COMMERCE BANCSHARES INC /MO/ 10-Q

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 three falling 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 low interest 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 and falling 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 September 30, 2022 June 30, 2022 (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 $ 3.3 .32 % $ — $ 45.2 4.91 % $ — 200 basis points rising 7.7 .75 — 36.9 4.01 — 100 basis points rising 9.9 .97 — 23.5 2.55 — 100 basis points falling (28.5) (2.80) — (35.3) (3.83) — 200 basis points falling (62.5) (6.14) — — — — 300 basis points falling (101.1) (9.94) — — — — Simulation B September 30, 2022 June 30, 2022 (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 $ (49.4) (5.06) % $ (848.9) $ (35.2) (4.01 %) $ (1,770.5) 200 basis points rising (34.5) (3.54) (716.2) (14.2) (1.62) (1,208.0) 100 basis points rising (14.0) (1.43) (405.7) (2.7) (.31) (612.5) 100 basis points falling (6.0) (.62) 403.2 (2.7) (.31) 1,086.4 200 basis points falling (26.5) (2.72) 849.4 — — — 300 basis points falling (58.7) (6.02) 1,446.4 — — — Under Simulation A, in the three rising rate scenarios and three falling rate scenarios, interest rate risk is less asset sensitive than the previous quarter, primarily due to an increase in the Federal funds rate, which increases non-maturity deposit rates. Deposit attrition was removed from the simulation in both the current and previous quarters. 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 and three falling rate scenarios, interest rate risk is more liability sensitive than in the previous quarter. This was primarily due to an increase in the Federal funds rate, which impacts surge deposit runoff and puts upward pressure on non-maturity deposit rates. 69 Table of Contents 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.