COMMERCE BANCSHARES INC /MO/ [CBSH] Filings

10-Q 1 cbsh-20230930.htm 10-Q cbsh-20230930

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


☐			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)


Missouri		43-0889454
(State of Incorporation)		(IRS Employer Identification No.)
1000 Walnut
Kansas City,	MO	64106
(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 class	Trading symbol(s)	Name of exchange on which registered
$5 Par Value Common Stock	CBSH	NASDAQ 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
Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022	3
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)	6
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (unaudited)	8
		Notes to Consolidated Financial Statements	9
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	48
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	72
	Item 4.	Controls and Procedures	72

Part II	Other Information
	Item 1.	Legal Proceedings	73
	Item 1A.	Risk Factors	73
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
	Item 5.	Other Information	74
	Item 6.	Exhibits	74
Signatures			75

Table of Contents

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 loans	16,967,082		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 debt	35,564		43,523
Equity	12,212		12,304
Other	230,792		225,034
Total investment securities	10,139,396		12,519,177
Federal funds sold	2,735		49,505
Securities purchased under agreements to resell	450,000		825,000
Interest earning deposits with banks	1,847,641		389,140
Cash and due from banks	358,010		452,496
Premises and equipment – net	460,830		418,909
Goodwill	146,539		138,921
Other intangible assets – net	14,432		15,234
Other assets	984,907		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 market	14,154,275		15,126,981
Certificates of deposit of less than $100,000	1,210,169		387,336
Certificates of deposit of $100,000 and over	1,764,611		606,767
Total deposits	25,090,457		26,187,440
Federal funds purchased and securities sold under agreements to repurchase	2,745,181		2,841,734
Other borrowings	503,589		9,672
Other liabilities	438,199		355,508
Total liabilities	28,777,426		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 surplus	2,924,211		2,932,959
Retained earnings	298,297		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' equity	2,581,405		2,465,291
Non-controlling interest	17,861		16,286
Total equity	2,599,266		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 30				For the Nine Months Ended September 30
(In thousands, except per share data)	2023		2022		2023		2022
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	256,242	$	171,272	$	721,385	$	445,873
Interest and fees on loans held for sale	152		159		448		470
Interest on investment securities	69,245		79,586		214,091		241,326
Interest on federal funds sold	45		94		639		114
Interest on securities purchased under agreements to resell	3,740		5,984		11,791		15,669
Interest on deposits with banks	31,738		5,571		70,328		9,150
Total interest income	361,162		262,666		1,018,682		712,602
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	43,795		7,545		93,992		11,583
Certificates of deposit of less than $100,000	15,499		411		27,049		755
Certificates of deposit of $100,000 and over	18,942		871		39,985		1,768
Interest on federal funds purchased	6,833		315		18,816		546
Interest on securities sold under agreements to repurchase	18,431		7,576		52,940		10,960
Interest on other borrowings	9,115		(425)		36,192		(554)
Total interest expense	112,615		16,293		268,974		25,058
Net interest income	248,547		246,373		749,708		687,544
Provision for credit losses	11,645		15,290		29,572		12,594
Net interest income after credit losses	236,902		231,083		720,136		674,950
NON-INTEREST INCOME
Bank card transaction fees	46,899		45,638		143,278		131,556
Trust fees	49,207		45,406		141,800		140,009
Deposit account charges and other fees	23,090		24,521		67,475		72,392
Consumer brokerage services	3,820		5,085		13,582		14,599
Capital market fees	2,410		3,393		8,311		10,845
Loan fees and sales	2,966		3,094		8,290		10,575
Other	14,557		11,377		45,430		29,734
Total non-interest income	142,949		138,514		428,166		409,710





INVESTMENT SECURITIES GAINS (LOSSES), NET	4,298		3,410		7,384		11,602
NON-INTEREST EXPENSE
Salaries and employee benefits	146,805		137,393		436,607		415,589
Data processing and software	30,744		28,050		87,617		82,701
Net occupancy	13,948		12,544		39,702		37,343
Marketing	6,167		6,228		18,006		18,408
Equipment	4,697		5,036		14,411		14,338
Supplies and communication	4,963		4,581		14,178		13,655
Other	20,686		19,052		69,207		50,003
Total non-interest expense	228,010		212,884		679,728		632,037
Income before income taxes	156,139		160,123		475,958		464,225
Less income taxes	33,439		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 30				For the Nine Months Ended September 30
(In thousands)	2023		2022		2023		2022
	(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 loss	199		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) expense	2,104		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 Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Non-Controlling Interest		Total
	(Unaudited)
Balance June 30, 2023	$	629,319	$	2,921,365	$	211,358	$	(58,389)	$	(1,036,295)	$	17,870	$	2,685,228
Net income					120,596						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 subsidiary			8								(8)		—
Issuance under stock purchase and equity compensation plans			(1,479)				1,479						—
Stock-based compensation			4,317										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 Income					122,823						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 compensation			4,232										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 Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Non-Controlling Interest		Total
	(Unaudited)
Balance December 31, 2022	$	629,319	$	2,932,959	$	31,620	$	(41,743)	$	(1,086,864)	$	16,286	$	2,481,577


Net income					367,837						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 subsidiary			54								(54)		—
Issuance under stock purchase and equity compensation plans			(21,396)				21,396						—
Stock-based compensation			12,594										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 compensation			12,641										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)	2023		2022
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	373,716	$	366,366
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	29,572		12,594
Provision for depreciation and amortization	36,661		35,350
Amortization of investment security premiums, net	13,345		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 sale	40,775		116,421
Net (increase) decrease in trading debt securities, excluding unsettled transactions	14,354		14,080
Purchase of interest rate floor derivative contracts	(54,449)		(16,849)
Stock-based compensation	12,594		12,641
(Increase) decrease in interest receivable	(7,861)		(21,959)
Increase (decrease) in interest payable	41,622		1,097
Increase (decrease) in income taxes payable	(52)		168


Other changes, net	(83,973)		70,285
Net cash provided by (used in) operating activities	367,745		469,785
INVESTING ACTIVITIES:
Cash paid in acquisition, net of cash received	(6,365)		—

Distributions received from equity-method investment	1,434		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 resell	375,000		550,000
Purchases of premises and equipment	(72,563)		(46,636)
Sales of premises and equipment	3,751		1,613
Net cash provided by (used in) investing activities	1,718,369		(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 deposit	1,980,677		(454,376)


Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase	(96,553)		(708,377)


FHLB short-term borrowings	2,250,000		—
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 cash	1,310,715		(3,287,878)
Cash, cash equivalents and restricted cash at beginning of year	897,801		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, 2023		December 31, 2022
Commercial:
Business	$	5,908,330	$	5,661,725
Real estate – construction and land	1,539,566		1,361,095
Real estate – business	3,647,168		3,406,981
Personal Banking:
Real estate – personal	3,024,639		2,918,078
Consumer	2,125,804		2,059,088
Revolving home equity	305,237		297,207
Consumer credit card	574,829		584,000
Overdrafts	3,753		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 Assumption	September 30, 2023	June 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)	Commercial		Personal Banking		Total		Commercial		Personal 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 loans	5,201		8,142		13,343		10,203		24,952		35,155
Deductions:
Loans charged off	2,664		9,262		11,926		3,263		26,549		29,812
Less recoveries on loans	66		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)	Commercial		Personal Banking		Total		Commercial		Personal 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 loans	4,014		6,136		10,150		5,851		900		6,751
Deductions:
Loans charged off	509		6,721		7,230		893		20,539		21,432
Less recoveries on loans	56		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