2022 due to increases of $69.4 million in interest expense on interest bearing deposits and $26.5 million on borrowings. The increase in deposit interest expense resulted mainly from an increase of $36.2 million in interest expense on interest checking and money market deposit accounts due to a 113 basis point increase in the average rate paid, slightly offset by lower average balances of $1.4 billion, or 9.5%. In addition, interest expense on certificates of deposit increased $33.2 million mainly due to an increase of 383 basis points in the average rate paid and an increase in average balances of $2.2 billion. A portion of this increase was due to brokered deposits added by the Company during the second quarter of 2023. The brokered deposits consist of short-term certificates of deposit less than $100 thousand, and $401.3 million were outstanding at September 30, 2023. Interest expense on borrowings was higher due to an increase of $10.9 million in interest expense on customer repurchase agreements resulting from an increase of 183 basis points in the average rate paid. Interest expense on federal funds purchased increased $6.5 million mainly due to a 292 basis point increase in the average rate paid and a $456.9 million increase in the average balance of federal funds purchased, while
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FHLB borrowings increased $684.2 million and resulted in an increase of $9.2 million in interest expense. The overall average rate incurred on all interest bearing liabilities was 2.12% and .34% in the third quarters of 2023 and 2022, respectively.

Net interest income (FTE) for the first nine months of 2023 was $756.1 million compared to $695.1 million for the same period in 2022. For the first nine months of 2023, the net interest margin was 3.16% compared to 2.75% for the same period in 2022.

Total interest income (FTE) for the first nine months of 2023 increased $61.0 million over the same period last year mainly due to higher interest income on loans (FTE) and balances at the Federal Reserve, partly offset by higher interest expense on deposit and borrowings and lower interest income on investment securities (FTE). Loan interest income (FTE) increased $276.5 million, or 61.6%, due to a 193 basis point increase in the average rate earned and a $1.2 billion, or 8.0%, increase in average loan balances. Most of the increase occurred in the business, business real estate and construction loan categories, but interest income in all loan categories increased due to higher average rates earned and average loan balances. Interest income on investment securities (FTE) decreased $29.1 million due to a $2.5 billion decrease in average balances, slightly offset by a 12 basis point increase in the average rate earned. Interest earned on U.S. government and federal agency obligations decreased $16.0 million, mainly due to lower TIPS interest income. Interest income earned on state and municipal securities declined $11.0 million due to lower average balances and lower interest rates earned. Interest earned on mortgage-backed securities decreased $7.0 million due to lower average balances, partly offset by higher average rates earned, while interest on asset-backed securities increased $4.5 million due to higher average rates earned, partly offset by lower average balances. Interest income on securities purchased under agreements to resell decreased $3.9 million due to lower average balances, partly offset higher average rates earned. Interest income on balances at the Federal Reserve increased $61.2 million mainly due to higher average rates earned.

Total interest expense for the first nine months of 2023 increased $244.2 million compared to the same period last year. Interest expense on deposits increased $146.9 million, due to a 116 basis point increase in the average rate paid. Interest expense on borrowings increased $97.3 million, mainly due to higher rates paid on federal funds purchased and customer repurchase agreements, as well as and higher average balances and higher rates paid on FHLB borrowings. The overall cost of total interest bearing liabilities increased to 1.74% compared to .17% in the same period last year.

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


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Non-Interest Income
  Three Months Ended September 30Increase (Decrease)Nine Months Ended September 30Increase (Decrease)
(Dollars in thousands)20232022Amount% change20232022Amount% change
Bank card transaction fees$46,899$45,638$1,261 2.8 %$143,278$131,556$11,722 8.9 %
Trust fees49,20745,4063,801 8.4 141,800140,0091,791 1.3 
Deposit account charges and other fees23,09024,521(1,431)(5.8)67,47572,392(4,917)(6.8)
Consumer brokerage services3,8205,085(1,265)(24.9)13,58214,599(1,017)(7.0)
Capital market fees2,4103,393(983)(29.0)8,31110,845(2,534)(23.4)
Loan fees and sales2,9663,094(128)(4.1)8,29010,575(2,285)(21.6)
Other14,55711,3773,180 28.0 45,43029,73415,696 52.8 
Total non-interest income$142,949$138,514$4,435 3.2 %$428,166$409,710$18,456 4.5 %
Non-interest income as a % of total revenue*36.5 %36.0 %36.4 %37.3 %
* Total revenue includes net interest income and non-interest income.

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

Three Months Ended September 30Nine Months Ended September 30
(Dollars in thousands)20232022$ change% change20232022$ change% change
Net debit card fees$11,089 $10,508 $581 5.5 %$32,716 $30,593 $2,123 6.9 %
Net credit card fees3,430 3,597 (167)(4.6)10,916 11,031 (115)(1.0)
Net merchant fees5,859 5,232 627 12.0 16,569 15,146 1,423 9.4 
Net corporate card fees26,521 26,301 220 .8 83,077 74,786 8,291 11.1 
Total bank card transaction fees$46,899 $45,638 $1,261 2.8 %$143,278 $131,556 $11,722 8.9 %

For the third quarter of 2023, total non-interest income amounted to $142.9 million compared to $138.5 million in the same quarter last year, which was an increase of $4.4 million, or 3.2%. The increase was mainly due to higher trust fees and net bank card fees, partly offset by lower deposit account fees, consumer brokerage services and capital market fees. Bank card transaction fees for the current quarter grew $1.3 million, or 2.8%, over the same period last year, mainly due to growth of $627 thousand in net merchant fees and $581 thousand in net debit card fees. The growth in net merchant fees was mainly due to higher interchange fees, and net debit card fees increased mainly due to lower network expense. Net corporate card fees increased mainly due to lower network and rewards expense, partly offset by lower interchange fees, while net credit card fees decreased due to lower interchange fees. Trust fees increased $3.8 million, or 8.4%, mainly due to higher private client trust fees. Compared to the third quarter of last year, deposit account fees decreased $1.4 million, or 5.8%, due to lower overdraft and return item fees, partly offset by higher corporate cash management fees. Consumer brokerage fees declined $1.3 million due to lower annuity and advisory fees, while capital market fees decreased $983 thousand, or 29.0%. Other non-interest income increased $3.2 million, or 28.0%, mainly due to growth of $942 thousand in bond underwriting fees and gains on the sale of real estate of $1.3 million recorded in the current quarter.

Non-interest income for the first nine months of 2023 was $428.2 million compared to $409.7 million in the first nine months of 2022, which was an increase of $18.5 million, or 4.5%. The increase was mainly due to higher net bank card fees and other income, partly offset by lower deposit account fees, capital market fees and loan fees and sales. Bank card transaction fees for the current quarter grew $11.7 million, or 8.9%, over the same period last year, mainly due to growth of $8.3 million in net corporate card fees and $2.1 million in net debit card fees. Trust fees increased $1.8 million, or 1.3%, mainly due to higher private client trust fees. Deposit account fees decreased $4.9 million, or 6.8%, mainly due to lower overdraft and return item fees, partly offset by higher corporate cash management fees and personal deposit account fees. Capital market fees decreased $2.5 million, or 23.4%, and consumer brokerage fees declined $1.0 million, or 7.0%, due to lower advisory and 12b-1 fees. Loan fees and sales decreased $2.3 million, or 21.6%, mainly due to lower mortgage banking revenue. Other non-interest income increased $15.7 million, or 52.8%, mainly due to higher letter of credit fees of $3.1 million, cash sweep commissions of $2.9 million, gains of $2.1 million on the sale of real estate and a write down of $965 thousand on a branch location recorded in 2022. In addition, increases of $6.0 million in fair value adjustments were recorded on the Company's deferred compensation plan, which is held in a trust and recorded as both an asset and liability, affecting both other income and other expense.


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Investment Securities Gains (Losses), Net
Three Months Ended September 30Nine Months Ended September 30
(In thousands)2023202220232022
Net gains (losses) on sales of available for sale debt securities$ $(10,692)$(8,444)$(20,274)
Fair value adjustments on equity securities, net(67)(25)(757)(1,048)
Net gains (losses) on sales of private equity investments(1,240)77 (361)(4,209)
Fair value adjustments on private equity investments5,605 14,050 16,946 37,133 
Total investment securities gains (losses), net$4,298 $3,410 $7,384 $11,602 

Net gains on investment securities, which were recognized in earnings during the three months ended September 30, 2023 and 2022, are shown in the table above. Net securities gains of $4.3 million were reported in the third quarter of 2023, compared to net gains of $3.4 million in the same period last year. The net gains in the third quarter of 2023 were primarily driven by the Company's private equity investments, where $5.6 million in net gains in fair value were partially offset by net losses of $1.2 million on sales. The net gains on investment securities for the same quarter last year were primarily comprised of $14.1 million of net gains in fair value on the Company’s private equity investments, partially offset by a loss of $10.7 million on the sale of an available for sale debt security.

Net gains on investment securities of $7.4 million were recognized in earnings for the nine months ended September 30, 2023, compared to net gains of $11.6 million for the same period in 2022. Net gains in the first nine months of 2023 were mainly comprised of net gains in fair value of $16.9 million on private equity investments, due to fair value adjustments, partially offset by net losses of $8.4 million on sales of available for sale securities. Net gains in the first nine months of 2022 were mainly comprised of net gains in fair value of $37.1 million on private equity investments, partly offset by losses of $20.3 million on sales of available for sale securities, net losses of $4.2 million on sales of private equity investments, and net losses in fair value of $1.0 million on equity investments. The portion of private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in expense of $3.3 million during the first nine months of 2023 and expense of $6.6 million during the first nine months of 2022.


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Non-Interest Expense
  Three Months Ended September 30Increase (Decrease)Nine Months Ended September 30Increase (Decrease)
(Dollars in thousands)20232022Amount% change20232022Amount% change
Salaries and employee benefits$146,805 $137,393 $9,412 6.9 %$436,607 $415,589 $21,018 5.1 %
Data processing and software30,744 28,050 2,694 9.6 87,617 82,701 4,916 5.9 
Net occupancy13,948 12,544 1,404 11.2 39,702 37,343 2,359 6.3 
Marketing6,167 6,228 (61)(1.0)18,006 18,408 (402)(2.2)
Equipment4,697 5,036 (339)(6.7)14,411 14,338 73 .5 
Supplies and communication4,963 4,581 382 8.3 14,178 13,655 523 3.8 
Other20,686 19,052 1,634 8.6 69,207 50,003 19,204 38.4 
Total non-interest expense$228,010 $212,884 $15,126 7.1 %$679,728 $632,037 $47,691 7.5 %

Non-interest expense for the third quarter of 2023 amounted to $228.0 million, an increase of $15.1 million, or 7.1%, compared to expense of $212.9 million in the third quarter of last year. The increase in expense over the same period last year was mainly due to higher salaries and employee benefits expense, data processing and software expense, FDIC insurance expense and occupancy expense. Salaries expense increased $6.8 million, or 5.8%, due to higher full-time salaries expense of $6.4 million, or 6.9%. Employee benefits expense totaled $21.5 million, reflecting growth of $2.6 million, or 13.6%, mainly due to higher healthcare expense. Full-time equivalent employees totaled 4,714 at September 30, 2023, compared to 4,595 at September 30, 2022. Data processing and software expense increased $2.7 million, or 9.6%, due to higher bank card processing fees and increased costs for service providers. Occupancy expense increased $1.4 million, or 11.2%, mainly due to higher depreciation expense and real estate taxes, partly offset by higher external rent income. Equipment expense decreased $339 thousand, or 6.7%, mainly due to lower equipment depreciation and repairs expense, while supplies and communication expense increased $382 thousand, or 8.3%, mainly due to higher postage, statement, and plastic expense. Other non-interest expense increased $1.6 million, or 8.6%, mainly due to higher FDIC insurance expense and lower deferred origination costs of $1.3 million and $982 thousand, respectively.

Non-interest expense amounted to $679.7 million for the first nine months of 2023, an increase of $47.7 million, or 7.5%, over the first nine months of 2022. Salaries and benefits expense increased $21.0 million, or 5.1%, mainly due to higher full-time salaries expense, healthcare expense and payroll taxes, partly offset by lower incentive compensation expense, largely the result of a $5.4 million accrual for special bonuses in 2022 that did not reoccur in 2023. Data processing and software expense increased $4.9 million, or 5.9%, due to increased costs for service providers and higher bank card processing fees. Occupancy expense increased $2.4 million, or 6.3%, mainly due to higher depreciation expense and real estate taxes, partly offset by higher external rent income. Marketing expense decreased $402 thousand, or 2.2%, while supplies and communication expense increased $523 thousand, or 3.8%, mainly due to higher office supplies, data network, and postage expense. Other non-interest expense increased $19.2 million, or 38.4%, mainly due to higher FDIC insurance expense of $5.4 million and higher travel and entertainment expense, miscellaneous losses and pension plan expense. In addition, an increase of $6.0 million in fair value equity adjustments were recorded on the Company's deferred compensation plan, and deconversion costs of $2.1 million relating to the transition of Commerce Financial Advisors support to LPL Financial's Institution Services platform were recorded in the second quarter of 2023.



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Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments
 Three Months EndedNine Months Ended September 30
(In thousands)Sept. 30, 2023June 30, 2023Sept. 30, 202220232022
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at beginning of period$158,685 $159,317 $138,039 $150,136 $150,044 
   Provision for credit losses on loans13,343 5,864 10,150 $35,155 $6,751 
   Net loan charge-offs (recoveries):
     Commercial:
        Business2,613 165 461 3,008 557 
        Real estate-construction and land (115)— (115)— 
        Real estate-business(15)(5)(8)(24)(16)
Commercial net loan charge-offs (recoveries)2,598 45 453 2,869 541 
     Personal Banking:
        Real estate-personal(9)(6)(15)(26)(34)
        Consumer1,797 1,273 827 4,345 2,268 
        Revolving home equity(1)(20)(38)(47)(34)
        Consumer credit card4,716 4,687 2,882 13,728 9,191 
        Overdrafts683 517 703 2,178 1,486 
Personal banking net loan charge-offs (recoveries)7,186 6,451 4,359 20,178 12,877 
Total net loan charge-offs (recoveries)9,784 6,496 4,812 23,047 13,418 
Balance at end of period$162,244 $158,685 $143,377 $162,244 $143,377 
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at beginning of period29,235 28,628 24,907 33,120 24,204 
Provision for credit losses on unfunded lending commitments(1,698)607 5,140 (5,583)5,843 
Balance at end of period27,537 29,235 30,047 27,537 30,047 
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS$189,781 $187,920 $173,424 $189,781 $173,424 

 Three Months EndedNine Months Ended September 30
Sept. 30, 2023June 30, 2023Sept. 30, 202220232022
Annualized net loan charge-offs (recoveries)*:
Commercial:
  Business.18 %.01 %.03 %.07 %.01 %
  Real estate-construction and land (.03)— (.01)— 
  Real estate-business — —  — 
Commercial net loan charge-offs (recoveries).09 — .02 .04 .01 
Personal Banking:
  Real estate-personal — —  — 
  Consumer.34 .24 .16 .28 .15 
  Revolving home equity (.03)(.05)(.02)(.02)
  Consumer credit card3.32 3.38 2.08 3.28 2.26 
  Overdrafts50.73 44.79 62.85 60.54 39.39 
Personal banking net loan charge-offs (recoveries).48 .44 .30 .46 .30 
Total annualized net loan charge-offs (recoveries).23 %.16 %.12 %.18 %.12 %
* as a percentage of average loans (excluding loans held for sale)

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To determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, the Company has an established process which assesses the risks and losses expected in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded lending commitments, as well as a second, smaller component based on certain individually evaluated loans and unfunded lending commitments. The Company's policies and processes for determining the allowance for credit losses on loans and the liability for unfunded lending commitments are discussed in Note 1 to the consolidated financial statements and in the "Allowance for Credit Losses" discussion within Critical Accounting Estimates and Related Policies in Item 7 of the 2022 Annual Report on Form 10-K.

Net loan charge-offs in the third quarter of 2023 amounted to $9.8 million, compared to $6.5 million in the prior quarter and $4.8 million in the third quarter of last year. Compared to the same period last year, total net loan charge-offs in the third quarter of 2023 increased $5.0 million and increased $3.3 million from the previous quarter. The increase over the prior year was mainly driven by increases in net charge-offs on business, consumer credit cards, and consumer loans of $2.2 million, $1.8 million, and $970 thousand, respectively. The increase from the previous quarter was driven by the increase in net charge-offs on business and consumer loans.

For the three months ended September 30, 2023, annualized net charge-offs on average consumer credit card loans were 3.32%, compared to 3.38% in the previous quarter and 2.08% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .34%, compared to .24% in the prior quarter and .16% in the same period last year. In the third quarter of 2023, total annualized net loan charge-offs were .23%, compared to .16% in the previous quarter and .12% in the same period last year.

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

For the nine months ended September 30, 2023, net loan charge-offs amounted to $23.0 million, compared to $13.4 million for the same period in the prior year. The increase in net loan charge-offs over the prior year was driven mainly by increases in consumer credit card, business, and consumer loans and overdrafts. Annualized net charge-offs on consumer credit card loans totaled 3.28% and 2.26% for the nine months ended September 30, 2023 and 2022, respectively, while consumer loan annualized net charge-offs were .28% and .15% in the nine months ended September 30, 2023 and 2022, respectively. Total annualized net loan charge-offs were .18% and .12% for the nine months ended September 30, 2023 and 2022, respectively.

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

For the nine months ended September 30, 2023, the allowance for credit losses on loans increased $12.1 million, compared to the allowance for credit losses on loans at December 31, 2022. During the nine months ended September 30, 2023, the allowance for credit losses on commercial loans increased by $7.3 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, increased $4.8 million. Compared to September 30, 2022, the allowance for credit losses on loans at September 30, 2023 increased $18.9 million. The increase in the allowance for credit losses at September 30, 2023 compared to both September 30, 2022 and December 31, 2022 was primarily the result of applying a slightly more pessimistic forecast at September 30, 2023 than was utilized in the prior year, coupled with loan growth and rising interest rates that extended the estimated lives of certain loan portfolios during 2023. The allowance for credit losses on loans was $162.2 million at September 30, 2023 and was .95%, .92% and .90% of total loans at September 30, 2023, December 31, 2022 and September 30, 2022, respectively.

In the current quarter, the provision for credit losses on unfunded lending commitments was a benefit of $1.7 million, compared to a provision of $5.1 million at September 30, 2022. For the nine months ended September 30, 2023, the provision for credit losses on unfunded commitments was a benefit of $5.6 million, compared to a provision of $5.8 million in the first nine months of 2022. At September 30, 2023, the liability for unfunded lending commitments was $27.5 million, compared to $33.1 million at December 31, 2022 and $30.0 million at September 30, 2022. The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans. See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses.
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The Company considers the allowance for credit losses on loans and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at September 30, 2023.

The allowance for credit losses on loans and the liability for unfunded lending commitments are estimates that require significant judgment including projections of the macro-economic environment. The Company utilizes a third-party macro-economic forecast that continuously changes due to economic conditions and events. These changes in the forecast cause fluctuations in the allowance for credit losses on loans and the liability for unfunded lending commitments. The Company uses judgment to assess the macro-economic forecast and internal loss data in estimating the allowance for credit losses on loans and the liability for unfunded lending commitments. These estimates are subject to periodic refinement based on changes in the underlying external and internal data.

Risk Elements of Loan Portfolio
The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual.

(Dollars in thousands)
September 30, 2023December 31, 2022
Non-accrual loans$8,209 $8,306 
Foreclosed real estate114 96 
Total non-performing assets$8,323 $8,402 
Non-performing assets as a percentage of total loans.05 %.05 %
Non-performing assets as a percentage of total assets.03 %.03 %
Total loans past due 90 days and still accruing interest$18,580 $15,830 

Non-accrual loans totaled $8.2 million at September 30, 2023, a decrease of $97 thousand from the balance at December 31, 2022. The decrease occurred mainly in business and business real estate loans, which decreased $149 thousand and $113 thousand, respectively. These decreases were partly offset by a $165 thousand increase in personal real estate non-accrual loans. At September 30, 2023, non-accrual loans were comprised of business (80.4%), personal real estate (18.7%), and business real estate (0.9%) loans. Foreclosed real estate totaled $114 thousand at September 30, 2023, a slight increase compared to December 31, 2022. Total loans past due 90 days or more and still accruing interest were $18.6 million as of September 30, 2023, an increase of $2.8 million from December 31, 2022. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements.

In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $219.4 million at September 30, 2023 compared with $259.7 million at December 31, 2022, resulting in a decrease of $40.4 million, or 15.5%.

(In thousands)
September 30, 2023December 31, 2022
Potential problem loans:
  Business$52,642 $29,455 
  Real estate – construction and land4,027 47,493 
  Real estate – business162,134 182,526 
  Real estate – personal569 250 
Total potential problem loans$219,372 $259,724 

When borrowers are experiencing financial difficulty, the Company may agree to modify the contractual terms of a loan to a borrower in order to assist the borrower in repaying principal and interest owed to the Company. At September 30, 2023, the Company held $129.0 million of loans that had been modified during the nine months ended September 30, 2023. These loans
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are further discussed in the "Modifications for borrowers experiencing financial difficulty" section in Note 2 to the consolidated financial statements.

Loans with Special Risk Characteristics
Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon.

Real Estate – Construction and Land Loans
The Company's portfolio of construction and land loans, as shown in the table below, amounted to 9.0% of total loans outstanding at September 30, 2023. The largest component of construction and land loans was commercial construction, which increased $183.3 million during the nine months ended September 30, 2023. At September 30, 2023, multi-family residential construction loans totaled approximately $376.0 million, or 28.8%, of the commercial construction loan portfolio, compared to $303.5 million, or 27.0%, at December 31, 2022.

(Dollars in thousands)September 30,
2023


% of Total
% of
Total
Loans
December 31, 2022
    

% of Total
% of
Total
Loans
Commercial construction$1,305,397 84.8 %7.6 %$1,122,105 82.4 %6.9 %
Residential construction126,941 8.2 .8 138,311 10.2 .8 
Residential land and land development67,279 4.4 .4 50,012 3.7 .3 
Commercial land and land development39,949 2.6 .2 50,667 3.7 .3 
Total real estate - construction and land loans$1,539,566 100.0 %9.0 %$1,361,095 100.0 %8.3 %

Real Estate – Business Loans
Total business real estate loans were $3.6 billion at September 30, 2023 and comprised 21.3% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At September 30, 2023, 31.0% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans.

(Dollars in thousands)September 30,
2023


% of Total
% of
Total
Loans
December 31, 2022


% of Total
% of
Total
Loans
Owner-occupied$1,130,922 31.0 %6.6 %$1,136,189 33.3 %7.0 %
Industrial585,716 16.1 3.4 478,534 14.0 2.9 
Office509,493 14.0 3.0 497,601 14.6 3.1 
Retail352,477 9.7 2.1 322,971 9.5 2.0 
Hotels293,420 8.0 1.7 230,972 6.8 1.4 
Multi-family281,542 7.7 1.6 308,156 9.0 1.9 
Farm202,050 5.5 1.2 195,920 5.8 1.2 
Senior living165,073 4.5 1.0 131,217 3.9 .8 
Other126,475 3.5 .7 105,421 3.1 .6 
Total real estate - business loans$3,647,168 100.0 %21.3 %$3,406,981 100.0 %20.9 %
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Information about the credit quality of the Company's business real estate loan portfolio as of September 30, 2023 and December 31, 2022 is provided in the table below.

(Dollars in thousands)PassSpecial MentionSubstandardNon-AccrualTotal
September 30, 2023
Owner-occupied$1,110,769 $7,510 $12,567 $76 $1,130,922 
Industrial585,634 82   585,716 
Office506,196  3,297  509,493 
Retail335,143 15,501 1,833  352,477 
Hotels282,404 9,373 1,643  293,420 
Multi-family280,384 1,158   281,542 
Farm202,050    202,050 
Senior living22,464  142,609  165,073 
Other126,224 251   126,475 
Total$3,451,268 $33,875 $161,949 $76 $3,647,168 
December 31, 2022
Owner-occupied$1,129,343 $632 $6,084 $130 $1,136,189 
Industrial478,534 — — — 478,534 
Office494,169 3,432 — — 497,601 
Retail321,041 — 1,930 — 322,971 
Hotels174,558 9,725 46,689 — 230,972 
Multi-family286,202 1,975 19,979 — 308,156 
Farm195,685 177 — 58 195,920 
Senior living23,514 — 107,702 131,217 
Other105,144 277 — — 105,421 
Total$3,208,190 $16,218 $182,384 $189 $3,406,981 

Revolving Home Equity Loans
The Company had $305.2 million in revolving home equity loans at September 30, 2023 that were collateralized by residential real estate. Most of these loans (91.3%) are written with terms requiring interest-only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of September 30, 2023, the outstanding principal of loans with an original LTV higher than 80% was $32.2 million, or 10.5% of the portfolio, compared to $32.4 million as of December 31, 2022. Total revolving home equity loan balances over 30 days past due were $5.2 million at September 30, 2023 and $1.9 million at December 31, 2022, and there were no revolving home equity loans on non-accrual status at September 30, 2023 or December 31, 2022. The weighted average FICO score for the total portfolio balance at September 30, 2023 is 785. At maturity, the accounts are re-underwritten, and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or convert the outstanding balance to an amortizing loan.  If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of 2023 through 2025, approximately 13% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 86% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels.

Consumer Loans
Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs. Auto loans comprised 38.8% of the consumer loan portfolio at September 30, 2023, and outstanding balances for auto loans were $824.7 million and $798.6 million at September 30, 2023 and December 31, 2022, respectively. The balances over 30 days past due amounted to $8.6 million at September 30, 2023 and $9.9 million at December 31, 2022, respectively, and comprised 1.0% of the outstanding balances of these loans at September 30, 2023 and 1.2% at December 31, 2022, respectively. For the nine months ended September 30, 2023, $290.3 million of new auto loans were originated, compared to $257.5 million during the first nine months of 2022.  At September 30, 2023, the automobile loan portfolio had a weighted average FICO score of 755, and net charge-offs on auto loans were .5% of average auto loans.

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The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 11.0% of the consumer loan portfolio at September 30, 2023. Losses on these loans have historically been low, and the Company saw net recoveries of $55 thousand for the first nine months of 2023. Private banking loans comprised 32.1% of the consumer loan portfolio at September 30, 2023. The Company's private banking loans are generally well-collateralized, and at September 30, 2023 were secured primarily by assets held by the Company's trust department. The remaining portion of the Company's consumer loan portfolio is comprised of health services financing, motorcycles, marine and RV loans. Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $1.6 million in the first nine months of 2023 and were .2% of the average balances of these loans at September 30, 2023.

Consumer Credit Card Loans
The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at September 30, 2023 of $574.8 million in consumer credit card loans outstanding, approximately $111.7 million, or 19.4%, carried a low promotional rate. Within the next six months, $41.9 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters.

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

(In thousands)
September 30, 2023December 31, 2022
Unfunded commitments at September 30, 2023
Extraction$204,372 $235,933 $118,941 
Mid-stream shipping and storage35,357 43,432 99,375 
Downstream distribution and refining9,718 7,675 12,590 
Support activities7,726 9,387 5,032 
Total energy lending portfolio$257,173 $296,427 $235,938 

Shared National Credits
The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled $1.5 billion at September 30, 2023, compared to $1.4 billion at December 31, 2022. Additional unfunded commitments at September 30, 2023 totaled $2.1 billion.

Income Taxes
Income tax expense was $33.4 million in the third quarter of 2023, compared to $36.0 million in the second quarter of 2023 and $33.9 million in the third quarter of 2022. The Company's effective tax rate, including the effect of non-controlling interest, was 21.7% in the third quarter of 2023, compared to 22.0% in the second quarter of 2023 and 21.7% in the third quarter of 2022.

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Financial Condition
Balance Sheet
Total assets of the Company were $31.4 billion at September 30, 2023 and $31.9 billion at December 31, 2022. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $31.2 billion at September 30, 2023 and $31.6 billion at December 31, 2022, and consisted of 55% in loans and 38% in investment securities at September 30, 2023.

At September 30, 2023, total loans increased $826.2 million or 5.1%, compared to balances at December 31, 2022. The increase was mainly due to growth in business, business real estate and construction loans of $246.6 million, $240.2 million, and $178.5 million, respectively. The growth in business loans was mainly the result of increased commercial and industrial lending and higher lease and tax free loan balances. Personal real estate loans increased $106.6 million, and consumer loans, which include automobile, marine and RV, fixed rate home equity and other consumer loans, increased $66.7 million, due to growth in auto loans and other consumer loans. These increases were partially offset by declines in overdrafts and consumer credit card loans of $11.2 million and $9.2 million, respectively.

Total available for sale debt securities, excluding fair value adjustments, decreased $2.3 billion at September 30, 2023 compared to December 31, 2022. Purchases of securities during this period totaled $87.4 million, offset by sales, maturities and pay downs of $2.4 billion. The decline in investment securities was mainly the result of lower balances of asset-backed securities, state and municipal securities, and agency mortgage-backed securities, which decreased $1.1 billion, $583.5 million, and $365.1 million, respectively, at September 30, 2023 compared to December 31, 2022. At September 30, 2023, the duration of the available for sale investment portfolio was 3.9 years, and maturities and pay downs of approximately $2.1 billion are expected to occur during the next 12 months. The Company does not have any investment securities classified as held-to-maturity.

Total deposits at September 30, 2023 amounted to $25.1 billion, a decrease of $1.1 billion compared to December 31, 2022. The decline in deposits largely resulted from a decrease in demand deposits, mainly in business demand deposits (decrease of $1.9 billion). Additionally, money market and savings deposit balances decreased $931.6 million and $157.3 million, respectively, while certificate of deposit balances grew $2.0 billion and interest checking balances increased $116.0 million over balances at December 31, 2022. The Company’s borrowings totaled $3.2 billion at September 30, 2023, an increase of $397.4 million over balances at December 31, 2022, mainly due to FHLB advances, which increased $500.0 million during the nine months ended September 30, 2023. Additionally, federal funds purchased were $346.5 million higher at September 30, 2023 than at December 31, 2022, whereas repurchase agreements declined by $443.0 million during the same period.

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

(In thousands)
September 30, 2023September 30, 2022December 31, 2022
Liquid assets:
  Available for sale debt securities$9,860,828 $12,632,510 $12,238,316 
  Federal funds sold2,735 14,020 49,505 
  Securities purchased under agreements to resell450,000 1,275,000 825,000 
  Balances at the Federal Reserve Bank1,847,641 642,943 389,140 
  Total$12,161,204 $14,564,473 $13,501,961 

The fair value of the available for sale debt portfolio was $9.9 billion at September 30, 2023 and included an unrealized net loss of $1.6 billion. Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $2.7 million as of September 30, 2023. Resale agreements, maturing through 2025, totaled $450.0 million at September 30, 2023. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral, and this collateral totaled $479.7 million in fair value at September 30, 2023. $325.0 million of the Company's resale agreements will mature in the next 12 months. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $1.8 billion at September 30, 2023 and increased $1.5 billion over December 31, 2022 balances.
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Approximately $2.1 billion of the Company's available for sale debt portfolio is expected to mature or pay down during the next 12 months, and at September 30, 2023, the duration of the Company's available for sale debt securities portfolio was 3.9 years. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows:

(In thousands)
September 30, 2023September 30, 2022December 31, 2022
Investment securities pledged for the purpose of securing:
  Federal Reserve Bank borrowings$2,700,426 $13,446 $11,469 
  FHLB borrowings and letters of credit301,406 2,033 1,817 
  Securities sold under agreements to repurchase *2,500,400 2,275,924 2,950,240 
  Other deposits and swaps2,082,807 2,483,636 1,772,974 
  Total pledged securities7,585,039 4,775,039 4,736,500 
  Unpledged and available for pledging2,264,732 6,905,006 6,545,695 
  Ineligible for pledging11,057 952,465 956,121 
  Total available for sale debt securities, at fair value$9,860,828 $12,632,510 $12,238,316 
* Includes securities pledged for collateral swaps, as discussed in Note 12 to the consolidated financial statements.

Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At September 30, 2023, such deposits totaled $22.1 billion and represented 88.1% of total deposits. These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources. Certificates of deposit of $100,000 and over totaled $1.8 billion at September 30, 2023. These accounts are normally considered more volatile with higher cost and comprised 7.0% of total deposits at September 30, 2023.

(In thousands)
September 30, 2023September 30, 2022December 31, 2022
Core deposit base:
 Non-interest bearing $7,961,402 $10,468,591 $10,066,356 
 Interest checking6,656,356 3,236,160 1,854,336 
 Savings and money market7,497,919 12,778,327 13,272,645 
 Total$22,115,677 $26,483,078 $25,193,337 

During the second quarter of 2023, the Company added brokered deposits in the form of short-term certificates of deposit less than $100 thousand, and $401.3 million were outstanding at September 30, 2023. At September 30, 2023, the Company's total deposit portfolio was $25.1 billion, compared to $26.2 billion at December 31, 2022. The Company's uninsured deposits were $10.2 billion, or 40.6% of total deposits at September 30, 2023. The Company's uninsured deposits include $2.1 billion of affiliate deposits and collateralized deposits. Excluding those affiliate and collateralized deposits, the Company's uninsured deposits at September 30, 2023 were $8.1 billion, or 32.3% of total deposits.

Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company's outside borrowings are mainly comprised of federal funds purchased, repurchase agreements, and FHLB advances, as follows:

(In thousands)
September 30, 2023September 30, 2022December 31, 2022
Borrowings:
 Federal funds purchased$506,355 $311,200 $159,860 
 Securities sold under agreements to repurchase2,238,826 2,003,390 2,681,874 
 FHLB advances500,000 — — 
 Other debt3,589 1,831 9,672 
 Total$3,248,770 $2,316,421 $2,851,406 

Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. In addition to the amount accessed as of September 30, 2023, the Company had access to an additional $3.8 billion of overnight, approved federal funds as of that date. Repurchase agreements are borrowings by the Company from its customers in the form of securities sold under agreements to repurchase. These
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repurchase agreements, which generally mature overnight, are comprised of non-insured customer funds totaling $2.2 billion at September 30, 2023 and are collateralized by securities in the Company's investment portfolio. At September 30, 2023, the value of the collateral pledged for the benefit of customers was $2.4 billion. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were $500.0 million in advances outstanding from the FHLB at September 30, 2023.
The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank (FRB) and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral and enables the FHLB to issue letters of credit in favor of public fund depositors of the Company. The FRB also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at September 30, 2023.

September 30, 2023
(In thousands)

FHLB
Federal Reserve

Total
Total collateral value established by FHLB and FRB$2,501,198 $4,950,839 $7,452,037 
Advances outstanding(500,000)— (500,000)
Letters of credit issued(399,541)— (399,541)
Available for future advances$1,601,657 $4,950,839 $6,552,496 

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

Standard & Poor’sMoody’s
Commerce Bancshares, Inc.
Issuer ratingA-
Rating outlookStable
Commerce Bank
Issuer ratingAA3
Baseline credit assessmenta2
Short-term ratingA-1P-1
Rating outlookStableStable

The cash flows from the operating, investing and financing activities of the Company resulted in a net increase in cash, cash equivalents and restricted cash of $1.3 billion during the first nine months of 2023, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $367.7 million and has historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, provided cash of $1.7 billion. Activity in the investment securities portfolio provided cash of $2.3 billion from sales, maturities, and pay downs (net of purchases), but this increase in investing cash flows was partially offset by growth in the loan portfolio, which used cash of $849.4 million. Additionally, repayments of securities purchased under agreements to resell provided cash of $375.0 million. Financing activities used cash of $775.4 million, largely resulting from net decreases in deposits of $1.0 billion and $1.8 billion in repayments of FHLB advances, partially offset by FHLB advance borrowings of $2.3 billion during the first nine months of 2023.

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

(Dollars in thousands)September 30, 2023December 31, 2022Minimum Capital RequirementCapital Conservation Buffer
Minimum Ratios Requirement including Capital Conservation Buffer
Minimum Ratios
for
Well-Capitalized
Banks *
Risk-adjusted assets$24,042,838 $24,178,423 
Tier I common risk-based capital3,632,429 3,417,223 
Tier I risk-based capital3,632,429 3,417,223 
Total risk-based capital3,822,504 3,600,920 
Tier I common risk-based capital ratio15.11 %14.13 %4.50 %2.50 %7.00 %6.50 %
Tier I risk-based capital ratio15.11 14.13 6.00 2.50 8.50 8.00 
Total risk-based capital ratio15.90 14.89 8.00 2.50 10.50 10.00 
Tier I leverage ratio10.87 10.34 4.00 N/A 4.00 5.00 
*Under Prompt Corrective Action requirements

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

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

The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and normally purchases stock in the open market. During the nine months ended September 30, 2023, the Company purchased 941,890 shares at an average price of $59.67 in open market purchases and through stock-based compensation transactions. At September 30, 2023, 2,170,168 shares remained available for purchase under the current Board authorization.

The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.270 per share cash dividend on its common stock in the third quarter of 2023, which was a 7.1% increase compared to its 2022 quarterly dividend.

Material Cash Requirements, Commitments, Off-Balance Sheet Arrangements and Contingencies
The Company's material cash requirements include commitments for contractual obligations (both short-term and long-term), commitments to extend credit, and off-balance sheet arrangements. The Company's material cash requirements for the next 12 months are primarily to fund loan commitments, deposit maturities and deposit withdrawals that may occur; repay borrowings; and fund loan growth. Other contractual obligations, purchase commitments, lease obligations, and unfunded commitments may require cash payments by the Company, and these are further discussed in the Company's 2022 Annual Report on Form 10-K. Further discussion of the Company's longer-term material cash obligations and sources for fulfilling those obligations is below.

Events impacting the banking industry during the first few months of 2023, including the failure of Silicon Valley Bank and Signature Bank, have resulted in decreased confidence in banks among consumer and commercial customers, investors, and other counterparties. Additionally, rapidly rising interest rates have resulted in unrealized losses in the Company's available for sale debt securities portfolio. In response to these industry events, the Company sought additional borrowings of $1.3 billion during the first quarter of 2023, and as a result, the Company had outstanding borrowings of $1.5 billion from the FHLB as of March 31, 2023. During the second quarter of 2023, the Company initially borrowed an additional $500.0 million but subsequently repaid $1.0 billion of its FHLB borrowings, resulting in $1.0 billion of FHLB borrowings outstanding as of June 30, 2023. During the third quarter of 2023, the Company repaid $500.0 million of its FHLB borrowings, resulting in $500.00
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million of FHLB borrowings outstanding as of September 30, 2023. Additionally, the Company added short-term brokered certificates of deposit during the second quarter of 2023 to provide additional liquidity. As of September 30, 2023, the Company had $401.3 million of brokered deposits that are scheduled to mature prior to December 31, 2023. Other than the repayment of these additional borrowings and deposits, the Company’s material cash requirements have not changed significantly since December 31, 2022. Further discussion of the Company's longer-term material cash obligations and sources for fulfilling those obligations is below.

In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at September 30, 2023 totaled $14.3 billion (including $5.2 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. The contractual amount of standby and commercial letters of credit totaled $583.1 million and $5.1 million, respectively, at September 30, 2023. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to $3.4 million at September 30, 2023. The allowance for these commitments is recorded in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheets. At September 30, 2023, the liability for unfunded commitments totaled $27.5 million. See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements.

The Company regularly purchases various state tax credits arising from third party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first nine months of 2023, purchases and sales of tax credits amounted to $89.3 million and $52.4 million, respectively. Fees from sales of tax credits were $3.0 million for the nine months ended September 30, 2023, compared to $4.4 million in the same period last year. At September 30, 2023, the Company expected to fund outstanding purchase commitments of $55.9 million during the remainder of 2023 and had purchase commitments of $524.7 million that it expects to fund from 2024 through 2029.

The Company continued to maintain a strong liquidity position throughout the first nine months of 2023. Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations.

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


(Dollars in thousands)
Consumer
Commercial
Wealth
Segment
Totals
Other/ Elimination
Consolidated Totals
Nine Months Ended September 30, 2023
Net interest income$304,859 $355,690 $54,193 $714,742 $34,966 $749,708 
Provision for credit losses(19,784)(3,204)(14)(23,002)(6,570)(29,572)
Non-interest income74,773 184,288 162,835 421,896 6,270 428,166 
Investment securities gains (losses), net    7,384 7,384 
Non-interest expense(242,991)(290,960)(119,015)(652,966)(26,762)(679,728)
Income before income taxes$116,857 $245,814 $97,999 $460,670 $15,288 $475,958 
Nine Months Ended September 30, 2022
Net interest income$270,561 $333,270 $56,731 $660,562 $26,982 $687,544 
Provision for credit losses(12,727)(651)(13,376)782 (12,594)
Non-interest income82,464 167,581 161,051 411,096 (1,386)409,710 
Investment securities gains (losses), net— — — — 11,602 11,602 
Non-interest expense(231,683)(272,219)(108,967)(612,869)(19,168)(632,037)
Income before income taxes$108,615 $227,981 $108,817 $445,413 $18,812 $464,225 
Increase (decrease) in income before income taxes:
   Amount$8,242 $17,833 $(10,818)$15,257 $(3,524)$11,733 
   Percent7.6 %7.8 %(9.9 %)3.4 %(18.7)%2.5 %
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Consumer
For the nine months ended September 30, 2023, income before income taxes for the Consumer segment increased $8.2 million, or 7.6%, compared to the first nine months of 2022. The increase in income before income taxes was mainly due to an increase in net interest income of $34.3 million, or 12.7%, partly offset by a decrease in non-interest income of $7.7 million, or 9.3%, and increases in non-interest expense of $11.3 million, or 4.9%, and the provision for credit losses of $7.1 million, or 55.4%. Net interest income increased due to a $32.8 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and a $31.8 million increase in loan interest income. These increases were partly offset by higher deposit interest expense of $30.3 million. Non-interest income decreased mainly due to lower deposit account fees (mainly overdraft and return item fees) and mortgage banking revenue, partly offset by growth in net debit card fees. Non-interest expense increased over the same period in the previous year mainly due to higher salaries and benefits expense, FDIC insurance expense and allocated support costs for consumer administration and operations, partly offset by lower marketing expense. The provision for credit losses totaled $19.8 million, and increased over the first nine months of 2022, mainly due to higher consumer credit card and personal loan net charge-offs.

Commercial
For the nine months ended September 30, 2023, income before income taxes for the Commercial segment increased $17.8 million, or 7.8%, compared to the same period in the previous year. This increase was mainly due to growth in net interest income and non-interest income, partly offset by higher non-interest expense. Net interest income increased $22.4 million, or 6.7%, mainly due to higher loan interest income of $223.5 million. This increase was partly offset by lower net allocated funding credits of $76.2 million and increases of $83.3 million in deposit interest expense and $41.9 million in interest expense on customer repurchase agreements. Non-interest income increased $16.7 million, or 10.0%, over the previous year mainly due to growth in net bank card fees (mainly corporate card and merchant fees), deposit account fees (mainly corporate cash management fees), letters of credit fees and cash sweep commissions, partly offset by a decline in capital market fees. Non-interest expense increased $18.7 million, or 6.9%, mainly due to higher salaries and benefits expense, FDIC insurance expense and allocated service and support costs (mainly bank operations, commercial sales and products and credit administration). These increases were partly offset by lower allocated support costs for information technology. The provision for credit losses increased $2.6 million over the same period last year, mainly due to higher business loan net charge-offs.

Wealth
Wealth segment pre-tax profitability for the nine months ended September 30, 2023 decreased $10.8 million, or 9.9%, from the same period in the previous year. Net interest income decreased $2.5 million, or 4.5%, mainly due to a $12.3 million decline in net allocated funding credits and a $17.2 million increase in deposit interest expense, partly offset by a $27.0 million increase in loan interest income. Non-interest income increased $1.8 million, or 1.1%, over the prior year largely due to higher private client trust fees and cash sweep commissions, partly offset by lower brokerage fees. Non-interest expense increased $10.0 million, or 9.2%, mainly due to higher salaries and benefits expense and the deconversion costs previously mentioned. The provision for credit losses increased $16 thousand over the same period last year.

The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio, brokered deposits, and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was $3.5 million lower than in the same period last year. Unallocated securities gains were $7.4 million in the first nine months of 2023 compared to gains of $11.6 million in 2022. Also, the unallocated provision for credit losses increased $7.4 million, primarily driven by an increase in the provision for credit losses on loans, partly offset by a decrease in the liability for unfunded lending commitments, which are both not allocated to the segments for management reporting purposes. Net charge-offs are allocated to the segments when incurred for management reporting purposes. The provision for credit losses on loans in the first nine months of 2023 was $35.2 million, or $12.1 million higher than net charge-offs due to an increase in the allowance for credit losses on loans. In the comparable period last year, the provision for credit losses on loans was $6.8 million, or $6.7 million lower than net charge-offs, due to a decrease in the allowance for credit losses on loans. For the nine months ended September 30, 2023, the Company's provision on unfunded lending commitments was a benefit of $5.6 million. Additionally, non-interest expense increased $7.6 million. These decreases to pre-tax profitability were partly offset by higher net interest income of $8.0 million, and non-interest income of $7.7 million.




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Regulatory Changes
During the second quarter of 2023, the Federal Deposit Insurance Corporation (“FDIC”) issued a proposed rule to impose a special assessment to recover losses to the FDIC’s Deposit Insurance Fund following the failure of two financial institutions. The proposed rule applies to all insured depository institutions. Under the proposed rule, the assessment base for would be equal to an insured depository institution’s estimated insured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion of uninsured deposits. The proposed special assessment would apply an annual rate of 12.5 basis points. If the final rule is adopted as proposed, the estimated impact of the special assessment on the Company is approximately $14.9 million to be recognized at the time the rule is finalized and paid in eight quarterly installments beginning in the first quarter of 2024. The actual assessment may vary as a result of the final rule.

In July 2023, the SEC adopted a final rule requiring registrants provide enhanced disclosures regarding cybersecurity incidents as well as reporting on cybersecurity risk management, strategy, and governance. The final rule requires registrants to disclose on Form 8-K material cybersecurity incidents within four business days after the company determines that the cybersecurity incident is material. Additionally, registrants are also required to disclose annually on Form 10-K information the Company’s processes for assessing, identifying, and managing material risks from cybersecurity threats, management’s role in assessing and managing material risks from cybersecurity threats, and the board of directors’ oversight of cybersecurity risks. Companies are required to comply with the Form 8-K incident disclosure requirements beginning December 18, 2023. The annual disclosures in Form 10-K are required for fiscal years ending on or after December 15, 2023.

Impact of Recently Issued Accounting Standards
Reference Rate Reform The Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting", in March 2020, and has been followed by additional clarifying guidance related to derivatives that are modified as a result of reference rate reform. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if they reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Further, the guidance applies to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The expedients and exceptions provided by the new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated for effectiveness after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which extended the sunset date under Topic 848 to December 31, 2024. The change is to align the temporary accounting relief guidance with the expected cessation date of LIBOR, which was postponed by administrators in 2021 to June 2023, a year after the current sunset date of ASU 2020-04. The Company's LIBOR Transition Steering Committee completed the Company's transition from LIBOR during the first half of 2023.

Disclosure Improvements The FASB issued ASU 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative," in October 2023. The amendments in this Update modify the disclosure or presentation requirements of a variety of topics in the Codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements. The effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The adoption is not expected to have a significant effect on the Company's consolidated financial statements.
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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Three Months Ended September 30, 2023 and 2022
 
Third Quarter 2023
Third Quarter 2022
(Dollars in thousands)
Average Balance
Interest Income/Expense
Avg. Rates Earned/Paid
Average BalanceInterest Income/ExpenseAvg. Rates Earned/Paid
ASSETS:
Loans:
Business(A)
$5,849,227 $85,104 5.77 %$5,317,696 $52,813 3.94 %
Real estate — construction and land1,508,850 31,070 8.17 1,288,721 17,133 5.27 
Real estate — business3,642,010 56,236 6.13 3,258,128 36,121 4.40 
Real estate — personal2,992,500 28,126 3.73 2,844,376 24,065 3.36 
Consumer2,102,281 31,630 5.97 2,101,622 22,110 4.17 
Revolving home equity304,055 5,947 7.76 280,923 3,413 4.82 
Consumer credit card564,039 19,570 13.77 550,058 16,711 12.05 
Overdrafts5,341   4,438 
Total loans16,968,303 257,683 6.02 15,645,962 172,366 4.37 
Loans held for sale5,714 152 10.55 7,170 159 8.80 
Investment securities:
U.S. government and federal agency obligations986,284 5,750 2.31 1,113,442 12,664 4.51 
Government-sponsored enterprise obligations55,676 331 2.36 55,753 332 2.36 
State and municipal obligations(A)
1,391,541 6,823 1.95 2,052,908 11,758 2.27 
Mortgage-backed securities6,161,348 31,942 2.06 6,847,912 33,323 1.93 
Asset-backed securities2,553,562 14,129 2.20 3,870,953 15,782 1.62 
Other debt securities514,787 2,268 1.75 587,026 2,852 1.93 
Trading debt securities(A)
35,044 451 5.11 35,621 246 2.74 
Equity securities(A)
12,230 711 23.06 8,838 604 27.11 
Other securities(A)
237,518 7,859 13.13 208,708 3,729 7.09 
Total investment securities11,947,990 70,264 2.33 14,781,161 81,290 2.18 
Federal funds sold2,722 45 6.56 13,486 94 2.77 
Securities purchased under agreements to resell712,472 3,740 2.08 1,379,341 5,984 1.72 
Interest earning deposits with banks2,337,744 31,738 5.39 980,273 5,571 2.25 
Total interest earning assets31,974,945 363,622 4.51 32,807,393 265,464 3.21 
Allowance for credit losses on loans(158,335)(137,833)
Unrealized gain (loss) on debt securities(1,458,141)(1,064,534)
Cash and due from banks295,711 310,713 
Premises and equipment, net463,828 408,884 
Other assets990,683 536,901 
Total assets$32,108,691 $32,861,524 
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings$1,436,149 194 .05 $1,595,857 177 .04 
Interest checking and money market13,048,199 43,601 1.33 14,423,713 7,368 .20 
Certificates of deposit of less than $100,0001,423,965 15,499 4.32 397,071 411 .41 
Certificates of deposit of $100,000 and over1,718,126 18,942 4.37 578,158 871 .60 
Total interest bearing deposits17,626,439 78,236 1.76 16,994,799 8,827 .21 
Borrowings:
Federal funds purchased$508,851 $6,833 5.33 51,929 $315 2.41 
Securities sold under agreements to repurchase2,283,020 18,431 3.20 2,199,866 7,576 1.37 
Other borrowings(B)
685,222 9,160 5.30 2,010 1.78 
Total borrowings3,477,093 34,424 3.93 2,253,805 7,900 1.39 
Total interest bearing liabilities21,103,532 112,660 2.12 %19,248,604 16,727 .34 %
Non-interest bearing deposits7,939,190 10,758,353 
Other liabilities367,741 123,691 
Equity2,698,228 2,730,876 
Total liabilities and equity$32,108,691 $32,861,524 
Net interest margin (FTE)$250,962 $248,737 
Net yield on interest earning assets3.11 %3.01 %
(A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%.
(B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above.
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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Nine Months Ended September 30, 2023 and 2022
Nine Months 2023
Nine Months 2022
(Dollars in thousands)
Average Balance
Interest Income/Expense
Avg. Rates Earned/Paid
Average BalanceInterest Income/ExpenseAvg. Rates Earned/Paid
ASSETS:
Loans:
Business(A)
$5,754,947 $239,181 5.56 %$5,342,326 $133,631 3.34 %
Real estate — construction and land1,456,986 85,201 7.82 1,216,860 40,148 4.41 
Real estate — business3,554,347 157,306 5.92 3,172,832 91,095 3.84 
Real estate — personal2,962,619 81,351 3.67 2,826,441 69,804 3.30 
Consumer2,089,524 88,144 5.64 2,071,019 58,891 3.80 
Revolving home equity300,502 16,754 7.45 275,713 8,267 4.01 
Consumer credit card558,741 57,415 13.74 542,895 47,011 11.58 
Overdrafts4,810   5,044 — — 
Total loans16,682,476 725,352 5.81 15,453,130 448,847 3.88 
Loans held for sale5,793 448 10.34 8,154 470 7.71 
Investment securities: 
U.S. government and federal agency obligations1,039,921 19,730 2.54 1,112,201 35,751 4.30 
Government-sponsored enterprise obligations66,056 1,352 2.74 54,443 962 2.36 
State and municipal obligations(A)
1,571,132 24,626 2.10 2,085,539 35,655 2.29 
Mortgage-backed securities6,309,586 97,702 2.07 7,105,874 104,695 1.97 
Asset-backed securities2,869,252 44,836 2.09 3,947,148 40,378 1.37 
Other debt securities521,187 7,204 1.85 622,065 9,143 1.97 
Trading debt securities(A)
42,392 1,494 4.71 40,052 700 2.34 
Equity securities(A)
12,340 2,140 23.19 9,141 1,823 26.66 
Other securities(A)
247,019 18,297 9.90 198,763 17,417 11.72 
Total investment securities12,678,885 217,381 2.29 15,175,226 246,524 2.17 
Federal funds sold16,262 639 5.25 6,315 114 2.41 
Securities purchased under agreements to resell787,070 11,791 2.00 1,604,300 15,669 1.31 
Interest earning deposits with banks1,816,210 70,328 5.18 1,606,452 9,150 .76 
Total interest earning assets31,986,696 1,025,939 4.29 33,853,577 720,774 2.85 
Allowance for credit losses on loans(155,870)(140,686)
Unrealized gain (loss) on debt securities(1,392,373)(699,908)
Cash and due from banks306,441 321,994 
Premises and equipment, net448,168 405,856 
Other assets936,131 538,438 
Total assets$32,129,193 $34,279,271 
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings$1,500,666 573 .05 $1,589,668 512 .04 
Interest checking and money market13,076,565 93,419 .96 14,738,322 11,071 .10 
Certificates of deposit of less than $100,000975,175 27,049 3.71 412,739 755 .24 
Certificates of deposit of $100,000 and over1,367,560 39,985 3.91 695,332 1,768 .34 
Total interest bearing deposits16,919,966 161,026 1.27 17,436,061 14,106 .11 
Borrowings:
Federal funds purchased$503,301 $18,816 5.00 $62,909 546 1.16 
Securities sold under agreements to repurchase2,302,289 52,940 3.07 2,388,295 10,960 .61 
Other borrowings(B)
951,971 37,027 5.20 1,607 22 1.83 
Total borrowings3,757,561 108,783 3.87 2,452,811 11,528 .63 
Total interest bearing liabilities20,677,527 269,809 1.74 %19,888,872 25,634 .17 %
Non-interest bearing deposits8,421,754 11,168,031 
Other liabilities360,506 255,041 
Equity2,669,406 2,967,327 
Total liabilities and equity$32,129,193 $34,279,271 
Net interest margin (FTE)$756,130 $695,140 
Net yield on interest earning assets3.16 %2.75 %
(A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%.
(B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 2022 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. 

September 30, 2023June 30, 2023
 (Dollars in millions)
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
300 basis points rising$(20.6)(2.08)%$(30.9)(3.09)%
200 basis points rising(17.7)(1.79)(24.4)(2.44)
100 basis points rising(9.1)(.92)(11.1)(1.11)
100 basis points falling$(.6)(.06)(3.3)(.33)
200 basis points falling(11.0)(1.11)(16.6)(1.66)
300 basis points falling(27.0)(2.71)(34.3)(3.43)

Under the simulation, in the three rising rate scenarios and three falling rate scenarios, interest rate risk is slightly improved compared to the scenarios in the previous quarter. This was primarily due to a decrease in wholesale funding, which is more rate sensitive, partly offset by non-interest bearing demand deposit accounts transitioning to more rate sensitive deposit sweep accounts. In addition, premium money market deposit account rates increased in the flat rate scenario to a point where the forecasted rates are less sensitive in rising rate scenarios and more sensitive in falling rate scenarios when compared to the previous quarter.

The comparison above provides insight into potential effects of changes in rates and deposit levels 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.

Item 4. CONTROLS AND PROCEDURES
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, 2023. 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.

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PART II: OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS
The information required by this item is set forth in Part I, Item 1 under Note 17, Legal and Regulatory Proceedings.

Item 1A. RISK FACTORS
In addition to the other information set forth in this report, the Company's business, financial condition, and results of operations may be materially impacted by the risks that are discussed under the caption “Risk Factors” in Part I, Item 1A of the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2022. The risk factors set forth below update, and should be read together with, such risk factors.

Liquidity and Capital Risks

Adverse developments affecting the banking industry, such as recent bank failures or concerns involving liquidity, may have material adverse effects on the Company’s operations.

Events impacting the banking industry during the first few months of 2023, including the failure of Silicon Valley Bank in March, have resulted in decreased confidence in regional banks among deposit customers, investors, and other counterparties. Additionally, these events have caused significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events occurred during a period of rapidly rising interest rates, which, among other things, has resulted in unrealized losses in the Company's available for sale debt securities portfolio and increased competition for bank deposits. These events have, and could continue to have, adverse impacts on the market price and volatility of the Company’s stock. These events could also lead to increases in the Company’s interest expense, as it has raised and may continue to raise interest rates paid to depositors in order to compete with other banks, and in an effort to replace deposits, seek borrowings which carry higher interest rates.

Recent bank failures have caused concern and uncertainty regarding the liquidity adequacy of the banking sector as a whole and resulted in some regional bank customers choosing to maintain deposits with larger financial institutions. A significant reduction in the Company’s deposits could materially, adversely impact the Company’s liquidity, ability to fund loans, and results of operations. In addition to customer deposits, the Company borrows on an overnight and short-term basis from third parties in the form of federal funds purchased and repurchase agreements and through lines of credit and borrowings from the FHLB and FRB. If the Company is not able to access borrowings through those facilities due to an increase in demand from other banks or due to insufficient levels of pledgeable assets, its ability to borrow funds may be materially adversely impacted.

The Company could recognize losses on securities held in its securities portfolio, particularly if it were to sell a significant portion of its investments prior to maturity.

The Company maintains a portfolio of investments, which includes available for sale debt securities, trading securities, equity securities, and other investments. At September 30, 2023, the Company did not hold any investments classified as held-to-maturity. The Company's available for sale debt securities portfolio is carried at fair value, with unrealized gains and losses carried in accumulated other comprehensive income (loss) within shareholder's equity. The fair value of investments, including available for sale debt investments, may change with changes in interest rates, credit concerns, or other economic factors. Due to the rapid rise of interest rates during 2022 and 2023, the fair value of the Company's available of sale debt securities included a net unrealized loss of $1.6 billion at September 30, 2023. Although as of September 30, 2023, the Company has the intent and ability to maintain its available for sale debt investments until maturity, if in the future the Company were to elect to sell or needed to sell the investments before their maturity, the Company could realize significant losses in its income statement.

Any changes to regulations, regulatory policies, laws, or supervisory or enforcement activities arising from the recent events in the banking industry could increase the Company’s expenses and adversely impact the Company’s operations.

In addition to operational impacts to the Company, the recent events in the banking industry may also result in changes to the laws and regulations governing banks and bank holding companies. As part of the financial services industry, the Company is subject to extensive federal and state regulation and supervision. Changes to regulations, regulatory policies, laws, or supervisory or enforcement activities could affect the Company in substantial and adverse ways, including limiting the services and products the Company may offer, restrict the Company’s ability to pay dividends, result in the Company incurring higher costs, or subject the Company to higher capital requirements. Inability to access short-term funding, loss of client deposits or
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changes in our credit ratings could increase the cost of funding, limit access to capital markets or negatively impact the Company’s overall liquidity or capitalization. The Company may be impacted by concerns regarding the soundness or creditworthiness of other financial institutions, which can cause disruption within the financial markets and increased expenses. The cost of resolving the recent bank failures may also prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments, which would likely increase expenses and negatively impact net income.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information about the Company's purchases of its $5 par value common stock, its only class of common stock registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.

 
 
 
Period
Total Number of Shares Purchased
 Average Price Paid per Share
Total Number of Shares Purchased as part of Publicly Announced Program
 Maximum Number that May Yet Be Purchased Under the Program
July 1 - 31, 202326,643 $52.93 26,643 2,531,829 
August 1 - 31, 2023305,314 $51.24 305,314 2,226,515 
September 1 - 30, 202356,347 $48.49 56,347 2,170,168 
Total388,304 $50.96 388,304 2,170,168 

The Company's stock purchases shown above were made under authorizations by the Board of Directors. Under the most recent authorization in April 2022 of 5,000,000 shares, 2,170,168 shares remained available for purchase at September 30, 2023.

Item 5. OTHER INFORMATION
During the three months ended September 30, 2023, none of the officers or directors of the Company adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”

Item 6. EXHIBITS
The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed below.

10 — Amended and restated Commerce Bancshares, Inc. Executive Incentive Compensation Plan (EICP) effective December 1, 2023

31.1 — Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 — Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 — Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 — Interactive data files in Inline XBRL pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

104 — Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMMERCE BANCSHARES, INC.
By 
/s/  MARGARET M. ROWE
Margaret M. Rowe
Date: November 6, 2023
Vice President & Secretary


By /s/  PAUL A. STEINER
Paul A. Steiner
Controller
Date: November 6, 2023
(Chief Accounting Officer)



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