COMMERCE BANCSHARES INC /MO/ 10-Q

cbsh-20220331 Table of Contents 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 March 31, 2022 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) 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 May 2, 2022, the registrant had outstanding 120,734,318 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 March 31, 2022 (unaudited) and December 31, 2021 3 Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021 (unaudited) 4 Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 202 1 (unaudited) 5 Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited) 6 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (unaudited) 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 41 Item 3. Quantitative and Qualitative Disclosures about Market Risk 61 Item 4. Controls and Procedures 62 Part II Other Information Item 1. Legal Proceedings 63 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 63 Item 6. Exhibits 63 Signatures 64 2 Table of Contents PART I: FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS March 31, 2022 December 31, 2021 (Unaudited) (In thousands) ASSETS Loans $ 15,459,014 $ 15,176,359 Allowance for credit losses on loans ( 134,710 ) ( 150,044 ) Net loans 15,324,304 15,026,315 Loans held for sale (including $ 3,901,000 and $ 5,570,000 of residential mortgage loans carried at fair value at March 31, 2022 and December 31, 2021, respectively) 8,908 8,615 Investment securities: Available for sale debt, at fair value (amortized cost of $ 15,425,954,000 and $ 14,419,133,000 at March 31, 2022 and December 31, 2021, respectively, and allowance for credit losses of $ — at March 31, 2022 and December 31, 2021, respectively) 14,780,494 14,450,027 Trading debt 31,380 46,235 Equity 9,284 9,202 Other 199,576 194,047 Total investment securities 15,020,734 14,699,511 Federal funds sold and short-term securities purchased under agreements to resell — 2,800 Securities purchased under agreements to resell 1,825,000 1,625,000 Interest earning deposits with banks 1,260,813 3,971,217 Cash and due from banks 326,549 305,539 Premises and equipment – net 394,028 388,738 Goodwill 138,921 138,921 Other intangible assets – net 15,885 15,570 Other assets 671,651 506,862 Total assets $ 34,986,793 $ 36,689,088 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 11,428,372 $ 11,772,374 Savings, interest checking and money market 16,751,632 16,598,085 Certificates of deposit of less than $100,000 422,992 435,960 Certificates of deposit of $100,000 and over 716,345 1,006,654 Total deposits 29,319,341 29,813,073 Federal funds purchased and securities sold under agreements to repurchase 2,317,461 3,022,967 Other borrowings 9,057 12,560 Other liabilities 367,532 392,164 Total liabilities 32,013,391 33,240,764 Commerce Bancshares, Inc. stockholders’ equity: Common stock, $ 5 par value Authorized 140,000,000 ; issued 122,160,705 shares 610,804 610,804 Capital surplus 2,678,025 2,689,894 Retained earnings 178,504 92,493 Treasury stock of 1,034,382 shares at March 31, 2022 and 476,392 shares at December 31, 2021, at cost ( 72,293 ) ( 32,973 ) Accumulated other comprehensive income ( 434,400 ) 77,080 Total Commerce Bancshares, Inc. stockholders' equity 2,960,640 3,437,298 Non-controlling interest 12,762 11,026 Total equity 2,973,402 3,448,324 Total liabilities and equity $ 34,986,793 $ 36,689,088 See accompanying notes to consolidated financial statements. 3 Table of Contents Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME For the Three Months Ended March 31 (In thousands, except per share data) 2022 2021 (Unaudited) INTEREST INCOME Interest and fees on loans $ 132,075 $ 146,338 Interest and fees on loans held for sale 150 304 Interest on investment securities 73,105 51,557 Interest on federal funds sold 1 — Interest on securities purchased under agreements to resell 5,300 11,128 Interest on deposits with banks 1,151 370 Total interest income 211,782 209,697 INTEREST EXPENSE Interest on deposits: Savings, interest checking and money market 1,760 2,103 Certificates of deposit of less than $100,000 139 473 Certificates of deposit of $100,000 and over 427 1,062 Interest on federal funds purchased and securities sold under agreements to repurchase 689 312 Interest on other borrowings ( 19 ) ( 1 ) Total interest expense 2,996 3,949 Net interest income 208,786 205,748 Provision for credit losses ( 9,858 ) ( 6,232 ) Net interest income after credit losses 218,644 211,980 NON-INTEREST INCOME Bank card transaction fees 42,045 37,695 Trust fees 47,811 44,127 Deposit account charges and other fees 22,307 22,575 Capital market fees 4,125 4,981 Consumer brokerage services 4,446 4,081 Loan fees and sales 4,235 10,184 Other 6,800 12,402 Total non-interest income 131,769 136,045 INVESTMENT SECURITIES GAINS, NET 7,163 9,853 NON-INTEREST EXPENSE Salaries and employee benefits 135,953 129,033 Net occupancy 12,296 12,021 Equipment 4,568 4,353 Supplies and communication 4,713 4,125 Data processing and software 27,016 25,463 Marketing 6,344 5,158 Other 14,758 12,420 Total non-interest expense 205,648 192,573 Income before income taxes 151,928 165,305 Less income taxes 31,902 32,076 Net income 120,026 133,229 Less non-controlling interest expense 1,872 2,257 Net income attributable to Commerce Bancshares, Inc. $ 118,154 $ 130,972 Net income per common share — basic $ .97 $ 1.06 Net income per common share — diluted $ .97 $ 1.06 See accompanying notes to consolidated financial statements. 4 Table of Contents Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Three Months Ended March 31 (In thousands) 2022 2021 (Unaudited) Net income $ 120,026 $ 133,229 Other comprehensive income (loss): Net unrealized losses on available for sale debt securities ( 507,265 ) ( 158,676 ) Pension loss amortization 323 437 Unrealized losses on cash flow hedge derivatives ( 4,538 ) ( 4,386 ) Other comprehensive income (loss) ( 511,480 ) ( 162,625 ) Comprehensive income (loss) ( 391,454 ) ( 29,396 ) Less non-controlling interest expense 1,872 2,257 Comprehensive income (loss) attributable to Commerce Bancshares, Inc. $ ( 393,326 ) $ ( 31,653 ) See accompanying notes to consolidated financial statements. 5 Table of Contents Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Three Months Ended March 31, 2022 and 2021 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, 2021 $ 610,804 $ 2,689,894 $ 92,493 $ ( 32,973 ) $ 77,080 $ 11,026 $ 3,448,324 Net income 118,154 1,872 120,026 Other comprehensive loss ( 511,480 ) ( 511,480 ) Distributions to non-controlling interest ( 136 ) ( 136 ) Purchases of treasury stock ( 55,855 ) ( 55,855 ) Issuance of stock under purchase and equity compensation plans $ ( 16,087 ) 16,535 448 Stock-based compensation 4,218 4,218 Cash dividends paid on common stock ($ 0.265 per share) ( 32,143 ) ( 32,143 ) Balance March 31, 2022 $ 610,804 $ 2,678,025 $ 178,504 $ ( 72,293 ) $ ( 434,400 ) $ 12,762 $ 2,973,402 Balance December 31, 2020 $ 589,352 $ 2,436,288 $ 73,000 $ ( 32,970 ) $ 331,377 $ 2,925 $ 3,399,972 Net income 130,972 2,257 133,229 Other comprehensive loss ( 162,625 ) ( 162,625 ) Distributions to non-controlling interest ( 387 ) ( 387 ) Purchases of treasury stock ( 25,923 ) ( 25,923 ) Issuance of stock under purchase and equity compensation plans ( 19,828 ) 19,813 ( 15 ) Stock-based compensation 3,933 3,933 Cash dividends paid on common stock ($ .250 per share) ( 30,799 ) ( 30,799 ) Balance March 31, 2021 $ 589,352 $ 2,420,393 $ 173,173 $ ( 39,080 ) $ 168,752 $ 4,795 $ 3,317,385 See accompanying notes to consolidated financial statements. 6 Table of Contents Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31 (In thousands) 2022 2021 (Unaudited) OPERATING ACTIVITIES: Net income $ 120,026 $ 133,229 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses ( 9,858 ) ( 6,232 ) Provision for depreciation and amortization 11,811 11,379 Amortization of investment security premiums, net 4,932 22,079 Investment securities gains, net (A) ( 7,163 ) ( 9,853 ) Net gains on sales of loans held for sale ( 1,302 ) ( 7,381 ) Originations of loans held for sale ( 57,580 ) ( 172,435 ) Proceeds from sales of loans held for sale 57,789 184,155 Net decrease in trading debt securities, excluding unsettled transactions 9,798 4,872 Stock-based compensation 4,218 3,933 (Increase) decrease in interest receivable ( 7,972 ) 444 Increase (decrease) in interest payable 273 ( 1,804 ) Increase in income taxes payable 28,657 28,105 Other changes, net ( 29,115 ) 11,178 Net cash provided by operating activities 124,514 201,669 INVESTING ACTIVITIES: Distributions received from equity-method investment 400 — Proceeds from sales of investment securities (A) 1,745 9,292 Proceeds from maturities/pay downs of investment securities (A) 805,355 938,527 Purchases of investment securities (A) ( 1,812,434 ) ( 1,194,891 ) Net increase in loans ( 287,328 ) ( 72,497 ) Securities purchased under agreements to resell ( 200,000 ) — Purchases of premises and equipment ( 15,597 ) ( 10,730 ) Sales of premises and equipment 175 2,568 Net cash used in investing activities ( 1,507,684 ) ( 327,731 ) FINANCING ACTIVITIES: Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits ( 208,358 ) 585,579 Net decrease in certificates of deposit ( 303,277 ) ( 73,000 ) Net decrease in federal funds purchased and securities sold under agreements to repurchase ( 705,506 ) ( 160,273 ) Net increase (decrease) in other borrowings ( 3,503 ) 2,989 Purchases of treasury stock ( 55,855 ) ( 25,923 ) Issuance of stock under equity compensation plans 448 ( 15 ) Cash dividends paid on common stock ( 32,143 ) ( 30,799 ) Net cash provided by (used in) financing activities ( 1,308,194 ) 298,558 Increase (decrease) in cash, cash equivalents and restricted cash ( 2,691,364 ) 172,496 Cash, cash equivalents and restricted cash at beginning of year 4,296,954 2,208,328 Cash, cash equivalents and restricted cash at March 31 $ 1,605,590 $ 2,380,824 Income tax payments, net $ 1,640 $ 2,510 Interest paid on deposits and borrowings $ 2,723 $ 5,753 Loans transferred to foreclosed real estate $ 25 $ 115 (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 $ 18.2 million and $ 24.5 million at March 31, 2022 and 2021, respectively. 7 Table of Contents Commerce Bancshares, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022 (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 2021 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 sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three month period ended March 31, 2022 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. 2. Loans and Allowance for Credit Losses Major classifications within the Company’s held for investment loan portfolio at March 31, 2022 and December 31, 2021 are as follows: (In thousands) March 31, 2022 December 31, 2021 Commercial: Business $ 5,508,508 $ 5,303,535 Real estate – construction and land 1,144,411 1,118,266 Real estate – business 3,109,668 3,058,837 Personal Banking: Real estate – personal 2,820,076 2,805,401 Consumer 2,053,160 2,032,225 Revolving home equity 264,401 275,945 Consumer credit card 544,579 575,410 Overdrafts 14,211 6,740 Total loans $ 15,459,014 $ 15,176,359 Accrued interest receivable totaled $ 32.1 million and $ 25.9 million at March 31, 2022 and December 31, 2021, respectively, and was included within other assets on the consolidated balance sheets. For the three months ended March 31, 2022, the Company wrote-off accrued interest by reversing interest income of $ 29 thousand and $ 899 thousand in the Commercial and Personal Banking portfolios, respectively. Similarly, for the three months ended March 31, 2021, the Company wrote-off accrued interest of $ 125 thousand and $ 2.0 million in the Commercial and Personal Banking portfolios, respectively. At March 31, 2022, loans of $ 3.2 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 $ 1.3 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings. 8 Table of Contents 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 unless there is a reasonable expectation that a troubled debt restructuring will be executed. Credit cards and certain similar consumer 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. 9 Table of Contents Key model 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 March 31, 2022 and December 31, 2021 are discussed below. Key Assumption March 31, 2022 December 31, 2021 Overall economic forecast • Improving health situation supports positive economic momentum in the short term • Projects significant monetary policy tightening to rein in inflation • Projects continued high inflation • Uncertainties related to supply chain issues • Continued recovery from the Global Coronavirus Recession (GCR) • Assumes improving health conditions • Assumes gradual easing of supply constraints • Continued uncertainty regarding the health crisis • Uncertainty regarding rising inflation Reasonable and supportable period and related reversion period • One year for commercial and personal banking loans • Reversion to historical average loss rates within two quarters using straight-line method • One year for commercial and personal banking loans • Reversion to historical average loss rates within two quarters using straight-line method Forecasted macro-economic variables • Unemployment rate ranging from 3.6% to 3.4% during the supportable forecast period • Real GDP growth ranging from 2.6% to 3.7% • Prime rate from 4.0% to 5.2% • Unemployment rate ranging from 4.1% to 3.7% during the supportable forecast period • Real GDP growth ranges from 5.0% to 3.4% • Prime rate of 3.25% through the second quarter of 2022, increasing to 3.5% by the end of 2022 Prepayment assumptions Commercial loans • 5% for most loan pools Personal banking loans • Ranging from 28.3% to 16.5% for most loan pools • 66.0% for consumer credit cards Commercial loans • 5% for most loan pools Personal banking loans • Ranging from 28.0% to 16.5% for most loan pools • 64.1% for consumer credit cards Qualitative factors Added qualitative factors related to: • Certain portfolios sensitive to pandemic economic uncertainties • Changes in the composition of the loan portfolios • Uncertainty related to unusually high rate of inflation, geopolitical environment, and supply chain issues • Loans downgraded to special mention, substandard, or non-accrual status Added net reserves using qualitative processes related to: • Loans originated in our expansion markets, loans that are designated as shared national credits, and certain portfolios sensitive to pandemic economic uncertainties • Changes in the composition of the loan portfolios • 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 losses. The current forecast projects a continued recovery of the COVID-19 related health situation, which is expected to create positive economic momentum. However, the higher inflation and Russia's invasion of Ukraine has created greater uncertainty in the forecast. The geopolitical environment, trends in health conditions, and ongoing supply constraints could significantly modify economic projections used in the estimation of the allowance for credit losses. 10 Table of Contents A summary of the activity in the allowance for credit losses on loans and the liability for unfunded lending commitments during the three months ended March 31, 2022 and 2021, respectively, follows: For the Three Months Ended March 31, 2022 (In thousands) Commercial Personal Banking Total ALLOWANCE FOR CREDIT LOSSES ON LOANS Balance at beginning of period $ 97,776 $ 52,268 $ 150,044 Provision for credit losses on loans ( 2,879 ) ( 7,807 ) ( 10,686 ) Deductions: Loans charged off 177 7,285 7,462 Less recoveries on loans 107 2,707 2,814 Net loan charge-offs (recoveries) 70 4,578 4,648 Balance March 31, 2022 $ 94,827 $ 39,883 $ 134,710 LIABILITY FOR UNFUNDED LENDING COMMITMENTS Balance at beginning of period $ 23,271 $ 933 $ 24,204 Provision for credit losses on unfunded lending commitments 509 319 828 Balance March 31, 2022 $ 23,780 $ 1,252 $ 25,032 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 118,607 $ 41,135 $ 159,742 For the Three Months Ended March 31, 2021 (In thousands) Commercial Personal Banking Total ALLOWANCE FOR CREDIT LOSSES ON LOANS Balance at beginning of period $ 121,549 $ 99,285 $ 220,834 Provision for credit losses on loans ( 1,909 ) ( 8,446 ) ( 10,355 ) Deductions: Loans charged off 232 12,709 12,941 Less recoveries on loans 215 2,774 2,989 Net loan charge-offs 17 9,935 9,952 Balance March 31, 2021 $ 119,623 $ 80,904 $ 200,527 LIABILITY FOR UNFUNDED LENDING COMMITMENTS Balance at beginning of period $ 37,259 $ 1,048 $ 38,307 Provision for credit losses on unfunded lending commitments 4,254 ( 131 ) 4,123 Balance March 31, 2021 $ 41,513 $ 917 $ 42,430 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 161,136 $ 81,821 $ 242,957 11 Table of Contents 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 March 31, 2022 and December 31, 2021. (In thousands) Current or Less Than 30 Days Past Due 30 – 89 Days Past Due 90 Days Past Due and Still Accruing Non-accrual Total March 31, 2022 Commercial: Business $ 5,494,664 $ 6,747 $ 341 $ 6,756 $ 5,508,508 Real estate – construction and land 1,144,411 — — — 1,144,411 Real estate – business 3,105,452 4,026 — 190 3,109,668 Personal Banking: Real estate – personal 2,811,330 5,076 2,281 1,389 2,820,076 Consumer 2,031,680 18,890 2,590 — 2,053,160 Revolving home equity 262,799 748 854 — 264,401 Consumer credit card 535,482 4,493 4,604 — 544,579 Overdrafts 13,891 320 — — 14,211 Total $ 15,399,709 $ 40,300 $ 10,670 $ 8,335 $ 15,459,014 December 31, 2021 Commercial: Business $ 5,292,125 $ 3,621 $ 477 $ 7,312 $ 5,303,535 Real estate – construction and land 1,117,434 832 — — 1,118,266 Real estate – business 3,058,566 57 — 214 3,058,837 Personal Banking: Real estate – personal 2,796,662 4,125 2,983 1,631 2,805,401 Consumer 2,005,556 24,458 2,211 — 2,032,225 Revolving home equity 274,372 772 801 — 275,945 Consumer credit card 565,335 4,821 5,254 — 575,410 Overdrafts 6,425 315 — — 6,740 Total $ 15,116,475 $ 39,001 $ 11,726 $ 9,157 $ 15,176,359 At March 31, 2022, the Company had $ 4.9 million in non-accrual business loans that had no allowance for credit loss. At December 31, 2021, the Company had $ 5.3 million in non-accrual business loans that had no allowance for credit loss. The Company did not record any interest income on non-accrual loans during the three months ended March 31, 2022 and 2021, 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 12 Table of Contents 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 March 31, 2022 and December 31, 2021 are as follows: Term Loans Amortized Cost Basis by Origination Year (In thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total March 31, 2022 Business Risk Rating: Pass $ 305,308 $ 1,246,520 $ 644,426 $ 533,462 $ 219,320 $ 368,615 $ 2,106,483 $ 5,424,134 Special mention 2,622 976 83 1,315 11,452 8,138 2,806 27,392 Substandard 2,437 1,230 1,110 7,172 4,530 10,503 23,244 50,226 Non-accrual 302 86 — — 1,462 4,906 — 6,756 Total Business: $ 310,669 $ 1,248,812 $ 645,619 $ 541,949 $ 236,764 $ 392,162 $ 2,132,533 $ 5,508,508 Real estate-construction Risk Rating: Pass $ 155,429 $ 591,643 $ 249,882 $ 53,869 $ 1,236 $ 2,800 $ 13,968 $ 1,068,827 Special mention — 19,474 — — 976 — — 20,450 Substandard — 15,486 11,600 — 14,891 13,157 — 55,134 Total Real estate-construction: $ 155,429 $ 626,603 $ 261,482 $ 53,869 $ 17,103 $ 15,957 $ 13,968 $ 1,144,411 Real estate-business Risk Rating: Pass $ 232,411 $ 726,266 $ 687,933 $ 514,629 $ 206,324 $ 378,239 $ 83,578 $ 2,829,380 Special mention — 3,537 30,657 8,995 34,319 2,345 — 79,853 Substandard 589 15,589 62,170 12,993 4,867 103,044 993 200,245 Non-accrual — — — — 173 17 — 190 Total Real estate-business: $ 233,000 $ 745,392 $ 780,760 $ 536,617 $ 245,683 $ 483,645 $ 84,571 $ 3,109,668 Commercial loans Risk Rating: Pass $ 693,148 $ 2,564,429 $ 1,582,241 $ 1,101,960 $ 426,880 $ 749,654 $ 2,204,029 $ 9,322,341 Special mention 2,622 23,987 30,740 10,310 46,747 10,483 2,806 127,695 Substandard 3,026 32,305 74,880 20,165 24,288 126,704 24,237 305,605 Non-accrual 302 86 — — 1,635 4,923 — 6,946 Total Commercial loans: $ 699,098 $ 2,620,807 $ 1,687,861 $ 1,132,435 $ 499,550 $ 891,764 $ 2,231,072 $ 9,762,587 13 Table of Contents Term Loans Amortized Cost Basis by Origination Year (In thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total December 31, 2021 Business Risk Rating: Pass $ 1,473,869 $ 704,157 $ 554,759 $ 248,739 $ 159,238 $ 270,454 $ 1,795,073 $ 5,206,289 Special mention 1,785 126 17,576 12,050 1,490 3,232 16,545 52,804 Substandard 836 1,191 8,855 4,936 1 10,775 10,536 37,130 Non-accrual 430 — 1 1,549 — 5,332 — 7,312 Total Business: $ 1,476,920 $ 705,474 $ 581,191 $ 267,274 $ 160,729 $ 289,793 $ 1,822,154 $ 5,303,535 Real estate-construction Risk Rating: Pass $ 598,734 $ 346,507 $ 66,985 $ 2,110 $ 2,655 $ 2,252 $ 13,230 $ 1,032,473 Special mention 44,649 — — 985 — — — 45,634 Substandard 485 11,620 — 14,896 13,158 — — 40,159 Total Real estate-construction: $ 643,868 $ 358,127 $ 66,985 $ 17,991 $ 15,813 $ 2,252 $ 13,230 $ 1,118,266 Real estate- business Risk Rating: Pass $ 775,561 $ 712,173 $ 551,697 $ 230,138 $ 170,888 $ 254,489 $ 76,641 $ 2,771,587 Special mention 4,011 30,322 10,500 37,576 2,068 2,103 1 86,581 Substandard 17,079 62,939 12,930 2,326 58,934 45,265 982 200,455 Non-accrual — — — 189 — 25 — 214 Total Real-estate business: $ 796,651 $ 805,434 $ 575,127 $ 270,229 $ 231,890 $ 301,882 $ 77,624 $ 3,058,837 Commercial loans Risk Rating: Pass $ 2,848,164 $ 1,762,837 $ 1,173,441 $ 480,987 $ 332,781 $ 527,195 $ 1,884,944 $ 9,010,349 Special mention 50,445 30,448 28,076 50,611 3,558 5,335 16,546 185,019 Substandard 18,400 75,750 21,785 22,158 72,093 56,040 11,518 277,744 Non-accrual 430 — 1 1,738 — 5,357 — 7,526 Total Commercial loans: $ 2,917,439 $ 1,869,035 $ 1,223,303 $ 555,494 $ 408,432 $ 593,927 $ 1,913,008 $ 9,480,638 14 Table of Contents The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided as of March 31, 2022 and December 31, 2021 below: Term Loans Amortized Cost Basis by Origination Year (In thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total March 31, 2022 Real estate-personal Current to 90 days past due $ 144,994 $ 668,179 $ 853,063 $ 328,209 $ 150,144 $ 661,855 $ 9,962 $ 2,816,406 Over 90 days past due — 192 962 126 114 887 — 2,281 Non-accrual — — — 182 107 1,100 — 1,389 Total Real estate-personal: $ 144,994 $ 668,371 $ 854,025 $ 328,517 $ 150,365 $ 663,842 $ 9,962 $ 2,820,076 Consumer Current to 90 days past due $ 208,522 $ 504,841 $ 310,052 $ 165,881 $ 66,175 $ 102,869 $ 692,230 $ 2,050,570 Over 90 days past due — 283 157 243 200 444 1,263 2,590 Total Consumer: $ 208,522 $ 505,124 $ 310,209 $ 166,124 $ 66,375 $ 103,313 $ 693,493 $ 2,053,160 Revolving home equity Current to 90 days past due $ — $ — $ — $ — $ — $ — $ 263,547 $ 263,547 Over 90 days past due — — — — — — 854 854 Total Revolving home equity: $ — $ — $ — $ — $ — $ — $ 264,401 $ 264,401 Consumer credit card Current to 90 days past due $ — $ — $ — $ — $ — $ — $ 539,975 $ 539,975 Over 90 days past due — — — — — — 4,604 4,604 Total Consumer credit card: $ — $ — $ — $ — $ — $ — $ 544,579 $ 544,579 Overdrafts Current to 90 days past due $ 14,211 $ — $ — $ — $ — $ — $ — $ 14,211 Total Overdrafts: $ 14,211 $ — $ — $ — $ — $ — $ — $ 14,211 Personal banking loans Current to 90 days past due $ 367,727 $ 1,173,020 $ 1,163,115 $ 494,090 $ 216,319 $ 764,724 $ 1,505,714 $ 5,684,709 Over 90 days past due — 475 1,119 369 314 1,331 6,721 10,329 Non-accrual — — — 182 107 1,100 — 1,389 Total Personal banking loans: $ 367,727 $ 1,173,495 $ 1,164,234 $ 494,641 $ 216,740 $ 767,155 $ 1,512,435 $ 5,696,427 15 Table of Contents Term Loans Amortized Cost Basis by Origination Year (In thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total December 31, 2021 Real estate-personal Current to 90 days past due $ 690,058 $ 888,631 $ 354,292 $ 157,485 $ 149,391 $ 551,460 $ 9,470 $ 2,800,787 Over 90 days past due 133 1,150 298 124 97 1,181 — 2,983 Non-accrual 115 — 251 109 — 1,156 — 1,631 Total Real estate-personal: $ 690,306 $ 889,781 $ 354,841 $ 157,718 $ 149,488 $ 553,797 $ 9,470 $ 2,805,401 Consumer Current to 90 days past due $ 571,455 $ 348,774 $ 192,076 $ 79,887 $ 47,401 $ 78,088 $ 712,333 $ 2,030,014 Over 90 days past due 283 335 257 250 74 351 661 2,211 Total Consumer: $ 571,738 $ 349,109 $ 192,333 $ 80,137 $ 47,475 $ 78,439 $ 712,994 $ 2,032,225 Revolving home equity Current to 90 days past due $ — $ — $ — $ — $ — $ — $ 275,144 $ 275,144 Over 90 days past due — — — — — — 801 801 Total Revolving home equity: $ — $ — $ — $ — $ — $ — $ 275,945 $ 275,945 Consumer credit card Current to 90 days past due $ — $ — $ — $ — $ — $ — $ 570,156 $ 570,156 Over 90 days past due — — — — — — 5,254 5,254 Total Consumer credit card: $ — $ — $ — $ — $ — $ — $ 575,410 $ 575,410 Overdrafts Current to 90 days past due $ 6,740 $ — $ — $ — $ — $ — $ — $ 6,740 Total Overdrafts: $ 6,740 $ — $ — $ — $ — $ — $ — $ 6,740 Personal banking loans Current to 90 days past due $ 1,268,253 $ 1,237,405 $ 546,368 $ 237,372 $ 196,792 $ 629,548 $ 1,567,103 $ 5,682,841 Over 90 days past due 416 1,485 555 374 171 1,532 6,716 11,249 Non-accrual 115 — 251 109 — 1,156 — 1,631 Total Personal banking loans: $ 1,268,784 $ 1,238,890 $ 547,174 $ 237,855 $ 196,963 $ 632,236 $ 1,573,819 $ 5,695,721 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 March 31, 2022 and December 31, 2021. (In thousands) Business Assets Oil & Gas Assets Total March 31, 2022 Commercial: Business $ 1,498 $ 2,401 $ 3,899 Total $ 1,498 $ 2,401 $ 3,899 December 31, 2021 Commercial: Business $ 1,604 $ 2,459 $ 4,063 Total $ 1,604 $ 2,459 $ 4,063 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 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 16 Table of Contents often underwritten with other collateral considerations. These loans totaled $ 183.4 million at March 31, 2022 and $ 185.6 million at December 31, 2021. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $ 181.8 million at March 31, 2022 and $ 186.6 million at December 31, 2021. 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 March 31, 2022 and December 31, 2021 by FICO score. Personal Banking Loans % of Loan Category Real Estate - Personal Consumer Revolving Home Equity Consumer Credit Card March 31, 2022 FICO score: Under 600 .9 % 1.9 % 0.9 % 3.4 % 600 - 659 2.5 3.9 2.6 11.3 660 - 719 7.2 13.5 10.1 31.0 720 - 779 26.6 24.9 21.7 28.0 780 and over 62.8 55.8 64.7 26.3 Total 100.0 % 100.0 % 100.0 % 100.0 % December 31, 2021 FICO score: Under 600 1.0 % 1.9 % 0.9 % 3.4 % 600 - 659 2.4 3.9 2.6 11.3 660 - 719 7.4 13.8 9.4 29.9 720 - 779 25.2 25.3 20.4 28.2 780 and over 64.0 55.1 66.7 27.2 Total 100.0 % 100.0 % 100.0 % 100.0 % Troubled debt restructurings 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) March 31, 2022 December 31, 2021 Accruing restructured loans: Commercial $ 108,789 $ 46,867 Assistance programs 5,865 6,146 Other consumer 4,681 4,787 Non-accrual loans 6,457 7,087 Total troubled debt restructurings $ 125,792 $ 64,887 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 17 Table of Contents 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 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 March 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) March 31, 2022 Balance 90 days past due at any time during previous 12 months Commercial: Business $ 30,254 $ — Real estate - construction and land 10,101 — Real estate - business 73,804 — Personal Banking: Real estate - personal 3,220 729 Consumer 20 — Revolving home equity 2,637 282 Consumer credit card 5,756 518 Total troubled debt restructurings $ 125,792 $ 1,529 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 were estimated to decrease interest income by approximately $ 649 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 $ 17.7 million at March 31, 2022 to lend additional funds to borrowers with restructured loans. Additionally, the Company had commitments at March 31, 2022 of $ 24.0 million related to letters of credit with an internal risk rating below substandard. 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 18 Table of Contents (FHLMC) and Federal National Mortgage Association (FNMA). At March 31, 2022, the fair value of these loans was $ 3.9 million, and the unpaid principal balance was $ 3.9 million. 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 March 31, 2022 totaled $ 5.0 million. At March 31, 2022, 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 $ 296 thousand and $ 115 thousand at March 31, 2022 and December 31, 2021, respectively. Personal property acquired in repossession, generally autos, totaled $ 1.3 million and $ 1.1 million at March 31, 2022 and December 31, 2021, respectively. 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 March 31, 2022 and December 31, 2021. (In thousands) March 31, 2022 December 31, 2021 Available for sale debt securities $ 14,780,494 $ 14,450,027 Trading debt securities 31,380 46,235 Equity securities: Readily determinable fair value 6,866 7,153 No readily determinable fair value 2,418 2,049 Other: Federal Reserve Bank stock 34,532 34,379 Federal Home Loan Bank stock 10,199 10,428 Equity method investments 1,434 1,834 Private equity investments 153,411 147,406 Total investment securities (1) $ 15,020,734 $ 14,699,511 (1) Accrued interest receivable totaled $ 41.4 million and $ 39.5 million at March 31, 2022 and December 31, 2021, 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 three months ended March 31, 2022, 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 other comprehensive income (OCI). A summary of the available for sale debt securities by maturity groupings as of March 31, 2022 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 collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit 19 Table of Contents 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 $ 186,706 $ 189,347 After 1 but within 5 years 746,460 746,770 After 5 but within 10 years 181,875 193,844 Total U.S. government and federal agency obligations 1,115,041 1,129,961 Government-sponsored enterprise obligations: After 5 but within 10 years 5,000 5,000 After 10 years 50,765 46,390 Total government-sponsored enterprise obligations 55,765 51,390 State and municipal obligations: Within 1 year 181,848 182,560 After 1 but within 5 years 735,420 730,637 After 5 but within 10 years 917,122 860,827 After 10 years 326,616 298,241 Total state and municipal obligations 2,161,006 2,072,265 Mortgage and asset-backed securities: Agency mortgage-backed securities 5,774,953 5,441,374 Non-agency mortgage-backed securities 1,525,223 1,435,363 Asset-backed securities 4,121,388 4,011,361 Total mortgage and asset-backed securities 11,421,564 10,888,098 Other debt securities: Within 1 year 121,215 121,629 After 1 but within 5 years 229,677 223,109 After 5 but within 10 years 312,426 285,620 After 10 years 9,260 8,422 Total other debt securities 672,578 638,780 Total available for sale debt securities $ 15,425,954 $ 14,780,494 Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $ 399.4 million, at fair value, at March 31, 2022. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. 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 The Company’s model for establishing its allowance for credit losses uses cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the 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 who 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. Credit impairment is determined using 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. At March 31, 2022, the fair value of securities on this watch list was $ 13.1 million compared to $ 13.4 million at December 31, 2021. Significant inputs to the cash flow model used at March 31, 2022 to quantify credit losses were primarily credit support agreements, as the securities on the Company's watch list at March 31, 2022 were securities backed by government-guaranteed student loans and are expected to perform as contractually required. As of March 31, 2022, the Company did not identify any securities for which a credit loss exists, and for the three months ended March 31, 2022 and 2021, the Company did not recognize a credit loss expense on any available for sale debt securities. 20 Table of Contents 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 March 31, 2022 and December 31, 2021. 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. Additionally, management does not intend to sell the securities, and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery. Less than 12 months 12 months or longer Total (In thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses March 31, 2022 U.S. government and federal agency obligations $ 390,451 $ 13,082 $ — $ — $ 390,451 $ 13,082 Government-sponsored enterprise obligations 29,665 1,281 16,725 3,094 46,390 4,375 State and municipal obligations 1,204,526 80,379 136,076 15,435 1,340,602 95,814 Mortgage and asset-backed securities: Agency mortgage-backed securities 4,009,914 242,976 987,082 96,265 4,996,996 339,241 Non-agency mortgage-backed securities 1,360,220 87,585 28,932 2,525 1,389,152 90,110 Asset-backed securities 3,439,877 106,785 149,894 6,339 3,589,771 113,124 Total mortgage and asset-backed securities 8,810,011 437,346 1,165,908 105,129 9,975,919 542,475 Other debt securities 326,917 17,622 148,487 16,683 475,404 34,305 Total $ 10,761,570 $ 549,710 $ 1,467,196 $ 140,341 $ 12,228,766 $ 690,051 December 31, 2021 U.S. government and federal agency obligations $ 296,492 $ 2,241 $ — $ — $ 296,492 $ 2,241 Government-sponsored enterprise obligations — — 18,899 919 18,899 919 State and municipal obligations 876,691 15,874 32,684 1,049 909,375 16,923 Mortgage and asset-backed securities: Agency mortgage-backed securities 3,333,691 59,044 265,835 8,720 3,599,526 67,764 Non-agency mortgage-backed securities 1,285,611 17,222 1,948 19 1,287,559 17,241 Asset-backed securities 2,518,935 19,201 87,893 525 2,606,828 19,726 Total mortgage and asset-backed securities 7,138,237 95,467 355,676 9,264 7,493,913 104,731 Other debt securities 270,409 5,098 58,574 3,017 328,983 8,115 Total $ 8,581,829 $ 118,680 $ 465,833 $ 14,249 $ 9,047,662 $ 132,929 The entire available for sale debt portfolio included $ 12.2 billion of securities that were in a loss position at March 31, 2022, compared to $ 9.0 billion at December 31, 2021. The total amount of unrealized loss on these securities was $ 690.1 million at March 31, 2022, an increase of $ 557.1 million compared to the unrealized loss at December 31, 2021. Securities with significant unrealized losses are discussed in the "Allowance for credit losses on available for sale debt securities" section above. 21 Table of Contents 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 March 31, 2022 and December 31, 2021, and the corresponding amounts of gross unrealized gains and losses (pre-tax) in AOCI, by security type. (In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value March 31, 2022 U.S. government and federal agency obligations $ 1,115,041 $ 28,002 $ ( 13,082 ) $ — $ 1,129,961 Government-sponsored enterprise obligations 55,765 — ( 4,375 ) — 51,390 State and municipal obligations 2,161,006 7,073 ( 95,814 ) — 2,072,265 Mortgage and asset-backed securities: Agency mortgage-backed securities 5,774,953 5,662 ( 339,241 ) — 5,441,374 Non-agency mortgage-backed securities 1,525,223 250 ( 90,110 ) — 1,435,363 Asset-backed securities 4,121,388 3,097 ( 113,124 ) — 4,011,361 Total mortgage and asset-backed securities 11,421,564 9,009 ( 542,475 ) — 10,888,098 Other debt securities 672,578 507 ( 34,305 ) — 638,780 Total $ 15,425,954 $ 44,591 $ ( 690,051 ) $ — $ 14,780,494 December 31, 2021 U.S. government and federal agency obligations $ 1,035,477 $ 47,484 $ ( 2,241 ) $ — $ 1,080,720 Government-sponsored enterprise obligations 50,773 1,901 ( 919 ) — 51,755 State and municipal obligations 2,072,210 41,540 ( 16,923 ) — 2,096,827 Mortgage and asset-backed securities: Agency mortgage-backed securities 5,698,088 52,676 ( 67,764 ) — 5,683,000 Non-agency mortgage-backed securities 1,383,037 681 ( 17,241 ) — 1,366,477 Asset-backed securities 3,546,024 12,921 ( 19,726 ) — 3,539,219 Total mortgage and asset-backed securities 10,627,149 66,278 ( 104,731 ) — 10,588,696 Other debt securities 633,524 6,620 ( 8,115 ) — 632,029 Total $ 14,419,133 $ 163,823 $ ( 132,929 ) $ — $ 14,450,027 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 Three Months Ended March 31 (In thousands) 2022 2021 Proceeds from sales of securities: Other investments $ 1,745 $ 9,292 Total proceeds $ 1,745 $ 9,292 Investment securities gains (losses), net: Equity securities: Fair value adjustments, net $ ( 287 ) $ ( 35 ) Other: Gains realized on sales — 1,523 Fair value adjustments, net 7,450 8,365 Total investment securities gains, net $ 7,163 $ 9,853 Net gains on investment securities for the three months ended March 31, 2022 were mainly comprised of net losses of $ 287 thousand on equity investments, offset by net gains in fair value of $ 7.5 million on private equity investments, due to fair value adjustments. At March 31, 2022, securities totaling $ 5.2 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 $ 6.4 billion at December 31, 2021. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $ 201.0 million, while the remaining securities were pledged under agreements pursuant to which the secured 22 Table of Contents parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10 % of stockholders’ equity. 4. Goodwill and Other Intangible Assets The following table presents information about the Company's intangible assets which have estimable useful lives. March 31, 2022 December 31, 2021 (In thousands) Gross Carrying Amount Accumulated Amortization Valuation Allowance Net Amount Gross Carrying Amount Accumulated Amortization Valuation Allowance Net Amount Amortizable intangible assets: Core deposit premium $ 31,270 $ ( 30,345 ) $ — $ 925 $ 31,270 $ ( 30,266 ) $ — $ 1,004 Mortgage servicing rights 21,490 ( 10,130 ) — 11,360 20,870 ( 9,600 ) ( 304 ) 10,966 Total $ 52,760 $ ( 40,475 ) $ — $ 12,285 $ 52,140 $ ( 39,866 ) $ ( 304 ) $ 11,970 Aggregate amortization expense on intangible assets was $ 609 thousand and $ 951 thousand for the three month periods ended March 31, 2022 and 2021. 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 March 31, 2022. 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) 2022 $ 1,785 2023 1,402 2024 1,240 2025 1,088 2026 945 Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2022 are as follows: (In thousands) Goodwill Easement Core Deposit Premium Mortgage Servicing Rights Balance January 1, 2022 $ 138,921 $ 3,600 $ 1,004 $ 10,966 Originations, net of disposals — — — 620 Amortization — — ( 79 ) ( 530 ) Impairment recovery — — — 304 Balance March 31, 2022 $ 138,921 $ 3,600 $ 925 $ 11,360 Goodwill allocated to the Company’s operating segments at March 31, 2022 and December 31, 2021 is shown below. (In thousands) Consumer segment $ 70,721 Commercial segment 67,454 Wealth segment 746 Total goodwill $ 138,921 23 Table of Contents 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 March 31, 2022, that net liability was $ 4.2 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 $ 502.1 million at March 31, 2022. 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 March 31, 2022, 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 March 31, 2022, the fair value of the Company's guarantee liabilities for RPAs was $ 126 thousand, and the notional amount of the underlying swaps was $ 347.9 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. 24 Table of Contents 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 3 months to 6 years. The following table provides the components of lease income. For the Three Months Ended March 31 (in thousands) 2022 2021 Direct financing and sales-type leases $ 5,247 $ 6,121 Operating leases (a) 2,184 2,074 Total lease income $ 7,431 $ 8,195 (a) Includes rent from Tower Properties Company, a related party, of $ 19 thousand for the three month periods ended March 31, 2022 and 2021 . 7. Pension The amount of net pension cost is shown in the table below: For the Three Months Ended March 31 (In thousands) 2022 2021 Service cost - benefits earned during the period $ 132 $ 95 Interest cost on projected benefit obligation 665 556 Expected return on plan assets ( 1,126 ) ( 1,124 ) Amortization of prior service cost ( 68 ) ( 68 ) Amortization of unrecognized net loss 498 651 Net periodic pension cost $ 101 $ 110 All benefits accrued under the Company’s defined benefit pension plan have been frozen since January 1, 2011. During the first three months of 2022, 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. 25 Table of Contents 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 March 31 (In thousands, except per share data) 2022 2021 Basic income per common share: Net income attributable to Commerce Bancshares, Inc. $ 118,154 $ 130,972 Less income allocated to nonvested restricted stock 1,070 1,200 Net income allocated to common stock $ 117,084 $ 129,772 Weighted average common shares outstanding 120,324 122,073 Basic income per common share $ .97 $ 1.06 Diluted income per common share: Net income attributable to Commerce Bancshares, Inc. $ 118,154 $ 130,972 Less income allocated to nonvested restricted stock 1,068 1,198 Net income allocated to common stock $ 117,086 $ 129,774 Weighted average common shares outstanding 120,324 122,073 Net effect of the assumed exercise of stock-based awards - based on the treasury stock method using the average market price for the respective periods 292 329 Weighted average diluted common shares outstanding 120,616 122,402 Diluted income per common share $ .97 $ 1.06 Unexercised stock appreciation rights of 119 thousand and 54 thousand for the three month periods ended March 31, 2022 and 2021, respectively, were excluded from the computation of diluted income per common share because their inclusion would have been anti-dilutive. * All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December 2021. 26 Table of Contents 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, 2022 $ 23,174 $ ( 20,668 ) $ 74,574 $ 77,080 Other comprehensive loss before reclassifications to current earnings ( 676,353 ) — — ( 676,353 ) Amounts reclassified to current earnings from accumulated other comprehensive income — 430 ( 6,050 ) ( 5,620 ) Current period other comprehensive income (loss), before tax ( 676,353 ) 430 ( 6,050 ) ( 681,973 ) Income tax (expense) benefit 169,088 ( 107 ) 1,512 170,493 Current period other comprehensive income (loss), net of tax ( 507,265 ) 323 ( 4,538 ) ( 511,480 ) Balance March 31, 2022 $ ( 484,091 ) $ ( 20,345 ) $ 70,036 $ ( 434,400 ) Balance January 1, 2021 $ 263,801 $ ( 25,118 ) $ 92,694 $ 331,377 Other comprehensive income (loss) before reclassifications to current earnings ( 211,569 ) — — ( 211,569 ) Amounts reclassified to current earnings from accumulated other comprehensive income — 583 ( 5,848 ) ( 5,265 ) Current period other comprehensive income (loss), before tax ( 211,569 ) 583 ( 5,848 ) ( 216,834 ) Income tax (expense) benefit 52,893 ( 146 ) 1,462 54,209 Current period other comprehensive income (loss), net of tax ( 158,676 ) 437 ( 4,386 ) ( 162,625 ) Balance March 31, 2021 $ 105,125 $ ( 24,681 ) $ 88,308 $ 168,752 (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 150 locations. This segment also includes indirect and other consumer loan financing businesses, along with debit and credit card loan and fee businesses. Residential mortgage origination, sales and servicing functions are included in this Consumer segment, but residential mortgage loans retained by the Company are not considered part of this segment and are instead included in the Other/Elimination column. 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. 27 Table of Contents 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) Consumer Commercial Wealth Segment Totals Other/Elimination Consolidated Totals Three Months Ended March 31, 2022 Net interest income $ 79,896 $ 109,530 $ 18,868 $ 208,294 $ 492 $ 208,786 Provision for credit losses ( 4,498 ) ( 82 ) ( 26 ) ( 4,606 ) 14,464 9,858 Non-interest income 28,354 53,651 53,206 135,211 ( 3,442 ) 131,769 Investment securities gains, net — — — — 7,163 7,163 Non-interest expense ( 72,994 ) ( 89,524 ) ( 36,286 ) ( 198,804 ) ( 6,844 ) ( 205,648 ) Income before income taxes $ 30,758 $ 73,575 $ 35,762 $ 140,095 $ 11,833 $ 151,928 Three Months Ended March 31, 2021 Net interest income $ 77,939 $ 110,565 $ 17,457 $ 205,961 $ ( 213 ) $ 205,748 Provision for credit losses ( 9,901 ) ( 27 ) 5 ( 9,923 ) 16,155 6,232 Non-interest income 38,248 50,728 50,985 139,961 ( 3,916 ) 136,045 Investment securities gains, net — — — — 9,853 9,853 Non-interest expense ( 70,369 ) ( 79,281 ) ( 33,043 ) ( 182,693 ) ( 9,880 ) ( 192,573 ) Income before income taxes $ 35,917 $ 81,985 $ 35,404 $ 153,306 $ 11,999 $ 165,305 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. 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. 28 Table of Contents 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. At March 31, 2022, 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) March 31, 2022 December 31, 2021 Interest rate swaps $ 2,177,130 $ 2,229,419 Interest rate caps 221,293 152,058 Credit risk participation agreements 475,944 485,633 Foreign exchange contracts 2,797 5,119 Mortgage loan commitments 19,638 21,787 Mortgage loan forward sale contracts 638 1,165 Forward TBA contracts 18,500 21,000 Total notional amount $ 2,915,940 $ 2,916,181 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. 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 March 31, 2022, the total realized gains on the monetized cash flow hedges remaining in AOCI was $ 93.4 million (pre-tax), which will be reclassified into interest income over the next 4.7 years. The estimated amount of net gains related to the cash flow hedges remaining in AOCI at March 31, 2022 that is expected to be reclassified into income within the next 12 months is $ 24.4 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 to purchase or deliver foreign currencies for customers 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. 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 17 on Fair Value Measurements in the 2021 Annual Report on Form 10-K. 29 Table of Contents The Company's policy is to present its derivative assets and derivative liabilities on a gross basis in 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 at March 31, 2022 in the table below, the positive fair values of cleared swaps were reduced by $ 11.3 million and the negative fair values of cleared swaps were reduced by $ 5.5 million. At December 31, 2021, positive fair values of cleared swaps were reduced by $ 587 thousand and the negative fair values of cleared swaps were reduced by $ 29.7 million. Asset Derivatives Liability Derivatives Mar. 31, 2022 Dec. 31, 2021 Mar. 31, 2022 Dec. 31, 2021 (In thousands ) Fair Value Fair Value Derivative instruments: Interest rate swaps $ 11,236 $ 40,752 $ ( 17,075 ) $ ( 11,606 ) Interest rate caps 1,137 147 ( 1,137 ) ( 147 ) Credit risk participation agreements 68 84 ( 126 ) ( 277 ) Foreign exchange contracts 28 77 ( 11 ) ( 45 ) Mortgage loan commitments 302 764 ( 23 ) — Mortgage loan forward sale contracts 4 5 — ( 1 ) Forward TBA contracts 355 13 ( 10 ) ( 25 ) Total $ 13,130 $ 41,842 $ ( 18,382 ) $ ( 12,101 ) The pre-tax effects of derivative instruments on the consolidated statements of income and consolidated statements of comprehensive income are shown in the tables below. Amount of Gain or (Loss) Recognized in OCI Location of Gain (Loss) Reclassified from AOCI into Income Amount of Gain (Loss) Reclassified from AOCI into Income (In thousands) Total Included Component Excluded Component Total Included Component Excluded Component For the Three Months Ended March 31, 2022 Derivatives in cash flow hedging relationships: Interest rate floors $ — $ — $ — Interest and fees on loans $ ( 6,050 ) $ ( 7,566 ) $ 1,516 Total $ — $ — $ — Total $ ( 6,050 ) $ ( 7,566 ) $ 1,516 For the Three Months Ended March 31, 2021 Derivatives in cash flow hedging relationships: Interest rate floors $ — $ — $ — Interest and fees on loans $ ( 5,848 ) $ ( 7,364 ) $ 1,516 Total $ — $ — $ — Total $ ( 5,848 ) $ ( 7,364 ) $ 1,516 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 March 31 (In thousands) 2022 2021 Derivative instruments: Interest rate swaps Other non-interest income $ 812 $ 1,075 Interest rate caps Other non-interest income 16 15 Credit risk participation agreements Other non-interest income ( 10 ) 365 Foreign exchange contracts Other non-interest income ( 14 ) 96 Mortgage loan commitments Loan fees and sales ( 485 ) ( 1,372 ) Mortgage loan forward sale contracts Loan fees and sales — 39 Forward TBA contracts Loan fees and sales 1,243 2,906 Total $ 1,562 $ 3,124 30 Table of Contents 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 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 Recognized Gross Amounts Offset in the Balance Sheet Net Amounts Presented in the Balance Sheet Financial Instruments Available for Offset Collateral Received/ Pledged Net Amount March 31, 2022 Assets: Derivatives subject to master netting agreements $ 12,805 $ — $ 12,805 $ ( 2,036 ) $ ( 1,298 ) $ 9,471 Derivatives not subject to master netting agreements 325 — 325 Total derivatives $ 13,130 $ — $ 13,130 Liabilities: Derivatives subject to master netting agreements $ 18,308 $ — $ 18,308 $ ( 2,036 ) $ ( 1,035 ) $ 15,237 Derivatives not subject to master netting agreements 74 — 74 Total derivatives $ 18,382 $ — $ 18,382 December 31, 2021 Assets: Derivatives subject to master netting agreements $ 40,970 $ — $ 40,970 $ ( 347 ) $ — $ 40,623 Derivatives not subject to master netting agreements 872 — 872 Total derivatives $ 41,842 $ — $ 41,842 Liabilities: Derivatives subject to master netting agreements $ 12,019 $ — $ 12,019 $ ( 347 ) $ ( 10,146 ) $ 1,526 Derivatives not subject to master netting agreements 82 — 82 Total derivatives $ 12,101 $ — $ 12,101 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 31 Table of Contents 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. 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 March 31, 2022 and $ 400.0 million at December 31, 2021. 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 Recognized Gross Amounts Offset in the Balance Sheet Net Amounts Presented in the Balance Sheet Financial Instruments Available for Offset Securities Collateral Received/Pledged Unsecured Amount March 31, 2022 Total resale agreements, subject to master netting arrangements $ 2,025,000 $ ( 200,000 ) $ 1,825,000 $ — $ ( 1,825,000 ) $ — Total repurchase agreements, subject to master netting arrangements 2,500,146 ( 200,000 ) 2,300,146 — ( 2,300,146 ) — December 31, 2021 Total resale agreements, subject to master netting arrangements $ 2,025,000 $ ( 400,000 ) $ 1,625,000 $ — $ ( 1,625,000 ) $ — Total repurchase agreements, subject to master netting arrangements 3,379,582 ( 400,000 ) 2,979,582 — ( 2,979,582 ) — The table below shows the remaining contractual maturities of repurchase agreements outstanding at March 31, 2022 and December 31, 2021, 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 continuous Up to 90 days Greater than 90 days Total March 31, 2022 Repurchase agreements, secured by: U.S. government and federal agency obligations $ 353,708 $ 23,631 $ 6,258 $ 383,597 Agency mortgage-backed securities 1,572,433 1,207 209,245 1,782,885 Non-agency mortgage-backed securities 24,953 — — 24,953 Asset-backed securities 290,783 — — 290,783 Other debt securities 17,928 — — 17,928 Total repurchase agreements, gross amount recognized $ 2,259,805 $ 24,838 $ 215,503 $ 2,500,146 December 31, 2021 Repurchase agreements, secured by: U.S. government and federal agency obligations $ 600,866 $ 33,373 $ 9,259 $ 643,498 Agency mortgage-backed securities 1,844,652 3,908 400,250 2,248,810 Non-agency mortgage-backed securities 32,299 — — 32,299 Asset-backed securities 422,525 — — 422,525 Other debt securities 32,450 — — 32,450 Total repurchase agreements, gross amount recognized $ 2,932,792 $ 37,281 $ 409,509 $ 3,379,582 32 Table of Contents 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 that has been charged against income was $ 4.2 million and $ 3.9 million in the three months ended March 31, 2022 and 2021, 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 March 31, 2022, and changes during the three month period then ended, is presented below. Shares Weighted Average Grant Date Fair Value Nonvested at January 1, 2022 1,120,491 $ 55.58 Granted 225,152 70.92 Vested ( 238,899 ) 47.60 Forfeited ( 3,088 ) 55.13 Nonvested at March 31, 2022 1,103,656 $ 60.44 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 $ 17.42 Assumptions: Dividend yield 1.5 % Volatility 28.4 % Risk-free interest rate 1.6 % Expected term 5.7 years A summary of SAR activity during the first three months of 2022 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, 2022 896,348 $ 46.21 Granted 96,318 70.64 Forfeited ( 1,797 ) 58.26 Expired ( 257 ) 57.18 Exercised ( 23,137 ) 44.54 Outstanding at March 31, 2022 967,475 $ 48.65 6.0 years $ 22,190 33 Table of Contents 14. Revenue from Contracts with Customers Revenue from contracts with customers is recognized to reflect 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 three months ended March 31, 2022, approximately 61 % 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 non-interest income subject to ASC 606 by major product line. Three Months Ended March 31 (In thousands) 2022 2021 Bank card transaction fees $ 42,045 $ 37,695 Trust fees 47,811 44,127 Deposit account charges and other fees 22,307 22,575 Consumer brokerage services 4,446 4,081 Other non-interest income 4,495 7,696 Total non-interest income from contracts with customers 121,104 116,174 Other non-interest income (1) 10,665 19,871 Total non-interest income $ 131,769 $ 136,045 (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, the majority 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 contribute approximately 39 % and 60 %, respectively, of the Company's deposit account charge revenue. All trust fees and consumer brokerage services income are earned in the Wealth segment. The following table presents the opening and closing receivable balances for the three month periods ended March 31, 2022 and 2021 for the Company’s significant revenue categories subject to ASC 606. (In thousands) March 31, 2022 December 31, 2021 March 31, 2021 December 31, 2020 Bank card transaction fees $ 14,171 $ 16,424 $ 12,437 $ 14,199 Trust fees 2,094 2,222 2,017 2,071 Deposit account charges and other fees 5,452 6,702 5,281 6,933 Consumer brokerage services 324 391 323 432 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. 34 Table of Contents 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 2021 Annual Report on Form 10-K. There have been no significant changes in these methodologies since then. 35 Table of Contents Instruments Measured at Fair Value on a Recurring Basis The table below presents the March 31, 2022 and December 31, 2021 carrying values of assets and liabilities measured at fair value on a recurring basis. There were no transfers among levels during the first three months of 2022 or the year ended December 31, 2021. Fair Value Measurements Using (In thousands) Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2022 Assets: Residential mortgage loans held for sale $ 3,901 $ — $ 3,901 $ — Available for sale debt securities: U.S. government and federal agency obligations 1,129,961 1,129,961 — — Government-sponsored enterprise obligations 51,390 — 51,390 — State and municipal obligations 2,072,265 — 2,070,363 1,902 Agency mortgage-backed securities 5,441,374 — 5,441,374 — Non-agency mortgage-backed securities 1,435,363 — 1,435,363 — Asset-backed securities 4,011,361 — 4,011,361 — Other debt securities 638,780 — 638,780 — Trading debt securities 31,380 — 31,380 — Equity securities 6,866 6,866 — — Private equity investments 153,411 — — 153,411 Derivatives * 13,130 — 12,760 370 Assets held in trust for deferred compensation plan 20,403 20,403 — — Total assets 15,009,585 1,157,230 13,696,672 155,683 Liabilities: Derivatives * 18,382 — 18,233 149 Liabilities held in trust for deferred compensation plan 20,403 20,403 — — Total liabilities $ 38,785 $ 20,403 $ 18,233 $ 149 December 31, 2021 Assets: Residential mortgage loans held for sale $ 5,570 $ — $ 5,570 $ — Available for sale debt securities: U.S. government and federal agency obligations 1,080,720 1,080,720 — — Government-sponsored enterprise obligations 51,755 — 51,755 — State and municipal obligations 2,096,827 — 2,094,843 1,984 Agency mortgage-backed securities 5,683,000 — 5,683,000 — Non-agency mortgage-backed securities 1,366,477 — 1,366,477 — Asset-backed securities 3,539,219 — 3,539,219 — Other debt securities 632,029 — 632,029 — Trading debt securities 46,235 — 46,235 — Equity securities 7,153 7,153 — — Private equity investments 147,406 — — 147,406 Derivatives * 41,842 — 40,994 848 Assets held in trust for deferred compensation plan 21,794 21,794 — — Total assets 14,720,027 1,109,667 13,460,122 150,238 Liabilities: Derivatives * 12,101 — 11,824 277 Liabilities held in trust for deferred compensation plan 21,794 21,794 — — Total liabilities $ 33,895 $ 21,794 $ 11,824 $ 277 * The fair value of each class of derivative is shown in Note 11. 36 Table of Contents The changes in 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 Derivatives Total For the three months ended March 31, 2022 Balance January 1, 2022 $ 1,984 $ 147,406 $ 571 $ 149,961 Total gains or losses (realized/unrealized): Included in earnings — 7,450 ( 495 ) 6,955 Included in other comprehensive income * ( 83 ) — — ( 83 ) Discount accretion 1 — — 1 Purchases of private equity investments — 300 — 300 Sale/pay down of private equity investments — ( 1,745 ) — ( 1,745 ) Purchase of risk participation agreement — — 145 145 Balance March 31, 2022 $ 1,902 $ 153,411 $ 221 $ 155,534 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 March 31, 2022 $ — $ 7,450 $ 267 $ 7,717 *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 March 31, 2022 $ ( 83 ) $ — $ — $ ( 83 ) For the three months ended March 31, 2021 Balance January 1, 2021 $ 7,968 $ 94,368 $ 2,741 $ 105,077 Total gains or losses (realized/unrealized): Included in earnings — 8,365 ( 1,007 ) 7,358 Included in other comprehensive income * ( 1 ) — — ( 1 ) Discount accretion 3 — — 3 Sale/pay down of private equity investments — ( 8,476 ) — ( 8,476 ) Sale of risk participation agreement — — ( 98 ) ( 98 ) Balance March 31, 2021 $ 7,970 $ 94,257 $ 1,636 $ 103,863 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 March 31, 2021 $ — $ 8,365 $ 2,050 $ 10,415 *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 March 31, 2021 $ ( 1 ) $ — $ — $ ( 1 ) * Included in "net unrealized gains (losses) on other securities" in the consolidated statements of comprehensive income. Gains and losses included in earnings for the Level 3 assets and liabilities in the previous table are reported in the following line items in the consolidated statements of income: (In thousands) Loan Fees and Sales Other Non-Interest Income Investment Securities Gains (Losses), Net Total For the three months ended March 31, 2022 Total gains or losses included in earnings $ ( 485 ) $ ( 10 ) $ 7,450 $ 6,955 Change in unrealized gains or losses relating to assets still held at March 31, 2022 $ 279 $ ( 12 ) $ 7,450 $ 7,717 For the three months ended March 31, 2021 Total gains or losses included in earnings $ ( 1,372 ) $ 365 $ 8,365 $ 7,358 Change in unrealized gains or losses relating to assets still held at March 31, 2021 $ 1,855 $ 195 $ 8,365 $ 10,415 Level 3 Inputs The Company's significant Level 3 measurements, which employ unobservable inputs that are readily quantifiable, pertain to auction rate securities (ARS), investments in portfolio concerns held by the Company's private equity subsidiaries, and held for sale residential mortgage loan commitments. ARS are included in state and municipal securities and totaled $ 1.9 million at March 31, 2022, while private equity investments, included in other securities, totaled $ 153.4 million. 37 Table of Contents Information about these inputs is presented in the table below. Quantitative Information about Level 3 Fair Value Measurements Weighted Valuation Technique Unobservable Input Range Average* Auction rate securities Discounted cash flow Estimated market recovery period 5 years 5 years Estimated market rate 2.5 % - 3.0 % 2.8 % Private equity investments Market comparable companies EBITDA multiple 4.0 - 6.0 5.4 Mortgage loan commitments Discounted cash flow Probability of funding 68.2 % - 100.0 % 90.2 % Embedded servicing value — % - 1.4 % 1.1 % * 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 three months of 2022 and 2021, and still held as of March 31, 2022 and 2021, 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 March 31, 2022 and 2021. 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 Three Months Ended March 31 March 31, 2022 Mortgage servicing rights 11,360 — — 11,360 304 Long-lived assets 497 — — 497 ( 965 ) March 31, 2021 Collateral dependent loans $ 11,233 $ — $ — $ 11,233 $ ( 2,926 ) Mortgage servicing rights 8,234 — — 8,234 1,055 The Company's significant Level 3 measurements that are measured on a nonrecurring basis pertain to the Company's mortgage servicing rights retained on certain fixed rate personal real estate loan originations. Mortgage servicing rights are included in other intangible assets-net on the consolidated balance sheets, and information about these inputs is presented in the table below. Quantitative Information about Level 3 Fair Value Measurements Weighted Valuation Technique Unobservable Input Range Average* Mortgage servicing rights Discounted cash flow Discount rate 9.01 % - 9.34 % 9.12 % Prepayment speeds (CPR)* 6.22 % - 9.41 % 6.65 % Loan servicing costs - annually per loan Performing loans $ 70 - $ 72 $ 71 Delinquent loans $ 200 - $ 750 Loans in foreclosure $ 1,000 *Ranges and weighted averages based on interest rate tranches . The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are updated periodically for changes in market conditions. Actual rates may differ from our estimates. Increases in prepayment speed and discount rates negatively impact the fair value of our mortgage servicing rights. 38 Table of Contents 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 March 31, 2022 and December 31, 2021: Carrying Amount Estimated Fair Value at March 31, 2022 (In thousands) Level 1 Level 2 Level 3 Total Financial Assets Loans: Business $ 5,508,508 $ — $ — $ 5,406,516 $ 5,406,516 Real estate - construction and land 1,144,411 — — 1,129,894 1,129,894 Real estate - business 3,109,668 — — 3,059,118 3,059,118 Real estate - personal 2,820,076 — — 2,777,860 2,777,860 Consumer 2,053,160 — — 2,043,692 2,043,692 Revolving home equity 264,401 — — 261,985 261,985 Consumer credit card 544,579 — — 508,944 508,944 Overdrafts 14,211 — — 13,985 13,985 Total loans 15,459,014 — — 15,201,994 15,201,994 Loans held for sale 8,908 — 8,908 — 8,908 Investment securities 15,016,882 1,136,827 13,680,011 200,044 15,016,882 Securities purchased under agreements to resell 1,825,000 — — 1,801,227 1,801,227 Interest earning deposits with banks 1,260,813 1,260,813 — — 1,260,813 Cash and due from banks 326,549 326,549 — — 326,549 Derivative instruments 13,130 — 12,760 370 13,130 Assets held in trust for deferred compensation plan 20,403 20,403 — — 20,403 Total $ 33,930,699 $ 2,744,592 $ 13,701,679 $ 17,203,635 $ 33,649,906 Financial Liabilities Non-interest bearing deposits $ 11,428,372 $ 11,428,372 $ — $ — $ 11,428,372 Savings, interest checking and money market deposits 16,751,632 16,751,632 — — 16,751,632 Certificates of deposit 1,139,337 — — 1,124,978 1,124,978 Federal funds purchased 17,315 17,315 — — 17,315 Securities sold under agreements to repurchase 2,300,146 — — 2,300,267 2,300,267 Other borrowings 8,990 — 8,990 — 8,990 Derivative instruments 18,382 — 18,233 149 18,382 Liabilities held in trust for deferred compensation plan 20,403 20,403 — — 20,403 Total $ 31,684,577 $ 28,217,722 $ 27,223 $ 3,425,394 $ 31,670,339 39 Table of Contents Carrying Amount Estimated Fair Value at December 31, 2021 (In thousands) Level 1 Level 2 Level 3 Total Financial Assets Loans: Business $ 5,303,535 $ — $ — $ 5,229,153 $ 5,229,153 Real estate - construction and land 1,118,266 — — 1,099,747 1,099,747 Real estate - business 3,058,837 — — 3,054,481 3,054,481 Real estate - personal 2,805,401 — — 2,809,490 2,809,490 Consumer 2,032,225 — — 2,031,408 2,031,408 Revolving home equity 275,945 — — 273,450 273,450 Consumer credit card 575,410 — — 536,468 536,468 Overdrafts 6,740 — — 6,458 6,458 Total loans 15,176,359 — — 15,040,655 15,040,655 Loans held for sale 8,615 — 8,615 — 8,615 Investment securities 14,695,628 1,087,873 13,413,558 194,197 14,695,628 Federal funds sold 2,800 2,800 — — 2,800 Securities purchased under agreements to resell 1,625,000 — — 1,623,856 1,623,856 Interest earning deposits with banks 3,971,217 3,971,217 — — 3,971,217 Cash and due from banks 305,539 305,539 — — 305,539 Derivative instruments 41,842 — 40,994 848 41,842 Assets held in trust for deferred compensation plan 21,794 21,794 — — 21,794 Total $ 35,848,794 $ 5,389,223 $ 13,463,167 $ 16,859,556 $ 35,711,946 Financial Liabilities Non-interest bearing deposits $ 11,772,374 $ 11,772,374 $ — $ — $ 11,772,374 Savings, interest checking and money market deposits 16,598,085 16,598,085 — — 16,598,085 Certificates of deposit 1,442,614 — — 1,438,919 1,438,919 Federal funds purchased 43,385 43,385 — — 43,385 Securities sold under agreements to repurchase 2,979,582 — — 2,979,677 2,979,677 Other borrowings 12,514 — 12,514 — 12,514 Derivative instruments 12,101 — 11,824 277 12,101 Liabilities held in trust for deferred compensation plan 21,794 21,794 — — 21,794 Total $ 32,882,449 $ 28,435,638 $ 24,338 $ 4,418,873 $ 32,878,849 17. Legal and Regulatory Proceedings The Company has various legal proceedings pending at March 31, 2022, 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. 40 Table of Contents 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 2021 Annual Report on Form 10-K. Results of operations for the three month periods ended March 31, 2022 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 2021 Annual Report on Form 10-K and in Part II Item 1A of this Quarterly Report on Form 10-Q. During the quarter ended March 31, 2022, there were no material changes to the Risk Factors disclosed in the Company's 2021 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 2021 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2021. 41 Table of Contents Selected Financial Data Three Months Ended March 31 2022 2021 Per Share Data Net income per common share — basic $ .97 $ 1.06 * Net income per common share — diluted .97 1.06 * Cash dividends on common stock .265 .250 * Book value per common share 24.60 26.99 * Market price 71.59 72.96 * Selected Ratios (Based on average balance sheets) Loans to deposits (1) 51.90 % 61.79 % Non-interest bearing deposits to total deposits 39.34 39.41 Equity to loans (1) 21.83 20.68 Equity to deposits 11.33 12.78 Equity to total assets 9.26 10.37 Return on total assets 1.33 1.63 Return on common equity 14.41 15.69 (Based on end-of-period data) Non-interest income to revenue (2) 38.69 39.80 Efficiency ratio (3) 60.29 56.37 Tier I common risk-based capital ratio 13.92 13.76 Tier I risk-based capital ratio 13.92 13.76 Total risk-based capital ratio 14.61 14.79 Tangible common equity to tangible assets ratio (4) 8.09 9.57 Tier I leverage ratio 9.07 9.38 * Restated for the 5% stock dividend distributed in December 2021. (1) Includes loans held for sale. (2) Revenue includes net interest income and non-interest income. (3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue. (4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization. It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP. The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets. March 31 (Dollars in thousands) 2022 2021 Total equity $ 2,973,402 $ 3,317,385 Less non-controlling interest 12,762 4,795 Less goodwill 138,921 138,921 Less core deposit premium 4,525 4,864 Total tangible common equity (a) $ 2,817,194 $ 3,168,805 Total assets $ 34,986,793 $ 33,269,786 Less goodwill 138,921 138,921 Less core deposit premium 4,525 4,864 Total tangible assets (b) $ 34,843,347 $ 33,126,001 Tangible common equity to tangible assets ratio (a)/(b) 8.09 % 9.57 % 42 Table of Contents Results of Operations Summary Three Months Ended March 31 Increase (Decrease) (Dollars in thousands) 2022 2021 Amount % change Net interest income $ 208,786 $ 205,748 $ 3,038 1.5 % Provision for credit losses 9,858 6,232 (3,626) 58.2 Non-interest income 131,769 136,045 (4,276) (3.1) Investment securities gains, net 7,163 9,853 (2,690) (27.3) Non-interest expense (205,648) (192,573) 13,075 6.8 Income taxes (31,902) (32,076) (174) (.5) Non-controlling interest expense (1,872) (2,257) (385) (17.1) Net income attributable to Commerce Bancshares, Inc. $ 118,154 $ 130,972 (12,818) (9.8) % For the quarter ended March 31, 2022, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $118.2 million, a decrease of $12.8 million, or 9.8%, compared to the first quarter of the previous year. For the current quarter, the annualized return on average assets was 1.33%, the annualized return on average equity was 14.41%, and the efficiency ratio was 60.29%. Diluted earnings per common share was $.97, a decrease of 8.5% compared to $1.06 per share in the first quarter of 2021, and increased 3.2% compared to $.94 per share in the previous quarter. Compared to the first quarter of last year, net interest income increased $3.0 million, or 1.5%, mainly due to an increase of $21.5 million in interest income on investment securities, partly offset by decreases in loan interest and interest on securities purchased under agreements to resell of $14.4 million and $5.8 million, respectively. The provision for credit losses declined $3.6 million due to a decrease in the estimate of the allowance for credit losses on loans and unfunded commitments and lower net loan charge-offs. Non-interest income decreased $4.3 million, or 3.1%, compared to the first quarter of 2021, mainly due to lower loan fees and sales and income from branch sales, partly offset by growth in net bank card and trust fees. Net gains on investment securities totaled $7.2 million in the current quarter compared to net gains of $9.9 million in the same quarter last year. Net securities gains in the current quarter primarily resulted from unrealized fair value gains of $7.5 million in the Company's private equity investment portfolio. Non-interest expense increased $13.1 million, or 6.8%, over the first quarter of 2021 mainly due to higher salaries and employee benefits, data processing and software, marketing, and travel and entertainment expense. 43 Table of Contents Net Interest Income The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate. Analysis of Changes in Net Interest Income Three Months Ended March 31, 2022 vs. 2021 Change due to (In thousands) Average Volume Average Rate Total Interest income, fully taxable equivalent basis: Loans: Business $ (9,222) $ (2,060) $ (11,282) Real estate - construction and land 375 609 984 Real estate - business 626 (1,069) (443) Real estate - personal (144) (858) (1,002) Consumer 921 (2,141) (1,220) Revolving home equity (213) 65 (148) Consumer credit card (1,837) 501 (1,336) Overdrafts — — — Total interest on loans (9,494) (4,953) (14,447) Loans held for sale (201) 47 (154) Investment securities: U.S. government and federal agency securities 2,370 2,405 4,775 Government-sponsored enterprise obligations 6 (3) 3 State and municipal obligations 722 (897) (175) Mortgage-backed securities 1,090 10,681 11,771 Asset-backed securities 6,332 (2,475) 3,857 Other securities 1,501 (402) 1,099 Total interest on investment securities 12,021 9,309 21,330 Federal funds sold 1 — 1 Securities purchased under agreements to resell 11,573 (17,401) (5,828) Interest earning deposits with banks 278 503 781 Total interest income 14,178 (12,495) 1,683 Interest expense: Deposits: Savings 45 (144) (99) Interest checking and money market 317 (561) (244) Certificates of deposit of less than $100,000 (81) (253) (334) Certificates of deposit of $100,000 and over 64 (699) (635) Total interest on deposits 345 (1,657) (1,312) Federal funds purchased (2) 4 2 Securities sold under agreements to repurchase 86 289 375 Other borrowings — (1) (1) Total interest expense 429 (1,365) (936) Net interest income, tax equivalent basis $ 13,749 $ (11,130) $ 2,619 Net interest income in the first quarter of 2022 was $208.8 million, an increase of $3.0 million over the first quarter of 2021. On a tax equivalent (T/E) basis, net interest income totaled $211.4 million in the first quarter of 2022, up $2.6 million over the same period last year and up $969 thousand over the previous quarter. The increase in net interest income compared to the first 44 Table of Contents quarter of 2021 was mainly due to higher interest income earned on on investment securities (T/E) of $21.3 million, partly offset by lower interest earned on loans (T/E) of $14.4 million and securities purchased under agreements to resell of $5.8 million. The increase in interest earned on investment securities (T/E) was mainly due to higher average balances and rates earned. The decrease in total interest earned on loans (T/E) was the result of declines in average balances and rates earned, while the decrease in securities purchased under agreements to resell declined due to lower average rates, partly offset by higher average balances. The Company's net yield on earning assets (T/E) was 2.45% in the current quarter compared to 2.71% in the first quarter of 2021. Total interest income (T/E) increased $1.7 million over the first quarter of 2021. Interest income on loans (T/E) was $133.0 million during the first quarter of 2022, a decrease of $14.4 million, or 9.8%, from the same quarter last year. The decrease in interest income from the same quarter last year was primarily due to a decline of $1.1 billion, or 6.8%, in average loan balances, coupled with a decrease of 12 basis points in the average rate earned. Most of the decrease in interest income occurred in the business, consumer credit card, consumer, and personal real estate loan categories. These decreases were partly offset by an increase in interest income in the construction and land loan category. Business loan interest income decreased $11.3 million due to a decline of $1.2 billion in average balances and a decrease of 16 basis points in the average rate earned. The decline in business loan average balances was mainly due to a decrease of $1.3 billion in Paycheck Protection Program (PPP) loans, while interest earned on PPP loans declined $10.0 million from the same quarter last year. Consumer credit card loan interest decreased $1.3 million mainly due to a decline of $67.9 million in average balances, partly offset by a 38 basis point increase in the average rate earned. Consumer loan interest declined $1.2 million due to a decrease of 43 basis points in the average rate earned, partly offset by a $92.9 million, or 4.8%, increase in average balances. Personal real estate loan interest income fell $1.0 million due to a 12 basis point decrease in the average rate earned and lower average balances of $17.1 million. These decreases to interest income (T/E) were partly offset by an increase of $984 thousand in interest earned on construction and land loans, due to an increase of 22 basis points in the average rate earned and growth of $42.9 million, or 3.9%, in average loan balances. Interest income on investment securities (T/E) was $74.8 million during the first quarter of 2022, which was an increase of $21.3 million over the same quarter last year. The increase in interest income occurred mainly in interest earned on mortgage-backed securities, which increased $11.8 million, partly due to a $7.5 million increase in premium amortization, reflecting slower forward prepayment speed estimates in the current quarter, compared to a premium amortization adjustment increase of $4.1 million in the prior year. In addition, the average rate earned increased 59 basis points and the average balance increased $318.1 million, or 4.5%. Interest on U.S. government and federal agency obligations grew $4.8 million mainly due to an increase in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS). Interest income related to TIPS, which is tied to the Consumer Price Index, increased $4.4 million over the same quarter last year. The average balance of U.S. government and federal agency obligations also increased $378.4 million, or 52.2%. Interest on asset-backed securities rose $3.9 million due to higher average balances of $1.8 billion, partly offset by a decrease of 26 basis points in the average rate earned. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $15.4 billion in the first quarter of 2022, compared to $12.6 billion in the first quarter of 2021. Interest income on securities purchased under agreements to resell decreased $5.8 million from the same quarter last year, due to a decrease of 407 basis points in the average rate earned, partly offset by growth of $883.9 million in the average balance. Interest income on balances at the Federal Reserve grew $781 thousand due to an increase of $1.1 billion in the average balance invested and an increase of eight basis points in the average rate earned. The average tax equivalent yield on total interest earning assets was 2.49% in the first quarter of 2022, down from 2.76% in the first quarter of 2021. Total interest expense decreased $936 thousand compared to the first quarter of 2021 due to a $1.3 million decrease in interest expense on interest bearing deposits, partly offset by a $376 thousand increase in interest expense on borrowings. The decrease in deposit interest expense resulted mainly from a four basis point decline in the overall average rate paid. Interest expense on certificates of deposit (CD's) declined $969 thousand due to an 18 basis point decrease in the average rate paid, coupled with a decrease of $454.7 million in the average balance. Interest expense on interest checking and money market accounts declined $244 thousand, due to a two basis point decrease in the average rate paid, partly offset by higher average balances of $2.0 billion. Interest expense on borrowings was higher due to an increase of four basis points in the average rate paid on customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .06% and .09% in the first quarters of 2022 and 2021, respectively. Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion. 45 Table of Contents Non-Interest Income Three Months Ended March 31 Increase (Decrease) (Dollars in thousands) 2022 2021 Amount % change Bank card transaction fees $ 42,045 $ 37,695 $ 4,350 11.5 % Trust fees 47,811 44,127 3,684 8.3 Deposit account charges and other fees 22,307 22,575 (268) (1.2) Capital market fees 4,125 4,981 (856) (17.2) Consumer brokerage services 4,446 4,081 365 8.9 Loan fees and sales 4,235 10,184 (5,949) (58.4) Other 6,800 12,402 (5,602) (45.2) Total non-interest income $ 131,769 $ 136,045 $ (4,276) (3.1) % Non-interest income as a % of total revenue* 38.7 % 39.8 % * Total revenue includes net interest income and non-interest income. The table below is a summary of net bank card transaction fees for the three month periods ended March 31, 2022 and 2021. Three Months Ended March 31 (Dollars in thousands) 2022 2021 $ change % change Net debit card fees $ 9,552 $ 9,367 $ 185 2.0 % Net credit card fees 3,722 3,421 301 8.8 Net merchant fees 4,980 4,614 366 7.9 Net corporate card fees 23,791 20,293 3,498 17.2 Total bank card transaction fees $ 42,045 $ 37,695 $ 4,350 11.5 % For the first quarter of 2022, total non-interest income amounted to $131.8 million compared to $136.0 million in the same quarter last year, which was a decrease of $4.3 million, or 3.1%. The decrease was mainly due to lower loan fees and sales and a decline in other non-interest income, partly offset by higher net bank card fees and trust fees. Bank card transaction fees for the current quarter grew $4.4 million, or 11.5%, over the same period last year, due to growth of $3.5 million in net corporate card fees, $366 thousand in net merchant card fees, $301 thousand in net credit card fees, and $185 thousand in net debit card fees. The growth in net corporate, credit and debit card fees was mainly due to higher interchange income, partly offset by higher rewards expense. The growth in net merchant fees was mostly due to higher merchant fees, partly offset by higher network expense. Trust fees for the quarter increased $3.7 million, or 8.3%, over the same quarter last year, resulting from higher private client fees, which were up 10.1%. Compared to the same period last year, deposit account fees decreased $268 thousand, or 1.2%, mainly due to lower personal deposit account fees, partly offset by higher corporate cash management fees. Capital market fees decreased $856 thousand, or 17.2%, while consumer brokerage service fees increased $365 thousand, or 8.9%, due to growth in advisory fees. Loan fees and sales decreased $5.9 million, or 58.4%, compared to the same quarter last year, mainly due to a decline in mortgage banking revenue. Other non-interest income decreased $5.6 million, or 45.2%, mainly due to a gain of $2.4 million on the sale of a branch location recorded last year coupled with a write-down of $965 thousand on a branch location recorded in the current quarter. In addition, swap fees, cash sweep commissions and tax credit sales fees declined $637 thousand, $403 thousand and $394 thousand, respectively. Fair value adjustments on the Company's deferred compensation plan assets, which are held in a trust and recorded as both an asset and a liability, decreased $1.9 million from the same quarter last year, affecting both other income and other expense. 46 Table of Contents Investment Securities Gains (Losses), Net Three Months Ended March 31 (In thousands) 2022 2021 Net gains (losses) on sales and fair value adjustments of private equity investments $ 7,450 $ 9,888 Fair value adjustments on equity securities, net (287) (35) Total investment securities gains, net $ 7,163 $ 9,853 Net gains on investment securities, which were recognized in earnings during the three months ended March 31, 2022 and 2021, are shown in the table above. Net securities gains of $7.2 million were reported in the first quarter of 2022, compared to net gains of $9.9 million in the same period last year. The net gains in the first quarter of 2022 were primarily comprised of $7.5 million of net gains in fair value on the Company’s private equity investments. The net gains on investment securities for the same quarter last year were mainly comprised of a net gain of $1.5 million realized on the sale of a private equity investment and $8.4 million of net gains in fair value on the Company’s private 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 $1.5 million during the first three months of 2022 and expense of $2.0 million during the first three months of 2021. Non-Interest Expense Three Months Ended March 31 Increase (Decrease) (Dollars in thousands) 2022 2021 Amount % change Salaries and employee benefits $ 135,953 $ 129,033 $ 6,920 5.4 % Net occupancy 12,296 12,021 275 2.3 Equipment 4,568 4,353 215 4.9 Supplies and communication 4,713 4,125 588 14.3 Data processing and software 27,016 25,463 1,553 6.1 Marketing 6,344 5,158 1,186 23.0 Other 14,758 12,420 2,338 18.8 Total non-interest expense $ 205,648 $ 192,573 $ 13,075 6.8 % Non-interest expense for the first quarter of 2022 amounted to $205.6 million, an increase of $13.1 million, or 6.8%, compared to expense of $192.6 million in the first quarter of last year. The increase in expense was mainly due to higher salaries and benefits expense, data processing and software expense, marketing expense and other non-interest expense. Salaries expense increased $4.4 million, or 4.1%, driven by growth in full-time salary costs and incentive compensation. Employee benefits expense totaled $24.2 million, reflecting growth of $2.5 million, or 11.5%, mainly as a result of higher healthcare expense, payroll taxes and retirement expense. Full-time equivalent employees totaled 4,563 at March 31, 2022, compared to 4,619 at March 31, 2021. Supplies and communication expense increased $588 thousand, or 14.3%, mainly due to higher postage and courier expense, while marketing expense increased $1.2 million, or 23.0%, due to an expansion of marketing efforts in the first quarter of 2022. Data processing and software expense increased $1.6 million, or 6.1%, due to higher software amortization, including expense related to the completed implementation of the Company's new core customer and deposit system placed into service in January 2022, as well as increased costs for service providers and bank card processing fees. Other non-interest expense increased $2.3 million, mainly due to higher travel and entertainment expense of $1.1 million, lower deferred origination costs of $1.1 million, partly offset by a $1.9 million decline in the Company's deferred compensation liability, as previously mentioned. 47 Table of Contents Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments Three Months Ended Mar. 31, 2022 Dec. 31, 2021 Mar. 31, 2021 ALLOWANCE FOR CREDIT LOSSES ON LOANS Balance at beginning of period $ 150,044 $ 162,775 $ 220,834 Provision for credit losses on loans (10,686) (8,474) (10,355) Net loan charge-offs (recoveries): Commercial: Business 77 90 (4) Real estate-construction and land — — 1 Real estate-business (7) 6 20 Commercial net loan charge-offs (recoveries) 70 96 17 Personal Banking: Real estate-personal 22 (71) 15 Consumer 808 919 763 Revolving home equity 18 (26) 23 Consumer credit card 3,372 2,964 8,981 Overdrafts 358 375 153 Personal banking net loan charge-offs (recoveries) 4,578 4,161 9,935 Total net loan charge-offs 4,648 4,257 9,952 Balance at end of period $ 134,710 $ 150,044 $ 200,527 LIABILITY FOR UNFUNDED LENDING COMMITMENTS Balance at beginning of period 24,204 22,784 38,307 Provision for credit losses on unfunded lending commitments 828 1,420 4,123 Balance at end of period 25,032 24,204 42,430 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 159,742 $ 174,248 $ 242,957 Three Months Ended Mar. 31, 2022 Dec. 31, 2021 Mar. 31, 2021 Annualized net loan charge-offs (recoveries)*: Commercial: Business .01 % .01 % — % Real estate-construction and land — — — Real estate-business — — — Commercial net loan charge-offs — — — Personal Banking: Real estate-personal — (.01) — Consumer .16 .18 .16 Revolving home equity .03 (.04) .03 Consumer credit card 2.53 2.10 5.98 Overdrafts 28.04 30.20 17.50 Personal banking net loan charge-offs (recoveries) .33 .29 .71 Total annualized net loan charge-offs .12 % .11 % .25 % * as a percentage of average loans (excluding loans held for sale) The Company has an established process to determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, 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 48 Table of Contents 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 2021 Annual Report on Form 10-K. Net loan charge-offs in the first quarter of 2022 amounted to $4.6 million, compared to $4.3 million in the prior quarter and $10.0 million in the first quarter of last year. During the first quarter of 2022, the Company recorded net charge-offs on commercial loans of $70 thousand, compared to net charge-offs of $96 thousand in the prior quarter. Consumer credit card loan net charge-offs increased $408 thousand in the first quarter of 2022, compared to the prior quarte r, but declined $5.6 million compared to the same quarter in the prior year. Comp ared to the same period last year, net loan charge-offs in the first quarter of 2022 decreased $5.4 million, primarily driven by the decrease in net charge-offs on consumer credit card loans. For the three months ended March 31, 2022, annualized net charge-offs on average consumer credit card loans totaled 2.53%, compared to 2.10% in the previous quarter and 5.98% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .16%, compared to .18% in the prior quarter and .16% in the same period last year. In the first quarter of 2022, total annualized net loan charge-offs were .12%, compared to .11% in the previous quarter and .25% in the same period last year. The continued recovery of the provision for credit losses on loans is the result of an improved forecast coupled with lower than projected net charge-offs. For the quarter ended March 31, 2021, the allowance for credit losses on loans decreased $15.3 million, compared to the allowance for credit losses on loans as of December 31, 2021. The decrease was primarily due to the improved economic forecast utilized in the Company's estimate of future credit losses at March 31, 2022, coupled with lower than projected net loan charge-offs during the first quarter of 2022. The allowance for credit losses on commercial loans decreased slightly by $2.9 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, decreased $12.4 million. As a result, the provision for credit losses on loans was a recovery of $10.7 million in the current quarter, which was a $2.2 million increase from the $8.5 million benefit recorded in the prior quarter. The recovery of the provision for credit losses on loans in the current quarter was $331 thousand more than the recovery recorded in the third quarter of 2020 . While the forecast reflects a continued recovery from the COVID-19 pandemic, the allowance considered the uncertainty of disruptions caused by higher inflation, the geopolitical environment, and ongoing supply constraints on the economy and on the consumer and commercial loan portfolios. At March 31, 2022, the allowance for credit losses on loans amounted to $134.7 million, compared to $150.0 million and $200.5 million at December 31, 2021 and March 31, 2021, respectively, and was .87%, .99% and 1.22% of total loans at March 31, 2022, December 31, 2021 and March 31, 2021, respectively. In the current quarter, the provision for credit losses on unfunded lending commitments was $828 thousand, reflecting a $592 thousand decrease over the provision in the prior quarter and a $3.3 million decrease compared to the first quarter of 2021. At March 31, 2022, the liability for unfunded lending commitments was $25.0 million, compared to $24.2 million at December 31, 2021 and $42.4 million at March 31, 2021. The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans. See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses. The Company considers the allowance for credit losses on loans and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at March 31, 2022. 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 its best 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. 49 Table of Contents 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) March 31, 2022 December 31, 2021 Non-accrual loans $ 8,335 $ 9,157 Foreclosed real estate 296 115 Total non-performing assets $ 8,631 $ 9,272 Non-performing assets as a percentage of total loans .06 % .06 % Non-performing assets as a percentage of total assets .02 % .03 % Total loans past due 90 days and still accruing interest $ 10,670 $ 11,726 Non-accrual loans totaled $8.3 million at March 31, 2022, a decrease of $822 thousand from the balance at December 31, 2021. The decrease occurred mainly in business loans which decreased $556 thousand. At March 31, 2022, non-accrual loans were comprised of business (81.1%), personal real estate (16.6%), and business real estate (2.3%) loans. Foreclosed real estate totaled $296 thousand at March 31, 2022, an increase of $181 thousand when compared to December 31, 2021. Total loans past due 90 days or more and still accruing interest were $10.7 million as of March 31, 2022, a decrease of $1.1 million from December 31, 2021. 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 $306.6 million at March 31, 2022 compared with $278.7 million at December 31, 2021, resulting in an increase of $27.9 million, or 10.0%. (In thousands) March 31, 2022 December 31, 2021 Potential problem loans: Business $ 50,198 $ 37,143 Real estate – construction and land 55,274 40,259 Real estate – business 200,631 200,766 Real estate – personal 533 526 Total potential problem loans $ 306,636 $ 278,694 At March 31, 2022, the Company had $125.8 million of loans whose terms have been modified or restructured under a troubled debt restructuring. These loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession, as defined by accounting guidance, and are further discussed in the "Troubled debt restructurings" section in Note 2 to the consolidated financial statements. This balance includes certain commercial loans totaling $108.8 million which are classified as substandard and included in the table above because of this classification. 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. 50 Table of Contents Real Estate – Construction and Land Loans The Company's portfolio of construction and land loans, as shown in the table below, amounted to 7.4% of total loans outstanding at March 31, 2022. The largest component of construction and land loans was commercial construction, which increased $17.1 million during the three months ended March 31, 2022. At March 31, 2022, multi-family residential construction loans totaled approximately $180.5 million, or 19.2%, of the commercial construction loan portfolio, compared to $155.9 million, or 16.9%, at December 31, 2021. (Dollars in thousands) March 31, 2022 % of Total % of Total Loans December 31, 2021 % of Total % of Total Loans Commercial construction $ 939,785 82.1 % 6.1 % $ 922,654 82.5 % 6.1 % Residential construction 115,079 10.1 .7 96,618 8.6 .7 Commercial land and land development 45,827 4.0 .3 48,481 4.3 .3 Residential land and land development 43,720 3.8 .3 50,513 4.6 .3 Total real estate - construction and land loans $ 1,144,411 100.0 % 7.4 % $ 1,118,266 100.0 % 7.4 % Real Estate – Business Loans Total business real estate loans were $3.1 billion at March 31, 2022 and comprised 20.1% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At March 31, 2022, 38.0% 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) March 31, 2022 % of Total % of Total Loans December 31, 2021 % of Total % of Total Loans Owner-occupied $ 1,180,589 38.0 % 7.6 % $ 1,188,469 38.9 % 7.8 % Office 419,430 13.5 2.7 380,101 12.4 2.5 Multi-family 350,567 11.3 2.3 354,282 11.6 2.3 Retail 336,142 10.8 2.2 339,874 11.1 2.2 Hotels 232,470 7.5 1.5 234,673 7.7 1.5 Farm 188,130 6.0 1.2 178,780 5.8 1.2 Senior living 177,534 5.7 1.1 174,871 5.7 1.2 Industrial 111,467 3.6 .7 99,800 3.3 .7 Other 113,339 3.6 .8 107,987 3.5 .8 Total real estate - business loans $ 3,109,668 100.0 % 20.1 % $ 3,058,837 100.0 % 20.2 % Revolving Home Equity Loans The Company had $264.4 million in revolving home equity loans at March 31, 2022 that were generally collateralized by residential real estate. Most of these loans (92.8%) are written with terms requiring interest-only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of March 31, 2022, the outstanding principal of loans with an original LTV higher than 80% was $30.7 million, or 11.6% of the portfolio, compared to $30.9 million as of December 31, 2021. Total revolving home equity loan balances over 30 days past due were $1.6 million at March 31, 2022 and December 31, 2021, and there were no revolving home equity loans on non-accrual status at March 31, 2022 or December 31, 2021. The weighted average FICO score for the total current portfolio balance is 790. 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 2022 through 2024, approximately 17% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 81% 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 40% of the consumer loan portfolio at March 31, 2022, and outstanding balances for auto loans were $830.7 million and $855.4 million at March 31, 2022 and December 31, 2021, 51 Table of Contents respectively. The balances over 30 days past due amounted to $6.9 million at March 31, 2022 and $9.0 million at December 31, 2021, respectively and comprised .8% of the outstanding balances of these loans at March 31, 2022 and 1.1% at December 31, 2021, respectively. For the three months ended March 31, 2022, $84.7 million of new auto loans were originated, compared to $106.2 million during the first three months of 2021. At March 31, 2022, the automobile loan portfolio had a weighted average FICO score of 755, and net charge-offs on auto loans were .1% of average auto loans. The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 11% of the consumer loan portfolio at March 31, 2022. Losses on these loans have historically been low, and the Company saw net recoveries of $28 thousand for the first three months of 2022. Private banking loans comprised 31% of the consumer loan portfolio at March 31, 2022. The Company's private banking loans are generally well-collateralized, and at March 31, 2022 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 $428 thousand in the first three months of 2022 and were .2% of the average balances of these loans at March 31, 2022. Consumer Credit Card Loans The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at March 31, 2022 of $544.6 million in consumer credit card loans outstanding, approximately $84.3 million, or 15.5%, carried a low promotional rate. Within the next six months, $32.7 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 $275.8 million, or 1.8% of total loans at March 31, 2022, an increase of $15.1 million from year end 2021, as shown in the table below. (In thousands) March 31, 2022 December 31, 2021 Unfunded commitments at March 31, 2022 Extraction $ 201,185 $ 184,840 $ 165,853 Mid-stream shipping and storage 38,413 36,850 67,878 Downstream distribution and refining 22,067 24,915 19,899 Support activities 14,103 14,039 17,843 Total energy lending portfolio $ 275,768 $ 260,644 $ 271,473 Information about the credit quality of the Company's energy lending portfolio as of March 31, 2022 and December 31, 2021 is provided in the table below. (Dollars in thousands) March 31, 2022 % of Energy Lending December 31, 2021 % of Energy Lending Pass $ 271,368 98.4 % $ 256,186 98.3 % Special mention 1,999 .7 1,999 .8 Non-accrual 2,401 .9 2,459 .9 Total $ 275,768 100.0 % $ 260,644 100.0 % Energy lending balances classified as substandard and non-accrual represented 0.9% of total energy lending loan balances at March 31, 2022. The Company saw a small recovery on energy loans during the three months ended March 31, 2022. The Company recorded $10 thousand of recoveries on energy loans for the year ended December 31, 2021. 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 52 Table of Contents totaled $1.2 billion at March 31, 2022 and December 31, 2021. Additional unfunded commitments at March 31, 2022 totaled $1.8 billion. Income Taxes Income tax expense was $31.9 million in the first quarter of 2022, compared to $33.8 million in the fourth quarter of 2021 and $32.1 million in the first quarter of 2021. The Company's effective tax rate, including the effect of non-controlling interest, was 21.3% in the first quarter of 2022, compared to 22.7% in the fourth quarter of 2021 and 19.7% in the first quarter of 2021. The effective tax rate in the first quarter has historically been lower than other quarters due to the recognition of share-based excess tax benefits as a reduction to income tax expense. These benefits result from transactions relating to equity award vesting, most of which occur in the first quarter of each year. The effective tax rate in the first quarter of 2022 increased compared to the effective tax rate in the first quarter of 2021 mainly due to executive compensation limitations on stock-based compensation. Financial Condition Balance Sheet Total assets of the Company were $35.0 billion at March 31, 2022 and $36.7 billion at December 31, 2021. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $34.2 billion at March 31, 2022 and $35.5 billion at December 31, 2021, and consisted of 45% in loans and 46% in investment securities at March 31, 2022. During the first quarter of 2022, average loans totaled $15.2 billion, an increase of $130.1 million over the prior quarter, and declined $1.1 billion, or 6.8%, from the same quarter last year. Compared to the previous quarter, average balances of business loans grew $132.3 million (includes a decline of $132.0 million in Paycheck Protection Program (PPP) average loan balances). Average business real estate loan balances grew $91.6 million, while construction loan balances declined $93.3 million. Period end loans increased $282.7 million compared to the prior quarter, including PPP loan balances that decreased $75.7 million this quarter and totaled $53.4 million at March 31, 2022. Excluding PPP loans, period end business loans increased $280.7 million. As of March 31, 2022, 97% of PPP loan balances have been forgiven. During the current quarter, the Company sold certain fixed rate personal real estate loans totaling $55.6 million, compared to $119.3 million in the prior quarter. Total average available for sale debt securities increased $418.0 million over the previous quarter to $14.9 billion, at fair value. The increase in investment securities was mainly the result of growth in asset-backed securities. During the current quarter, purchases of securities totaled $1.8 billion with a weighted average yield of approximately 2.06%. Maturities and pay downs were $806.5 million. At March 31, 2022, the duration of the investment portfolio was 3.6 years, and maturities and pay downs of approximately $3.1 billion are expected to occur during the next 12 months. Total average deposits increased $501.7 million this quarter compared to the previous quarter. The increase in deposits mostly resulted from growth in interest checking and money market deposits of $1.1 billion, partially offset by declines in demand deposit and certificates of deposit balances of $374.6 million and $255.3 million, respectively. Compared to the previous quarter, total average consumer and wealth deposits grew $290.2 million and $213.6 million, respectively. The average loans to deposits ratio was 51.9% in the current quarter and 52.4% in the prior quarter. The Company’s average borrowings, which include customer repurchase agreements, were $2.7 billion in the first quarter of 2022 and $2.6 billion in the prior quarter. 53 Table of Contents 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 balances at the Federal Reserve Bank, as follows: (In thousands) March 31, 2022 March 31, 2021 December 31, 2021 Liquid assets: Available for sale debt securities $ 14,780,494 $ 12,528,203 $ 14,450,027 Federal funds sold — 500 2,800 Securities purchased under agreements to resell 1,825,000 850,000 1,625,000 Balances at the Federal Reserve Bank 1,260,813 2,017,128 3,971,217 Total $ 17,866,307 $ 15,395,831 $ 20,049,044 There were no federal funds sold at March 31, 2022, which are funds lent to the Company's correspondent bank customers with overnight maturities. Resale agreements, maturing through 2024, totaled $1.8 billion at March 31, 2022. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled $1.9 billion in fair value at March 31, 2022. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $1.3 billion at March 31, 2022. The fair value of the available for sale debt portfolio was $14.8 billion at March 31, 2022 and included an unrealized net loss of $645.5 million. Approximately $3.1 billion of the available for sale debt portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet new loan demand or help offset potential reductions in the Company's deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows: (In thousands) March 31, 2022 March 31, 2021 December 31, 2021 Investment securities pledged for the purpose of securing: Federal Reserve Bank borrowings $ 16,260 $ 39,586 $ 17,465 FHLB borrowings and letters of credit 2,798 4,874 3,218 Securities sold under agreements to repurchase * 2,575,444 2,170,744 3,475,589 Other deposits and swaps 2,606,141 2,477,132 2,897,576 Total pledged securities 5,200,643 4,692,336 6,393,848 Unpledged and available for pledging 8,426,648 6,490,351 6,913,721 Ineligible for pledging 1,153,203 1,345,516 1,142,458 Total available for sale debt securities, at fair value $ 14,780,494 $ 12,528,203 $ 14,450,027 * 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 March 31, 2022, such deposits totaled $28.2 billion and represented 96.1% 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 $716.3 million at March 31, 2022. These accounts are normally considered more volatile with higher cost and comprised 2.4% of total deposits at March 31, 2022. (In thousands) March 31, 2022 March 31, 2021 December 31, 2021 Core deposit base: Non-interest bearing $ 11,428,372 $ 11,076,556 $ 11,772,374 Interest checking 3,301,315 2,180,434 3,227,822 Savings and money market 13,450,317 12,391,944 13,370,263 Total $ 28,180,004 $ 25,648,934 $ 28,370,459 54 Table of Contents 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 and repurchase agreements, as follows: (In thousands) March 31, 2022 March 31, 2021 December 31, 2021 Borrowings: Federal funds purchased $ 17,315 $ 28,490 $ 43,385 Securities sold under agreements to repurchase 2,300,146 1,909,620 2,979,582 Other debt 9,057 3,791 12,560 Total $ 2,326,518 $ 1,941,901 $ 3,035,527 Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Repurchase agreements are collateralized by securities in the Company's investment portfolio and are comprised of non-insured customer funds totaling $2.3 billion, which generally mature overnight. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were no advances outstanding from the FHLB at March 31, 2022. The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank 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. Also, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at March 31, 2022. March 31, 2022 (In thousands) FHLB Federal Reserve Total Collateral value established by FHLB and FRB $ 1,949,603 $ 1,011,829 $ 2,961,432 Letters of credit issued (199,250) — (199,250) Available for future advances $ 1,750,353 $ 1,011,829 $ 2,762,182 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 rankings 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’s Moody’s Commerce Bancshares, Inc. Issuer rating A- Rating outlook Stable Commerce Bank Issuer rating A A2 Baseline credit assessment a1 Short-term rating A-1 P-1 Rating outlook Stable Stable The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash equivalents and restricted cash of $2.7 billion during the first three months of 2022, 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 $124.5 million and has historically been a stable source of funds. Investing activities, which occur mainly in the 55 Table of Contents loan and investment securities portfolios, used cash of $1.5 billion. Activity in the investment securities portfolio used cash of $1.0 billion from purchases (net of sales, maturities and pay downs), securities purchased under agreements to resell used cash of $200.0 million, and increase in the loan portfolio, which used cash of $287.3 million. Financing activities used cash of $1.3 billion, largely resulting from a decrease in federal funds purchased and securities sold under agreements to repurchase of $705.5 million, paired with a decrease in deposits of $511.6 million. Capital Management The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at March 31, 2022 and December 31, 2021, as shown in the following table. (Dollars in thousands) March 31, 2022 December 31, 2021 Minimum Ratios under Capital Adequacy Guidelines Minimum Ratios for Well-Capitalized Banks * Risk-adjusted assets $ 23,415,739 $ 22,483,748 Tier I common risk-based capital 3,259,861 3,225,044 Tier I risk-based capital 3,259,861 3,225,044 Total risk-based capital 3,420,044 3,399,880 Tier I common risk-based capital ratio 13.92 % 14.34 % 7.00 % 6.50 % Tier I risk-based capital ratio 13.92 14.34 8.50 8.00 Total risk-based capital ratio 14.61 15.12 10.50 10.00 Tier I leverage ratio 9.07 9.13 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 required under Basel III. The capital conservation buffer 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 extends 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 three months ended March 31, 2022, the Company purchased 795,387 shares at an average price of $70.22 in open market purchases and through stock-based compensation transactions. At March 31, 2022, 941,935 shares remained available for purchase under the Board authorization. On April 20, 2022, the share repurchase authorization was increased to 5,000,000 shares. The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.265 per share cash dividend on its common stock in the first quarter of 2022, which was a 6.0% increase compared to its 2021 quarterly dividend. Material Cash Requirements, Commitments, Off-Balance Sheet Arrangements and Contingencies The Company's material cash requirements include commitments for contractual obligations (both short-term and long-term), commitments to extend credit, and off-balance sheet arrangements. The Company's material cash requirements for the next 12 months are primarily to fund loan growth. Additionally, the Company will utilize cash to fund deposit maturities and withdrawals that may occur in the next 12 months. Other contractual obligations, purchase commitments, lease obligations, and unfunded commitments may require cash payments by the Company, and these are further discussed in the Company's 2021 Annual Report on Form 10-K. There have been no changes in the Company's material cash requirements since December 31, 2021. Further discussion of the Company's longer-term material cash obligations is below. 56 Table of Contents 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 March 31, 2022 totaled $13.0 billion (including $5.0 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $502.1 million and $1.4 million, respectively, at March 31, 2022. 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 $4.2 million at March 31, 2022. The allowance for these commitments is recorded in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheets. At March 31, 2022, the liability for unfunded commitments totaled $25.0 million. See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements. During the third quarter of 2020, the Company signed a $106.7 million agreement with U.S. Capital Development to develop a 280,000 square foot commercial office building in a two building complex in Clayton, Missouri, which is expected to be completed near the end of 2022. As of March 31, 2022, the Company has made payments totaling $63.3 million. While the Company intends to occupy a portion of the office building for executive offices, a 15 year lease agreement has been signed by an anchor tenant to lease approximately 50% of the office building. The Company regularly purchases various state tax credits arising from third party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first three months of 2022, purchases and sales of tax credits amounted to $52.1 million and $22.1 million, respectively. Fees from sales of tax credits were $783 thousand for the three months ended March 31, 2022, compared to $1.2 million in the same period last year. At March 31, 2022, the Company expected to fund outstanding purchase commitments of $167.3 million during the remainder of 2022. The Company's sound equity base, along with its long-term low debt level, common and preferred stock availability, and excellent debt ratings, provide several alternatives for future financing. Future acquisitions may utilize partial funding through one or more of these options. Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations. The Company is not aware of any trends, events, or commitments that are reasonably likely to increase or decrease its liquidity in a material way. Segment Results The table below is a summary of segment pre-tax income results for the first three months of 2022 and 2021. (Dollars in thousands) Consumer Commercial Wealth Segment Totals Other/ Elimination Consolidated Totals Three Months Ended March 31, 2022 Net interest income $ 79,896 $ 109,530 $ 18,868 $ 208,294 $ 492 $ 208,786 Provision for credit losses (4,498) (82) (26) (4,606) 14,464 9,858 Non-interest income 28,354 53,651 53,206 135,211 (3,442) 131,769 Investment securities gains, net — — — — 7,163 7,163 Non-interest expense (72,994) (89,524) (36,286) (198,804) (6,844) (205,648) Income before income taxes $ 30,758 $ 73,575 $ 35,762 $ 140,095 $ 11,833 $ 151,928 Three Months Ended March 31, 2021 Net interest income $ 77,939 $ 110,565 $ 17,457 $ 205,961 $ (213) $ 205,748 Provision for credit losses (9,901) (27) 5 (9,923) 16,155 6,232 Non-interest income 38,248 50,728 50,985 139,961 (3,916) 136,045 Investment securities gains, net — — — — 9,853 9,853 Non-interest expense (70,369) (79,281) (33,043) (182,693) (9,880) (192,573) Income before income taxes $ 35,917 $ 81,985 $ 35,404 $ 153,306 $ 11,999 $ 165,305 Increase (decrease) in income before income taxes: Amount $ (5,159) $ (8,410) $ 358 $ (13,211) $ (166) $ (13,377) Percent (14.4 %) (10.3 %) 1.0 % (8.6 %) (1.4 %) (8.1 %) Consumer For the three months ended March 31, 2022, income before income taxes for the Consumer segment decreased $5.2 million, or 14.4%, compared to the first three months of 2021. The decrease in income before income taxes was mainly due to a decline 57 Table of Contents in non-interest income of $9.9 million, or 25.9%, and higher non-interest expense of $2.6 million, or 3.7%. These decreases to income were partly offset by growth in net interest income of $2.0 million, or 2.5%, and a decrease in the provision for loan losses of $5.4 million, or 54.6%. Net interest income increased due to a $3.7 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios, and a $968 thousand decrease in deposit interest expense. These increases were partly offset by a $2.7 million decline in loan interest income. Non-interest income decreased mainly due to a decline of $9.5 million in mortgage banking revenue. Personal deposit account fees also declined from the prior year, while net credit and debit card fees were higher. Non-interest expense increased over the same period in the previous year mainly due to higher full-time salaries expense, marketing expense and allocated support costs for information technology. In addition, impairment expense on mortgage servicing rights (MSR) increased, while MSR amortization expense declined. The provision for credit losses totaled $4.5 million, a $5.4 million decrease from the first three months of 2021, mainly due to lower credit card loan net charge-offs. Commercial For the three months ended March 31, 2022, income before income taxes for the Commercial segment decreased $8.4 million, or 10.3%, compared to the same period in the previous year. This decrease was mainly due to an increase in non-interest expense and and a decline in net interest income, partly offset by an increase in non-interest income. Net interest income decreased $1.0 million, or .9%, due to lower loan interest income of $11.3 million and higher interest expense on customer repurchase agreements of $378 thousand, partly offset by a $10.5 million increase in net allocated funding credits. Non-interest income increased $2.9 million, or 5.8%, over the previous year mainly due to growth in net bank card fees (mainly corporate card fees) and deposit account fees (mainly corporate cash management fees). These increases were partly offset by declines in capital market fees and swap fees. Non-interest expense increased $10.2 million, or 12.9%, mainly due to higher salaries and benefits expense, data processing and software expense and allocated support costs for information technology, and lower deferred origination costs. The provision for credit losses increased $55 thousand over the same period last year, mainly due to higher commercial card loan net charge-offs. Wealth Wealth segment pre-tax profitability for the three months ended March 31, 2022 increased $358 thousand, or 1.0%, over the same period in the previous year. Net interest income increased $1.4 million, or 8.1%, mainly due to a $1.0 million increase in loan interest income. Non-interest income increased $2.2 million, or 4.4%, over the prior year largely due to higher trust fees (mainly private client trust fees) and brokerage fees, partly offset by lower mortgage banking revenue. Non-interest expense increased $3.2 million, or 9.8%, mainly due to higher salaries and benefits expense. In addition, travel and entertainment expense and marketing expense also increased. The provision for credit losses increased $31 thousand over the same period last year, mainly due to higher net charge-offs on personal real estate loans. The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was lower than in the same period last year by $166 thousand. This decrease was partly due to higher non-interest expense of $3.0 million, partly offset by higher net interest income of $705 thousand and non-interest income of $474 thousand. Unallocated securities gains were $7.2 million in the first three months of 2022 compared to gains of $9.9 million in 2021. Also, the unallocated provision for credit losses increased $1.7 million, primarily driven by an increase in the liability for unfunded lending commitments and an increase in the provision for credit losses on loans, 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 was $15.3 million lower than net charge-offs, as the provision was a benefit in 2022, while the provision was $20.3 million lower than net charge-offs, as the provision was also a benefit in 2021. For the three months ended March 31, 2022, the Company's provision on unfunded lending commitments was expense of $828 thousand. 58 Table of Contents Impact of Recently Issued Accounting Standards Reference Rate Reform The 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 April 2022, the FASB proposed extending 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 earlier this year to June 2023, a year after the current sunset date of ASU 2020-04. In order to assess the impact of transition and ensure a successful transition process, the Company established a LIBOR Transition Program led by the LIBOR Transition Steering Committee (the Committee), which is an internal, cross-functional team with representatives from all relevant business lines, support functions and legal counsel. A LIBOR impact and risk assessment has been performed, and the Committee has developed and prioritized action items. All financial contracts that reference LIBOR have been identified and LIBOR fallback language has been included in key loan provisions of new and renewed loans in preparation from transition from LIBOR. The Company ceased originating new loans with LIBOR as a reference rate at the end of 2021 and is actively working with customers to modify existing loans that reference LIBOR to a new reference rate. Additionally, changes to the Company's systems have been identified, and the process of installing and testing code was started in the third quarter of 2021. The installation and testing process is expected to be completed in 2022. Credit Losses The FASB issued ASU 2022-01, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures", in March 2022. This ASU eliminates the troubled debt restructuring recognition and measurement guidance and, instead, requires that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The amendments require that an entity disclose current period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. The guidance is effective January 1, 2023. The Company is evaluating the guidance to determine the impact on the Company's consolidated financial statements. 59 Table of Contents AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS Three Months Ended March 31, 2022 and 2021 First Quarter 2022 First Quarter 2021 (Dollars in thousands) Average Balance Interest Income/Expense Avg. Rates Earned/Paid Average Balance Interest Income/Expense Avg. Rates Earned/Paid ASSETS: Loans: Business (A) $ 5,324,172 $ 38,416 2.93 % $ 6,532,921 $ 49,698 3.09 % Real estate — construction and land 1,134,902 10,526 3.76 1,091,969 9,542 3.54 Real estate — business 3,095,068 25,801 3.38 3,022,979 26,244 3.52 Real estate — personal 2,808,980 22,696 3.28 2,826,112 23,698 3.40 Consumer 2,040,200 18,084 3.59 1,947,322 19,304 4.02 Revolving home equity 273,859 2,347 3.48 299,371 2,495 3.38 Consumer credit card 540,844 15,130 11.35 608,747 16,466 10.97 Overdrafts 5,178 — — 3,546 — — Total loans 15,223,203 133,000 3.54 16,332,967 147,447 3.66 Loans held for sale 9,383 150 6.48 35,814 304 3.44 Investment securities: U.S. government and federal agency obligations 1,103,749 9,317 3.42 725,367 4,542 2.54 Government-sponsored enterprise obligations 51,770 298 2.33 50,801 295 2.36 State and municipal obligations (A) 2,077,600 11,708 2.29 1,958,637 11,883 2.46 Mortgage-backed securities 7,316,609 35,770 1.98 6,998,521 23,999 1.39 Asset-backed securities 3,933,061 10,984 1.13 2,085,491 7,127 1.39 Other debt securities 636,247 3,134 2.00 570,115 3,020 2.15 Trading debt securities (A) 40,686 185 1.84 32,320 86 1.08 Equity securities (A) 9,498 609 26.00 4,321 528 49.56 Other securities (A) 192,311 2,802 5.91 154,030 1,997 5.26 Total investment securities 15,361,531 74,807 1.97 12,579,603 53,477 1.72 Federal funds sold 1,053 1 .39 7 — — Securities purchased under agreements to resell 1,733,887 5,300 1.24 849,999 11,128 5.31 Interest earning deposits with banks 2,608,029 1,151 .18 1,480,331 370 .10 Total interest earning assets 34,937,086 214,409 2.49 31,278,721 212,726 2.76 Allowance for credit losses on loans (149,685) (220,512) Unrealized gain (loss) on debt securities (174,297) 283,511 Cash and due from banks 340,242 354,569 Premises and equipment, net 407,000 401,230 Other assets 557,158 552,306 Total assets $ 35,917,504 $ 32,649,825 LIABILITIES AND EQUITY: Interest bearing deposits: Savings $ 1,563,093 178 .05 $ 1,333,177 277 .08 Interest checking and money market 14,949,727 1,582 .04 12,970,629 1,826 .06 Certificates of deposit of less than $100,000 429,852 139 .13 516,728 473 .37 Certificates of deposit of $100,000 and over 862,232 427 .20 1,230,075 1,062 .35 Total interest bearing deposits 17,804,904 2,326 .05 16,050,609 3,638 .09 Borrowings: Federal funds purchased $ 23,356 $ 7 .12 37,034 $ 5 .05 Securities sold under agreements to repurchase 2,712,468 682 .10 2,129,038 307 .06 Other borrowings 768 1 .53 831 2 .98 Total borrowings 2,736,592 690 .10 2,166,903 314 .06 Total interest bearing liabilities 20,541,496 3,016 .06 % 18,217,512 3,952 .09 % Non-interest bearing deposits 11,544,701 10,438,637 Other liabilities 505,644 608,212 Equity 3,325,663 3,385,464 Total liabilities and equity $ 35,917,504 $ 32,649,825 Net interest margin (T/E) $ 211,393 $ 208,774 Net yield on interest earning assets 2.45 % 2.71 % (A) Stated on a tax equivalent basis using a federal income tax rate of 21%. 60 Table of Contents 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 2021 Annual Report on Form 10-K. The tables below show 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. Simulation A presents three rising rate scenarios and in each scenario, rates are assumed to change evenly over 12 months. In these scenarios, the balance sheet remains flat. The sensitivity of deposit balances to changes in rates is particularly difficult to estimate in exceptionally low rate environments. Since the future effects of changes in rates on deposit balances cannot be known with certainty, the Company conservatively models alternate scenarios with deposit attrition as rates rise. Simulation B illustrates results from these higher attrition scenarios to provide added perspective on potential effects of higher rates. The Company utilizes these simulations both for monitoring interest rate risk and for liquidity planning purposes. While the future effects of rising rates on deposit balances cannot be known, the Company maintains a practice of running multiple rate scenarios to better understand interest rate risk and its effect on the Company’s performance. Simulation A March 31, 2022 December 31, 2021 (Dollars in millions) $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit (Attrition)/Growth $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit (Attrition)/Growth 300 basis points rising $ 75.3 9.21 % $ — $ 105.2 14.44 % $ — 200 basis points rising 57.5 7.03 — 76.0 10.44 — 100 basis points rising 31.5 3.86 — 39.5 5.42 — Simulation B March 31, 2022 December 31, 2021 (Dollars in millions) $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit (Attrition)/Growth $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit (Attrition)/Growth 300 basis points rising $ 7.6 .94 % $ (2,001.8) $ 60.8 8.35 % $ (1,611.1) 200 basis points rising 14.1 1.73 (1,414.9) 51.8 7.11 (950.7) 100 basis points rising 12.9 1.58 (673.4) 33.5 4.59 (263.6) Under Simulation A, in the three rising rate scenarios, interest rate risk is less asset sensitive than the previous quarter, which is primarily due to a decrease in interest earning balances at the Federal Reserve coupled with an increase in interest rates. Deposit attrition was removed from the simulation in both the current and previous quarters. The Company did not model a 100 basis point falling scenario due to the already low interest rate environment. In Simulation B, the assumed levels of deposit attrition were modeled to capture the results of a shrinking balance sheet. Under this Simulation, in the three rising rate scenarios, interest rate risk is less asset sensitive than the previous quarter, also primarily due to a decrease in interest earning balances at the Federal Reserve coupled with an increase in interest rates. Projecting deposit activity in a period of historically low interest rates is difficult, and the Company cannot predict how deposits will actually react to shifting rates. The comparisons above provide 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. 61 Table of Contents 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 March 31, 2022. 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. 62 Table of Contents 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 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 January 1 - 31, 2022 178,380 $ 68.44 178,380 1,558,942 February 1 - 28, 2022 330,983 $ 70.81 330,983 1,227,959 March 1 - 31, 2022 286,024 $ 70.66 286,024 941,935 Total 795,387 $ 70.22 795,387 941,935 The Company's stock purchases shown above were made under authorizations by the Board of Directors. At March 31, 2022, 941,935 shares remained available for purchase. On April 20, 2022, the share repurchase authorization was increased to 5,000,000 shares. Item 6. EXHIBITS 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) 63 Table of Contents 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. C OMMERCE B ANCSHARES, I NC. By /s/ M ARGARET M. R OWE Margaret M. Rowe Date: May 5, 2022 Vice President & Secretary By /s/ PAUL A. STEINER Paul A. Steiner Controller Date: May 5, 2022 (Chief Accounting Officer) 64