COMMERCE BANCSHARES INC /MO/ 10-K

cbsh-20221231 Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ________________________________________________________ For the Fiscal Year Ended December 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) Registrant's telephone number, including area code: ( 816 ) 234-2000 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 Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ 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 ¨ 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 ¨ 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 ¨ Non-accelerated filer ¨ 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ¨ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ¨ 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 June 30, 2022, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $ 7,329,000,000 . As of February 16, 2023, there were 124,801,957 shares of Registrant’s $5 Par Value Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive proxy statement for its 2023 annual meeting of shareholders, which will be filed within 120 days of December 31, 2022, are incorporated by reference into Part III of this Report. Commerce Bancshares, Inc. Form 10-K INDEX Page PART I Item 1. Business 3 Item 1a. Risk Factors 9 Item 1b. Unresolved Staff Comments 14 Item 2. Properties 15 Item 3. Legal Proceedings 15 Item 4. Mine Safety Disclosures 15 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17 Item 6. RESERVED 18 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 65 Item 8. Financial Statements and Supplementary Data 65 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 141 Item 9a. Controls and Procedures 141 Item 9b. Other Information 143 Item 9c. Disclosure regarding Foreign Jurisdictions that Prevent Inspections 143 PART III Item 10. Directors, Executive Officers and Corporate Governance 143 Item 11. Executive Compensation 143 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 143 Item 13. Certain Relationships and Related Transactions, and Director Independence 143 Item 14. Principal Accounting Fees and Services 143 PART IV Item 15. Exhibits and Financial Statement Schedules 144 Item 16. Form 10-K Summary 146 Signatures 147 2 Table of Conte nts PART I Item 1. BUSINESS General Commerce Bancshares, Inc., a bank holding company as defined in the Bank Holding Company Act of 1956, as amended, was incorporated under the laws of Missouri on August 4, 1966. Through a second tier wholly-owned bank holding company, it owns all the outstanding capital stock of Commerce Bank (the “Bank”), which is headquartered in Missouri. The Bank engages in general banking business, providing a broad range of retail, mortgage banking, corporate, investment, trust, and asset management products and services to individuals and businesses. Commerce Bancshares, Inc. also owns, directly or through the Bank, various non-banking subsidiaries. Their activities include private equity investment, securities brokerage, insurance agency, specialty lending, and leasing activities. A list of Commerce Bancshares, Inc.'s subsidiaries is included as Exhibit 21. Commerce Bancshares, Inc. and its subsidiaries (collectively, the "Company") is one of the nation’s top 50 bank holding companies, based on asset size. At December 31, 2022, the Company had consolidated assets of $31.9 billion, loans of $16.3 billion, deposits of $26.2 billion, and equity of $2.5 billion. The Company's principal markets, which are served by 148 branch facilities, are located throughout Missouri, Kansas, and central Illinois, as well as Tulsa and Oklahoma City, Oklahoma and Denver, Colorado. Its two largest markets are St. Louis and Kansas City, which serve as central hubs for the Company. The Company also has offices in Dallas, Houston, Cincinnati, Nashville, Des Moines, Indianapolis, and Grand Rapids that support customers in its commercial and/or wealth segments and operates a commercial payments business with sales representatives covering the continental United States of America (“U.S.”). The Company’s goal is to be the preferred provider of financial services in its communities, based on strong customer relationships built through providing top quality service with a strong risk management culture, and employing a strong balance sheet with strong capital levels. The Company operates under a super-community banking format which incorporates large bank product offerings coupled with deep local market knowledge, augmented by experienced, centralized support in select, critical areas. The Company’s focus on local markets is supported by an experienced team of bankers assigned to each market coupled with industry specialists. The Company also uses regional advisory boards, comprised of local business leaders, professionals and other community representatives, who assist the Company in responding to local banking needs. In addition to this local market, community-based focus, the Company offers sophisticated financial products usually only available at much larger financial institutions. The markets the Bank serves are mainly located in the lower Midwest, which provides natural sites for production and distribution facilities and serve as transportation hubs. The economy has been well-diversified in these markets with many major industries represented, including telecommunications, automobile, technology, financial services, aircraft and general manufacturing, health care, numerous service industries, and food and agricultural production. The personal real estate lending operations of the Bank are predominantly centered in its lower Midwestern markets. From time to time, the Company evaluates the potential acquisition of various financial institutions. In addition, the Company regularly considers the purchase and disposition of real estate assets and branch locations. The Company seeks merger or acquisition partners that are culturally similar, have experienced management and either possess significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services. The Company has not completed any bank acquisitions since 2013. Employees and Human Capital The Company employed 4,447 persons on a full-time basis and 151 persons on a part-time basis at December 31, 2022. None of the Company's employees are represented by collective bargaining agreements. Attracting and retaining talented team members is key to the Company’s ability to execute its strategy and compete effectively. The Company values the unique combination of talents and experiences each team member contributes toward the Company’s success and strives to offer rewards that meet team members’ individual, evolving needs. Well-being is much more than a paycheck and that’s why the Company takes a comprehensive approach to Total Rewards, supporting team members’ physical well-being, financial well-being, and emotional well-being and career development. The Company’s financial well-being program includes a company-matching 401(k) plan and health savings accounts, educational and adoption assistance programs. Emotional well-being programs include paid time off, an employee assistance program (EAP) and company-paid membership to Care.com. Physical well-being is supported by the Company’s health, dental, vision, life and various other insurances, and a wellness program that incentivizes team members to live a healthy and balanced lifestyle. Career development is also a key component of the Company’s Total Rewards, and the Company has a variety of programs to support team members as they continue to grow within their current role or develop for their next role. Job shadowing, leadership 3 Table of Conte nts development programs, Aspiring Managers program, Managing at Commerce, competency assessments and education assistance are just a few of the ways the Company helps team members excel. During the COVID-19 pandemic, the Company focused efforts on providing team members support and resources to navigate the ever-changing environment. Initiatives included routine communications providing relevant updates and information, resources for leaders to help keep their teams engaged and connected, new resources for working parents, and access to emotional support resources. The Company implemented a phased-in approach to returning to on-site work and created more flexible work categories for team members to provide for ongoing flexibility. While the most significant impacts of the pandemic appear to have passed, the Company continues to provide most of its team members flexible work schedules. The Company believes diversity, equity, and inclusion (DEI) builds stronger companies with better results. In 2022, the Company’s efforts continued around a key initiative focusing on DEI through the lens of our workforce, our suppliers, our community and our customers. Internal teams continue to iterate to build plans for growth in all four areas. The Company continues to build a sense of belonging by engaging team members in a variety of Employee Resource Groups (ERGs) to support its diverse workforce. RISE (empowering women), EMERGE (connecting young professionals), VIBE (valuing multicultural perspectives), PRIDE (engaging the LGBTQIA+ community), and SALUTE (supporting veterans) are important forums that provide team members opportunities to connect, learn, and encourage diverse perspectives. Participation in these ERGs is voluntary, and more than 40% of team members belong to one of these groups. Other internal DEI efforts have included unconscious bias training, book clubs, listen, talk, and learn sessions, courageous conversation training, mentoring programs, and review of talent at all levels of the organization. The Company’s longstanding approach of “doing what’s right” continues to guide its focus on its team members and communities. The Company’s robust listening strategy allows it to stay connected to the team member experience to understand the evolving needs of its team members and to focus on what matters most to them. This strategy includes a balance of surveys, focus groups, and one on one conversations to allow for two-way conversation and provides trends over time by key demographics. The Company’s goal is to create a sense of belonging which it believes is connected to high levels of engagement, enablement, retention, and results. The Company’s intentional strategy has allowed it to maintain levels of engagement that have been recognized by its annual survey partner, Korn Ferry, for being “best-in-class" and to be recognized by Forbes as one of the best mid-sized employers. Competition The Company operates in the highly competitive environment of financial services. The Company regularly faces competition from banks, savings and loan associations, credit unions, brokerage companies, mortgage companies, insurance companies, trust companies, credit card companies, private equity firms, leasing companies, securities brokers and dealers, financial technology companies, e-commerce companies, investment management companies, and other companies providing financial services. Some of these competitors are not subject to the same regulatory restrictions as domestic banks and bank holding companies. Some other competitors are significantly larger than the Company, and therefore have greater economies of scale, greater financial resources, higher lending limits, and may offer products and services that the Company does not provide. The Company competes by providing a broad offering of products and services to support the needs of customers, matched with a strong commitment to customer service. The Company also competes based on quality, innovation, convenience, reputation, industry knowledge, and price. In its two largest markets, the Company has approximately 12% of the deposit market share in Kansas City and approximately 8% of the deposit market share in St. Louis. Operating Segments The Company is managed in three operating segments: Commercial, Consumer, and Wealth. The Commercial segment provides a full array of corporate lending, merchant and commercial bank card products, payment solutions, leasing, and international services, as well as business and government deposit, investment, and cash management services. The Consumer segment includes the retail branch network, consumer installment lending, personal mortgage banking, and consumer debit and credit bank card activities. The Wealth segment provides traditional trust and estate planning services, brokerage services, and advisory and discretionary investment portfolio management services to both personal and institutional corporate customers. In 2022, the Commercial, Consumer and Wealth segments contributed 53%, 23% and 24% of total segment pre-tax income, respectively. See the section captioned "Operating Segments" in Item 7, Management's Discussion and Analysis, of this report and Note 13 to the consolidated financial statements for additional discussion on operating segments. Government Policies The Company's operations are affected by federal and state legislative changes, by the U.S. government, and by policies of various regulatory authorities, including those of the numerous states in which they operate. These include, for example, the 4 Table of Conte nts statutory minimum legal lending rates, domestic monetary policies of the Board of Governors of the Federal Reserve System, U.S. fiscal policy, international currency regulations and monetary policies, the U.S. Patriot Act, and capital adequacy and liquidity constraints imposed by federal and state bank regulatory agencies. Supervision and Regulation The following information summarizes existing laws and regulations that materially affect the Company's operations. It does not discuss all provisions of these laws and regulations, and it does not include all laws and regulations that affect the Company presently or may affect the Company in the future. General The Company, as a bank holding company, is primarily regulated by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended (BHC Act). Under the BHC Act, the Federal Reserve Board’s prior approval is required in any case in which the Company proposes to acquire all or substantially all the assets of any bank, acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or merge or consolidate with any other bank holding company. With certain exceptions, the BHC Act also prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any non-banking company. Under the BHC Act, the Company may not engage in any business other than managing and controlling banks or furnishing certain specified services to subsidiaries, and may not acquire voting control of non-banking companies unless the Federal Reserve Board determines such businesses and services to be closely related to banking. When reviewing bank acquisition applications for approval, the Federal Reserve Board considers, among other things, the Bank’s record in meeting the credit needs of the communities it serves in accordance with the Community Reinvestment Act of 1977, as amended (CRA). Under the terms of the CRA, banks have a continuing obligation, consistent with safe and sound operation, to help meet the credit needs of their communities, including providing credit to individuals residing in low- and moderate-income areas. The Bank has a current CRA rating of “outstanding.” The Company is required to file various reports and additional information with the Federal Reserve Board. The Federal Reserve Board regularly performs examinations of the Company. The Bank is a state-chartered Federal Reserve member bank and is subject to regulation, supervision and examination by the Federal Reserve Bank of Kansas City and the Missouri Division of Finance. The Bank is also subject to regulation by the Federal Deposit Insurance Corporation (FDIC). In addition, there are numerous other federal and state laws and regulations which control the activities of the Company, including requirements and limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates, loan limits, mergers and acquisitions, issuance of securities, dividend payments, and extensions of credit. The Bank is subject to federal and state consumer protection laws, including laws designed to protect customers and promote fair lending. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and their respective state law counterparts. If the Company fails to comply with these or other applicable laws and regulations, it may be subject to civil monetary penalties, imposition of cease and desist orders or other written directives, removal of management and, in certain circumstances, criminal penalties. This regulatory framework is intended primarily for the protection of depositors and the preservation of the federal deposit insurance funds. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to employ assets and maximize income. In addition to its regulatory powers, the Federal Reserve Bank affects the conditions under which the Company operates by its influence over the national supply of bank credit. The Federal Reserve Board employs open market operations in U.S. government securities and oversees changes in the discount rate on bank borrowings, changes in the federal funds rate on overnight inter-bank borrowings, and changes in reserve requirements on bank deposits in implementing its monetary policy objectives. These methods are used in varying combinations to influence the overall level of the interest rates charged on loans and paid for deposits, the price of the dollar in foreign exchange markets, and the level of inflation. The monetary policies of the Federal Reserve have a significant effect on the operating results of financial institutions, most notably on the interest rate environment. In view of changing conditions in the national economy and in the money markets, as well as the effect of credit policies of monetary and fiscal authorities, the Company makes no prediction as to possible future changes in interest rates, deposit levels or loan demand, or their effect on the financial statements of the Company. The financial industry operates under laws and regulations that are under regular review by various agencies and legislatures and are subject to change. The Company currently operates as a bank holding company, as defined by the Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLB Act), and the Bank qualifies as a financial subsidiary under the GLB Act, which allows it to engage in investment banking, insurance agency, brokerage, and underwriting activities that were not available to banks prior to the GLB Act. The GLB Act also included privacy provisions that limit banks’ abilities to disclose non-public information about customers to non-affiliated entities. 5 Table of Conte nts The Company must also comply with the requirements of the Bank Secrecy Act (BSA). The BSA is designed to help fight drug trafficking, money laundering, and other crimes. Compliance is monitored by the Federal Reserve. The BSA was enacted to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, criminal activity. Since its passage, the BSA has been amended several times. These amendments include the Money Laundering Control Act of 1986 which made money laundering a criminal act, as well as the Money Laundering Suppression Act of 1994 which required regulators to develop enhanced examination procedures and increased examiner training to improve the identification of money laundering schemes in financial institutions. The USA PATRIOT Act, established in 2001, substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the U.S. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent, and report money laundering and terrorist financing. The regulations include significant penalties for non-compliance. The Company is subject to regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2011 (Dodd-Frank Act). Among its many provisions, the Dodd-Frank Act required stress-testing for certain financial services companies and established a new council of “systemic risk” regulators. The Dodd-Frank Act also established the Consumer Financial Protection Bureau (CFPB) which is authorized to supervise certain financial services companies and has responsibility to implement, examine for compliance with, and enforce “Federal consumer financial law.” The Company is subject to examinations by the CFPB. The Dodd-Frank Act, through Title VI, commonly known as the Volcker Rule, placed trading restrictions on financial institutions and separated investment banking, private equity and proprietary trading (hedge fund) sections of financial institutions from their consumer lending arms. The Volcker Rule also restricts financial institutions from investing in and sponsoring certain types of investments. In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law which provides a number of limited amendments to the Dodd-Frank Act. Notable provisions of the legislation include: an increase in the asset threshold from $50 billion to $250 billion, above which the Federal Reserve is required to apply enhanced prudential standards; an exemption from the Volcker Rule for insured depository institutions with less than $10 billion in consolidated assets; modifications to the Liquidity Coverage and Supplementary Leverage ratios; and the elimination of Dodd-Frank company-run stress tests for banks and bank holding companies with less than $250 billion in assets. Most of these provisions affect institutions larger than the Company, and the Company is not required to prepare stress testing as specified by the Dodd-Frank Act. Subsidiary Bank Under Federal Reserve policy, the bank holding company, Commerce Bancshares, Inc. (the "Parent"), is expected to act as a source of financial strength to its bank subsidiary and to commit resources to support it in circumstances when it might not otherwise do so. In addition, loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Deposit Insurance Substantially all of the deposits held by the Bank are insured up to applicable limits (generally $250,000 per depositor for each account ownership category) by the FDIC's Deposit Insurance Fund (DIF) and are subject to deposit insurance assessments to maintain the DIF. In 2011, the FDIC released a final rule to implement provisions of the Dodd-Frank Act that affected deposit insurance assessments. Among other things, the Dodd-Frank Act raised the minimum designated reserve ratio from 1.15% to 1.35% of estimated insured deposits, removed the upper limit of the designated reserve ratio, required that the designated reserve ratio reach 1.35% by September 30, 2020, and required the FDIC to offset the effect of increasing the minimum designated reserve ratio on depository institutions with total assets of less than $10 billion. The Dodd-Frank Act provided the FDIC flexibility in the implementation of the increase in the designated reserve ratio and also required that the FDIC redefine the assessment base to average consolidated assets minus average tangible equity. Due to growth in insured deposits during the first half of 2020, the DIF reserve ratio fell below statutory minimum of 1.35% on June 30, 2022. The FDIC Board of Directors adopted an Amended Restoration Plan in an effort to restore the reserve ratio to at least 1.35% by September 30, 2028. The FDIC Board also increased base deposit insurance assessment rates by 2 basis points, which takes effect on January 1, 2023. For the year ended December 31, 2022, the Company's deposit insurance expense was $10.6 million. 6 Table of Conte nts Payment of Dividends The Federal Reserve Board may prohibit the payment of cash dividends to shareholders by bank holding companies if their actions constitute unsafe or unsound practices. The principal source of the Parent's cash revenues is cash dividends paid by the Bank. The amount of dividends paid by the Bank in any calendar year is limited to the net profit of the current year combined with the retained net profits of the preceding two years, and permission must be obtained from the Federal Reserve Board for dividends exceeding these amounts. The payment of dividends by the Bank may also be affected by factors such as the maintenance of adequate capital. Capital Adequacy The Company is required to comply with the capital adequacy standards established by the Federal Reserve, which are based on the risk levels of assets and off-balance sheet financial instruments. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to judgments by regulators regarding qualitative components, risk weightings, and other factors. A comprehensive capital framework was established by the Basel Committee on Banking Supervision, which was effective for large and internationally active U.S. banks and bank holding companies on January 1, 2015. A key goal of the Basel III framework was to strengthen the capital resources of banking organizations during normal and challenging business environments. Basel III increased minimum requirements for both the quantity and quality of capital held by banking organizations. The rule includes a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. 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, stock repurchases and executive compensation. The rule also adjusted the methodology for calculating risk-weighted assets to enhance risk sensitivity. At December 31, 2022, the Company's capital ratios are well in excess of those minimum ratios required by Basel III. The Federal Deposit Insurance Corporation Improvement Act (FDICIA) requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. Pursuant to FDICIA, the FDIC promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under the prompt corrective action provisions of FDICIA, an insured depository institution generally will be classified as well-capitalized (under the Basel III rules mentioned above) if it has a Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, a total capital ratio of at least 10%, and a Tier 1 leverage ratio of at least 5%. An institution that, based upon its capital levels, is classified as “well-capitalized,” “adequately capitalized,” or “undercapitalized,” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if a bank is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the federal bank regulator, and the holding company must guarantee the performance of that plan. The Bank has consistently maintained regulatory capital ratios above the “well-capitalized” standards. Stress Testing As required by the Dodd-Frank Act, the Company performed stress tests as specified by the Federal Reserve requirement and published results beginning in 2014 through 2017. On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was enacted, which eliminated the required stress testing under the Dodd-Frank Act for banks with consolidated assets of less than $250 billion. The Company continues to perform periodic stress-testing based on its own internal criteria. Executive and Incentive Compensation Guidelines adopted by federal banking agencies prohibit excessive compensation as an unsafe and unsound practice, and describe compensation as "excessive" when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. The Federal Reserve Board has issued comprehensive guidance on incentive compensation intended to ensure that the incentive compensation policies do not undermine safety and soundness by encouraging excessive risk taking. This guidance covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, based on key principles that (i) incentives do not 7 Table of Conte nts encourage risk-taking beyond the organization's ability to identify and manage risk, (ii) compensation arrangements are compatible with effective internal controls and risk management, and (iii) compensation arrangements are supported by strong corporate governance, including active and effective board oversight. Deficiencies in compensation practices may affect supervisory ratings and enforcement actions may be taken if incentive compensation arrangements pose a risk to safety and soundness. Transactions with Affiliates The Federal Reserve Board regulates transactions between the Bank and its subsidiaries. Generally, the Federal Reserve Act and Regulation W, as amended by the Dodd-Frank Act, limit the Company’s banking subsidiary and its subsidiaries to lending and other “covered transactions” with affiliates. The aggregate amount of covered transactions a banking subsidiary or its subsidiaries may enter into with an affiliate may not exceed 10% of the capital stock and surplus of the banking subsidiary. The aggregate amount of covered transactions with all affiliates may not exceed 20% of the capital stock and surplus of the banking subsidiary. Covered transactions with affiliates are also subject to collateralization requirements and must be conducted on arm’s length terms. Covered transactions include (a) a loan or extension of credit by the banking subsidiary, including derivative contracts, (b) a purchase of securities issued to a banking subsidiary, (c) a purchase of assets by the banking subsidiary unless otherwise exempted by the Federal Reserve, (d) acceptance of securities issued by an affiliate to the banking subsidiary as collateral for a loan, and (e) the issuance of a guarantee, acceptance or letter of credit by the banking subsidiary on behalf of an affiliate. Certain transactions with the Company's directors, officers or controlling persons are also subject to conflicts of interest regulations. Among other things, these regulations require that loans to such persons and their related interests be made on terms substantially the same as for loans to unaffiliated individuals, and must not create an abnormal risk of repayment or other unfavorable features for the financial institution. See Note 2 to the consolidated financial statements for additional information on loans to related parties. Available Information The Company’s principal offices are located at 1000 Walnut Street, Kansas City, Missouri (telephone number 816-234-2000). The Company makes available free of charge, through its website at www.commercebank.com, reports filed with the Securities and Exchange Commission as soon as reasonably practicable after the electronic filing. Additionally, a copy of our electronically filed materials can be found at www.sec.gov. These filings include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports. 8 Table of Conte nts Item 1a. RISK FACTORS Making or continuing an investment in securities issued by the Company, including its common stock, involves certain risks that you should carefully consider. If any of the following risks actually occur, the Company's business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Commerce Bancshares, Inc. Market Risks Difficult market conditions may affect the Company’s industry. The concentration of the Company’s banking business in the United States particularly exposes it to downturns in the U.S. economy. In particular, the Company may face the following risks in connection with market conditions: • In 2022, the United States economy saw an uneven year. Consumer spending and corporate profit growth were resilient despite high inflation, rising geopolitical tensions, and supply chain disruptions. The Federal Reserve responded to persistently high inflation by raising its benchmark interest rate in a series of hikes starting in March 2022 and continuing into 2023. While unemployment levels remained low during 2022, an increasing number of companies, especially in the technology sector, announced layoffs toward the end of 2022 and into 2023. The pace of inflation slowed late in 2022, but the probability of a looming recession appears to be growing, as many economists are now predicting a recession in 2023. • The U.S. economy is affected by global events and conditions, including U.S. trade disputes and renewed trade agreements with various countries. Although the Company does not directly hold foreign debt or have significant activities with foreign customers, the global economy, the strength of the U.S. dollar, international trade conditions, and oil prices may ultimately affect interest rates, business import/export activity, capital expenditures by businesses, and investor confidence. Unfavorable changes in these factors may result in declines in consumer credit usage, adverse changes in payment patterns, reduced loan demand, and higher loan delinquencies and default rates. These could impact the Company’s future provision for credit losses, as a significant part of the Company’s business includes consumer and credit card lending. • In addition to the results above, a slowdown in economic activity may cause declines in financial services activity, including declines in bank card, corporate cash management and other fee businesses, as well as the fees earned by the Company on such transactions. • The process used to estimate credit losses in the Company’s loan portfolio requires difficult, subjective, and complex judgments, including consideration of economic conditions and how these economic predictions might impair the ability of its borrowers to repay their loans. If an instance occurs that renders these predictions no longer capable of accurate estimation, this may in turn impact the reliability of the process. • Competition in the industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions, thereby reducing market prices for various products and services which could in turn reduce the Company’s revenues. The performance of the Company is dependent on the economic conditions of the markets in which the Company operates. The Company’s success is heavily influenced by the general economic conditions of the specific markets in which it operates. Unlike larger national or other regional banks that are more geographically diversified, the Company provides financial services primarily throughout the states of Missouri, Kansas, central Illinois, Oklahoma, and Colorado. It also has a growing presence in additional states through its commercial banking offices in: Texas, Iowa, Indiana, Michigan, Ohio, and Tennessee. As the Company does not have a significant banking presence in other parts of the country, a prolonged economic downturn in these markets could have a material adverse effect on the Company’s financial condition and results of operations. The Company operates in a highly competitive industry and market area. The Company operates in the financial services industry and has numerous competitors including other banks and insurance companies, securities dealers, brokers, trust and investment companies, mortgage bankers, and financial technology companies. Consolidation among financial service providers and new changes in technology, product offerings and regulation continue to challenge the Company's marketplace position. As consolidation occurs, larger regional and national banks may enter the Company's markets and add to existing competition. Large, national financial institutions have substantial capital, technology and marketing resources. These new competitors may lower fees to grow market share, which could result in a loss of 9 Table of Conte nts customers and lower fee revenue for the Company. They may have greater access to capital at a lower cost than the Company, and may have higher loan limits, both of which may adversely affect the Company’s ability to compete effectively. The Company must continue to make investments in its products and delivery systems to stay competitive with the industry, or its financial performance may suffer. The soundness of other financial institutions could adversely affect the Company. The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institution counterparties. Financial services institutions are interrelated because of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties and routinely executes transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual funds, and other institutional clients. Transactions with these institutions include overnight and term borrowings, interest rate swap agreements, securities purchased and sold, short-term investments, and other such transactions. Because of this exposure, defaults by, or rumors or questions about, one or more financial services institutions or the financial services industry in general, could lead to market-wide liquidity problems and defaults by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client, while other transactions expose the Company to liquidity risks should funding sources quickly disappear. In addition, the Company’s credit risk may be exacerbated when the collateral held cannot be realized or is liquidated at prices not sufficient to recover the full amount of the exposure due to the Company. Any such losses could materially and adversely affect results of operations. Regulatory and Compliance Risks The Company is subject to extensive government regulation and supervision. As part of the financial services industry, the Company is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds, and the banking system, not shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products it may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition, and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. Significant changes in federal monetary policy could materially affect the Company’s business. The Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine in large part the cost of funds for lending and interest rates earned on loans and paid on borrowings and interest-bearing deposits. Credit conditions are influenced by its open market operations in U.S. government securities, changes in the member bank discount rate, and bank reserve requirements. Changes in Federal Reserve Board policies are beyond the Company’s control and difficult to predict, and such changes may result in lower interest margins and a lack of demand for credit products. Liquidity and Capital Risks The Company is subject to both interest rate and liquidity risk. With oversight from its Asset-Liability Management Committee, the Company devotes substantial resources to monitoring its liquidity and interest rate risk on a monthly basis. The Company's net interest income is the largest source of overall revenue to the Company, representing 63% of total revenue for the year ended December 31, 2022. The interest rate environment in which the Company operates fluctuates in response to general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve Board, which regulates the supply of money and credit in the U.S. Changes in monetary policy, including changes in interest rates, will influence loan originations, deposit generation, demand for investments and revenues and costs for earning assets and liabilities, and could significantly impact the Company’s net interest income. As the economy rebounded from the COVID-19 pandemic-induced recession, strong inflation in 2022 caused the Federal Reserve Board to significantly increase the benchmark interest rate from nearly zero to between 4.25% and 4.50%. Future economic conditions or other factors could shift monetary policy resulting in additional increases or decreases in the benchmark 10 Table of Conte nts rate. Furthermore, changes in interest rates could result in unanticipated changes to customer deposit balances and adversely affect the Company’s liquidity position. Commerce Bancshares, Inc. relies on dividends from its subsidiary bank for most of its revenue. Commerce Bancshares, Inc. is a separate and distinct legal entity from its banking and other subsidiaries. It receives substantially all of its revenue from dividends from its subsidiary bank. These dividends, which are limited by various federal and state regulations, are the principal source of funds to pay dividends on its common stock and to meet its other cash needs. In the event the subsidiary bank is unable to pay dividends, the Company may not be able to pay dividends or other obligations, which would have a material adverse effect on the Company's financial condition and results of operations. Operational Risks The impact of the phase-out of LIBOR is uncertain. In 2017, the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that LIBOR would likely be discontinued at the end of 2021 as panel banks would no longer be required to submit estimates that are used to construct LIBOR. U.S. regulatory authorities voiced similar support for phasing out LIBOR. On March 5, 2021, LIBOR’s regulator and its administrator announced that the publication of certain LIBOR tenors will cease immediately after December 31, 2021 and the remaining LIBOR tenors, including 1-month USD LIBOR, will cease immediately after June 30, 2023. The Alternative Rates Reference Committee (the “ARRC”), a group of market participants convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from LIBOR, identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate. The Company established a LIBOR Transition Program, which is led by the LIBOR Transition Steering Committee (Committee) whose purpose is to guide the overall transition process for the Company. The Committee 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 Company has developed and prioritized action items. All of the Company's 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 for the cessation of LIBOR. Significant progress has been made in converting loans that reference LIBOR to an alternative reference rate during 2022. Additionally, changes to the Company's systems to utilize alternative reference rates were completed in 2022. The Company has loans, derivative contracts, and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR, mostly 1-month LIBOR. As of December 31, 2022, the Company had approximately $1.0 billion of commercial loans, $948 million of derivative contracts (notional value), and $691 million of investment securities that are expected to mature after June 30, 2023. These amounts are expected to decrease as the Company continues to work with customers to replace contracts that use LIBOR with alternative reference rates. The Company ceased entering any new loan contracts that use USD LIBOR as a reference rate in December 2021. The Company may be adversely affected if the interest rates currently tied to LIBOR on the Company's loans, derivatives, and other financial instruments are not able to be transitioned to an alternative rate. Furthermore, the Company may be faced with disputes or litigation with customers regarding interpretation and enforcement of fallback language used in loan agreements as the transition to a new benchmark rate continues to evolve. The Company’s asset valuation may include methodologies, models, estimations and assumptions which are subject to differing interpretations and could result in changes to asset valuations that may materially adversely affect its results of operations or financial condition. The Company uses estimates, assumptions, and judgments when certain financial assets and liabilities are measured and reported at fair value. Assets and liabilities carried at fair value inherently result in greater financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices and/or other observable inputs provided by independent third-party sources, when available. When such third-party information is not available, fair value is estimated primarily by using cash flow and other financial modeling techniques utilizing assumptions such as credit quality, liquidity, interest rates and other relevant inputs. Changes in underlying factors, assumptions, or estimates in any of these areas could materially impact the Company’s future financial condition and results of operations. Furthermore, if models used to calculate fair value of financial instruments are inadequate or inaccurate due to flaws in their design or execution, upon sale, the Company may not realize the cash flows of a financial instrument as modeled and could incur material, unexpected losses. 11 Table of Conte nts During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain assets if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes in active markets with significant observable data that become illiquid due to the current financial environment. In such cases, certain asset valuations may require more subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of assets as reported within the Company’s consolidated financial statements, and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on results of operations or financial condition. The Company’s operations rely on certain external vendors. The Company relies on third-party vendors to provide products and services necessary to maintain day-to-day operations. For example, the Company outsources a portion of its information systems, communication, data management, and transaction processing to third parties. Accordingly, the Company is exposed to the risk that these vendors might not perform in accordance with the contracted arrangements or service level agreements because of changes in the vendor’s organizational structure, financial condition, support for existing products and services, or strategic focus. Such failure to perform could be disruptive to the Company’s operations, which could have a materially adverse impact on its business, financial condition and results of operations. These third parties are also sources of risk associated with operational errors, system interruptions or breaches and unauthorized disclosure of confidential information. If the vendors encounter any of these issues, the Company could be exposed to disruption of service, damage to reputation and litigation. Because the Company is an issuer of both debit and credit cards, it is periodically exposed to losses related to security breaches which occur at retailers that are unaffiliated with the Company (e.g., customer card data being compromised at retail stores). These losses include, but are not limited to, costs and expenses for card reissuance as well as losses resulting from fraudulent card transactions. Credit Risks The allowance for credit losses may be insufficient or future credit losses could increase. The allowance for credit losses on loans and the liability for unfunded lending commitments at December 31, 2022 reflect management's estimate of credit losses expected in the loan portfolio, including unfunded lending commitments, as of the balance sheet date. See Note 2 to the consolidated financial statements and the section captioned “Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report for further discussion related to the Company’s process for determining the appropriate level of the allowance for credit losses on loans and the liability for unfunded lending commitments at December 31, 2022. The Company's estimate of credit losses utilizes a life of loan loss concept, and the level of the allowance is based on management’s methodology that utilizes historical net charge-off rates and adjusts for the impacts in the reasonable and supportable forecast and other qualitative factors. Key assumptions include the application of historical loss rates, prepayment speeds, forecast results of a reasonable and supportable period, the period to revert to historical loss rates, and qualitative factors. The Company’s allowance level is subject to review by regulatory agencies, and that review could also result in adjustments to the allowance for credit losses. Additionally, the volatility of the Company's provision for credit losses may change from year to year due to macroeconomic variables that influence the Company's loss estimates, and the volatility in credit losses may be material to the Company's earnings. The Company’s investment portfolio values may be adversely impacted by deterioration in the credit quality of underlying collateral within the various categories of investment securities it owns. The Company generally invests in liquid, investment grade securities, however, these securities are subject to changes in market value due to changing interest rates and implied credit spreads. While the Company maintains prudent risk management practices over bonds issued by municipalities and other issuers, credit deterioration in these bonds could occur and result in losses. Certain mortgage and asset-backed securities (which are collateralized by residential mortgages, credit cards, automobiles, mobile homes or other assets) may decline in value due to actual or expected deterioration in the underlying collateral. Under accounting rules, when an available for sale debt security is in an unrealized loss position, the entire loss in fair value is required to be recognized in current earnings if the Company intends to sell the security or believes it is more likely than not that the Company will be required to sell the security before the value recovers. Additionally, the current expected credit loss model (CECL) implemented by the Company on January 1, 2020, requires that lifetime expected credit losses on securities be recorded in current earnings. This could result in significant losses. 12 Table of Conte nts Strategic Risk New lines of business or new products and services may subject the Company to additional risk. From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and new products or services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business, or new product or service, could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and new products or services could have a material adverse effect on the Company’s financial condition and results of operations. General Risks A successful cyber attack or other computer system breach could significantly harm the Company, its reputation and its customers. The Company relies heavily on communications and information systems to conduct its business, and as part of its business, the Company maintains significant amounts of data about its customers and the products they use. The Company’s data is maintained on its own systems and on the systems of its vendors, business partners and third-party service providers. The Company relies on a layered system of security controls to secure collection, transmission, storage, and retrieval of data, including confidential data, in its computer systems and the systems of third parties. Information security risks continue to increase due to new technologies, the increasing use of the Internet and telecommunication technologies (including mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, and others. The Company has faced security incidents, which have been minor in scope and impact, and it expects unauthorized parties to continue to attempt to gain access to its systems or information, as well as those of its business partners and service providers. The Company makes significant investments in various technology to identify and prevent intrusions into its information systems. The Company has policies, procedures and controls designed to identify, protect, detect, respond, and recover from security incidents. The Company also requires ongoing security awareness training for employees, hosts tabletop exercises to test response readiness, and performs regular audits using both internal and outside resources. However, there can be no assurance that any such failures, interruptions or security breaches will not occur, or if they do occur, that they will be adequately addressed. In addition to unauthorized access, denial-of-service attacks or other operational disruptions could prevent the Company from adequately serving customers. Should any of the Company's systems become compromised or customer information be obtained by unauthorized parties, the reputation of the Company could be damaged, relationships with existing customers may be impaired, and the Company could be subject to lawsuits, all of which could result in lost business and have a material adverse effect on the Company’s business, financial condition and results of operations. The Company continually encounters technological change. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services, including the entrance of financial technology companies offering new financial service products. The Company regularly upgrades or replaces technological systems to increase efficiency, enhance product and service capabilities, eliminate risks of end-of-lifecycle products, reduce costs, and better serve our customers. During 2022, the Company replaced its core customer and deposit systems and other ancillary systems (collectively referred to as "core system"). While the conversion was completed successfully, the Company may face operational risks after the conversion, including disruptions to its technology systems, which may adversely impact customers. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may encounter significant problems in effectively implementing new technology-driven products and services and may not be successful in marketing the new products and services to its customers. These problems might include significant time delays, cost overruns, loss of key people, and technological system failures. Failure to successfully keep pace with technological change affecting the financial services industry or failure to successfully complete the replacement of technological systems could have a material adverse effect on the Company’s business, financial condition and results of operations. 13 Table of Conte nts The Company must attract and retain skilled employees. The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people can be intense, and the Company spends considerable time and resources attracting, hiring, and retaining qualified people for its various business lines and support units. Companies throughout the U.S. saw significant turnover during 2021 and into 2022, and the number of candidates in the job market was generally much lower than the demand for talent. The unexpected loss of the services of one or more of the Company’s key personnel could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, and years of industry experience, as well as the difficulty of promptly finding qualified replacement personnel. Public health threats or outbreaks of communicable diseases could have an adverse effect on the Company's operations and financial results. The Company may face risks related to public health threats or outbreaks of communicable diseases. A widespread healthcare crisis, such as an outbreak of a communicable disease could adversely affect the global economy and the Company’s financial performance. For example, the global COVID-19 pandemic caused significant disruption and harm to the economy and the financial markets in which the Company operates. The situation surrounding the COVID-19 pandemic remains uncertain. While the U.S. economy has rebounded significantly since the peak of the pandemic-induced recession, fallout from economic and societal changes resulting from the pandemic may cause prolonged global or national recessionary economic conditions, which could have a material adverse effect on the Company's business, results of operations and financial condition. Beyond the impact of the COVID-19 pandemic, the potential impacts of future epidemics, pandemics, or other outbreaks of an illness, disease, or virus could therefore materially and adversely affect the Company's business, revenue, operations, financial condition, liquidity and cash flows. Our business and financial results may be affected by societal and governmental responses to climate change and related environmental issues. The current and anticipated effects of climate change have raised concerns for the condition of the global environment. These concerns have changed and will continue to change the behavior of consumers and businesses. Further, governments have increased their attention on the issue of climate change. As a result, international agreements have been signed to attempt to reduce global temperatures and federal and state legislative and regulatory initiatives have been proposed to seek to mitigate the effects of climate change. The Company and its customers may need to respond to new laws and regulations as well as new consumer and business preferences resulting from climate change concerns. These changes may result in cost increases, asset value reductions, and operating process changes to the Company and its customers. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to the Company could be a drop in demand for our products and services, particularly in certain industries. In addition, the Company could experience reductions in creditworthiness on the part of some customers or in the value of assets securing loans. The Company’s efforts to take these risks into account in making lending and other decisions, including by increasing the Company’s business with climate-friendly companies, may not be effective in protecting the Company from the adverse impact of new laws and regulations or changes in consumer or business behavior. Item 1b. UNRESOLVED STAFF COMMENTS None 14 Table of Conte nts Item 2. PROPERTIES The main offices of the Company are located in Kansas City and St. Louis, Missouri. The Company owns its main offices and leases unoccupied premises to the public. The larger office buildings include: Building Net rentable square footage % occupied in total % occupied by Bank 1000 Walnut Kansas City, MO 391,000 95 % 53 % 922 Walnut Kansas City, MO 256,000 95 91 811 Main Kansas City, MO 237,000 100 100 8000 Forsyth Clayton, MO 178,000 100 100 The Company has an additional 148 branch locations in Missouri, Illinois, Kansas, Oklahoma and Colorado which are owned or leased. Item 3. LEGAL PROCEEDINGS The information required by this item is set forth in Item 8 under Note 21, Commitments, Contingencies and Guarantees on page 137. Item 4. MINE SAFETY DISCLOSURES Not applicable Information about the Company's Executive Officers The following are the executive officers of the Company as of February 22, 2023, each of whom is designated annually. There are no arrangements or understandings between any of the persons so named and any other person pursuant to which such person was designated an executive officer. Name and Age Positions with Registrant Kevin G. Barth, 62 Executive Vice President of the Company since April 2005, and Community President and Chief Executive Officer of Commerce Bank since October 1998. Senior Vice President of the Company and Officer of Commerce Bank prior thereto. Derrick R. Brooks, 46 Senior Vice President of the Company and Executive Vice President of Commerce Bank since January 2021. Senior Vice President of Commerce Bank prior thereto. John K. Handy, 59 Executive Vice President of the Company since January 2018 and Senior Vice President of the Company prior thereto. Community President and Chief Executive Officer of Commerce Bank since January 2018 and Senior Vice President of Commerce Bank prior thereto. Richard W. Heise, 54 Senior Vice President of the Company since April 2022 and Executive Vice President of Commerce Bank since July 2021. Prior to his employment with Commerce Bank in February 2017, he was employed at a healthcare tech services company where he served as a senior vice president of revenue cycle and financial services. Robert S. Holmes, 59 Executive Vice President of the Company since April 2015, and Community President and Chief Executive Officer of Commerce Bank since January 2016. Prior to his employment with Commerce Bank in March 2015, he was employed at a Midwest regional bank where he served as managing director and head of Regional Banking. Kim L. Jakovich, 53 Senior Vice President of the Company since April 2022, and Officer of the Company prior thereto. Senior Vice President of Commerce Bank since July 2015. 15 Table of Conte nts Name and Age Positions with Registrant Patricia R. Kellerhals, 65 Senior Vice President of the Company since February 2016 and Vice President of the Company prior thereto. Executive Vice President of Commerce Bank since 2005. David W. Kemper, 72 Executive Chairman of the Company and of the Board of Directors of the Company since August 2018. Prior thereto, he was Chief Executive Officer of the Company and Chairman of the Board of Directors of the Company. He was President of the Company from April 1982 until February 2013. He is the brother of Jonathan M. Kemper (a former Vice Chairman of the Company), and father of John W. Kemper, President and Chief Executive Officer of the Company. John W. Kemper, 45 Chief Executive Officer of the Company and Chairman and Chief Executive Officer of Commerce Bank since August 2018. Prior thereto, he was Chief Operating Officer of the Company. President of the Company since February 2013 and President of Commerce Bank since March 2013. Member of Board of Directors since September 2015. He is the son of David W. Kemper (Executive Chairman of the Company) and nephew of Jonathan M. Kemper (a former Vice Chairman of the Company). Charles G. Kim, 62 Chief Financial Officer of the Company since July 2009. Executive Vice President of the Company since April 1995 and Executive Vice President of Commerce Bank since January 2004. Prior thereto, he was Senior Vice President of Commerce Bank. Douglas D. Neff, 54 Senior Vice President of the Company since January 2019 and Chairman and Chief Executive Officer of Commerce Bank Southwest Region since 2013. Thomas J. Noack, 67 Senior Vice President of the Company since October 2018 and was also Secretary and General Counsel of the Company from October 2018 to March 2022. He was Secretary, General Counsel and Vice President of the Company prior to October 2018. Executive Vice President of Commerce Bank since September 2021. Prior thereto, he was Secretary, General Counsel and Vice President of Commerce Bank. David L. Orf, 56 Executive Vice President of the Company since October 2020 and Chief Credit Officer of the Company since January 2021. Executive Vice President of Commerce Bank since January 2014 and Senior Vice President of Commerce Bank prior thereto. Paula S. Petersen, 56 Executive Vice President of the Company since January 2022 and Senior Vice President of the Company prior thereto. Executive Vice President of Commerce Bank since March 2012. David L. Roller, 52 Senior Vice President of the Company since July 2016 and Senior Vice President of Commerce Bank since September 2010. Paul A. Steiner, 51 Controller of the Company since April 2019. He is also Controller of the Company's subsidiary bank, Commerce Bank. Assistant Controller and Director of Tax of the Company prior thereto. 16 Table of Conte nts PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Commerce Bancshares, Inc. Common Stock Data Commerce Bancshares, Inc. common shares are listed on the Nasdaq Global Select Market (NASDAQ) under the symbol CBSH. The Company had 3,421 common shareholders of record as of December 31, 2022. Certain of the Company's shares are held in "nominee" or "street" name and the number of beneficial owners of such shares is approximately 148,500. Performance Graph The following graph presents a comparison of Company (CBSH) performance to the indices named below. It assumes $100 invested on December 31, 2017 with dividends reinvested on a cumulative total shareholder return basis. 2017 2018 2019 2020 2021 2022 Commerce (CBSH) $ 100.00 $ 107.56 $ 138.44 $ 143.26 $ 159.78 $ 168.73 KBW NASDAQ Regional Banking 100.00 82.51 102.20 93.35 127.57 118.73 NASDAQ OMX Global-Bank 100.00 83.60 114.68 100.00 137.32 113.60 S&P 500 100.00 95.61 125.70 148.74 191.40 156.70 In the preceding year, the Company selected the NASDAQ OMX Global-Bank Index with which to compare its performance. The Company is replacing this index with the KBW NASDAQ Regional Banking Index as it believes the index to be more representative of companies similar in size and market capitalization to the Company. In addition, the Company is a member of the KBW NASDAQ Regional Banking Index. The Company has a long history of paying dividends. 2022 marked the 54th consecutive year of growth in our regular common dividend, and the Company has also issued an annual 5% common stock dividend for the past 29 years. However, 17 Table of Conte nts payment of future dividends is within the discretion of the Board of Directors and will depend, among other factors, on earnings, capital requirements, and the operating and financial condition of the Company. The Board of Directors makes the dividend determination quarterly. 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 Exchange Act, during the fourth quarter of 2022. 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 October 1 - 31 2022 1,491 $71.23 1,491 3,442,745 November 1 - 30 2022 189,860 $72.27 189,860 3,252,885 December 1 - 31 2022 140,827 $67.28 140,827 3,112,058 Total 332,178 $70.15 332,178 3,112,058 The Company’s stock purchases shown above were made under authorizations by the Board of Directors. Under the most recent authorization in April 2022 of 5,000,000 shares, 3,112,058 shares remained available for purchase at December 31, 2022. Item 6. RESERVED 18 Table of Conte nts Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements 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 Commerce Bancshares, Inc. and its subsidiaries (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 which 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 the risk factors identified in Item 1a Risk Factors and the following: changes in economic conditions in the Company’s market area; changes in policies by regulatory agencies, governmental legislation and regulation; fluctuations in interest rates; changes in liquidity requirements; demand for loans in the Company’s market area; changes in accounting and tax principles; estimates made on income taxes; failure of litigation settlement agreements to become final in accordance with their terms; and competition with other entities that offer financial services. Overview The Company operates as a super-community bank and offers a broad range of financial products to consumer and commercial customers, delivered with a focus on high-quality, personalized service. The Company is headquartered in Missouri, with its principal offices in Kansas City and St. Louis, Missouri. Customers are served from 275 locations in Missouri, Kansas, Illinois, Oklahoma and Colorado and commercial offices throughout the nation's midsection. A variety of delivery platforms are utilized, including an extensive network of branches and ATM machines, full-featured online banking, a mobile application, and a centralized contact center. The core of the Company’s competitive advantage is its focus on the local markets in which it operates, its offering of competitive, sophisticated financial products, and its concentration on relationship banking and high-touch service. In order to enhance shareholder value, the Company targets core revenue growth. To achieve this growth, the Company focuses on strategies that will expand new and existing customer relationships, offer opportunities for controlled expansion in additional markets, utilize improved technology, and enhance customer satisfaction. Various indicators are used by management in evaluating the Company’s financial condition and operating performance. Among these indicators are the following: • Net income and earnings per share — Net income attributable to Commerce Bancshares, Inc. was $488.4 million, a decrease of 8.0% compared to the previous year. The return on average assets was 1.45% in 2022, and the return on average common equity was 17.31%. Diluted earnings per share decreased 6.3% in 2022 compared to 2021. • Total revenue — Total revenue is comprised of net interest income and non-interest income. Total revenue in 2022 increased $92.9 million, or 6.7%, from 2021, as net interest income grew $106.8 million, and non-interest income decreased $13.9 million. Growth in net interest income resulted principally from increases in interest income from investment securities and loans, partly offset by an increase in interest expense on deposits and borrowings. The decrease in non-interest income in 2022 was mainly due to lower loan fees and sales income. • Non-interest expense — Total non-interest expense increased 5.3% this year compared to 2021, mainly due to higher salaries and employee benefits expense and data processing and software expense. • Asset quality — Net loan charge-offs totaled $19.1 million in 2022, an increase of $496 thousand from those recorded in 2021, and averaged .12% of loans in both 2022 and 2021. Total non-performing assets, which include non-accrual loans and foreclosed real estate, amounted to $8.4 million at December 31, 2022, compared to $9.3 million at December 31, 2021, and represented .05% of loans outstanding at December 31, 2022. • Shareholder return — During 2022, the Company paid cash dividends of $1.01 per share on its common stock, representing an increase of 6.1% over the previous year. In 2022, the Company issued its 29th consecutive annual 5% common stock dividend, and in February 2023, the Company's Board of Directors authorized an increase of 7.1% in the common cash dividend. The Company purchased 2,684,667 shares in 2022. Total shareholder return, including 19 Table of Conte nts the change in stock price and dividend reinvestment, was 11.0%, 14.2%, and 10.4% over the past 5, 10, and 15 years, respectively. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes. The historical trends reflected in the financial information presented below are not necessarily reflective of anticipated future results. Key Ratios 2022 2021 2020 2019 2018 (Based on average balances) Return on total assets 1.45 % 1.55 % 1.20 % 1.67 % 1.76 % Return on common equity 17.31 15.37 10.64 14.06 16.16 Equity to total assets 8.39 10.11 11.18 12.20 11.24 Loans to deposits (1) 55.41 56.46 67.73 71.54 69.27 Non-interest bearing deposits to total deposits 39.02 40.46 37.83 32.03 33.43 Net yield on interest earning assets (tax equivalent basis) 2.85 2.58 2.99 3.48 3.53 (Based on end of period data) Non-interest income to revenue (2) 36.71 40.15 37.87 38.98 37.83 Efficiency ratio (3) 56.90 57.64 57.19 56.87 55.58 Tier I common risk-based capital ratio 14.13 14.34 13.71 13.93 14.22 Tier I risk-based capital ratio 14.13 14.34 13.71 14.66 14.98 Total risk-based capital ratio 14.89 15.12 14.82 15.48 15.82 Tier I leverage ratio 10.34 9.13 9.45 11.38 11.52 Tangible common equity to tangible assets ratio (4) 7.32 9.01 9.92 10.99 10.45 Common cash dividend payout ratio 26.10 23.12 35.32 27.52 23.61 (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 total 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 assist regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP. The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets. (Dollars in thousands) 2022 2021 2020 2019 2018 Total equity $ 2,481,577 $ 3,448,324 $ 3,399,972 $ 3,138,472 $ 2,937,149 Less non-controlling interest 16,286 11,026 2,925 3,788 5,851 Less preferred stock — — — 144,784 144,784 Less goodwill 138,921 138,921 138,921 138,921 138,921 Less intangible assets* 4,305 4,604 4,958 1,785 2,316 Total tangible common equity (a) $ 2,322,065 $ 3,293,773 $ 3,253,168 $ 2,849,194 $ 2,645,277 Total assets $ 31,875,931 $ 36,689,088 $ 32,922,974 $ 26,065,789 $ 25,463,842 Less goodwill 138,921 138,921 138,921 138,921 138,921 Less intangible assets* 4,305 4,604 4,958 1,785 2,316 Total tangible assets (b) $ 31,732,705 $ 36,545,563 $ 32,779,095 $ 25,925,083 $ 25,322,605 Tangible common equity to tangible assets ratio (a)/(b) 7.32 % 9.01 % 9.92 % 10.99 % 10.45 % * Intangible assets other than mortgage servicing rights. 20 Table of Conte nts Results of Operations $ Change % Change (Dollars in thousands) 2022 2021 2020 '22-'21 '21-'20 '22-'21 '21-'20 Net interest income $ 942,185 $ 835,424 $ 829,847 $ 106,761 $ 5,577 12.8 % .7 % Provision for credit losses (28,071) 66,326 (137,190) 94,397 (203,516) (142.3) (148.3) Non-interest income 546,535 560,393 505,867 (13,858) 54,526 (2.5) 10.8 Investment securities gains, net 20,506 30,059 11,032 (9,553) 19,027 (31.8) N.M. Non-interest expense (848,777) (805,901) (768,378) 42,876 37,523 5.3 4.9 Income taxes (132,358) (145,711) (87,293) (13,353) 58,418 (9.2) 66.9 Income (expense) attributable to non-controlling interest (11,621) (9,825) 172 1,796 9,997 18.3 N.M. Net income attributable to Commerce Bancshares, Inc. 488,399 530,765 354,057 (42,366) 176,708 (8.0) 49.9 Preferred stock dividends — — (11,966) — 11,966 — (100.0) Net income available to common shareholders $ 488,399 $ 530,765 $ 342,091 $ (42,366) $ 188,674 (8.0) % 55.2 % N.M. - Not meaningful. Net income attributable to Commerce Bancshares, Inc. (net income) for 2022 was $488.4 million, a decrease of $42.4 million, or 8.0%, compared to $530.8 million in 2021. Diluted income per common share was $ 3.85 in 2022, compared to $ 4.11 in 2021. The decrease in net income resulted from an increase of $94.4 million in the provision for credit losses, as well as an increase of $42.9 million in non-interest expense and a decrease of $13.9 million in non-interest income. These decreases to net income were partly offset by increases in net interest income of $106.8 million and a decrease in income tax expense of $13.4 million. The return on average assets was 1.45% in 2022 compared to 1.55% in 2021, and the return on average common equity was 17.31% in 2022 compared to 15.37% in 2021. At December 31, 2022, the ratio of tangible common equity to assets decreased to 7.32%, compared to 9.01% at year end 2021. During 2022, net interest income grew mainly due to increases of $77.6 million in interest income earned on investment securities, due to higher average rates earned and higher average balances, and $75.5 million in interest income earned on loans, mainly due to higher average rates earned, partly offset by an increase in interest expense on deposits and borrowings of $43.9 million, due to higher average rates paid. Total rates earned on average interest earning assets increased 41 basis points this year, while funding costs for deposits and borrowings increased 23 basis points. The provision for credit losses increased in 2022 compared to 2021 due to a significant reduction in the allowance for credit losses on loans during 2021, which did not reoccur in 2022. In addition, there was an increase in the liability for unfunded lending commitments during 2022, compared to a decrease in 2021. Net loan charge-offs increased $496 thousand, mainly due to business loan net charge-offs in 2022, compared to net loan recoveries recorded in 2021, partly offset by lower credit card loan net charge-offs in 2022. Non-interest income fell 2.5% in 2022, mainly due to a decrease in loan fees and sales income. Net investment securities gains of $20.5 million were recorded in 2022 and were comprised mainly of net fair value gains on the Company's private equity investment portfolio, partly offset by losses on sales of available for sale securities. Non-interest expense increased $42.9 million in 2022 compared to 2021, mainly due to higher salaries and benefits expense and data processing and software expense. Net income attributable to Commerce Bancshares, Inc. (net income) for 2021 was $530.8 million, an increase of $176.7 million, or 49.9%, compared to $354.1 million in 2020. Diluted income per common share was $4.11 in 2021, compared to $2.64 in 2020. The increase in net income resulted from a decrease of $203.5 million in the provision for credit losses, as well as an increase of $54.5 million in non-interest income. These increases to net income were partly offset by increases in non-interest expense and income tax expense of $37.5 million and $58.4 million, respectively. The return on average assets was 1.55% in 2021 compared to 1.20% in 2020, and the return on average common equity was 15.37% in 2021 compared to 10.64% in 2020. At December 31, 2021, the ratio of tangible common equity to assets decreased to 9.01%, compared to 9.92% at year end 2020. During 2021, net interest income grew mainly due to a decrease of $29.9 million in interest expense on deposits and borrowings, due to lower average rates paid, coupled with an increase of $19.5 million in interest income earned on investment securities, mainly due to higher average balances. These increases to net interest income were partly offset by a decline of $41.5 million in interest earned on loans, mainly due to lower rates earned. Total rates earned on average interest earning assets fell 53 basis points in 2021, while funding costs for deposits and borrowings decreased 19 basis points. The provision for credit losses decreased due to an improved credit outlook and the release of loan loss reserves provided for anticipated credit losses in 21 Table of Conte nts 2020, which did not occur. Net loan charge-offs decreased $16.3 million in 2021 compared to 2020, mainly due to lower credit card loan net charge-offs and net recoveries on business loans. Non-interest income grew 10.8% in 2021, mainly due to growth in trust and net bank card fee income. Net gains on investment securities in 2021 were comprised mainly of net fair value gains on the Company's private equity investment portfolio, partly offset by net losses on bond sales. Non-interest expense increased $37.5 million in 2021 compared to 2020, largely due to higher salaries and benefits expense and data processing and software expense, as well as lower deferred loan origination costs and non-recurring litigation settlement costs recorded in the third quarter of 2021. The Company distributed a 5% stock dividend for the 29th consecutive year on December 19, 2022. All per share and average share data in this report has been restated for the 2022 stock dividend. Critical Accounting Estimates and Related Policies The Company's consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 to the consolidated financial statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations which may significantly affect the Company's reported results and financial position for the current period or future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Current economic conditions may require the use of additional estimates, and some estimates may be subject to a greater degree of uncertainty due to the current instability of the economy. The Company has identified several 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. Allowance for Credit Losses The Company's Allowance for Credit Losses policies govern the processes and procedures used to estimate the collectability of its loan portfolio and unfunded lending commitments, and the potential for credit losses in its available for sale investment portfolio. Allowance for Credit Losses – Loans and Unfunded Lending Commitments The Company performs periodic and systematic detailed reviews of its loan portfolio and unfunded lending commitments to assess overall collectability. The level of the allowance for credit losses on loans and unfunded lending commitments reflects the Company's estimate of the losses expected in the loan portfolio and unfunded lending commitments over the assets’ contractual term. The allowance for credit loss is an estimate that is subject to uncertainty due to the various assumptions and judgments used in the estimation process. 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. 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 an economic forecast that may affect the collectability of the remaining cash flows over the contractual term of the loans. The calculated loss rate is increased or decreased to reflect expectations of future losses given a single path economic forecast. These adjustments to the loss rate are based on results from various regression models projecting the impact of the macroeconomic variables. The forecast is used for a reasonable and supportable period before reverting to historical averages using a straight-line method. 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. Adjustments to the allowance for credit losses are made by increases to or reductions in the provision for credit losses, which are reflected in the consolidated statements of income. 22 Table of Conte nts Assumptions, Judgments, and Uncertainties: The uncertainty in the estimation of the allowance for credit losses is created because key assumptions and judgements are applied throughout the process. Key assumptions include segmentation of the portfolio into pools, calculations of life of a loan using a combination of contractual terms and expected prepayment speeds and forecast of macroeconomic conditions. The Company utilizes a third-party macro-economic forecast that continuously changes due to economic conditions and events. The single path economic forecast includes key macroeconomic variables including GDP, disposable income, unemployment rate, various interest rates, consumer price index (CPI) inflation rate, housing price index (HPI), commercial real estate price index (CREPI) and market volatility. Each reporting period, the base macroeconomic forecast scenario is evaluated to ensure it is not inconsistent with management’s expectations. Changes in the forecast cause fluctuations in the estimates of the allowance for credit losses on loans and the liability for unfunded lending commitments. Potential changes in any one economic variable may or may not affect the overall allowance because a variety of economic variables and inputs are considered in estimating the allowance, and changes in those variables and inputs may not occur at the same rate, may not be consistent across product types and may have offsetting impacts to other changing variables and inputs. Data points such as loan mix, level of loan balances outstanding, portfolio performance, line utilization trends and risk ratings change throughout the life of a portfolio which could cause changes to the expected credit losses. Qualitative factors not included in historical information or macroeconomic forecast require significant judgment to identify and determine how to apply to the estimate for credit losses. The qualitative factors continuously evolve in reaction to other changing assumptions, data inputs and industry trends. The Company uses its best judgment to assess the macroeconomic forecast, key assumptions and internal and external data in estimating the allowance for credit losses on loans and the liability for unfunded lending commitments. These estimates are subject to continuous refinement based on changes in the underlying external and internal data. Impact if actual results differ from assumptions : The allowance for credit losses represents management’s best estimate of expected current credit losses in the loan portfolio and within the Company’s unfunded lending commitments, but changes in the inputs and assumptions described above could significantly impact the calculated estimated credit losses. Therefore, actual credit losses may differ significantly from estimated results. Significant deterioration in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, changes could have a significant impact on our financial condition and results of operations. Allowance for Credit Losses - Available for Sale Debt Securities The level of the allowance for credit losses on available for sale securities reflects the Company’s estimate of the losses expected in the available for sale debt security portfolio. In order to estimate the allowance for credit losses on available for sale debt securities, the Company performs quarterly reviews of its investment portfolio to identify securities in an unrealized loss position. If the unrealized loss is not expected to be recovered, the Company performs further analyses to determine whether any portion of the unrealized loss indicates that a credit loss exists. Changes to the allowance for credit losses are made by changes to or reductions in the provision for credit losses, which are reflected in the consolidated statements of income. Assumptions, Judgments, and Uncertainties: 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. Certain securities are analyzed using a projected cash flow model, discounted to present value, and compared to the current amortized cost bases of the securities. The model uses input factors such as cash flow projections, contractual payments required, expected delinquency rates, credit support from other tranches, prepayment speeds, collateral loss severity rates (including loan to values), and various other information related to the underlying collateral. Securities not analyzed using the cash flow model are analyzed by reviewing risk ratings, credit support agreements, and industry knowledge to project future cash flows and any possible credit impairment. Impact if actual results differ from assumptions : The allowance for credit losses represents management’s best estimate of expected credit losses in the available for sale debt portfolio, but significant deterioration in interest rates and economic 23 Table of Conte nts conditions could result in a requirement for additional allowance. Likewise, an increase in interest rates and improved economic conditions may allow a reduction in the required allowance. In either instance, anticipated changes could have a significant impact on our financial condition and results of operations. Fair Value Measurement Investment securities, including available for sale debt, trading, equity and other securities, residential mortgage loans held for sale, derivatives and deferred compensation plan assets and associated liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, other assets and liabilities may be recorded at fair value on a nonrecurring basis, such as loan values that have been reduced based on the fair value of the underlying collateral, other real estate (primarily foreclosed property), non-marketable equity securities and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve write-downs of individual assets or application of lower of cost or fair value accounting. Assumptions, Judgments, and Uncertainties: Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability. Fair value measurement and disclosure guidance establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. Fair value is measured based on a variety of inputs. Fair value may be based on quoted market prices for identical assets or liabilities traded in active markets (Level 1 valuations). If market prices are not available, quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuation techniques for which all significant assumptions are observable in the market are used (Level 2 valuations). Where observable market data is not available, the valuation is generated from model-based techniques that use significant assumptions not observable in the market (Level 3 valuations). Unobservable assumptions reflect the Company’s estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. The selection and weighting of the various fair value techniques may result in a fair value higher or lower than carrying value. Considerable judgment may be involved in determining the amount that is most representative of fair value. For assets and liabilities recorded at fair value, the Company looks to active and observable market data when developing fair value measurements for those items where there is an active market. Certain assets and liabilities are not actively traded in observable markets, and the Company must use alternative valuation techniques to derive an estimated fair value measurement. In doing so, the Company may be required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument. The assumptions used to determine fair value adjustments are regularly evaluated by management for relevance under current facts and circumstances. Changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. When market data is not available, the Company uses valuation techniques requiring more management judgment to estimate the appropriate fair value. Impairment analysis also relates to long-lived assets and core deposit and other intangible assets. An impairment loss is recognized if the carrying amount of the asset is not likely to be recoverable and exceeds its fair value. In determining the fair value, management uses models and applies the techniques and assumptions previously discussed. At December 31, 2022, assets and liabilities measured using observable inputs that are classified as either Level 1 or Level 2 represented 98.5% and 99.8% of total assets and liabilities recorded at fair value, respectively. Valuations generated from model-based techniques that use at least one significant assumption not observable in the market are considered Level 3, and the Company's Level 3 assets totaled $180.0 million, or 1.4% of total assets recorded at fair value on a recurring basis. The fair value hierarchy, the extent to which fair value is used to measure assets and liabilities, and the valuation methodologies and key inputs used are discussed in Note 17 on Fair Value Measurements. Impact if actual results differ from assumptions : Changes in fair value are recorded either in earnings or accumulated other comprehensive income. Adjustments in the inputs and assumptions described above could significantly impact the fair values of the Company’s assets and liabilities and have a significant impact on our financial condition and results of operations. 24 Table of Conte nts Net Interest Income Net interest income, the largest source of revenue, results from the Company’s lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest bearing liabilities. 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. 2022 2021 Change due to Change due to (In thousands) Average Volume Average Rate Total Average Volume Average Rate Total Interest income, fully taxable-equivalent basis Loans: Business $ (14,493) $ 25,763 $ 11,270 $ (16,872) $ 7,591 $ (9,281) Real estate - construction and land 3,034 18,157 21,191 7,585 (5,502) 2,083 Real estate - business 6,909 22,671 29,580 1,744 (7,495) (5,751) Real estate - personal 1,452 1,159 2,611 6,459 (9,027) (2,568) Consumer 2,516 5,167 7,683 1,859 (11,594) (9,735) Revolving home equity (200) 3,002 2,802 (1,806) (776) (2,582) Consumer credit card (3,377) 3,935 558 (10,758) (3,672) (14,430) Total interest on loans (4,159) 79,854 75,695 (11,789) (30,475) (42,264) Loans held for sale (434) 191 (243) 96 (76) 20 Investment securities: U.S. government and federal agency obligations 12,468 (4,261) 8,207 336 15,183 15,519 Government-sponsored enterprise obligations 92 21 113 (1,726) (440) (2,166) State and municipal obligations 1,089 (1,689) (600) 12,259 (6,798) 5,461 Mortgage-backed securities (82) 40,827 40,745 24,048 (38,707) (14,659) Asset-backed securities 12,336 13,675 26,011 27,557 (24,611) 2,946 Other securities 4,599 (2,133) 2,466 7,760 4,128 11,888 Total interest on investment securities 30,502 46,440 76,942 70,234 (51,245) 18,989 Federal funds sold 61 347 408 4 (3) 1 Securities purchased under agreements to resell 6,449 (21,179) (14,730) 20,355 (23,625) (3,270) Interest earning deposits with banks (1,375) 13,271 11,896 2,610 (1,681) 929 Total interest income 31,044 118,924 149,968 81,510 (107,105) (25,595) Interest expense Interest bearing deposits: Savings 107 (496) (389) 294 (218) 76 Interest checking and money market 732 17,247 17,979 2,697 (13,115) (10,418) Certificates of deposit of less than $100,000 (174) 485 311 (957) (2,782) (3,739) Certificates of deposit of $100,000 and over (499) 1,820 1,321 (1,410) (8,961) (10,371) Federal funds purchased 42 1,777 1,819 (646) (131) (777) Securities sold under agreements to resell 31 22,362 22,393 1,366 (5,034) (3,668) Other borrowings 1,817 18 1,835 (1,029) 5 (1,024) Total interest expense 2,056 43,213 45,269 315 (30,236) (29,921) Net interest income, fully taxable-equivalent basis $ 28,988 $ 75,711 $ 104,699 $ 81,195 $ (76,869) $ 4,326 Net interest income totaled $942.2 million in 2022, increasing $106.8 million, or 12.8%, compared to $835.4 million in 2021. On a fully taxable-equivalent (FTE) basis, net interest income totaled $951.8 million, and increased $104.7 million over 2021. This growth was mainly due to an increase of $75.7 million in interest earned on loans, due to higher average rates paid and an increase of $76.9 million in interest earned on investment securities, due to higher rates and average balances, partly offset by an increase of $45.3 million in interest expense on deposits and borrowings, due to higher average rates paid. The net yield on earning assets (FTE) was 2.85% in 2022 compared with 2.58% in 2021. 25 Table of Conte nts During 2022, loan interest income (FTE) grew $75.7 million over 2021 mainly due to an increase in rates earned for all loan categories. The average fully taxable-equivalent rate earned on the loan portfolio increased 51 basis points to 4.18% in 2022 compared to 3.67% in 2021. The higher rates earned on the loan portfolio were mostly related to actions taken by the Federal Reserve to raise short-term interest rates, which caused most of the Company's variable rate loan portfolio to re-price higher. Additionally, fixed rate loans were generally originated in 2022 at higher interest rates than the weighted-average of the portfolio of fixed rate loans. The increase in interest rates earned was partly offset a decline in average loan balances of $102.4 million, or .7%, this year. Increased interest earned on business real estate and construction and land loans was the main driver of overall higher interest income. Business real estate loan interest grew $29.6 million in 2022 compared to 2021 as a result of an increase of 71 basis points in the average rate earned and higher average balances of $199.1 million, or 6.6%. Interest earned on construction and land loans increased $21.2 million due to an increase of 147 basis points in the average rate earned and growth of $85.2 million, or 7.4%, in average balances. Business loan interest income increased $11.3 million mainly due to a 49 basis point increase in the average rate earned, partly offset by a decrease of $462.1 million in average balances. Average balances of business loans included average balances of $41.9 million in Paycheck Protection Program (PPP) loans at December 31, 2022, which was a decline of $812.2 million from balances of $854.1 billion at December 31, 2021. Interest on personal real estate loans increased $2.6 million as the average balance grew $44.0 million and the average rate earned increased four basis points. Interest on consumer loans grew $7.7 million over the prior year as the average rate earned increased 25 basis points and average balances were higher by $66.2 million. Revolving home equity loan interest increased $2.8 million due to an increase of 108 basis points in the average rate earned, slightly offset by lower average balances of $5.8 million. Interest on consumer credit card loans was higher by $558 thousand due to an increase of 72 basis points in the average rate earned, mostly offset by a decline of $30.3 million, or 5.3%, in average balances. Fully taxable-equivalent interest income on total investment securities increased $76.9 million during 2022, as average balances grew $1.5 billion and the average rate earned increased 34 basis points. The average rate on the total investment securities portfolio was 2.15% in 2022 compared to 1.81% in 2021, while the average balance of the total investment securities portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $14.9 billion in 2022 compared to an average balance of $13.5 billion in 2021. The increase in interest income was mainly due to higher interest income earned on mortgage-backed, asset-backed and U.S. government securities. Interest earned on mortgage-backed securities increased $40.7 million due to a 59 basis point increase in the average rate earned. The increase of $26.0 million in interest earned on asset-backed securities was due to an increase of 35 basis points in the average rate earned coupled with growth of $1.1 billion in average balances. Interest earned on U.S. government securities grew $8.2 million and was mainly impacted by growth of $7.3 million in inflation income on treasury inflation-protected securities (TIPS). Average balances of U.S. government securities increased $301.9 million, while the average rate earned declined 39 basis points. Interest on securities purchased under resell agreements decreased $14.7 million compared to 2021 due to a decrease of 142 basis points in the average rate, partly offset by growth in average balances of $220.1 million. Interest earned on deposits with banks increased $11.9 million over 2021, mainly due to a 98 basis point increase in the average rate earned, partly offset by a decline in average balances of $1.1 billion. During 2022, interest expense on deposits increased $19.2 million over 2021 and resulted mainly from an 11 basis point increase in the overall average rate paid on deposits. Interest expense on interest checking and money market accounts increased $18.0 million mainly due to higher rates paid, which grew 12 basis points, coupled with higher average balances of $1.1 billion. Interest expense on certificates of deposit over $100,000 grew $1.3 million, mainly due to a 37 basis point increase in the average rate paid. The overall rate paid on total deposits increased from .07% in 2021 to .18% in the current year. Interest expense on borrowings increased $26.0 million mainly due to a 95 basis point increase in the rate paid on securities sold under repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .30% in 2022, compared to .07% in 2021. Net interest income totaled $835.4 million in 2021, increasing $5.6 million, or .7%, compared to $829.8 million in 2020. On a FTE basis, net interest income totaled $847.1 million, and increased $4.3 million over 2020. This increase was mainly due to a decline of $29.9 million in interest expense on deposits and borrowings, due to lower average rates paid, coupled with an increase of $19.0 million in interest earned on investment securities, mainly due to higher average balances. These increases to net interest income (FTE) were partly offset by lower interest earned on loans, which declined $42.3 million, mainly due to lower rates earned. The net yield on earning assets (FTE) was 2.58% in 2021 compared with 2.99% in 2020. 26 Table of Conte nts During 2021, loan interest income (FTE) fell $42.3 million from 2020 mainly due to a decline in rates earned for most loan categories and lower average business and consumer credit card loan balances. The average fully taxable-equivalent rate earned on the loan portfolio decreased 21 basis points to 3.67% in 2021 compared to 3.88% in 2020. Average loan balances decreased $232.5 million, or 1.5%, in 2021. The decrease in consumer credit card loan interest income was the main driver of overall lower interest income. Consumer credit card loan interest declined $14.4 million due to lower average balances of $91.4 million and a decrease of 64 basis points in the average rate earned. Business loan interest income declined $9.3 million mainly due to a decrease of $548.7 million in average balances, partly offset by a 13 basis point increase in the average rate earned. Average balances of business loans included average balances of $854.1 million in PPP loans at December 31, 2021, which was a decline of $204.9 million from balances of $1.1 billion at December 31, 2020. The average rate earned on PPP loans increased 193 basis points to 4.81% in 2021 compared to 2.88% in 2020, partly offsetting the decline in average balances. During 2021, the Company recognized $41.0 million in interest income on PPP loans. As of December 31, 2021, 93% of the PPP loans originated by the Company had been forgiven. Business real estate loan interest was lower by $5.8 million in 2021 compared to 2020 as a result of a decrease of 25 basis points in the average rate, partly offset by higher average balances of $46.9 million. Interest on personal real estate loans decreased $2.6 million as the average rate earned declined 32 basis points, while average balances increased $178.4 million. Interest on consumer loans declined $9.7 million from 2020 as the average rate earned decreased 58 basis points, but was partly offset by growth in average balances of $42.4 million. These decreases to loan interest income (FTE) were partly offset by an increase of $2.1 million in interest earned on construction and land loans. This increase resulted from higher average balances of $187.7 million, partly offset by a 48 basis point decrease in the average rate earned. Fully taxable-equivalent interest income on total investment securities increased $19.0 million during 2021, as average balances grew $3.2 billion, while the average rate earned decreased 38 basis points. The average rate on the total investment securities portfolio was 1.81% in 2021 compared to 2.19% in 2020, while the average balance of the total investment securities portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $13.5 billion in 2021 compared to an average balance of $10.3 billion in 2020. The increase in interest income was mainly due to higher interest income earned on U.S. government securities, state and municipal obligations, asset-backed securities and other securities. Interest earned on U.S. government securities grew $15.5 million and was mainly impacted by growth of the same amount in inflation income on TIPS. Average balances of U.S. government securities increased $15.1 million and the average rated earned grew 191 basis points. The increase in interest earned on state and municipal obligations resulted mainly from growth of $453.2 million in average balances, partly offset by a 33 basis point decrease in the average rate earned. Interest on asset-backed securities increased $2.9 million mainly due to growth of $1.4 billion in the average balance, partly offset by an 87 basis point decrease in the average rate earned. Other securities interest increased $11.9 million mainly due to higher interest earned on equity securities, largely as a result of one-time dividend payments of $5.5 million received on private equity portfolio investments in 2021. Partly offsetting these increases in interest income was a decline of $14.7 million in interest income on mortgage-backed securities, due to a decrease of 56 basis points in the average rate earned, partly offset by higher average balances of $1.3 billion. Interest on securities purchased under resell agreements decreased $3.3 million compared to 2020 due to a decrease of 185 basis points in the average rate, partly offset by growth in balances of $425.8 million. Interest earned on deposits with banks increased $929 thousand over 2020, mainly due to growth in average balances of $1.3 billion, partly offset by a seven basis point decrease in the average rate earned. During 2021, interest expense on deposits decreased $24.5 million from 2020 and resulted mainly from a 17 basis point decrease in the overall average rate paid on deposits. Interest expense on interest checking and money market accounts decreased $10.4 million mainly due to lower rates paid, which fell 10 basis points, but was partly offset by higher average balances of $1.8 billion. Interest expense on certificates of deposit over $100,000 declined $10.4 million, mainly due to a 74 basis point decline in the average rate paid. The overall rate paid on total deposits decreased from .24% in 2020 to .07% in 2021. Interest expense on borrowings decreased $5.5 million mainly due to lower rates paid on securities sold under repurchase agreements, partly offset by higher average balances. The overall average rate incurred on all interest bearing liabilities was .07% in 2021, compared to .26% in 2020. 27 Table of Conte nts Provision for Credit Losses The provision for credit losses is comprised of provisions for credit losses on loans and for unfunded lending commitments and is recorded to adjust the allowance for credit losses on loans and the liability for unfunded lending commitments to a level deemed adequate by management based on the factors mentioned in the “Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments” section of this discussion. The provision for credit losses was $28.1 million in 2022, an increase of $94.4 million over the 2021 provision, which was a recovery of $66.3 million. The provision for credit losses on loans in 2022 was $19.2 million, compared to a recovery in the provision for credit losses on loans of $52.2 million in 2021. The allowance for credit losses on loans totaled $150.1 million at December 31, 2022, an increase of $92 thousand compared to the prior year, and represented .92% of loans at year end 2022, compared to .99% at December 31, 2021. The provision for unfunded lending commitments was $8.9 million during 2022, compared to a recovery of $14.1 million in 2021, and the liability for unfunded lending commitments was $33.1 million at December 31, 2022, compared to $24.2 million at December 31, 2021. Non-Interest Income % Change (Dollars in thousands) 2022 2021 2020 '22-'21 '21-'20 Trust fees $ 184,719 $ 188,227 $ 160,637 (1.9) % 17.2 % Bank card transaction fees 176,144 167,891 151,797 4.9 10.6 Deposit account charges and other fees 94,381 97,217 93,227 (2.9) 4.3 Consumer brokerage services 19,117 18,362 15,095 4.1 21.6 Capital market fees 14,231 15,943 14,582 (10.7) 9.3 Loan fees and sales 13,141 29,720 26,684 (55.8) 11.4 Other 44,802 43,033 43,845 4.1 (1.9) Total non-interest income $ 546,535 $ 560,393 $ 505,867 (2.5) % 10.8 % Non-interest income as a % of total revenue* 36.7 % 40.1 % 37.9 % Total revenue per full-time equivalent employee $ 324.1 $ 305.6 $ 280.3 * Total revenue is calculated as net interest income plus non-interest income. Below is a summary of net bank card transaction fees for the years ended December 31, 2022, 2021 and 2020, respectively. % Change (Dollars in thousands) 2022 2021 2020 '22-'21 '21-'20 Net corporate card fees 100,012 91,701 82,374 9.1 11.3 Net debit card fees $ 40,968 $ 41,010 $ 37,644 (.1) % 8.9 % Net merchant fees 20,604 20,036 18,386 2.8 9.0 Net credit card fees 14,560 15,144 13,393 (3.9) 13.1 Total bank card transaction fees $ 176,144 $ 167,891 $ 151,797 4.9 % 10.6 % Non-interest income totaled $546.5 million, a decrease of $13.9 million, or 2.5%, compared to $560.4 million in 2021. Trust fee income decreased $3.5 million, or 1.9%, as a result of lower institutional (down 7.0%), mutual fund (down 10.9%) and private client trust fees (down .3%). Private client trust fees comprised 79.7% of trust fee income in 2022. The market value of total customer trust assets totaled $60.3 billion at year end 2022, which was a decrease of 13.0% from year end 2021 balances. Bank card fees increased $8.3 million, or 4.9%, over the prior year, mainly due to an increase in net corporate card fees of $8.3 million. The growth in net corporate card fees over the prior year was mainly due to higher interchange income, partly offset by higher rewards expense. Deposit account fees decreased $2.8 million, or 2.9%, mainly due to lower overdraft and return item fees of $4.2 million and personal account deposit fees of $1.2 million, partly offset by growth in corporate cash management fees of $2.5 million. In 2022, corporate cash management fees comprised 55.6% of total deposit fees, while overdraft fees comprised 21.1% of total deposit fees. In September 2022, the Company implemented enhancements to consumer checking accounts that eliminated return items fees and lowered overdraft fees. Capital market fees decreased $1.7 million, or 10.7%, compared to the prior year, while revenue from consumer brokerage services increased $755 thousand, or 4.1%, mainly due to growth in annuity fees. Loan fees and sales decreased $16.6 million, or 55.8%, mainly due to lower mortgage banking revenue. Other non-interest income increased $1.8 million, or 4.1%, over the prior year mainly due to higher 28 Table of Conte nts cash sweep commissions of $8.2 million and lease income of $1.3 million, income of $2.2 million from a life insurance death benefit recorded in the second quarter of 2022, a $2.6 million loss on an equity method investment recorded in 2021 and a lease impairment of $1.1 million recorded in 2021. These increases were partly offset by gains of $5.6 million recorded mainly on the sales of branch properties last year. In addition, a decrease of $6.6 million in fair value adjustments was recorded on the Company's deferred compensation plan assets, which are held in a trust, recorded as both an asset and a liability and affect both other income and other expense. During 2021, non-interest income totaled $560.4 million, an increase of $54.5 million, or 10.8%, compared to $505.9 million in 2020. Bank card fees increased $16.1 million, or 10.6%, over 2020, due to increases in net corporate card fees of $9.3 million, net debit card fees of $3.4 million, net credit card fees of $1.8 million and net merchant fees of $1.7 million. The growth in net corporate and credit card fees over the prior year was due to higher interchange income, partly offset by higher rewards expense. Net debit card fees increased due to higher interchange income, partly offset by an increase in network expense. Net merchant fees were up due to an increase in merchant discount fees, partly offset by higher rewards expense. Trust fee income increased $27.6 million, or 17.2%, as a result of growth in private client trust fees (up 19.1%) and higher institutional trust fees (up 11.0%). Private client trust fees comprised 78.4% of trust fee income in 2021. The market value of total customer trust assets totaled $69.3 billion at year end 2021, which was an increase of 13.2% over year end 2020 balances. Deposit account fees increased $4.0 million, or 4.3%, mainly due to growth in corporate cash management fees and overdraft and return item fees of $3.3 million and $1.2 million, respectively, partly offset by lower personal deposit account service charge fees of $1.2 million. In 2021, corporate cash management fees comprised 51.5% of total deposit fees, while overdraft fees comprised 24.8% of total deposit fees. Capital market fees grew $1.4 million, or 9.3%, compared to 2020, while revenue from consumer brokerage services increased $3.3 million, or 21.6%, due to growth in advisory and annuity fees. Loan fees and sales increased $3.0 million, or 11.4%, mainly due to growth in mortgage banking revenue and loan commitment fees. Other non-interest income decreased $812 thousand, or 1.9%, from 2020 mainly due to lower cash sweep commissions of $7.9 million and a $2.6 million loss recorded on an equity method investment in 2021. These decreases were partly offset by gains of $5.6 million recorded mainly on sales of branch properties during 2021 and increases in interest rate swap fees and check sales and wire fees of $2.2 million and $1.0 million, respectively. 29 Table of Conte nts Investment Securities Gains (Losses), Net (In thousands) 2022 2021 2020 Net gains (losses) on sales of available for sale debt securities $ (20,273) $ (3,284) $ 21,096 Net gains on sales of equity securities 17 — 2 Fair value adjustments on equity securities, net (943) 187 37 Net gains (losses) on sales of private equity investments (2,128) 1,452 — Fair value adjustments of private equity investments 43,833 31,704 (10,103) Total investment securities gains, net $ 20,506 $ 30,059 $ 11,032 Net gains and losses on investment securities during 2022, 2021 and 2020 are shown in the table above. Included in these amounts are gains and losses arising from sales of securities from the Company’s available for sale debt portfolio and gains and losses relating to private equity investments, which are primarily held by the Parent’s majority-owned private equity subsidiary. The gains and losses on private equity investments include fair value adjustments, in addition to gains and losses realized upon disposition. The portions of private equity investment gains and losses that are attributable to minority interests are reported as non-controlling interest in the consolidated statements of income, and resulted in expense of $8.5 million in 2022 and $6.5 million in 2021, compared to income of $1.4 million in 2020. Net securities gains of $20.5 million were recorded in 2022, which included net gains of $43.8 million in fair value adjustments on private equity investments. This increase was partly offset by losses of $20.3 million realized on sales resulting from the Company's sale of approximately $105 million (book value) in bonds, mainly mortgage-backed and corporate bond securities, net losses of $2.1 million on sales of private equity investments, and net losses of $943 thousand in fair value adjustments on equity securities. Net securities gains of $30.1 million were recorded in 2021, which included $1.5 million in net gains realized on sales of private equity investments, net gains totaling $31.7 million of fair value adjustments on private equity investments, and $187 thousand of fair value adjustments on equity investments. These net gains were offset by losses of $3.3 million realized on bond sales resulting from the Company's sale of approximately $73 million (book value) of bonds, mainly mortgage-backed securities. Net securities gains of $11.0 million were recorded in 2020, which included $21.1 million in net gains realized on bond sales resulting from the Company's sale of approximately $602 million (book value) of bonds, mainly mortgage-backed securities and municipal securities. These gains were offset by net losses totaling $10.1 million of fair value adjustments on private equity investments. 30 Table of Conte nts Non-Interest Expense % Change (Dollars in thousands) 2022 2021 2020 '22-'21 '21-'20 Salaries $ 471,260 $ 447,238 $ 436,087 5.4 % 2.6 % Employee benefits 82,787 78,010 76,900 6.1 1.4 Data processing and software 110,692 101,792 95,325 8.7 6.8 Net occupancy 49,117 48,185 46,645 1.9 3.3 Equipment 19,359 18,089 18,839 7.0 (4.0) Supplies and communication 18,101 17,118 17,419 5.7 (1.7) Marketing 23,827 21,856 19,734 9.0 10.8 Other 73,634 73,613 57,429 — 28.2 Total non-interest expense $ 848,777 $ 805,901 $ 768,378 5.3 % 4.9 % Efficiency ratio 56.9 % 57.6 % 57.2 % Salaries and benefits as a % of total non-interest expense 65.3 % 65.2 % 66.8 % Number of full-time equivalent employees 4,594 4,567 4,766 Non-interest expense was $848.8 million in 2022, an increase of $42.9 million, or 5.3%, over the previous year. Salaries and benefits expense increased $28.8 million, or 5.5%, mainly due to higher costs for full-time salaries, incentive compensation, stock compensation, payroll taxes and 401(k) expense. Salaries expense included expense of $5.4 million for special bonuses paid to non-incentivized full-time and part-time employees in 2022. Full-time equivalent employees totaled 4,594 at December 31, 2022, compared to 4,567 at December 31, 2021. Data processing and software expense increased $8.9 million, or 8.7%, primarily due to higher bank card processing fees, software amortization and expense, and increased costs for service providers. Net occupancy expense increased $932 thousand, or 1.9%, mainly due to higher depreciation, utilities and outside services expense, partly offset by lower real estate taxes expense. Equipment expense increased $1.3 million, or 7.0%, mainly due to higher depreciation and equipment service contract expense, while marketing expense increased $2.0 million, or 9.0%. Supplies and communication expense increased $983 thousand, or 5.7%, mainly due to higher postage and courier expense and bank card reissuance fees, partly offset by lower data network expense. Other non-interest expense increased slightly over 2021. Higher costs for travel and entertainment expense (up $5.1 million), insurance expense (up $1.9 million), depreciation expense on leased assets (up $958 thousand) and airplane expense (up $864 thousand) were offset by $8.2 million in non-recurring litigation settlement costs recorded in 2021. In addition, the previously mentioned fair value adjustments on the Company's deferred compensation plan assets decreased $6.6 million from the prior year. In 2021, non-interest expense was $805.9 million, an increase of $37.5 million, or 4.9%, over 2020. Salaries and benefits expense increased $12.3 million, or 2.4%, mainly due to higher incentive compensation and healthcare expense, partly offset by lower salaries expense. Incentive compensation increased due to higher incentives in wealth and commercial, while full-time and part-time salaries expense declined mainly due to lower retail banking salaries expense. Full-time equivalent employees totaled 4,567 at December 31, 2021, reflecting a 4.2% decrease from 2020. Net occupancy expense increased $1.5 million, or 3.3%, mainly due to lower external rent income. Equipment expense decreased $750 thousand, or 4.0%, mainly due to lower depreciation and equipment service expense, while supplies and communication expense decreased $301 thousand, or 1.7%. Data processing and software expense increased $6.5 million, or 6.8%, primarily due to higher costs for service providers, bank card processing fees and software expense, while marketing expense increased $2.1 million, or 10.8%. Other non-interest expense increased $16.2 million, or 28.2%, over 2020 mainly due to $8.2 million in non-recurring litigation settlement costs mentioned above. In addition, deferred loan origination costs declined $3.5 million and deposit insurance expense increased $1.3 million. These increases were partly offset by a reduction in impairment expense of $3.6 million on the Company's mortgage servicing rights. Income Taxes Income tax expense was $132.4 million in 2022, compared to $145.7 million in 2021 and $87.3 million in 2020. The effective tax rate, including the effect of non-controlling interest, was 21.3% in 2022 compared to 21.5% in 2021 and 19.8% in 2020. Additional information about income tax expense is provided in Note 9 to the consolidated financial statements. 31 Table of Conte nts Financial Condition Loan Portfolio Analysis Classifications of consolidated loans by major category at December 31, 2022 and 2021 are shown in the table below. This portfolio consists of loans which were acquired or originated with the intent of holding to their maturity. Loans held for sale are separately discussed in a following section. A schedule of average balances invested in each loan category below is disclosed within the Average Balance Sheets section of Management's Discussion and Analysis of Financial Condition and Results of Operations below. Balance at December 31 (In thousands) 2022 2021 Commercial: Business $ 5,661,725 $ 5,303,535 Real estate — construction and land 1,361,095 1,118,266 Real estate — business 3,406,981 3,058,837 Personal banking: Real estate — personal 2,918,078 2,805,401 Consumer 2,059,088 2,032,225 Revolving home equity 297,207 275,945 Consumer credit card 584,000 575,410 Overdrafts 14,957 6,740 Total loans $ 16,303,131 $ 15,176,359 The table below presents contractual maturities of the loan portfolio, based on payment due dates, as well as a breakdown of fixed rate and floating rate loans at December 31, 2022. Principal Payments Due (In thousands) In One Year or Less After One Year Through Five Years After Five Years Through Fifteen Years After Fifteen Years Total Commercial: Business $ 2,188,745 $ 3,097,082 $ 374,934 $ 964 $ 5,661,725 Real estate — construction and land 450,456 880,531 24,958 5,150 1,361,095 Real estate — business 716,024 2,182,596 504,254 4,107 3,406,981 Personal banking: Real estate — personal 175,599 554,999 1,063,609 1,123,871 2,918,078 Consumer 830,809 1,051,373 176,111 795 2,059,088 Revolving home equity 18,247 92,621 186,339 — 297,207 Consumer credit card 66,352 198,109 319,539 — 584,000 Overdrafts 14,957 — — — 14,957 Total loans $ 4,461,189 $ 8,057,311 $ 2,649,744 $ 1,134,887 $ 16,303,131 Loans with fixed rates $ 1,303,933 $ 3,782,069 $ 1,521,000 $ 622,618 $ 7,229,620 Loans with floating rates 3,157,256 4,275,242 1,128,744 512,269 9,073,511 Total loans $ 4,461,189 $ 8,057,311 $ 2,649,744 $ 1,134,887 $ 16,303,131 32 Table of Conte nts The following table shows loan balances at December 31, 2022, segregated between those with fixed interest rates and those with variable rates that fluctuate with an index. (In thousands) Fixed Rate Loans Variable Rate Loans Total % Variable Rate Loans Business $ 2,249,024 $ 3,412,701 $ 5,661,725 60.3 % Real estate — construction and land 74,713 1,286,382 1,361,095 94.5 Real estate — business 1,471,746 1,935,235 3,406,981 56.8 Real estate — personal 1,950,578 967,500 2,918,078 33.2 Consumer 1,438,912 620,176 2,059,088 30.1 Revolving home equity 1,775 295,432 297,207 99.4 Consumer credit card 27,915 556,085 584,000 95.2 Overdrafts 14,957 — 14,957 — Total loans $ 7,229,620 $ 9,073,511 $ 16,303,131 55.7 % Total loans at December 31, 2022 were $16.3 billion, an increase of $1.1 billion, or 7.4%, over balances at December 31, 2021. The increase in loans during 2022 occurred in all categories over the previous year. Business loans increased $358.2 million, or 6.8%, mainly due to a $374 million increase in commercial and industrial loans. Excluding declines in PPP loan balances, which decreased $121.1 million during 2022, business loans increased $479.3 million, or 9.0%. As of December 31, 2022, nearly 100% of PPP loan balances have been forgiven. Lease lending and commercial card lending, included within business loans, also increased during 2022, but the increase was partly offset by a decline in tax-advantaged lending. Construction loans increased $242.8 million, or 21.7% mainly due to growth in commercial construction lending. Business real estate loans increased $348.1 million, or 11.4%, due mainly to increases in industrial and office building lending, while owner-occupied, multi-family, and senior living lending declined. Personal real estate loans increased $112.7 million, or 4.0%. The Company sells certain long-term fixed rate mortgage loans to the secondary market, and loan sales in 2022 totaled $111.3 million, compared to $547.1 million in 2021. Consumer loans increased $26.9 million, or 1.3%, mainly due to growth in private banking lending. Health services financing and fixed rate home equity loans also increased, offset by declines in auto lending, other vehicle and equipment lending (mostly comprised of motorcycle loans), and continued run off of marine and recreational vehicle loan balances. Consumer credit card loans increased $8.6 million, or 1.5%, and revolving home equity loan balances increased $21.3 million, or 7.7%, compared to balances at year end 2021. The Company currently holds approximately 31% of its loan portfolio in the Kansas City market, 25% in the St. Louis market, and 45% in other regional markets. The portfolio is diversified from a business and retail standpoint, with 64% in loans to businesses and 36% in loans to consumers. The Company believes a diversified approach to loan portfolio management, strong underwriting criteria and an aversion toward credit concentrations from an industry, geographic and product perspective, have contributed to low levels of problem loans and credit losses on loans experienced over the last several years. 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. At December 31, 2022, the balance of SNC loans totaled approximately $1.4 billion, with an additional $2.0 billion in unfunded commitments, compared to a balance of $1.2 billion, with an additional $1.9 billion in unfunded commitments, at year end 2021. Commercial Loans Business Total business loans amounted to $5.7 billion at December 31, 2022 and includes loans used mainly to fund customer accounts receivable, inventories, and capital expenditures. The business loan portfolio includes tax-advantaged loans and leases which carry tax-free interest rates. These loans totaled $618.1 million at December 31, 2022, a decrease of $111.8 million, or 15.3%, from December 31, 2021 balances. In addition to tax-advantaged leases, the business loan portfolio also includes other direct financing and sales type leases totaling $614.7 million at December 31, 2022, an increase of $75.4 million, or 14.0%, from December 31, 2021. These loans are used by commercial customers to finance capital purchases ranging from computer equipment to office and transportation equipment. Additionally, the Company has outstanding oil and gas energy-related loans totaling $296.4 million at December 31, 2022, which are further discussed within the Oil and Gas Energy Lending section of the Risk Elements of Loan Portfolio section located within Management's Discussion and Analysis of Financial Condition and 33 Table of Conte nts Results of Operations. Also included in the business portfolio are corporate card loans, which totaled $367.3 million at December 31, 2022 and are made in conjunction with the Company’s corporate card business for corporate trade purchases. Corporate card loans are made to corporate, non-profit and government customers nationwide, but have very short-term maturities, which limits credit risk. Business loans, excluding corporate card loans, are made primarily to customers in the regional trade area of the Company, generally the central Midwest, encompassing the states of Missouri, Kansas, Illinois, and nearby Midwestern markets, including Iowa, Oklahoma, Colorado, Texas, Tennessee, Michigan, Indiana, and Ohio. This portfolio is diversified from an industry standpoint and includes businesses engaged in manufacturing, wholesaling, retailing, agribusiness, insurance, financial services, public utilities, health care, and other service businesses. Emphasis is upon middle-market and community businesses with known local management and financial stability. Consistent with management’s strategy and emphasis upon relationship banking, most borrowing customers also maintain deposit accounts and utilize other banking services. Net loan charge-offs in this category totaled $1.1 million in 2022 compared to net loan recoveries of $4.8 million in 2021. Non-accrual business loans were $6.8 million (.1% of business loans) at December 31, 2022 compared to $7.3 million at December 31, 2021. Real Estate-Construction and Land The portfolio of loans in this category amounted to $1.4 billion at December 31, 2022, an increase of $242.8 million, or 21.7%, from the prior year and comprised 8.3% of the Company’s total loan portfolio. Commercial construction and land development loans totaled $1.2 billion, or 86.2% of total construction loans at December 31, 2022. These loans increased $201.6 million from 2021 year end balances, driving the growth in the total construction portfolio. Commercial construction loans are made during the construction phase for small and medium-sized office and medical buildings, manufacturing and warehouse facilities, apartment complexes, shopping centers, hotels and motels, and other commercial properties. Commercial land development loans relate to land owned or developed for use in conjunction with business properties. Residential construction and land development loans at December 31, 2022 totaled $188.3 million, or 13.8% of total construction loans. A stable construction market has contributed to low loss rates on these loans, with net loan charge-offs of nearly zero in both 2022 and 2021. Real Estate-Business Total business real estate loans were $3.4 billion at December 31, 2022 and comprised 20.9% of the Company’s total loan portfolio. This category includes mortgage loans for small and medium-sized office and medical buildings, manufacturing and warehouse facilities, distribution facilities, multi-family housing, farms, shopping centers, hotels and motels, churches, and other commercial properties. The business real estate borrowers and/or properties are generally located in local and regional markets where Commerce does business, and emphasis is placed on owner-occupied lending (33.3% of this portfolio), which presents lower risk levels. Additional information about business real estate loans by borrower is disclosed within the Real Estate - Business Loans section of the Risk Elements of Loan Portfolio section located within Management's Discussion and Analysis of Financial Condition and Results of Operations. At December 31, 2022, balances of non-accrual loans amounted to $189 thousand, less than .1% of business real estate loans, down from $214 thousand at year end 2021. The Company experienced net loan recoveries of $20 thousand in 2022, compared to net loan recoveries of $64 thousand in 2021. Personal Banking Loans Real Estate-Personal At December 31, 2022, there were $2.9 billion in outstanding personal real estate loans, which comprised 17.9% of the Company’s total loan portfolio. The mortgage loans in this category are mainly for owner-occupied residential properties. The Company originates both adjustable and fixed rate mortgage loans, and at December 31, 2022, 33% of the portfolio was comprised of adjustable rate loans, while 67% was comprised of fixed rate loans. The Company does not purchase any loans from outside parties or brokers. The Company originates certain mortgage loans with the intent to sell to the secondary market, generally FNMA or FHLMC conforming fixed rate loans. The remaining loans are originated with the intent to hold to maturity. Of the $699 million of mortgage loans originated in 2022, $111.3 million were sold to the secondary market. This compares to $1.3 billion of mortgage loans originated and $547.1 million of loans sold to the secondary market in 2021. The decrease in loan sales during 2022 compared to 2021 was partly due to lower demand for mortgage loans, as well as the Company's temporary pause on loan sales in late 2022. The Company has experienced lower credit losses on loans in this category than many others in the industry and believes this is partly because of its conservative underwriting culture and the fact that it does not purchase loans from brokers. Net loan 34 Table of Conte nts recoveries in 2022 totaled $74 thousand, and net loan recoveries were $98 thousand in 2021. Balances of non-accrual loans in this category were $1.4 million at December 31, 2022, compared to $1.6 million at year end 2021. Consumer Consumer loans consist of private banking, automobile, motorcycle, marine, tractor/trailer, recreational vehicle (RV), fixed rate home equity, patient health care financing and other types of consumer loans. These loans totaled $2.1 billion at December 31, 2022. Approximately 39% of the consumer portfolio consists of automobile loans, 32% in private banking loans, 11% in fixed rate home equity loans, and 10% in healthcare financing loans. Total consumer loans increased $26.9 million at year end 2022 compared to year end 2021. Growth of $77.6 million in private banking loans was supplemented by increases in patient healthcare financing and fixed rate home equity loans. These increases in consumer loan balances were partially offset by declines of $56.8 million in automobile loans and $19.2 million in motorcycle loans. Net charge-offs on total consumer loans were $3.8 million in 2022, compared to $2.6 million in 2021, averaging .18% and .13% of consumer loans in 2022 and 2021, respectively. Revolving Home Equity Revolving home equity loans, of which more than 99% are adjustable rate loans, totaled $297.2 million at year end 2022. An additional $846.4 million was available in unused lines of credit, which can be drawn at the discretion of the borrower. Home equity loans are secured mainly by second mortgages (and less frequently, first mortgages) on residential property of the borrower. The underwriting terms for the home equity line product permit borrowing availability, in the aggregate, generally up to 80% or 90% of the appraised value of the collateral property at the time of origination. Net loan recoveries were $60 thousand in 2022, compared to net loan charge-offs of nearly zero in 2021. Consumer Credit Card Total consumer credit card loans amounted to $584.0 million at December 31, 2022 and comprised 3.6% of the Company’s total loan portfolio. The credit card portfolio is concentrated within regional markets served by the Company. The Company offers a variety of credit card products, including affinity cards, rewards cards, and standard and premium credit cards, and emphasizes its credit card relationship product, Special Connections. Approximately 38% of the households that own a Commerce credit card product also maintain a deposit relationship with the subsidiary bank. Approximately 95% of the outstanding credit card loan balances had a floating interest rate at year end 2022, unchanged from year end 2021. Net charge-offs amounted to $12.7 million in 2022, a decrease of $7.4 million from $20.0 million in 2021. Loans Held for Sale At December 31, 2022, loans held for sale were comprised of certain loans extended to students while attending colleges and universities. The student loans, carried at the lower of cost or fair value, totaled $4.9 million at December 31, 2022. This portfolio is further discussed in Note 2 to the consolidated financial statements. 35 Table of Conte nts Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments To determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, the Company has established a process which assesses the risks and losses expected in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded lending commitments, as well as a second, smaller component based on certain individually evaluated loans and unfunded lending commitments. The Company's policies and processes for determining the allowance for credit losses on loans and the liability for unfunded lending commitments are discussed in Note 1 to the consolidated financial statements and in the " Allowance for Credit Losses " discussion within Critical Accounting Policies above. Loans subject to individual evaluation generally consist of business, construction, business real estate and personal real estate loans on non-accrual status. These non-accrual loans are evaluated individually for impairment based on factors such as payment history, borrower financial condition and collateral. For collateral dependent loans, appraisals of collateral (including exit costs) are normally obtained annually but discounted based on the date last received and market conditions. From these evaluations of expected cash flows and collateral values, specific allowances are determined. Loans which are not individually evaluated are segregated by loan type and sub-type and are collectively evaluated. These loans consist of commercial loans (business, construction and business real estate) which have been graded pass, special mention, or substandard, and also include all personal banking loans except personal real estate loans on non-accrual status. Collectively-evaluated loans include certain troubled debt restructurings with similar risk characteristics. The allowance for credit losses on loans and the liability for unfunded lending commitments are estimates that require significant judgment including projections of the macro-economic environment. The Company utilizes a third-party macro-economic forecast that continuously changes due to economic conditions and events. These changes in the forecast cause fluctuations in the allowance for credit losses on loans and the liability for unfunded lending commitments. The Company uses judgment to assess the macro-economic forecast and internal loss data in estimating the allowance for credit losses on loans and the liability for unfunded lending commitments. These estimates are subject to periodic refinement based on changes in the underlying external and internal data. The Company has internal credit administration and loan review staff that continuously review loan quality and report the results of their reviews and examinations to the Company’s senior management and Board of Directors. Such reviews also assist management in establishing the level of the allowance. The Company’s subsidiary bank continues to be subject to examination by several regulatory agencies, and examinations are conducted throughout the year, targeting various segments of the loan portfolio for review. Refer to Note 1 to the consolidated financial statements for additional discussion on the allowance and charge-off policies. At December 31, 2022, the allowance for credit losses on loans was $150.1 million, compared to $150.0 million at December 31, 2021. The allowance for credit losses related to commercial loans increased $5.5 million during 2022, due to increases in the allowance for construction and business loans of $5.6 million and $2.4 million, respectively, partly offset by a decrease in the allowance for business real estate loans of $2.5 million. The increase in the allowance for credit losses on the commercial portfolio is due to an increase in outstanding loan balances, partially offset by a reduction in certain pandemic-related reserves, as those uncertainties and concerns began to resolve. Compared to December 31, 2021, the allowance for credit losses on consumer credit card loans decreased $10.6 million, due to the changing forecast, as concerns related to COVID-19 lessened. This decrease was partly offset by a $4.7 million increase in the allowance for personal real estate loans, as prepayment speeds slowed, extending the estimated average life of the loans and increasing the related allowance. T he provision for credit losses, which includes the provision for loans and unfunded lending commitments, was $28.1 million for the year, compared to a benefit of $66.3 million in 2021. During 2021, the allowance for credit losses built in 2020 to estimate the impact of the pandemic were released as the economic forecast and loss projections improved. See Note 2 to the consolidated financial statements for the various model assumptions utilized in the Company's CECL estimate at December 31, 2022. The percentage of allowance to loans decreased to .92% at December 31, 2022, compared to .99% at December 30, 2021. The percentage of allowance to commercial portfolio loans decreased to .99% at December 31, 2022, compared to 1.03% at December 30, 2021, and the percentage of allowance to personal banking loans decreased to .80% at December 31, 2022 from .92% at December 31, 2021. The allowance fell as a percentage of loans at December 31, 2022 as the forecast used in the Company's CECL model moved away from the forecast estimating losses related to the trailing impact of the unprecedented pandemic at year end 2021 to a forecast showing a near term mild recession. 36 Table of Conte nts Total loans delinquent 90 days or more and still accruing were $15.8 million at December 31, 2022, an increase of $4.1 million compared to year end 2021. The increase was mainly driven by growth of $3.7 million in personal real estate loans. Non-accrual loans at December 31, 2022 were $8.3 million, a decrease of $851 thousand from the prior year, mainly due to declines in business and personal real estate non-accrual loans of $561 thousand and $264 thousand, respectively. The allowance for credit losses as a percentage of non-accrual loans was 1,807.6% at December 31, 2022, compared to 1,638.6% at December 31, 2021. The increase in the ratio of the allowance to non-accrual loans was driven by the decrease in non-accrual loans outstanding. The 2022 year-end balance of non-accrual loans was comprised of $6.8 million of business loans, $1.4 million of personal real estate loans, and $189 thousand of business real estate loans. Net loan charge-offs totaled $19.1 million in 2022, representing a $496 thousand increase compared to net charge-offs of $18.6 million in 2021. The increase was largely due to net charge-offs of $1.1 million on business loans during 2022, compared to net recoveries of $4.8 million in the prior year, and higher net charge-offs on consumer loans of $1.2 million in 2022. These increases to net charge-offs were partly offset by lower consumer credit card loan net charge-offs of $7.4 million. Consumer credit card loan net charge-offs were 2.31% of average consumer credit card loans in 2022, compared to 3.47% in 202 1. Consumer credit card loan net charge-offs as a percentage of total net charge-offs decreased to 66.4% in 2022, compared to 107.8% in 2021 . Consumer loan net charge-offs were .18% of average consumer loans in 2022, compared to .13% in 2021, and represented 19.9% of total net loan charge-offs in 2022. The ratio of net loan charge-offs to total average loans outstanding was .12% in both 2022 and 2021 and .22% in 2020. At December 31, 2022, the liability for unfunded lending commitments was $33.1 million, an increase of $8.9 million compared to December 31, 2021. The increase in the liability for unfunded lending commitments during 2022 was driven primarily by increases in the balance and the average term of unfunded lending commitments. 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 lending commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at December 31, 2022. 37 Table of Conte nts The schedules which follow summarize the relationship between loan balances and activity in the allowance for credit losses on loans: Years Ended December 31 (Dollars in thousands) 2022 2021 2020 Loans outstanding at end of year (A) $ 16,303,131 $ 15,176,359 $ 16,329,641 Average loans outstanding (A) $ 15,561,987 $ 15,664,388 $ 15,896,848 Allowance for credit losses: Balance at end of prior year $ 150,044 $ 220,834 $ 160,682 Adoption of ASU 2016-13 — — (21,039) Balance at beginning of year 150,044 220,834 139,643 Provision for credit losses on loans 19,155 (52,223) 116,049 Loans charged off: Business 1,474 810 7,862 Real estate — construction and land — 3 — Real estate — business 6 155 — Real estate — personal 159 134 42 Consumer 6,073 5,370 7,769 Revolving home equity 77 188 79 Consumer credit card 19,039 27,461 32,541 Overdrafts 2,414 1,506 1,754 Total loans charged off 29,242 35,627 50,047 Recoveries of loans previously charged off: Business 421 5,568 4,197 Real estate — construction and land — 2 3 Real estate — business 26 219 47 Real estate — personal 233 232 333 Consumer 2,283 2,814 3,325 Revolving home equity 137 185 245 Consumer credit card 6,381 7,453 6,562 Overdrafts 698 587 477 Total recoveries 10,179 17,060 15,189 Net loans charged off 19,063 18,567 34,858 Balance at end of year $ 150,136 $ 150,044 $ 220,834 Ratio of allowance to loans at end of year .92 % .99 % 1.35 % Ratio of provision to average loans outstanding .12 % (.33) % .73 % Non-accrual loans $ 8,306 $ 9,157 $ 26,540 Ratio of non-accrual loans to total loans outstanding .05 % .06 % .16 % Ratio of allowance for credit losses on loans to non-accrual loans 1,807.56 1,638.57 832.08 (A) Net of unearned income, before deducting allowance for credit losses on loans, excluding loans held for sale. 38 Table of Conte nts Years Ended December 31 2022 2021 2020 Ratio of net charge-offs (recoveries) to average loans outstanding, by loan category: Business .02 % (.08) % .06 % Real estate — construction and land — — — Real estate — business — — — Real estate — personal — — (.01) Consumer .18 .13 .23 Revolving home equity (.02) — (.05) Consumer credit card 2.31 3.47 3.88 Overdrafts 30.40 21.20 38.11 Ratio of total net charge-offs to total average loans outstanding .12 % .12 % .22 % Average loans outstanding by loan class are listed on the Company's average balance sheet on page 60 . The following schedule provides a breakdown of the allowance for credit losses on loans (ACL) by loan category and the percentage of each loan category to total loans outstanding at year end. (Dollars in thousands) 2022 2021 Credit Loss Allowance Allocation % of Loans to Total Loans % of ACL to Loan Category Credit Loss Allowance Allocation % of Loans to Total Loans % of ACL to Loan Category Business $ 46,340 34.8 % .82 % $ 43,943 34.9 % .83 % RE — construction and land 28,799 8.3 2.12 23,171 7.4 2.07 RE — business 28,154 20.9 .83 30,662 20.2 1.00 RE — personal 10,047 17.9 .34 5,331 18.5 .19 Consumer 10,252 12.6 .50 10,073 13.4 .50 Revolving home equity 1,576 1.8 .53 1,217 1.8 .44 Consumer credit card 24,858 3.6 4.26 35,467 3.8 6.16 Overdrafts 110 .1 .74 180 — 2.67 Total $ 150,136 100.0 % .92 % $ 150,044 100.0 % .99 % 39 Table of Conte nts Risk Elements of the Loan Portfolio Management reviews the loan portfolio continuously for evidence of problem loans. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of loan agreements. Such loans are placed under close supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for credit loss, and (if appropriate) partial or full loan charge-off. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. After a loan is placed on non-accrual status, any interest previously accrued but not yet collected is reversed against current income. Interest is included in income only as received and only after all previous loan charge-offs have been recovered, so long as management is satisfied there is no impairment of collateral values. The loan is returned to accrual status only when the borrower has brought all past due principal and interest payments current, and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. 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 comprised of those personal banking loans that are exempt under regulatory rules from being classified as non-accrual. Consumer installment loans and related accrued interest are normally charged down to the fair value of related collateral (or are charged off in full if no collateral) once the loans are more than 120 days delinquent. Credit card loans and the related accrued interest are charged off when the receivable is more than 180 days past due. The following schedule shows non-performing assets and loans past due 90 days and still accruing interest. December 31 (Dollars in thousands) 2022 2021 2020 2019 2018 Total non-accrual loans $ 8,306 $ 9,157 $ 26,540 $ 10,220 $ 12,536 Real estate acquired in foreclosure 96 115 93 365 1,413 Total non-performing assets $ 8,402 $ 9,272 $ 26,633 $ 10,585 $ 13,949 Non-performing assets as a percentage of total loans .05 % .06 % .16 % .07 % .10 % Non-performing assets as a percentage of total assets .03 % .03 % .08 % .04 % .05 % Loans past due 90 days and still accruing interest $ 15,830 $ 11,726 $ 22,190 $ 19,859 $ 16,658 Non-accrual loans totaled $8.3 million at year end 2022, a decrease of $851 thousand from the balance at year end 2021. The decrease from December 31, 2021 occurred mainly in business loans, which decreased $561 thousand, and personal real estate loans, which decreased $265 thousand. At December 31, 2022, non-accrual loans were comprised of business (81.3%), personal real estate (16.4%), and business real estate (2.3%) loans. Foreclosed real estate totaled $96 thousand at December 31, 2022, a decrease of $19 thousand when compared to December 31, 2021. Total non-performing assets remain low compared to the overall banking industry in 2022, with the non-performing assets to total loans ratio at .05% at December 31, 2022. Total loans past due 90 days or more and still accruing interest were $15.8 million as of December 31, 2022, an increase of $4.1 million when compared to 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 of 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 $259.7 million at December 31, 2022, compared with $278.7 million at December 31, 2021, resulting in a decrease of $19.0 million or 6.8%. The decrease in potential problem loans was largely driven by an $18.2 million decrease in business real estate loans, partly offset by a $7.2 million increase in construction loans. December 31 (In thousands) 2022 2021 Potential problem loans: Business $ 29,455 $ 37,143 Real estate – construction and land 47,493 40,259 Real estate – business 182,526 200,766 Real estate – personal 250 526 Total potential problem loans $ 259,724 $ 278,694 40 Table of Conte nts 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 a higher risk of loss due to their terms, location, or special conditions. Construction and land loans and business real estate loans are subject to higher risk because of the impact that volatile interest rates and a changing economy can have on real estate value, and because of the potential volatility of the real estate industry. Certain home equity loans have contractual features that could increase credit exposure in a market of declining real estate prices, when interest rates are steadily increasing, or when a geographic area experiences an economic downturn. For these home equity loans, higher risks could exist when 1) loan terms require a minimum monthly payment that covers only interest, or 2) loan-to-collateral value (LTV) ratios at origination are above 80%, with no private mortgage insurance. Information presented below for home equity loans is based on LTV ratios which were calculated with valuations at loan origination date. The Company does not obtain updated appraisals or valuations unless the loans become significantly delinquent or are in the process of being foreclosed upon. For credit monitoring purposes, the Company analyzes delinquency information, current FICO scores, and line utilization. This has remained an effective means of evaluating credit trends and identifying problem loans, partly because the Company offers standard, conservative lending products. Real Estate - Construction and Land Loans The Company’s portfolio of construction and land loans, as shown in the table below, amounted to 8.3% of total loans outstanding at December 31, 2022. The largest component of construction and land loans was commercial construction, which increased $199.5 million during the year ended December 31, 2022. At December 31, 2022, multi-family residential construction loans totaled approximately $303.5 million, or 27.0%, of the commercial construction loan portfolio. (Dollars in thousands) December 31, 2022 % of Total % of Total Loans December 31, 2021 % of Total % of Total Loans Commercial construction $ 1,122,105 82.4 % 6.9 % $ 922,654 82.5 % 6.1 % Residential construction 138,311 10.2 .8 96,618 8.6 .7 Commercial land and land development 50,667 3.7 .3 48,481 4.3 .3 Residential land and land development 50,012 3.7 .3 50,513 4.6 .3 Total real estate – construction and land loans $ 1,361,095 100.0 % 8.3 % $ 1,118,266 100.0 % 7.4 % Real Estate – Business Loans Total business real estate loans were $3.4 billion at December 31, 2022 and comprised 20.9% of the Company’s total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, distribution facilities, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. Approximately 33.3% of these loans were for owner-occupied real estate properties, which present lower risk profiles. (Dollars in thousands) December 31, 2022 % of Total % of Total Loans December 31, 2021 % of Total % of Total Loans Owner-occupied $ 1,136,189 33.3 % 7.0 % $ 1,188,469 38.9 % 7.8 % Office 497,601 14.6 3.1 380,101 12.4 2.5 Industrial 478,534 14.0 2.9 99,800 3.3 .7 Retail 322,971 9.5 2.0 339,874 11.1 2.2 Multi-family 308,156 9.0 1.9 354,282 11.6 2.3 Hotels 230,972 6.8 1.4 234,673 7.7 1.5 Farm 195,920 5.8 1.2 178,780 5.8 1.2 Senior living 131,217 3.9 .8 174,871 5.7 1.2 Other 105,421 3.1 .6 107,987 3.5 .8 Total real estate - business loans $ 3,406,981 100.0 % 20.9 % $ 3,058,837 100.0 % 20.2 % 41 Table of Conte nts Revolving Home Equity Loans The Company has revolving home equity loans that are generally collateralized by residential real estate. Most of these loans (91.4%) 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 shown in the following tables, the percentage of loans with LTV ratios greater than 80% has remained a small segment of this portfolio, and delinquencies have been low and stable. The weighted average FICO score for the total portfolio balance at December 31, 2022 was 789. 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 to convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. Over the next three years, approximately 19.3% of the Company's current outstanding balances are expected to mature. Of these balances, 88.1% have a FICO score above 700. 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. (Dollars in thousands) Principal Outstanding at December 31, 2022 * New Lines Originated During 2022 * Unused Portion of Available Lines at December 31, 2022 * Balances Over 30 Days Past Due * Loans with interest-only payments $ 271,772 91.4 % $232,767 78.3 % $822,413 276.7 % $1,757 .6 % Loans with LTV: Between 80% and 90% 30,110 10.1 18,229 6.1 49,154 16.5 97 — Over 90% 2,288 0.8 820 .3 2,469 0.8 16 — Over 80% LTV 32,398 10.9 19,049 6.4 51,623 17.4 113 — Total loan portfolio from which above loans were identified 297,207 244,310 846,361 * Percentage of total principal outstanding of $297.2 million at December 31, 2022. (Dollars in thousands) Principal Outstanding at December 31, 2021 * New Lines Originated During 2021 * Unused Portion of Available Lines at December 31, 2021 * Balances Over 30 Days Past Due * Loans with interest-only payments $ 255,636 92.6 % $145,968 52.9 % $760,706 275.7 % $1,344 .5 % Loans with LTV: Between 80% and 90% 28,682 10.4 17,887 6.5 47,283 17.1 222 .1 Over 90% 2,262 0.8 — — 2,666 1.0 — — Over 80% LTV 30,944 11.2 17,887 6.5 49,949 18.1 222 .1 Total loan portfolio from which above loans were identified 275,945 154,000 784,262 * Percentage of total principal outstanding of $275.9 million at December 31, 2021 . Consumer Loans The Company's consumer loans totaled $2.1 billion and comprised 13% of total loans outstanding at December 31, 2022. Within the consumer loan portfolio are several direct and indirect product lines comprised mainly of loans secured by automobiles, motorcycles, marine, and RVs. Auto loans comprised 39% of the consumer loan portfolio at December 31, 2022, and outstanding balances in the auto loan portfolio were $798.6 million and $855.4 million at December 31, 2022 and 2021, respectively. The balances over 30 days past due amounted to $9.9 million at December 31, 2022, compared to $9.0 million at the end of 2021, and comprised 1.2% of the outstanding balances of these loans at December 31, 2022 compared to 1.1% at December 31, 2021. For the year ended December 31, 2022, $329.3 million of new auto loans were originated, compared to $400.8 million during 2021. At December 31, 2022, the automobile loan portfolio had a weighted average FICO score of 755, and net charge-offs on auto loans were .26% 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 December 31, 2022. Losses on these loans have historically been low, and the Company saw net recoveries of $46 thousand in 2022. Private banking loans comprised 32% of the consumer loan portfolio at December 31, 2022. The Company's private banking loans are generally well-collateralized and at December 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 $1.7 million in 2022 and were .16% of the average balances of these loans at December 31, 2022. 42 Table of Conte nts Consumer Credit Card Loans The Company offers low introductory rates on selected consumer credit card products. Out of a portfolio at December 31, 2022 of $584.0 million in consumer credit card loans outstanding, approximately $101.4 million, or 17.4%, carried a low promotional rate. Within the next six months, $37.3 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 promotional feature, 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 was comprised of lending to the petroleum and natural gas sectors and totaled $296.4 million at December 31, 2022, an increase of $35.8 million from year end 2021, as shown in the table below. (In thousands) December 31, 2022 December 31, 2021 Unfunded commitments at December 31, 2022 Extraction $ 235,933 $ 184,840 $ 145,523 Mid-stream shipping and storage 43,432 36,850 93,145 Downstream distribution and refining 7,675 24,915 34,735 Support activities 9,387 14,039 9,058 Total energy lending portfolio $ 296,427 $ 260,644 $ 282,461 Information about the credit quality of the Company's energy lending portfolio as of December 31, 2022 and December 31, 2021 is provided in the table below. (Dollars in thousands) December 31, 2022 % of Energy Lending December 31, 2021 % of Energy Lending Pass $ 293,371 99.0 % $ 256,186 98.3 % Special mention 1,232 .4 1,999 0.8 Substandard — — — — Non-accrual 1,824 .6 2,459 0.9 Total $ 296,427 100.0 % $ 260,644 100.0 % Energy lending balances classified as non-accrual represented .6% of total energy lending loan balances at December 31, 2022. There were no balances classified as substandard at December 31, 2022. The Company recorded $5 thousand of recoveries on energy loans for the year ended December 31, 2022, compared to $10 thousand of recoveries on energy loans for the year ended December 31, 2021. 43 Table of Conte nts Investment Securities Analysis Investment securities are comprised of securities that are classified as available for sale, equity, trading or other. The largest component, available for sale debt securities, decreased 4.7% during 2022 to $13.7 billion (excluding unrealized gains/losses in fair value) at year end 2022. During 2022, debt securities of $2.1 billion were purchased, which included $1.1 billion in asset-backed securities, $406.3 million in agency mortgage-backed securities, $207.9 million in non-agency mortgage-based securities, $150.1 million in state and municipal securities, and $152.9 million in U.S. government and federal agency obligations. Total sales, maturities and pay downs of available for sale debt securities were $2.8 billion during 2022. During 2023, maturities and pay downs of approximately $2.4 billion are expected to occur. The Company's tax-exempt investment portfolio is primarily comprised of tax-exempt municipal bonds and certain equity securities in its private equity investment portfolio. There were no significant changes to the Company's tax-exempt investment portfolio during 2022. The average tax equivalent yield earned on total investment securities was 2.15% in 2022 and 1.81% in 2021. At December 31, 2022, the fair value of available for sale securities was $12.2 billion, which included a net unrealized loss in fair value of $1.5 billion, compared to a net unrealized gain of $30.9 million at December 31, 2021. The overall unrealized loss in fair value at December 31, 2022 included net losses of $43.4 million is U.S. government and federal agency obligations, net losses of $197.9 million in state and municipal securities, and net losses of $1.2 billion in mortgage and asset-backed securities. As described in Note 1, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2020, and the current expected credit loss model (CECL) implemented by the Company requires that lifetime expected credit losses on securities be recorded in current earnings. For the year ended December 31, 2022, the Company did not recognize a credit loss expense on any available for sale debt securities. Available for sale investment securities at year end for the past two years are shown below: December 31 (In thousands) 2022 2021 Amortized Cost U.S. government and federal agency obligations $ 1,078,807 $ 1,035,477 Government-sponsored enterprise obligations 55,729 50,773 State and municipal obligations 1,965,028 2,072,210 Agency mortgage-backed securities 5,087,893 5,698,088 Non-agency mortgage-backed securities 1,423,469 1,383,037 Asset-backed securities 3,588,025 3,546,024 Other debt securities 539,255 633,524 Total available for sale debt securities $ 13,738,206 $ 14,419,133 Fair Value U.S. government and federal agency obligations $ 1,035,406 $ 1,080,720 Government-sponsored enterprise obligations 43,108 51,755 State and municipal obligations 1,767,109 2,096,827 Agency mortgage-backed securities 4,308,427 5,683,000 Non-agency mortgage-backed securities 1,211,607 1,366,477 Asset-backed securities 3,397,801 3,539,219 Other debt securities 474,858 632,029 Total available for sale debt securities $ 12,238,316 $ 14,450,027 At December 31, 2022, the available for sale portfolio included $4.3 billion of agency mortgage-backed securities, which are collateralized bonds issued by agencies including FNMA, GNMA, FHLMC, FHLB, Federal Farm Credit Banks and FDIC. Non-agency mortgage-backed securities totaled $1.2 billion and included $328.4 million collateralized by commercial mortgages and $883.2 million collateralized by residential mortgages at December 31, 2022. At December 31, 2022, U.S. government obligations included TIPS of $373.8 million, at fair value. Other debt securities include corporate bonds, notes and commercial paper. 44 Table of Conte nts The types of securities held in the available for sale security portfolio at year end 2022 are presented in the table below. Additional detail by maturity category is provided in Note 3 to the consolidated financial statements. December 31, 2022 Percent of Total Debt Securities Weighted Average Yield Estimated Average Maturity* Available for sale debt securities: U.S. government and federal agency obligations 8.5 % 1.23 % 2.2 years Government-sponsored enterprise obligations 0.4 2.38 13.3 State and municipal obligations 14.3 2.00 6.3 Agency mortgage-backed securities 35.2 2.07 7.0 Non-agency mortgage-backed securities 9.9 2.30 5.5 Asset-backed securities 27.8 2.07 2.0 Other debt securities 3.9 1.88 5.6 *Based on call provisions and estimated prepayment speeds. Equity securities include common and preferred stock with readily determinable fair values that totaled $6.2 million at December 31, 2022, compared to $7.2 million at December 31, 2021. Other securities totaled $225.0 million at December 31, 2022 and $194.0 million at December 31, 2021. These include Federal Reserve Bank stock and Federal Home Loan Bank (Des Moines) stock held by the bank subsidiary in accordance with debt and regulatory requirements. These are restricted securities and are carried at cost. 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. Also included in other securities are private equity investments which are held by a subsidiary qualified as a Small Business Investment Company. These investments are carried at estimated fair value, but are not readily marketable. While the nature of these investments carries a higher degree of risk than the normal lending portfolio, this risk is mitigated by the overall size of the investments and oversight provided by management, and management believes the potential for long-term gains in these investments outweighs the potential risks. Other securities at year end for the past two years are shown below: December 31 (In thousands) 2022 2021 Federal Reserve Bank stock $ 34,795 $ 34,379 Federal Home Loan Bank stock 10,678 10,428 Equity method investments 1,434 1,834 Private equity investments in debt securities 66,899 63,416 Private equity investments in equity securities 111,228 83,990 Total other securities $ 225,034 $ 194,047 In addition to its holdings in the investment securities portfolio, the Company invests in securities purchased under agreements to resell, which totaled $825.0 million at December 31, 2022 and $1.6 billion at December 31, 2021. These investments mature in 2023 through 2025 and have fixed rates or variable rates that fluctuate with published indices. The counterparties to these agreements are other financial institutions from whom the Company has accepted collateral of $869.6 million in marketable investment securities at December 31, 2022. The average rate earned on these agreements during 2022 was 1.5%, compared to 2.9% in 2021. The Company also holds offsetting repurchase and resale agreements totaling $200.0 million at December 31, 2022 and $400.0 million at December 31, 2021, which are further discussed in Note 20 to the consolidated financial statements. 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 been offset against each other in the balance sheet, as permitted under current accounting guidance. The agreements mature in 2023 and earned an average of 29 basis points during 2022, compared to 30 basis points in 2021. 45 Table of Conte nts Deposits and Borrowings Deposits, including both individual and corporate customers, are the primary funding source for the Bank and are acquired from a broad base of local markets. Total period-end deposits were $26.2 billion at December 31, 2022, compared to $29.8 billion last year, reflecting an decrease of $3.6 billion, or 12.2%. Average deposits increased $316.6 million, or 1.1%, in 2022 compared to 2021, resulting from increases in interest checking and money market account balances, and savings account balances of $1.1 billion and $133.5 million, respectively. Partially offsetting these increases in deposit balances were declines in certificates of deposit balances, which decreased $646.1 million in 2022. Additionally, average demand deposits decreased $275.7 million, primarily driven by lower balances in business demand deposits. The following table shows year end deposit balances by type, as a percentage of total deposits. December 31 2022 2021 Non-interest bearing 38.4 % 39.4 % Savings, interest checking and money market 57.8 55.7 Certificates of deposit of less than $100,000 1.5 1.5 Certificates of deposit of $100,000 and over 2.3 3.4 Total deposits 100.0 % 100.0 % Core deposits, which include non-interest bearing, interest checking, savings, and money market deposits, supported 81% and 79% of average earning assets in 2022 and 2021, respectively. Average balances by major deposit category for the last six years are disclosed in the Average Balance Sheets section of Management's Discussion and Analysis of Financial Condition and Results of Operations below. A maturity schedule of all certificates of deposits outstanding at December 31, 2022 is included in Note 7 on Deposits in the consolidated financial statements. Total uninsured deposits were calculated using the same methodology that the Company uses to determine uninsured deposits for regulatory reporting and amounted to $11.3 billion and $14.6 billion at December 31, 2022 and December 31, 2021. The following table shows a detailed breakdown of the maturities of uninsured certificates of deposit at December 31, 2022. The Company estimated the uninsured deposits in the following table by aggregating all deposit balances by customer and assuming federal deposit insurance would first apply to demand deposits, followed by savings deposits, and lastly to time deposits (beginning with the earliest maturity deposits). (In thousands) Uninsured Certificates of Deposit at December 31, 2022 Due in 3 months or less $ 188,297 Due in over 3 through 6 months 68,357 Due in over 6 through 12 months 140,672 Due in over 12 months 124,849 Total $ 522,175 The Company’s primary sources of overnight borrowings are federal funds purchased and securities sold under agreements to repurchase (repurchase agreements). Balances in these accounts can fluctuate significantly on a day-to-day basis and generally have one day maturities. Total balances of federal funds purchased and repurchase agreements outstanding at December 31, 2022 were $2.8 billion, comprised of federal funds purchased of $159.9 million and repurchase agreements of $2.7 billion. These balances increased $116.5 million from the federal funds purchased and decreased $297.7 million from the repurchase agreements outstanding at December 31, 2021. On an average basis, these borrowings increased $104.4 million, or 4.5%, during 2022, due to an increase of $44.8 million in repurchase agreements and $59.6 million in federal funds purchased. The average rate was 2.21% paid on federal funds purchased and 1.02% paid on repurchase agreements during 2022, compared to the average rate paid on both federal funds purchased and repurchase agreements of .07% during 2021. In addition to the funding sources above, the Company may borrow from the FHLB on a short-term basis (borrowings with an original maturity of less than one year) and long-term basis. During 2022, the Company had average short-term borrowings of $45.1 million. All of the short-term borrowings were repaid by the Company before December 31, 2022, and the average 46 Table of Conte nts rate paid on the FHLB borrowings during 2022 was 4.02%. The Company did not have any short-term FHLB borrowings during 2021. The Company did not borrow any long-term funds from the FHLB during 2022 or 2021. Liquidity and Capital Resources Liquidity Management Liquidity is managed within the Company in order to satisfy cash flow requirements of deposit and borrowing customers while at the same time meeting its own cash flow needs. The Company has taken numerous steps to address liquidity risk and has developed a variety of liquidity sources which it believes will provide the necessary funds for future growth. The Company manages its liquidity position through a variety of sources including: • A portfolio of liquid assets including marketable investment securities and overnight investments, • A large customer deposit base and limited exposure to large, volatile certificates of deposit, • Lower long-term borrowings that might place demands on Company cash flow, • Relatively low loan to deposit ratio promoting strong liquidity, • Excellent debt ratings from both Standard & Poor’s and Moody’s national rating services, and • Available borrowing capacity from outside sources. The Company’s most liquid assets include available for sale debt securities, federal funds sold, balances at the Federal Reserve Bank, and securities purchased under agreements to resell. At December 31, 2022 and 2021, such assets were as follows: (In thousands) 2022 2021 Available for sale debt securities $ 12,238,316 $ 14,450,027 Federal funds sold 49,505 2,800 Securities purchased under agreements to resell 825,000 1,625,000 Balances at the Federal Reserve Bank 389,140 3,971,217 Total $ 13,501,961 $ 20,049,044 There were $49.5 million federal funds sold at December 31, 2022, which are funds lent to the Company’s correspondent bank customers with overnight maturities. Resale agreements, maturing through 2025, totaled $825.0 million at December 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 $869.6 million in fair value at December 31, 2022. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $389.1 million at December 31, 2022. The fair value of the available for sale debt portfolio was $12.2 billion at December 31, 2022 and included an unrealized net loss of $1.5 billion. The total net unrealized loss included net loss of $1.2 billion on mortgage-backed and asset-backed securities, $197.9 million on state and municipal obligations, and $43.4 million on U.S. government and federal agency obligations. Approximately $2.4 billion of the available for sale debt portfolio is expected to mature or pay down during 2023, and these funds offer substantial resources to meet either 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. At December 31, 2022 and 2021, total investment securities pledged for these purposes were as follows: 47 Table of Conte nts (In thousands) 2022 2021 Investment securities pledged for the purpose of securing: Federal Reserve Bank borrowings $ 11,469 $ 17,465 FHLB borrowings and letters of credit 1,817 3,218 Repurchase agreements * 2,950,240 3,475,589 Other deposits 1,772,974 2,897,576 Total pledged securities 4,736,500 6,393,848 Unpledged and available for pledging 6,545,695 6,913,721 Ineligible for pledging 956,121 1,142,458 Total available for sale debt securities, at fair value $ 12,238,316 $ 14,450,027 * Includes securities pledged for collateral swaps, as discussed in Note 20 to the consolidated financial statements The average loans to deposits ratio is a measure of a bank's liquidity, and the Company’s average loans to deposits ratio was 55.4% for the year ended December 31, 2022. Core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts, totaled $25.2 billion and represented 96.2% of the Company’s total deposits at December 31, 2022. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company promoting long lasting relationships and stable funding sources. Core deposits decreased $3.2 billion at year end 2022 compared to year end 2021, primarily due to decreases in commercial and wealth management deposits of $2.0 billion and $820 million, respectively. While the Company considers core consumer and wealth management deposits less volatile, corporate deposits could decline if interest rates increase significantly, encouraging corporate customers to increase investing activities, or if the economy declines and companies experience lower cash inflows, reducing deposit balances. If these corporate deposits decline, the Company's funding needs can be met by liquidity supplied by investment security maturities and pay downs expected to total $2.4 billion over the next year, as noted above. In addition, as shown in the table of collateral available for future advances below, the Company has borrowing capacity of $2.1 billion through advances from the FHLB and the Federal Reserve. (In thousands) 2022 2021 Core deposit base: Non-interest bearing $ 10,066,356 $ 11,772,374 Interest checking 1,854,336 3,227,822 Savings and money market 13,272,645 13,370,263 Total $ 25,193,337 $ 28,370,459 Certificates of deposit of $100,000 or greater totaled $607 million at December 31, 2022. These deposits are normally considered more volatile and higher costing, and comprised 2.3% of total deposits at December 31, 2022. 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) 2022 2021 Borrowings: Federal funds purchased $ 159,860 $ 43,385 Securities sold under agreements to repurchase 2,681,874 2,979,582 Other debt 9,672 12,560 Total $ 2,851,406 $ 3,035,527 Federal funds purchased, which totaled $159.9 million at December 31, 2022, are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Retail repurchase agreements are offered to customers wishing to earn interest in highly liquid balances and are used by the Company as a funding source considered to be stable, but short-term in nature. Repurchase agreements are collateralized by securities in the Company’s investment portfolio. Total repurchase agreements at December 31, 2022 were comprised of non-insured customer funds totaling $2.7 billion, and securities pledged for these retail agreements totaled $2.7 billion. 48 Table of Conte nts 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. Additionally, 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 December 31, 2022. December 31, 2022 (In thousands) FHLB Federal Reserve Total Total collateral value established by FHLB and FRB $ 1,855,080 $ 953,083 $ 2,808,163 Letters of credit issued (678,215) — (678,215) Available for future advances $ 1,176,865 $ 953,083 $ 2,129,948 The Company receives outside ratings from both Standard & Poor’s and Moody’s on both the consolidated company and its subsidiary bank, Commerce Bank. These ratings are as follows: 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 Company considers these ratings to be indications of a sound capital base and strong liquidity and believes that these ratings would help ensure the ready marketability of its commercial paper, should the need arise. No commercial paper has been outstanding during the past ten years. The Company has no subordinated or hybrid debt instruments which would affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that, through its Capital Markets Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit, privately-placed corporate notes or other forms of debt. The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash equivalents and restricted cash of $3.4 billion in 2022, as reported in the consolidated statements of cash flows. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $559.4 million and has historically been a stable source of funds. Investing activities provided cash of $242.3 million. Sales and maturities proceeds (net of purchases) of investment securities provided cash of $650.4 million, repayments of securities purchased under agreements to resell (net of securities purchased under agreements to resell) provided cash of $800.0 million, and a net increase in the loan portfolio used cash of $1.1 billion. Investing activities are somewhat unique to financial institutions in that, while large sums of cash flow are normally used to fund growth in investment securities, loans, or other bank assets, they are normally dependent on the financing activities described below. During 2022, financing activities used cash of $4.2 billion. This decrease in cash was largely driven by a decline in deposits, which used cash of $3.7 billion. Federal funds purchases and short-term securities sold under agreements to repurchase used cash in the amount of $181.2 million. The Company paid cash dividends of $127.5 million on common stock, and treasury stock purchases used cash of $186.6 million during 2022. Future short-term liquidity needs for daily operations are not expected to vary significantly, and the Company believes it maintains adequate liquidity to meet these cash flows. 49 Table of Conte nts Cash outflows resulting from the Company’s transactions in its common and preferred stock were as follows: (In millions) 2022 2021 2020 Purchases of treasury stock $ 186.6 $ 129.4 $ 54.2 Common cash dividends paid 127.5 122.7 120.8 Preferred stock redemption* — — 150.0 Preferred cash dividends paid — — 6.8 Cash used $ 314.1 $ 252.1 $ 331.8 * The period ended December 31, 2020 includes $5.2 million of excess redemption costs over the book value of the preferred stock. This excess payment was considered a dividend. The Parent faces unique liquidity constraints due to legal limitations on its ability to borrow funds from its bank subsidiary. The Parent obtains funding to meet its obligations from two main sources: dividends received from bank and non-bank subsidiaries (within regulatory limitations) and management fees charged to subsidiaries as reimbursement for services provided by the Parent, as presented below: (In millions) 2022 2021 2020 Dividends received from subsidiaries $ 300.0 $ 340.0 $ 210.0 Management fees 38.6 36.3 33.5 Total $ 338.6 $ 376.3 $ 243.5 These sources of funds are used mainly to pay cash dividends on outstanding stock, pay general operating expenses, and purchase treasury stock. At December 31, 2022, the Parent’s investment securities totaled $16.3 million at fair value, consisting mainly of corporate bonds and preferred stock. To support its various funding commitments, the Parent maintains a $20.0 million line of credit with its subsidiary bank. There were no borrowings outstanding under the line during 2022 or 2021. Company senior management is responsible for measuring and monitoring the liquidity profile of the organization with oversight by the Company’s Asset/Liability Committee. This is done through a series of controls, including a written Contingency Funding Policy and risk monitoring procedures, which include daily, weekly and monthly reporting. In addition, the Company prepares forecasts to project changes in the balance sheet affecting liquidity and to allow the Company to better plan for forecasted changes. Material Cash Requirements, Contractual Obligations, Commitments, and Off-Balance Sheet Arrangements The Company's material cash requirements include commitments for contractual obligations (both short-term and long-term), commitments to extend credit, and off-balance sheet arrangements. The Company's material cash requirements for the next 12 months are primarily to fund loan growth. Additionally, the Company will utilize cash to fund deposit maturities and withdrawals that may occur in the next 12 months. Other contractual obligations, purchase commitments, lease obligations, and unfunded commitments may require cash payments by the Company within the next 12 months, and these, along with longer-term obligations, are discussed below. A table summarizing contractual cash obligations of the Company at December 31, 2022, and the expected timing of these payments follows: Payments Due by Period (In thousands) In One Year or Less After One Year Through Three Years After Three Years Through Five Years After Five Years Total Operating lease obligations $ 6,430 $ 8,248 $ 5,241 $ 14,370 $ 34,289 Purchase obligations 234,955 413,217 125,675 128,957 902,804 Certificates of Deposit* 726,984 232,118 34,919 82 994,103 Total $ 968,369 $ 653,583 $ 165,835 $ 143,409 $ 1,931,196 *Includes principal payments only. In the normal course of business, various commitments and contingent liabilities arise that are not required to be recorded on the balance sheet. The most significant of these are loan commitments totaling $14.3 billion (including approximately $5.2 billion in unused, approved credit card lines) and the contractual amount of standby letters of credit totaling $555.9 million at 50 Table of Conte nts December 31, 2022. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. Management does not anticipate any material losses arising from commitments or contingent liabilities and believes there are no material commitments to extend credit that represent risks of an unusual nature. The Company funds a defined benefit pension plan for a portion of its employees. Under the funding policy for the plan, contributions are made as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. No contributions to the defined benefit plan were made in 2022, 2021 or 2020, and the Company is not required nor does it expect to make a contribution in 2023. The Company has investments in low-income housing partnerships generally within the areas it serves. These partnerships supply funds for the construction and operation of apartment complexes that provide affordable housing to that segment of the population with lower family income. If these developments successfully attract a specified percentage of residents falling in that lower income range, federal (and sometimes state) income tax credits are made available to the partners. The tax credits are normally recognized over ten years, and they play an important part in the anticipated yield from these investments. In order to continue receiving the tax credits each year over the life of the partnership, the low-income residency targets must be maintained. Under the terms of the partnership agreements, the Company has a commitment to fund a specified amount that will be due in installments over the life of the agreements, which ranges from 3 to 18 years. At December 31, 2022, the investments totaled $59.9 million and are recorded as other assets in the Company’s consolidated balance sheet. Unfunded commitments, which are recorded as liabilities, amounted to $38.8 million at December 31, 2022. 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. As of December 31, 2022, the Company has made payments totaling $94.0 million. While the Company intends to occupy a portion of the office building for executive offices, a 15 year lease 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 for a profit or retained for use by the Company. During 2022, purchases and sales of tax credits amounted to $112.7 million and $126.9 million, respectively. Income from the sales of tax credits were $5.4 million, $4.5 million and $4.2 million in 2022, 2021 and 2020, respectively. At December 31, 2022, the Company had outstanding purchase commitments totaling $121.8 million that it expects to fund in 2023. These commitments, along with the commitments for the next five years, are included in the table above. 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. 51 Table of Conte nts Capital Management Under Basel III capital guidelines, at December 31, 2022 and 2021, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table. (Dollars in thousands) 2022 2021 Minimum Ratios under Capital Adequacy Guidelines Minimum Ratios for Well-Capitalized Banks* Risk-adjusted assets $ 24,178,423 $ 22,483,748 Tier I common risk-based capital 3,417,223 3,225,044 Tier I risk-based capital 3,417,223 3,225,044 Total risk-based capital 3,600,920 3,399,880 Tier I common risk-based capital ratio 14.13 % 14.34 % 7.00 % 6.50 % Tier I risk-based capital ratio 14.13 14.34 8.50 8.00 Total risk-based capital ratio 14.89 15.12 10.50 10.00 Tier I leverage ratio 10.34 9.13 4.00 5.00 Tangible common equity to tangible assets 7.32 9.01 Dividend payout ratio 26.10 23.12 * 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 adopted CECL (ASU 2016-13) during the 2020 calendar year the option to delay recognizing the estimated impact on regulatory capital until after a two year deferral period, followed by a three year transition period. In connection with the adoption of CECL on January 1, 2020, the Company has 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 was required to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. The Company maintains a treasury stock buyback program under authorizations by its Board of Directors and periodically purchases stock in the open market. During 2021, the Company purchased 1.8 million shares, and during 2022 the Company purchased 2.7 million shares. At December 31, 2022, 3.1 million shares remained available for purchase under the current Board authorization. The Company’s common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital levels and alternative investment options. Per share cash dividends paid by the Company increased 6.1% in 2022 compared with 2021, and the Company increased its first quarter 2023 cash dividend 7.1%, making 2023 the Company's 55th consecutive year of regular cash dividend increases. The Company also distributed its 29th consecutive annual 5% stock dividend in December 2022. On September 1, 2020, the Company redeemed all 6,000 outstanding shares of its 6.00% Series B Non-Cumulative Perpetual Preferred Stock and the corresponding depositary shares representing fractional interests in the Series B Preferred Stock at a redemption price of $25 per depositary share (equivalent to $1,000 per share of preferred stock). Regular dividends on the outstanding shares of the Series B Preferred Stock were paid separately on September 1, 2020 to holders of record as of the close of business on August 14, 2020, in the customary manner. On and after September 1, 2020, all dividends on the shares of Series B Preferred Stock ceased to accrue. 52 Table of Conte nts Interest Rate Sensitivity The Company’s Asset/Liability Management Committee (ALCO) measures and manages the Company’s interest rate risk on a monthly basis to identify trends and establish strategies to maintain stability in net interest income throughout various rate environments. Analytical modeling techniques provide management insight into the Company’s exposure to changing rates. These techniques include net interest income simulations and market value analysis. Management has set guidelines specifying acceptable limits within which net interest income and market value may change under various rate change scenarios. The Company’s main interest rate measurement tool, income simulation, projects net interest income under various rate change scenarios in order to quantify the magnitude and timing of potential rate-related changes. Income simulations are able to capture option risks within the balance sheet where expected cash flows may be altered under various rate environments. Modeled rate movements include “shocks, ramps and twists.” Shocks are intended to capture interest rate risk under extreme conditions by immediately shifting rates up and down, while ramps measure the impact of gradual changes and twists measure yield curve risk. The size of the balance sheet is assumed to remain constant so that results are not influenced by growth predictions. The Company also employs a sophisticated simulation technique known as a stochastic income simulation. This technique allows management to see a range of results from hundreds of income simulations. The stochastic simulation creates a vector of potential rate paths around the market’s best guess (forward rates) concerning the future path of interest rates and allows rates to randomly follow paths throughout the vector. This allows for the modeling of non-biased rate forecasts around the market consensus. Results give management insight into a likely range of rate-related risk as well as worst and best-case rate scenarios. Additionally, the Company uses market value analyses to help identify longer-term risks that may reside on the balance sheet. This is considered a secondary risk measurement tool by management. The Company measures the market value of equity as the net present value of all asset and liability cash flows discounted along the current swap curve plus appropriate market risk spreads. It is the change in the market value of equity under different rate environments, or effective duration, that gives insight into the magnitude of risk to future earnings due to rate changes. Market value analyses also help management understand the price sensitivity of non-marketable bank products under different rate environments. 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 current balance sheet is held constant. The sensitivity of deposit balances to changes in rates is particularly difficult to estimate in 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 greater 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 for monitoring interest rate risk. 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 December 31, 2022 September 30, 2022 (Dollars in millions) $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit Attrition $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit Attrition 300 basis points rising $ (0.5) (.05) % $ — $ 3.3 .32 % $ — 200 basis points rising 2.0 .19 — 7.7 .75 — 100 basis points rising 4.1 .38 — 9.9 .97 — 100 basis points falling (24.0) (2.2) — (28.5) (2.80) — 200 basis points falling (52.6) (4.82) — (62.5) (6.14) — 300 basis points falling (84.9) (7.78) — (101.1) (9.94) — 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. This is mainly due to an increase in the Federal funds rate, which puts upward pressure on deposit 53 Table of Conte nts rates in the rising rate scenarios and deposit rates have more room to fall in falling rate scenarios. Deposits are held constant for this simulation in both the current and previous quarters. Simulation B December 31, 2022 September 30, 2022 (Dollars in millions) $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit Attrition* $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit Attrition 300 basis points rising $ (17.9) (1.71) % $ (216.7) $ (49.4) (5.06) % $ (848.9) 200 basis points rising (11.4) (1.09) (180.4) (34.5) (3.54) (716.2) 100 basis points rising (5.0) (.48) (136.6) (14.0) (1.43) (405.7) 100 basis points falling 3.6 .34 539.3 (6.0) (.62) 403.2 200 basis points falling (15.2) (1.45) 761.0 (26.5) (2.72) 849.4 300 basis points falling (45.6) (4.36) 792.0 (58.7) (6.02) 1,446.4 * Compared to the flat rate scenario In Simulation B, the assumed levels of deposit attrition were modeled to capture the results of a shrinking balance sheet due to the potential loss of surge deposits. Under this Simulation, in the three rising rate scenarios and three falling rate scenarios, interest rate risk is less liability sensitive than the previous quarter, which primarily resulted from a decrease in surge deposits and changes in surge deposit run-off. In the three falling rate scenarios, interest rate risk was also impacted by higher non-maturity deposit rates, which increased during the current quarter and now have more room to fall. 54 Table of Conte nts Derivative Financial Instruments The Company maintains an overall interest rate risk management strategy that permits the use of derivative instruments to modify exposure to interest rate risk. Such instruments include interest rate swaps, interest rate floors, interest rate caps, credit risk participation agreements, mortgage loan commitments, forward sale contracts, and forward to-be-announced (TBA) contracts. The Company’s interest rate risk management strategy includes the ability to modify the re-pricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. In addition to using derivatives to manage interest rate risk, the Company enters into foreign exchange derivative instruments as an accommodation to customers and offsets the related foreign exchange risk by entering into offsetting third-party forward contracts with approved, reputable counterparties. This trading activity is managed within a policy of specific controls and limits. In all of these contracts, the Company is exposed to credit risk in the event of nonperformance by counterparties, who may be bank customers or other financial institutions. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures. Because the Company generally only enters into transactions with high quality counterparties, there have been no losses associated with counterparty nonperformance on derivative financial instruments. The following table summarizes the notional amounts and estimated fair values of the Company’s derivative instruments at December 31, 2022 and 2021. Notional amount, along with the other terms of the derivative, is used to determine the amounts to be exchanged between the counterparties. Because the notional amount does not represent amounts exchanged by the parties, it is not a measure of loss exposure related to the use of derivatives nor of exposure to liquidity risk. All of these derivative instruments utilized by the Company are further discussed in Note 19 on Derivative Instruments. 2022 2021 (In thousands) Notional Amount Positive Fair Value Negative Fair Value Notional Amount Positive Fair Value Negative Fair Value Interest rate swaps $ 1,981,821 $ 23,894 $ (51,742) $ 2,229,419 $ 40,752 $ (11,606) Interest rate floors 1,000,000 33,371 — — — — Interest rate caps 152,784 2,705 (2,705) 152,058 147 (147) Credit risk participation agreements 579,925 34 (119) 485,633 84 (277) Foreign exchange contracts 27,991 488 (418) 5,119 77 (45) Mortgage loan commitments — — — 21,787 764 — Mortgage loan forward sale contracts — — — 1,165 5 (1) Forward TBA contracts — — — 21,000 13 (25) Total at December 31 $ 3,742,521 $ 60,492 $ (54,984) $ 2,916,181 $ 41,842 $ (12,101) Operating Segments The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments. The results are determined based on the Company’s management accounting process, which assigns balance sheet and income statement items to each responsible segment. These segments are defined by customer base and product type. The management process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Each segment is managed by executives who, in conjunction with the Chief Executive Officer, make strategic business decisions regarding that segment. The three reportable operating segments are Consumer, Commercial, and Wealth. Additional information is presented in Note 13 on Segments in the consolidated financial statements. The Company uses a funds transfer pricing method to value funds used (e.g., loans, fixed assets, cash, etc.) and funds provided (deposits, borrowings, and equity) by the business segments and their components. This process assigns a specific value to each new source or use of funds with a maturity, based on current swap rates, thus determining an interest spread at the time of the transaction. Non-maturity assets and liabilities are valued using weighted average pools. The funds transfer pricing process attempts to remove interest rate risk from valuation, allowing management to compare profitability under various rate environments. The Company also assigns loan charge-offs and recoveries (labeled in the table below as “provision for credit losses”) directly to each operating segment instead of allocating an estimated credit loss provision. The operating segments also include a number of allocations of income and expense from various support and overhead centers within the Company. 55 Table of Conte nts The table below is a summary of segment pre-tax income results for the past three years. (Dollars in thousands) Consumer Commercial Wealth Segment Totals Other/Elimination Consolidated Totals Year ended December 31, 2022: Net interest income $ 339,080 $ 452,686 $ 74,416 $ 866,182 $ 76,003 $ 942,185 Provision for credit losses (17,872) (1,196) (8) (19,076) (8,995) (28,071) Non-interest income 116,030 224,890 213,388 554,308 (7,773) 546,535 Investment securities gains, net — — — — 20,506 20,506 Non-interest expense (300,566) (365,276) (144,914) (810,756) (38,021) (848,777) Income before income taxes $ 136,672 $ 311,104 $ 142,882 $ 590,658 $ 41,720 $ 632,378 Year ended December 31, 2021: Net interest income $ 319,439 $ 453,692 $ 71,522 $ 844,653 $ (9,229) $ 835,424 Provision for loan losses (23,249) 4,845 (52) (18,456) 84,782 66,326 Non-interest income 147,273 211,048 213,617 571,938 (11,545) 560,393 Investment securities gains, net — — — — 30,059 30,059 Non-interest expense (293,504) (329,313) (136,356) (759,173) (46,728) (805,901) Income before income taxes $ 149,959 $ 340,272 $ 148,731 $ 638,962 $ 47,339 $ 686,301 2022 vs 2021 Decrease in income before income taxes: Amount $ (13,287) $ (29,168) $ (5,849) $ (48,304) $ (5,619) $ (53,923) Percent (8.9 %) (8.6 %) (3.9 %) (7.6 %) (11.9 %) (7.9 %) Year ended December 31, 2020: Net interest income $ 321,031 $ 414,724 $ 57,925 $ 793,680 $ 36,167 $ 829,847 Provision for loan losses (31,220) (3,724) 12 (34,932) (102,258) (137,190) Non-interest income 148,586 194,505 188,942 532,033 (26,166) 505,867 Investment securities gains, net — — — — 11,032 11,032 Non-interest expense (297,790) (316,004) (124,964) (738,758) (29,620) (768,378) Income before income taxes $ 140,607 $ 289,501 $ 121,915 $ 552,023 $ (110,845) $ 441,178 2021 vs 2020 Increase in income before income taxes: Amount $ 9,352 $ 50,771 $ 26,816 $ 86,939 $ 158,184 $ 245,123 Percent 6.7 % 17.5 % 22.0 % 15.7 % 142.7 % 55.6 % Consumer The Consumer segment includes consumer deposits, consumer finance, and consumer debit and credit cards. During 2022, income before income taxes for the Consumer segment decreased $13.3 million, or 8.9%, compared to 2021. This decrease was due to a decline in non-interest income of $31.2 million, or 21.2%, and higher non-interest expense of $7.1 million, or 2.4%. These decreases to income were partly offset by growth in net interest income of $19.6 million, or 6.1%, and a decrease in the provision for credit losses of $5.4 million, or 23.1%. Net interest income increased due to a $19.0 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios. Non-interest income decreased mainly due to declines of $24.7 million in mortgage banking revenue and $4.0 million in overdraft and return item fees. Non-interest expense increased over the prior year mainly due to higher occupancy expense, insurance expense and allocated service and support costs (mainly bank card fraud operations and information technology), partly offset by lower allocated service costs for branch employees and mortgage operations. The provision for credit losses totaled $17.9 million, a $5.4 million decrease from the prior year, which resulted mainly from lower credit card loan net charge-offs, slightly offset by higher consumer loan net charge-offs. Total average loans in this segment decreased $95.5 million, or 5.0%, in 2022 compared to 2021 mainly due to declines in consumer credit card and auto loans. Average deposits increased $559.8 million, or 4.4%, over the prior year, resulting from growth in personal demand, savings and interest checking and money market deposit account balances. 56 Table of Conte nts During 2021, income before income taxes for the Consumer segment increased $9.3 million, or 6.7%, compared to 2020. This increase was due to a decrease in non-interest expense of $4.3 million, or 1.4%, and a decrease in the provision for credit losses of $8.0 million. These increases to income were partly offset by a $1.6 million, or .5%, decrease in net interest income and a $1.3 million, or .9%, decrease to non-interest income. Net interest income decreased due to a $21.9 million decline in loan interest income, partly offset by a $9.1 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios, and lower deposit interest expense of $11.2 million. Non-interest income decreased mainly due to a decline in mortgage banking revenue, partly offset by growth in net credit and debit card fees (mainly higher interchange fees, partly offset by higher credit card rewards expense) and check sales and wire fees. Non-interest expense decreased from 2020 mainly due to lower salaries and benefits expense, occupancy expense, allocated servicing costs for mortgage operations and a reduction in impairment expense on mortgage servicing rights. These decreases were partly offset by higher marketing expense and higher allocated costs for information technology. The provision for credit losses totaled $23.2 million, an $8.0 million decrease from 2020, which resulted mainly from lower net charge-offs on consumer credit card and consumer loans. Total average loans in this segment decreased $178.3 million, or 8.5%, in 2021 compared to 2020 mainly due to declines in consumer credit card, auto and fixed and revolving home equity loans. Average deposits increased $1.6 billion, or 13.8%, over 2020, resulting from growth in personal demand, savings and interest checking and money market deposit account balances. Commercial The Commercial segment provides lending (including the Small Business Banking product line within the branch network), leasing, international services, and business, government deposit, and related commercial cash management services, as well as merchant and commercial bank card products. The segment includes the Capital Markets Group, which sells fixed-income securities to correspondent banks, corporations, public institutions, municipalities, and individuals and also provides securities safekeeping and bond accounting services. Pre-tax income for 2022 decreased $29.2 million, or 8.6%, compared to 2021, mainly due to increases in non-interest expense and the provision for credit losses, partly offset by an increase in non-interest income. Net interest income decreased $1.0 million, or .2%, due to a $21.4 million decrease in net allocated funding credits assigned to the Commercial segment's loan and deposit portfolios, coupled with higher interest expense on customer repurchase agreements and deposits of $22.6 million and 18.5 million, respectively. The decreases were partly offset by a $61.2 million increase in loan interest income. The provision for credit losses increased $6.0 million due to net charge-offs recorded on business loans in 2022 compared to net recoveries recorded in the prior year. Non-interest income increased $13.8 million, or 6.6%, over 2021 due to higher net bank card fees (mainly corporate card), deposit account fees (mainly corporate cash management fees), and higher cash sweep commissions. These increases were partly offset by lower capital market fees. Non-interest expense increased $36.0 million, or 10.9%, during 2022, mainly due to higher salaries and benefits expense, data processing and software expense, travel and entertainment expense, and allocated service and support costs (mainly bank operations expense, branch employee expense, and commercial banking expense). Average segment loans decreased $216.9 million, or 2.1%, compared to 2021, mainly due to a decline in business loans, partly offset by increases in business real estate and construction loans. Average deposits decreased $49.4 million, or .4%, mainly due to declines in business demand and certificate of deposit account balances, offset by an increase in interest checking and money market deposit account balances. Pre-tax income for 2021 increased $50.8 million, or 17.5%, compared to 2020, mainly due to increases in net interest income and non-interest income and a decline in the provision for credit losses, partly offset by an increase in non-interest expense. Net interest income increased $39.0 million, or 9.4%, due to higher net allocated funding credits of $56.9 million and lower interest expense of $12.9 million on deposits and customer repurchase agreements, partly offset by a decrease of $30.9 million in loan interest income. The provision for credit losses decreased $8.6 million due to recoveries recorded on business loans in 2021 compared to net charge-offs recorded 2020. Non-interest income increased $16.5 million, or 8.5%, over 2020 due to higher net bank card fees (mainly corporate card and merchant fees), deposit account fees (mainly corporate cash management fees), and higher interest rate swap fees. These increases were partly offset by lower cash sweep commissions. Non-interest expense increased $13.3 million, or 4.2%, during 2021, mainly due to higher salaries and benefits expense (mainly incentive compensation), data processing and software expense, allocated support costs for information technology and commercial banking, and lower deferred origination costs. These increases were partly offset by lower allocated service costs (mainly lockbox). Average segment loans decreased $327.8 million, or 3.1%, compared to 2020, with the decline occurring in business loans (mainly PPP loans), partly offset by an increase in construction loans. Average deposits increased $2.1 billion, or 20.7%, mainly due to growth in business demand deposits. Wealth The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management services, brokerage services, and includes Private Banking accounts. At December 31, 2022, the Trust group managed investments with a market value of $37.3 billion and administered an additional $23.0 billion in non-managed assets. It also provides investment management services to The Commerce Funds, a series of mutual funds with $2.5 billion in total assets at 57 Table of Conte nts December 31, 2022. In 2022, pre-tax income for the Wealth segment was $142.9 million, compared to $148.7 million in 2021, a decrease of $5.8 million, or 3.9%. Net interest income increased $2.9 million, or 4.0%, mainly due to a $16.4 million increase in loan interest income, partly offset by a $12.5 million decrease in net allocated funding credits assigned to the Wealth segment's loan and deposit portfolios and a $1.0 million increase in deposit interest expense. Non-interest income decreased $229 thousand, or .1%, from the prior year due to higher cash sweep commissions and brokerage fees, partly offset by lower mortgage banking revenue and trust fees. Non-interest expense increased $8.6 million, or 6.3%, resulting from higher salaries and benefits expense, travel and entertainment expense, and marketing expense. The provision for credit losses decreased $44 thousand, mainly due to net recoveries on revolving home equity loans. Average assets increased $253.3 million, or 16.0%, during 2022 mainly due to higher personal real estate and consumer loan balances. Average deposits decreased $161.0 million, or 5.4%, due to a decline in interest checking and money market deposit account balances. In 2021, pre-tax income for the Wealth segment was $148.7 million, compared to $121.9 million in 2020, an increase of $26.8 million, or 22.0%. Net interest income increased $13.6 million, or 23.5%, due to an $11.0 million increase in net allocated funding credits and lower deposit interest expense of $4.0 million, slightly offset by a decline in loan interest income of $1.3 million. Non-interest income increased $24.7 million, or 13.1%, over 2020 largely due to higher private client and institutional trust fees and brokerage fees, partly offset by lower cash sweep commissions. Non-interest expense increased $11.4 million, or 9.1%, resulting from higher salaries expense (mainly incentive compensation) and higher allocated support costs for information technology. The provision for credit losses increased $64 thousand, mainly due to higher net charge-offs on revolving home equity loans. Average assets increased $178.3 million, or 12.7%, during 2021 mainly due to higher personal real estate and consumer loan balances. Average deposits increased $694.7 million, or 30.6%, due to growth in business demand and interest checking and money market account deposit balances. 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 certain administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. In accordance with the Company's transfer pricing procedures, the difference between the total provision and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. In 2022, the pre-tax net income in this category was $41.7 million, compared to $47.3 million in 2021. This decrease was mainly due to an increase in the provision for credit losses of $93.8 million and an $8.7 million increase in non-interest expense, partly offset by increases of $85.2 million in net interest income and $3.8 million in non-interest income. Unallocated securities gains were $20.5 million in 2022, compared to securities gains of $30.1 million in 2021. The increase in the unallocated provision for credit losses of $93.8 million was primarily driven by an increase in the allowance for credit losses on loans and the liability for unfunded lending commitments, which are not allocated to segments for management reporting purposes. Net charge-off are allocated to segments when incurred for management reporting purposes. For the year ended December 31, 2022, the Company's provision for credit losses on unfunded lending commitments, which is not allocated to the segments for management reporting, was $8.9 million, compared to a benefit of $14.1 million in 2021. Additionally, the provision for credit losses on loans was $92 thousand in excess of net charge-offs in 2022, while the provision was $70.8 million lower than net charge-offs in 2021. 58 Table of Conte nts 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 new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if they reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Further, the guidance applies to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The expedients and exceptions provided by the new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated for effectiveness after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which extended the sunset date under Topic 848 to December 31, 2024. The change is to align the temporary accounting relief guidance with the expected cessation date of LIBOR, which was postponed by administrators in 2021 to June 2023, a year after the current sunset date of ASU 2020-04. 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 LIBOR-based loans must be converted to an alternative index by June 30, 2023, as LIBOR will no longer be published after June 30, 2023. All of the Company's 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 of the 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. The Company plans to finish transitioning the impacted loans by spring of 2023. Credit Losses The FASB issued ASU 2022-02, "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. Aside from additional disclosure requirements, the Company expects no material impact to its consolidated financial statements from adoption of this ASU. Corporate Governance The Company has adopted a number of corporate governance measures. These include corporate governance guidelines, a code of ethics that applies to its senior financial officers and the charters for its audit and risk committee, its committee on compensation and human resources, and its committee on governance/directors. This information is available on the Company’s investor relations website at investor.commercebank.com/overview/corporate-governance. 59 Table of Conte nts AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS Years Ended December 31 2022 2021 2020 (Dollars in thousands) Average Balance Interest Income/ Expense Average Rates Earned/Paid Average Balance Interest Income/ Expense Average Rates Earned/Paid Average Balance Interest Income/ Expense Average Rates Earned/Paid ASSETS Loans: (A) Business (B) $ 5,376,584 $ 198,238 3.69 % $ 5,838,682 $ 186,968 3.20 % $ 6,387,410 $ 196,249 3.07 % Real estate – construction and land 1,229,977 61,893 5.03 1,144,741 40,702 3.56 956,999 38,619 4.04 Real estate – business 3,205,061 133,909 4.18 3,005,943 104,329 3.47 2,959,068 110,080 3.72 Real estate – personal 2,841,626 94,878 3.34 2,797,635 92,267 3.30 2,619,211 94,835 3.62 Consumer 2,075,781 84,044 4.05 2,009,577 76,361 3.80 1,967,133 86,096 4.38 Revolving home equity 280,242 12,625 4.51 286,064 9,823 3.43 334,866 12,405 3.70 Consumer credit card 547,071 64,832 11.85 577,411 64,274 11.13 668,810 78,704 11.77 Overdrafts 5,645 — — 4,335 — — 3,351 — — Total loans 15,561,987 650,419 4.18 15,664,388 574,724 3.67 15,896,848 616,988 3.88 Loans held for sale 7,754 637 8.22 21,524 880 4.09 18,685 860 4.60 Investment securities: U.S. government & federal agency obligations 1,097,935 41,095 3.74 796,043 32,888 4.13 780,903 17,369 2.22 Government-sponsored enterprise obligations 54,768 1,293 2.36 50,789 1,180 2.32 105,069 3,346 3.18 State & municipal obligations (B) 2,061,620 47,121 2.29 2,015,635 47,721 2.37 1,562,415 42,260 2.70 Mortgage-backed securities 6,979,862 135,920 1.95 6,985,897 95,175 1.36 5,733,398 109,834 1.92 Asset-backed securities 3,888,405 58,716 1.51 2,824,993 32,705 1.16 1,467,496 29,759 2.03 Other debt securities 606,661 11,811 1.95 603,720 12,556 2.08 444,489 10,846 2.44 Trading debt securities (B) 41,205 1,129 2.74 36,534 452 1.24 30,321 659 2.17 Equity securities (B) 9,492 2,578 27.16 6,809 2,223 32.65 4,206 2,030 48.26 Other securities (B) 203,953 21,103 10.35 171,322 18,924 11.05 133,391 8,732 6.55 Total investment securities 14,943,901 320,766 2.15 13,491,742 243,824 1.81 10,261,688 224,835 2.19 Federal funds sold 11,701 412 3.52 677 4 .59 278 3 1.08 Securities purchased under agreements to resell 1,495,956 22,647 1.51 1,275,837 37,377 2.93 849,998 40,647 4.78 Interest earning deposits with banks 1,362,863 15,098 1.11 2,420,533 3,202 .13 1,115,551 2,273 .20 Total interest earning assets 33,384,162 1,009,979 3.03 32,874,701 860,011 2.62 28,143,048 885,606 3.15 Allowance for credit losses on loans (141,341) (188,758) (196,942) Unrealized gain (loss) on debt securities (922,259) 198,722 292,898 Cash and due from banks 323,296 339,431 343,516 Premises and equipment - net 409,235 408,537 399,228 Other assets 552,224 531,102 634,949 Total assets $ 33,605,317 $ 34,163,735 $ 29,616,697 LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 1,583,983 740 .05 $ 1,450,495 1,129 .08 $ 1,123,413 1,053 .09 Interest checking and money market 14,475,089 24,359 .17 13,370,226 6,380 .05 11,539,717 16,798 .15 Certificates of deposit of less than $100,000 406,580 1,469 .36 478,371 1,158 .24 585,695 4,897 .84 Certificates of deposit of $100,000 and over 670,472 3,898 .58 1,244,757 2,577 .21 1,358,389 12,948 .95 Total interest bearing deposits 17,136,124 30,466 .18 16,543,849 11,244 .07 14,607,214 35,696 .24 Borrowings: Federal funds purchased 83,255 1,836 2.21 23,623 17 .07 126,203 794 .63 Securities sold under agreements to repurchase 2,356,024 24,022 1.02 2,311,214 1,629 .07 1,840,276 5,297 .29 Other borrowings (C) 46,459 1,840 3.96 808 5 .62 126,585 1,029 .81 Total borrowings 2,485,738 27,698 1.11 2,335,645 1,651 .07 2,093,064 7,120 .34 Total interest bearing liabilities 19,621,862 58,164 .30 % 18,879,494 12,895 .07 % 16,700,278 42,816 .26 % Non-interest bearing deposits 10,964,573 11,240,267 8,890,263 Other liabilities 198,002 591,459 715,033 Equity 2,820,880 3,452,515 3,311,123 Total liabilities and equity $ 33,605,317 $ 34,163,735 $ 29,616,697 Net interest margin (FTE) $ 951,815 $ 847,116 $ 842,790 Net yield on interest earning assets 2.85 % 2.58 % 2.99 % Percentage increase (decrease) in net interest margin (FTE) compared to the prior year 12.36 % .51 % .88 % (A) Loans on non-accrual status are included in the computation of average balances. Included in interest income above are loan fees and late charges, net of amortization of deferred loan origination fees and costs, which are immaterial. Credit card income from merchant discounts and net interchange fees are not included in loan income. E — A VERAGE RATES AND 60 Table of Conte nts YI Years Ended December 31 2019 2018 2017 Average Balance Interest Income/Expense Average Rates Earned/Paid Average Balance Interest Income/Expense Average Rates Earned/Paid Average Balance Interest Income/Expense Average Rates Earned/Paid Average Balance Five Year Compound Growth Rate $ 5,214,158 $ 202,308 3.88 % $ 4,963,029 $ 184,837 3.72 % $ 4,832,045 $ 154,681 3.20 % 2.16 % 909,367 49,702 5.47 967,320 49,440 5.11 881,879 37,315 4.23 6.88 2,859,008 127,635 4.46 2,737,820 117,516 4.29 2,694,620 102,009 3.79 3.53 2,178,716 85,604 3.93 2,093,802 80,365 3.84 2,019,674 75,267 3.73 7.07 1,930,883 92,414 4.79 2,010,826 89,074 4.43 2,036,393 81,065 3.98 .38 358,474 18,204 5.08 379,715 17,513 4.61 398,611 15,516 3.89 (6.80) 764,828 93,754 12.26 768,789 92,269 12.00 743,885 88,329 11.87 (5.96) 9,203 — — 4,778 — — 4,592 — — 4.22 14,224,637 669,621 4.71 13,926,079 631,014 4.53 13,611,699 554,182 4.07 2.71 18,577 1,209 6.51 19,493 1,298 6.66 17,452 1,000 5.73 (14.98) 851,124 20,968 2.46 921,759 21,720 2.36 914,961 19,697 2.15 3.71 191,406 4,557 2.38 308,520 6,098 1.98 452,422 7,321 1.62 (34.45) 1,220,958 38,362 3.14 1,410,700 42,867 3.04 1,720,723 62,073 3.61 3.68 4,594,576 123,806 2.69 4,203,625 111,686 2.66 3,784,602 89,623 2.37 13.02 1,372,574 37,478 2.73 1,455,690 34,223 2.35 2,083,611 36,757 1.76 13.29 333,105 9,017 2.71 340,458 8,912 2.62 330,365 8,410 2.55 12.93 29,450 886 3.01 24,731 759 3.07 21,929 583 2.66 13.45 4,547 1,792 39.41 26,459 11,816 44.66 60,772 2,283 3.76 (31.02) 134,255 8,466 6.31 114,438 12,412 10.85 98,564 10,507 10.66 15.65 8,731,995 245,332 2.81 8,806,380 250,493 2.84 9,467,949 237,254 2.51 9.56 2,034 55 2.70 27,026 519 1.92 18,518 230 1.24 (8.77) 741,089 15,898 2.15 696,438 15,881 2.28 688,147 15,440 2.24 16.80 316,299 6,698 2.12 319,948 6,233 1.95 207,269 2,223 1.07 45.74 24,034,631 938,813 3.91 23,795,364 905,438 3.81 24,011,034 810,329 3.37 6.81 (160,212) (158,791) (156,572) (2.03) 74,605 (113,068) 45,760 N.M. 370,709 360,732 361,414 (2.20) 380,350 343,636 345,639 3.44 513,442 438,362 424,333 5.41 $ 25,213,525 $ 24,666,235 $ 25,031,608 6.07 $ 918,896 1,021 .11 $ 867,150 973 .11 $ 819,558 981 .12 14.09 10,607,224 38,691 .36 10,817,169 26,830 .25 10,517,741 16,328 .16 6.60 610,807 6,368 1.04 603,137 3,215 .53 676,272 2,645 .39 (9.68) 1,396,760 26,945 1.93 1,114,825 14,658 1.31 1,404,960 10,859 .77 (13.75) 13,533,687 73,025 .54 13,402,281 45,676 .34 13,418,531 30,813 .23 5.01 247,126 5,332 2.16 82,179 1,582 1.93 164,156 1,600 .97 (12.70) 1,574,972 24,083 1.53 1,431,965 18,073 1.26 1,298,231 8,229 .63 12.66 43,919 952 2.17 1,747 45 2.58 87,696 3,086 3.52 (11.93) 1,866,017 30,367 1.63 1,515,891 19,700 1.30 1,550,083 12,915 .83 9.91 15,399,704 103,392 .67 % 14,918,172 65,376 .44 % 14,968,614 43,728 .29 % 5.56 6,376,204 6,728,971 7,176,255 8.85 360,587 247,520 250,510 (4.60) 3,077,030 2,771,572 2,636,229 1.36 $ 25,213,525 $ 24,666,235 $ 25,031,608 6.07 % $ 835,421 $ 840,062 $ 766,601 3.48 % 3.53 % 3.19 % (.55 %) 9.58 % 7.75 % (B) Interest income and yields are presented on a fully taxable-equivalent basis using a federal income tax rate of 21% in 2022, 2021, 2020, 2019 and 2018 and 35% in 2017. Loan interest income includes tax free loan income (categorized as business loan income) which includes tax equivalent adjustments of $4,126,000 in 2022, $4,176,000 in 2021, $4,916,000 in 2020, $6,282,000 in 2019, $5,931,000 in 2018, and $10,357,000 in 2017. Investment securities interest income includes tax equivalent adjustments of $6,874,000 in 2022, $7,546,000 in 2021, $8,042,000 in 2020, $7,845,000 in 2019, $10,306,000 in 2018, and $22,565,000 in 2017. These adjustments relate to state and municipal obligations, trading securities, equity securities, and other securities. (C) Interest expense of $1,370,000, $29,000 and $14,000, which was capitalized on construction projects in 2022, 2021, and 2020, respectively, is not deducted from the interest expense shown above. 61 Table of Conte nts QUARTERLY AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS Year ended December 31, 2022 Fourth Quarter Third Quarter Second Quarter First Quarter (Dollars in millions) Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid ASSETS Loans: Business (A) $ 5,478 4.68 % $ 5,318 3.94 % $ 5,384 3.16 % $ 5,324 2.93 % Real estate – construction and land 1,269 6.80 1,289 5.27 1,225 4.09 1,135 3.76 Real estate – business 3,301 5.15 3,258 4.40 3,164 3.70 3,095 3.38 Real estate – personal 2,887 3.45 2,844 3.36 2,826 3.27 2,809 3.28 Consumer 2,090 4.77 2,102 4.17 2,071 3.62 2,040 3.59 Revolving home equity 294 5.89 281 4.82 272 3.69 274 3.48 Consumer credit card 559 12.64 550 12.05 538 11.32 541 11.35 Overdrafts 7 — 4 — 6 — 5 — Total loans 15,885 5.03 15,646 4.37 15,486 3.72 15,223 3.54 Loans held for sale 7 10.09 7 8.80 8 8.14 9 6.48 Investment securities: U.S. government & federal agency obligations 1,056 2.01 1,113 4.51 1,119 4.93 1,104 3.42 Government-sponsored enterprise obligations 56 2.36 56 2.36 56 2.39 52 2.33 State & municipal obligations (A) 1,991 2.29 2,053 2.27 2,126 2.30 2,078 2.29 Mortgage-backed securities 6,606 1.88 6,848 1.93 7,158 1.99 7,317 1.98 Asset-backed securities 3,714 1.96 3,871 1.62 4,038 1.35 3,934 1.13 Other debt securities 561 1.89 587 1.93 643 1.97 636 2.00 Trading debt securities (A) 44 3.81 36 2.74 44 2.46 41 1.84 Equity securities (A) 10 28.44 9 27.11 9 26.90 9 26.00 Other securities (A) 219 6.67 209 7.09 195 22.38 192 5.91 Total investment securities 14,257 2.07 14,782 2.18 15,388 2.36 15,363 1.97 Federal funds sold 28 4.27 13 2.77 4 1.79 1 .39 Securities purchased under agreements to resell 1,174 2.36 1,379 1.72 1,704 1.03 1,734 1.24 Interest earning deposits with banks 640 3.69 980 2.25 1,249 .78 2,608 .18 Total interest earning assets 31,991 3.59 32,807 3.21 33,839 2.86 34,938 2.49 Allowance for credit losses on loans (143) (138) (135) (150) Unrealized loss on debt securities (1,582) (1,065) (851) (174) Cash and due from banks 327 311 315 340 Premises and equipment – net 419 409 402 407 Other assets 593 538 522 557 Total assets $ 31,605 $ 32,862 $ 34,092 $ 35,918 LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 1,567 .06 $ 1,596 .04 $ 1,610 .04 $ 1,563 .05 Interest checking and money market 13,694 .38 14,424 .20 14,846 .06 14,950 .04 Certificates of deposit under $100,000 388 .73 397 .41 412 .20 430 .13 Certificates of deposit $100,000 & over 597 1.42 578 .60 649 .29 862 .20 Total interest bearing deposits 16,246 .40 16,995 .21 17,517 .07 17,805 .05 Borrowings: Federal funds purchased 144 3.56 52 2.41 113 .79 23 .12 Securities sold under agreements to repurchase 2,260 2.29 2,200 1.37 2,258 .48 2,713 .10 Other borrowings 179 4.02 2 1.78 2 2.37 1 .53 Total borrowings 2,583 2.48 2,254 1.39 2,373 .50 2,737 .10 Total interest bearing liabilities 18,829 .69 % 19,249 .34 % 19,890 .12 % 20,542 .06 % Non-interest bearing deposits 10,361 10,758 11,210 11,545 Other liabilities 29 124 140 505 Equity 2,386 2,731 2,852 3,326 Total liabilities and equity $ 31,605 $ 32,862 $ 34,092 $ 35,918 Net interest margin (FTE) $ 257 $ 249 $ 235 $ 211 Net yield on interest earning assets 3.18 % 3.01 % 2.79 % 2.45 % (A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%. 62 Table of Conte nts — AVERAGE RATES AND YIELDS Year ended December 31, 2021 Fourth Quarter Third Quarter Second Quarter First Quarter (Dollars in millions) Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid ASSETS Loans: Business (A) $ 5,193 3.16 % $ 5,437 3.43 % $ 6,212 3.15 % $ 6,533 3.09 % Real estate – construction and land 1,228 3.61 1,169 3.51 1,088 3.56 1,092 3.54 Real estate – business 3,003 3.41 2,983 3.46 3,015 3.49 3,023 3.52 Real estate – personal 2,785 3.21 2,776 3.27 2,804 3.31 2,826 3.40 Consumer 2,044 3.65 2,041 3.71 2,005 3.84 1,947 4.02 Revolving home equity 276 3.47 282 3.46 287 3.43 299 3.38 Consumer credit card 559 11.06 566 11.29 576 11.22 609 10.97 Overdrafts 5 — 5 — 4 — 4 — Total loans 15,093 3.62 15,259 3.74 15,991 3.65 16,333 3.66 Loans held for sale 11 5.10 16 4.63 23 4.20 36 3.44 Investment securities: U.S. government & federal agency obligations 1,009 3.11 728 5.74 720 5.52 725 2.54 Government-sponsored enterprise obligations 51 2.30 51 2.30 51 2.33 51 2.36 State & municipal obligations (A) 2,096 2.26 2,040 2.35 1,967 2.41 1,959 2.46 Mortgage-backed securities 7,141 1.40 7,115 1.53 6,685 1.11 6,999 1.39 Asset-backed securities 3,515 1.03 3,028 1.08 2,654 1.25 2,086 1.39 Other debt securities 630 2.07 609 2.04 606 2.06 570 2.15 Trading debt securities (A) 46 1.54 32 1.01 35 1.19 32 1.08 Equity securities (A) 9 27.64 9 23.92 5 43.10 4 49.56 Other securities (A) 190 18.39 183 7.46 157 11.90 154 5.26 Total investment securities 14,687 1.82 13,795 1.89 12,880 1.78 12,580 1.72 Federal funds sold 1 .70 1 .50 1 .60 — — Securities purchased under agreements to resell 1,670 1.62 1,633 2.19 937 4.46 850 5.31 Interest earning deposits with banks 2,857 .15 2,603 .15 2,725 .11 1,480 .10 Total interest earning assets 34,319 2.47 33,307 2.62 32,557 2.64 31,279 2.76 Allowance for credit losses on loans (162) (172) (201) (221) Unrealized gain on debt securities 86 230 197 284 Cash and due from banks 345 329 329 355 Premises and equipment – net 420 409 404 401 Other assets 522 523 526 552 Total assets $ 35,530 $ 34,626 $ 33,812 $ 32,650 LIABILITIES AND EQUITY Interest bearing deposits: Savings $ 1,507 .08 $ 1,485 .08 $ 1,474 .08 $ 1,333 .08 Interest checking and money market 13,875 .04 13,343 .05 13,284 .05 12,971 .06 Certificates of deposit under $100,000 442 .14 464 .18 491 .27 517 .37 Certificates of deposit $100,000 & over 1,105 .14 1,290 .14 1,355 .20 1,230 .35 Total interest bearing deposits 16,929 .05 16,582 .06 16,604 .07 16,051 .09 Borrowings: Federal funds purchased 21 .11 14 .10 23 .05 37 .05 Securities sold under agreements to repurchase 2,620 .08 2,347 .08 2,143 .06 2,129 .06 Other borrowings 1 — — 1.14 1 .82 1 .98 Total borrowings 2,642 .08 2,361 .08 2,167 .06 2,167 .06 Total interest bearing liabilities 19,571 .06 % 18,943 .06 % 18,771 .07 % 18,218 .09 % Non-interest bearing deposits 11,919 11,475 11,109 10,439 Other liabilities 562 668 527 608 Equity 3,478 3,540 3,405 3,385 Total liabilities and equity $ 35,530 $ 34,626 $ 33,812 $ 32,650 Net interest margin (FTE) $ 210 $ 217 $ 211 $ 209 Net yield on interest earning assets 2.43 % 2.58 % 2.60 % 2.71 % (A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%. 63 Table of Conte nts SUMMARY OF QUARTERLY STATEMENTS OF INCOME Year ended December 31, 2022 For the Quarter Ended (In thousands, except per share data) 12/31/2022 9/30/2022 6/30/2022 3/31/2022 Interest income $ 286,377 $ 262,666 $ 238,154 $ 211,782 Interest expense (31,736) (16,293) (5,769) (2,996) Net interest income 254,641 246,373 232,385 208,786 Non-interest income 136,825 138,514 139,427 131,769 Investment securities gains, net 8,904 3,410 1,029 7,163 Salaries and employee benefits (138,458) (137,393) (142,243) (135,953) Other expense (78,282) (75,491) (71,262) (69,695) Provision for credit losses (15,477) (15,290) (7,162) 9,858 Income before income taxes 168,153 160,123 152,174 151,928 Income taxes (34,499) (33,936) (32,021) (31,902) Non-controlling interest (2,026) (3,364) (4,359) (1,872) Net income attributable to Commerce Bancshares, Inc. $ 131,628 $ 122,823 $ 115,794 $ 118,154 Net income per common share — basic* $ 1.05 $ .97 $ .92 $ .92 Net income per common share — diluted* $ 1.04 $ .97 $ .92 $ .92 Weighted average shares — basic* 124,311 124,840 125,987 126,341 Weighted average shares — diluted* 124,589 125,117 125,916 126,647 Year ended December 31, 2021 For the Quarter Ended (In thousands, except per share data) 12/31/2021 9/30/2021 6/30/2021 3/31/2021 Interest income $ 210,479 $ 216,981 $ 211,133 $ 209,697 Interest expense (2,822) (2,944) (3,151) (3,949) Net interest income 207,657 214,037 207,982 205,748 Non-interest income 147,699 137,506 139,143 136,045 Investment securities gains (losses), net (9,706) 13,108 16,804 9,853 Salaries and employee benefits (132,640) (132,824) (130,751) (129,033) Other expense (70,942) (78,796) (67,375) (63,540) Provision for credit losses 7,054 7,385 45,655 6,232 Income before income taxes 149,122 160,416 211,458 165,305 Income taxes (33,764) (34,662) (45,209) (32,076) Non-controlling interest (452) (3,193) (3,923) (2,257) Net income attributable to Commerce Bancshares, Inc. $ 114,906 $ 122,561 $ 162,326 $ 130,972 Net income per common share — basic* $ .90 $ .95 $ 1.26 $ 1.01 Net income per common share — diluted* $ .90 $ .95 $ 1.25 $ 1.01 Weighted average shares — basic* 127,012 127,709 128,070 128,176 Weighted average shares — diluted* 127,283 127,975 128,387 128,522 Year ended December 31, 2020 For the Quarter Ended (In thousands, except per share data) 12/31/2020 9/30/2020 6/30/2020 3/31/2020 Interest income $ 214,726 $ 223,114 $ 213,323 $ 221,485 Interest expense (4,963) (7,152) (10,266) (20,420) Net interest income 209,763 215,962 203,057 201,065 Non-interest income 135,117 129,572 117,515 123,663 Investment securities gains (losses), net 12,307 16,155 (4,129) (13,301) Salaries and employee benefits (129,983) (127,308) (126,759) (128,937) Other expense (66,327) (63,550) (60,753) (64,761) Provision for credit losses 4,403 (3,101) (80,539) (57,953) Income before income taxes 165,280 167,730 48,392 59,776 Income taxes (33,084) (34,375) (9,661) (10,173) Non-controlling interest (2,307) (907) 1,132 2,254 Net income attributable to Commerce Bancshares, Inc. $ 129,889 $ 132,448 $ 39,863 $ 51,857 Net income per common share — basic* $ 1.00 $ .97 $ .29 $ .38 Net income per common share — diluted* $ 1.00 $ .97 $ .29 $ .38 Weighted average shares — basic* 128,185 128,173 128,157 128,633 Weighted average shares — diluted* 128,450 128,380 128,377 128,932 * Restated for the 5% stock dividend distributed in 2022. 64 Table of Conte nts Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is disclosed within the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Commerce Bancshares, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Commerce Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 65 Table of Conte nts Assessment for credit losses related to loans collectively evaluated for impairment As discussed in Notes 1 and 2 to the consolidated financial statements, the allowance for credit losses related to loans evaluated on a collective basis (the December 31, 2022 collective ACL) was $148.0 million of a total allowance for credit losses of $150.1 million as of December 31, 2022. The allowance for credit losses on loans and leases is measured on a collective (pool) basis whereas loans are aggregated into pools based on similar risk characteristics. The Company estimates the collective ACL utilizing average historical loss rates, calculated using historical net charge-offs and outstanding loan balances during a lookback period for each pool. In certain 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 (forecast adjusted loss rate). 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. 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 allowance is further adjusted for certain qualitative factors not included in historical loss rates or the macroeconomic forecast, which include changes in portfolio composition and characteristics, underwriting practices, watchlist trends, or significant unique events or conditions. We identified the assessment of the December 31, 2022 collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment due to significant measurement uncertainty. Specifically, this assessment encompassed the evaluation of the conceptual soundness of the average historical loss model used to estimate the collective ACL, including the following key factors and assumptions (1) historical losses, (2) the reasonable and supportable forecast period, and (3) the development and evaluation of qualitative adjustments. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. The following are the primary procedures we performed to address the critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL estimates, including controls over the (1) development and approval of the collective ACL methodology, (2) validation of the collective ACL methodology and model, (3) identification and determination of the key factors and assumptions used to estimate the collective ACL, (4) development of qualitative adjustments, and (5) analysis of the collective ACL results, trends, and ratios. We evaluated the Company’s process to develop the collective ACL estimates by testing certain sources of data, factors, and assumptions, and considered the relevance and reliability of such data, factors, and assumptions. We evaluated whether the historical losses in the Company’s portfolio are representative of the credit characteristics of the current portfolio. We involved credit risk professionals with specialized skills and knowledge, who assisted in: • evaluating the Company’s collective ACL methodology for compliance with U.S. generally accepted accounting principles, • evaluating the collective ACL methodology and model for conceptual soundness by inspecting the methodology and model documentation to determine whether the methodology and model are suitable for intended use • testing the historical losses period and the reasonable and supportable forecast period by comparing them to the Company’s business environment and relevant industry practices • evaluating the methodology used to develop the qualitative factors and the effect of those factors on the collective ACL compared with changes in the nature and volume of the entity’s financial assets and identified limitations of the underlying quantitative model. We assessed the sufficiency of the audit evidence obtained related to the Company’s December 31, 2022 collective ACL by evaluating the cumulative results of the audit procedures, qualitative aspects of the Company’s accounting practices and potential bias in the accounting estimates. We have served as the Company’s auditor since 1971. Kansas City, Missouri February 22, 2023 66 Table of Conte nts Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31 2022 2021 (In thousands) ASSETS Loans $ 16,303,131 $ 15,176,359 Allowance for credit losses on loans ( 150,136 ) ( 150,044 ) Net loans 16,152,995 15,026,315 Loans held for sale (including $ — and $ 5,570,000 of residential mortgage loans carried at fair value at December 31, 2022 and 2021, respectively) 4,964 8,615 Investment securities: Available for sale debt, at fair value (amortized cost of $ 13,738,206,000 and $ 14,419,133,000 at December 31, 2022 and 2021, respectively, and allowance for credit losses of $ — at both December 31, 2022 and 2021) 12,238,316 14,450,027 Trading debt 43,523 46,235 Equity 12,304 9,202 Other 225,034 194,047 Total investment securities 12,519,177 14,699,511 Federal funds sold 49,505 2,800 Securities purchased under agreements to resell 825,000 1,625,000 Interest earning deposits with banks 389,140 3,971,217 Cash and due from banks 452,496 305,539 Premises and equipment – net 418,909 388,738 Goodwill 138,921 138,921 Other intangible assets – net 15,234 15,570 Other assets 909,590 506,862 Total assets $ 31,875,931 $ 36,689,088 LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits: Non-interest bearing $ 10,066,356 $ 11,772,374 Savings, interest checking and money market 15,126,981 16,598,085 Certificates of deposit of less than $100,000 387,336 435,960 Certificates of deposit of $100,000 and over 606,767 1,006,654 Total deposits 26,187,440 29,813,073 Federal funds purchased and securities sold under agreements to repurchase 2,841,734 3,022,967 Other borrowings 9,672 12,560 Other liabilities 355,508 392,164 Total liabilities 29,394,354 33,240,764 Commerce Bancshares, Inc. stockholders’ equity: Common stock, $ 5 par value Authorized 140,000,000 ; issued 125,863,879 shares at December 31, 2022 and 122,160,705 shares at December 31, 2021 629,319 610,804 Capital surplus 2,932,959 2,689,894 Retained earnings 31,620 92,493 Treasury stock of 605,142 shares at December 31, 2022 and 476,392 shares at December 31, 2021, at cost ( 41,743 ) ( 32,973 ) Accumulated other comprehensive income (loss) ( 1,086,864 ) 77,080 Total Commerce Bancshares, Inc. stockholders’ equity 2,465,291 3,437,298 Non-controlling interest 16,286 11,026 Total equity 2,481,577 3,448,324 Total liabilities and equity $ 31,875,931 $ 36,689,088 See accompanying notes to consolidated financial statements. 67 Table of Conte nts Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31 (In thousands, except per share data) 2022 2021 2020 INTEREST INCOME Interest and fees on loans $ 646,293 $ 570,549 $ 612,072 Interest on loans held for sale 637 880 860 Interest on investment securities 313,892 236,278 216,793 Interest on federal funds sold 412 4 3 Interest on securities purchased under agreements to resell 22,647 37,377 40,647 Interest on deposits with banks 15,098 3,202 2,273 Total interest income 998,979 848,290 872,648 INTEREST EXPENSE Interest on deposits: Savings, interest checking and money market 25,099 7,509 17,851 Certificates of deposit of less than $100,000 1,469 1,158 4,897 Certificates of deposit of $100,000 and over 3,898 2,577 12,948 Interest on federal funds purchased and securities sold under agreements to repurchase 25,858 1,646 6,091 Interest on other borrowings 470 ( 24 ) 1,014 Total interest expense 56,794 12,866 42,801 Net interest income 942,185 835,424 829,847 Provision for credit losses 28,071 ( 66,326 ) 137,190 Net interest income after credit losses 914,114 901,750 692,657 NON-INTEREST INCOME Trust fees 184,719 188,227 160,637 Bank card transaction fees 176,144 167,891 151,797 Deposit account charges and other fees 94,381 97,217 93,227 Consumer brokerage services 19,117 18,362 15,095 Capital market fees 14,231 15,943 14,582 Loan fees and sales 13,141 29,720 26,684 Other 44,802 43,033 43,845 Total non-interest income 546,535 560,393 505,867 INVESTMENT SECURITIES GAINS, NET 20,506 30,059 11,032 NON-INTEREST EXPENSE Salaries and employee benefits 554,047 525,248 512,987 Data processing and software 110,692 101,792 95,325 Net occupancy 49,117 48,185 46,645 Equipment 19,359 18,089 18,839 Supplies and communication 18,101 17,118 17,419 Marketing 23,827 21,856 19,734 Other 73,634 73,613 57,429 Total non-interest expense 848,777 805,901 768,378 Income before income taxes 632,378 686,301 441,178 Less income taxes 132,358 145,711 87,293 Net income 500,020 540,590 353,885 Less non-controlling interest expense (income) 11,621 9,825 ( 172 ) Net income attributable to Commerce Bancshares, Inc. 488,399 530,765 354,057 Less preferred stock dividends — — 11,966 Net income available to common shareholders $ 488,399 $ 530,765 $ 342,091 Net income per common share - basic $ 3.86 $ 4.12 $ 2.64 Net income per common share - diluted $ 3.85 $ 4.11 $ 2.64 See accompanying notes to consolidated financial statements. 68 Table of Conte nts Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31 (In thousands) 2022 2021 2020 Net income $ 500,020 $ 540,590 $ 353,885 Other comprehensive income (loss): Net unrealized gains (losses) on other securities ( 1,148,089 ) ( 240,627 ) 161,728 Change in pension loss 3,482 4,450 ( 3,178 ) Unrealized gains (losses) on cash flow hedge derivatives ( 19,337 ) ( 18,120 ) 62,383 Other comprehensive income (loss) ( 1,163,944 ) ( 254,297 ) 220,933 Comprehensive income (loss) ( 663,924 ) 286,293 574,818 Less non-controlling interest (income) loss 11,621 9,825 ( 172 ) Comprehensive income (loss) attributable to Commerce Bancshares, Inc. $ ( 675,545 ) $ 276,468 $ 574,990 See accompanying notes to consolidated financial statements. 69 Table of Conte nts Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Commerce Bancshares, Inc. Shareholders (In thousands, except per share data) Preferred Stock Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Non-Controlling Interest Total Balance at December 31, 2019 $ 144,784 $ 563,978 $ 2,151,464 $ 201,562 $ ( 37,548 ) $ 110,444 $ 3,788 $ 3,138,472 Adoption of ASU 2016-13 3,766 3,766 Balance at December 31, 2019, adjusted 144,784 563,978 2,151,464 205,328 ( 37,548 ) 110,444 3,788 3,142,238 Net income 354,057 ( 172 ) 353,885 Other comprehensive income 220,933 220,933 Distributions to non-controlling interest ( 691 ) ( 691 ) Redemption of preferred stock ( 144,784 ) ( 5,216 ) ( 150,000 ) Purchases of treasury stock ( 54,163 ) ( 54,163 ) Cash dividends paid on common stock ($ .933 per share) ( 120,818 ) ( 120,818 ) Cash dividends paid on preferred stock ($ 1.125 per depositary share) ( 6,750 ) ( 6,750 ) Stock-based compensation 14,915 14,915 Issuance under stock purchase and equity compensation plans ( 24,271 ) 25,580 1,309 5 % stock dividend, net 25,374 294,180 ( 353,601 ) 33,161 ( 886 ) Balance at December 31, 2020 — 589,352 2,436,288 73,000 ( 32,970 ) 331,377 2,925 3,399,972 Net income 530,765 9,825 540,590 Other comprehensive loss ( 254,297 ) ( 254,297 ) Distributions to non-controlling interest ( 1,065 ) ( 1,065 ) Purchases of treasury stock ( 129,361 ) ( 129,361 ) Sale of non-controlling interest of subsidiary 659 ( 659 ) — Cash dividends paid on common stock ($ .952 per share) ( 122,693 ) ( 122,693 ) Stock-based compensation 15,415 15,415 Issuance under stock purchase and equity compensation plans ( 21,799 ) 22,710 911 5 % stock dividend, net 21,452 259,331 ( 388,579 ) 106,648 ( 1,148 ) Balance at December 31, 2021 — 610,804 2,689,894 92,493 ( 32,973 ) 77,080 11,026 3,448,324 Net income 488,399 11,621 500,020 Other comprehensive loss ( 1,163,944 ) ( 1,163,944 ) Distributions to non-controlling interest ( 6,361 ) ( 6,361 ) Purchases of treasury stock ( 186,622 ) ( 186,622 ) Cash dividends paid on common stock ($ 1.010 per share) ( 127,466 ) ( 127,466 ) Stock-based compensation 16,995 16,995 Issuance under stock purchase and equity compensation plans ( 19,563 ) 21,468 1,905 5 % stock dividend, net 18,515 245,633 ( 421,806 ) 156,384 ( 1,274 ) Balance at December 31, 2022 $ — $ 629,319 $ 2,932,959 $ 31,620 $ ( 41,743 ) $ ( 1,086,864 ) $ 16,286 $ 2,481,577 See accompanying notes to consolidated financial statements. 70 Table of Conte nts Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31 (In thousands) 2022 2021 2020 OPERATING ACTIVITIES Net income $ 500,020 $ 540,590 $ 353,885 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 28,071 ( 66,326 ) 137,190 Provision for depreciation and amortization 46,856 44,866 43,769 Amortization of investment security premiums, net 18,805 66,934 59,863 Deferred income tax (benefit) expense 21,716 25,613 ( 19,540 ) Investment securities gains, net (A) ( 20,506 ) ( 30,059 ) ( 11,032 ) Net gains on sales of loans held for sale ( 2,660 ) ( 22,641 ) ( 16,406 ) Proceeds from sales of loans held for sale 123,656 576,864 297,267 Originations of loans held for sale ( 118,850 ) ( 524,597 ) ( 313,329 ) Net (increase) decrease in trading securities, excluding unsettled transactions 4,152 ( 29,885 ) ( 770 ) Purchase of interest rate floors ( 35,799 ) — — Stock-based compensation 16,995 15,415 14,915 (Increase) decrease in interest receivable ( 28,439 ) 19,788 ( 13,399 ) Increase (decrease) in interest payable 3,054 ( 3,179 ) ( 9,444 ) Increase (decrease) in income taxes payable ( 12,936 ) ( 5,175 ) 12,345 Proceeds from terminated interest rate floors — — 156,740 Other changes, net 15,250 ( 10,486 ) ( 68,062 ) Net cash provided by operating activities 559,385 597,722 623,992 INVESTING ACTIVITIES Distributions received from equity-method investment 400 13,540 — Proceeds from sales of investment securities (A) 106,971 80,811 602,477 Proceeds from maturities/pay downs of investment securities (A) 2,691,260 3,459,106 2,673,510 Purchases of investment securities (A) ( 2,147,862 ) ( 5,947,891 ) ( 6,991,460 ) Net (increase) decrease in loans ( 1,146,292 ) 1,134,533 ( 1,643,775 ) Securities purchased under agreements to resell ( 200,000 ) ( 900,000 ) — Repayments of securities purchased under agreements to resell 1,000,000 125,000 — Purchases of premises and equipment ( 65,191 ) ( 56,716 ) ( 33,134 ) Sales of premises and equipment 2,985 8,859 1,878 Net cash provided by (used in) investing activities 242,271 ( 2,082,758 ) ( 5,390,504 ) FINANCING ACTIVITIES Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits ( 3,254,081 ) 3,291,466 6,316,100 Net decrease in certificates of deposit ( 448,511 ) ( 402,077 ) ( 163,321 ) Net increase (decrease) in federal funds purchased and short-term securities sold under agreements to repurchase ( 181,233 ) 924,584 247,611 Net increase (decrease) in other borrowings ( 2,888 ) 11,758 ( 1,616 ) Preferred stock redemption — — ( 150,000 ) Purchases of treasury stock ( 186,622 ) ( 129,361 ) ( 54,163 ) Issuance of stock under equity compensation plans ( 8 ) ( 15 ) ( 11 ) Cash dividends paid on common stock ( 127,466 ) ( 122,693 ) ( 120,818 ) Cash dividends paid on preferred stock — — ( 6,750 ) Net cash provided by (used in) financing activities ( 4,200,809 ) 3,573,662 6,067,032 Increase (decrease) in cash, cash equivalents and restricted cash ( 3,399,153 ) 2,088,626 1,300,520 Cash, cash equivalents and restricted cash at beginning of year 4,296,954 2,208,328 907,808 Cash, cash equivalents and restricted cash at end of year $ 897,801 $ 4,296,954 $ 2,208,328 Income tax payments, net $ 116,995 $ 119,665 $ 90,066 Interest paid on deposits and borrowings 53,740 16,045 52,245 Loans transferred to foreclosed real estate 457 182 93 (A) Available for sale debt securities, equity securities, and other securities. See accompanying notes to consolidated financial statements. 71 Table of Conte nts Commerce Bancshares, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Nature of Operations Commerce Bancshares, Inc. and its subsidiaries (the Company) conducts its principal activities from approximately 275 branch and ATM locations throughout Missouri, Kansas, Illinois, Oklahoma and Colorado. Principal activities include retail and commercial banking, investment management, securities brokerage, mortgage banking, trust, and private banking services. The Company also maintains offices in Dallas, Houston, Cincinnati, Nashville, Des Moines, Indianapolis, and Grand Rapids that support customers in its commercial and/or wealth segments and operates a commercial payments business with sales representatives covering the continental U.S. Basis of Presentation, Use of Estimates, and Subsequent Events The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All material inter-company transactions have been eliminated through consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no effect on net income or total assets. The Company follows accounting principles generally accepted in the United States of America (GAAP) and reporting practices applicable to the banking industry. The preparation of financial statements under GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes. These estimates are based on information available to management at the time the estimates are made. While the consolidated financial statements reflect management’s best estimates and judgments, actual results could differ from those estimates. Management has evaluated subsequent events for potential recognition or disclosure through the date these consolidated financial statements were issued. The Company, in the normal course of business, engages in a variety of activities that involve variable interest entities (VIEs). A VIE is a legal entity that lacks equity investors or whose equity investors do not have a controlling financial interest in the entity through their equity investments. However, an enterprise is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. An enterprise that is the primary beneficiary must consolidate the VIE. The Company’s interests in VIEs are evaluated to determine if the Company is the primary beneficiary both at inception and when there is a change in circumstances that requires a reconsideration. The Company is considered to be the primary beneficiary in a rabbi trust related to a deferred compensation plan offered to certain employees. The assets and liabilities of this trust, which are included in the accompanying consolidated balance sheets, are not significant. The Company also has variable interests in certain entities in which it is not the primary beneficiary. These entities are not consolidated. These interests include certain investments in entities accounted for using the equity method of accounting, as well as affordable housing limited partnership interests, holdings in its investment portfolio of various asset and mortgage-backed bonds that are issued by securitization trusts, and managed discretionary trust assets that are not included in the accompanying consolidated balance sheets. Adoption of ASU 2016-13 The Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its related amendments (collectively known as “CECL”) on January 1, 2020. The Company adopted CECL using the modified retrospective method for all financial assets measured at amortized cost and for unfunded lending commitments. Results for reporting periods beginning on or after January 1, 2020 are presented under CECL, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net increase to retained earnings of $ 3.8 million as of January 1, 2020 for the cumulative effect of adopting CECL. The transition adjustment included a decrease to the allowance for credit losses of $ 29.7 million related to the commercial loan portfolio, an increase to the allowance for credit losses of $ 8.7 million related to the personal banking loan portfolio, an increase to the liability for unfunded commitments of $ 16.1 million, and a tax impact of $ 1.2 million. 72 Table of Conte nts Cash, Cash Equivalents and Restricted Cash In the accompanying consolidated statements of cash flows, cash and cash equivalents include “Cash and due from banks”, “Federal funds sold and short-term securities purchased under agreements to resell”, and “Interest earning deposits with banks” as segregated in the accompanying consolidated balance sheets. Restricted cash is comprised of cash collateral on deposit with another financial institution to secure interest rate swap transactions. Restricted cash is included in other assets in the consolidated balance sheets and totaled $ 6.7 million and $ 17.4 million at December 31, 2022 and 2021, respectively. During 2020, the Federal Reserve System, which historically required the Bank to maintain cash balances at the Federal Reserve Bank, reduced the reserve requirement ratios to zero percent effective March 26, 2020. Other interest earning cash balances held at the Federal Reserve Bank totaled $ 389.1 million at December 31, 2022. Loans and Related Earnings The Company's portfolio of held-for-investment loans includes a net investment in direct financing and sales type leases to commercial and industrial and tax-exempt entities, and collectively, the Company's portfolio of loans and leases is referred to as its "loan portfolio" or "loans". Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at amortized cost, excluding accrued interest receivable. Amortized cost is the outstanding principal balance, net of any deferred fees and costs on originated loans. Origination fee income received on loans and amounts representing the estimated direct costs of origination are deferred and amortized to interest income over the life of the loan using the interest method. Interest on loans is accrued based upon the principal amount outstanding. The Company has elected the practical expedient to exclude all accrued interest receivable from all required disclosures of amortized cost. Additionally, an election was made not to measure an allowance for credit losses for accrued interest receivables. The Company has also made the election that all interest accrued but ultimately not received is reversed against interest income. Loan and commitment fees, net of costs, are deferred and recognized in interest income over the term of the loan or commitment as an adjustment of yield. Annual fees charged on credit card loans are capitalized to principal and amortized over 12 months to loan fees and sales. Other credit card fees, such as cash advance fees and late payment fees, are recognized in income as an adjustment of yield when charged to the cardholder’s account. Past Due Loans Management reports loans as past due on the day following the contractual repayment date if payment was not received by end of the business day. Loans, or portions of loans, are charged off to the extent deemed uncollectible. Loan charge-offs reduce the allowance for credit losses on loans, and recoveries of loans previously charged off are added back to the allowance. Business, business real estate, construction and land real estate, and personal real estate loans are generally charged down to estimated collectible balances when they are placed on non-accrual status. Consumer loans and related accrued interest are normally charged down to the fair value of related collateral (or are charged off in full if not collateralized) once the loans are more than 120 to 180 days delinquent, depending on the type of loan. Revolving home equity loans are charged down to the fair value of the related collateral once the loans are more than 180 days past due. Credit card loans are charged off against the allowance for credit losses when the receivable is more than 180 days past due. Non-Accrual Loans Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Business, construction real estate, business real estate, and personal real estate loans that are contractually 90 days past due as to principal and/or interest payments are generally placed on non-accrual status, unless they are both well-secured and in the process of collection. Consumer, revolving home equity and credit card loans are exempt under regulatory rules from being classified as non-accrual. When a loan is placed on non-accrual status, any interest previously accrued but not collected is reversed against current interest income, and the loan is charged off to the extent uncollectible. Principal and interest payments received on non-accrual loans are generally applied to principal. Interest is included in income only after all previous loan charge-offs have been recovered and is recorded only as received. The loan is returned to accrual status only when the borrower has brought all past due principal and interest payments current, and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. A six month history of sustained payment performance is generally required before reinstatement of accrual status. 73 Table of Conte nts Troubled Debt Restructurings A loan is accounted for as a troubled debt restructuring if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. A troubled debt restructuring typically involves (1) modification of terms such as a reduction of the stated interest rate, loan principal, or accrued interest, (2) a loan renewal at a stated interest rate lower than the current market rate for a new loan with similar risk, or (3) debt that was not reaffirmed in bankruptcy. Business, business real estate, construction and land real estate and personal real estate troubled debt restructurings with impairment charges are placed on non-accrual status. The Company measures the impairment loss of a troubled debt restructuring at the time of modification based on the present value of expected future cash flows. Subsequent to modification, troubled debt restructurings are subject to the Company’s allowance for credit loss model, which is discussed below and in Note 2, Loans and Allowance for Credit Losses. Troubled debt restructurings that are performing under their contractual terms continue to accrue interest, which is recognized in current earnings. Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which was signed into law on March 27, 2020, provided financial institutions an option to suspend the requirement to categorize certain loan modifications related to the global Coronavirus Disease 2019 (COVID-19) pandemic as troubled debt restructurings. The 2021 Consolidated Appropriations Act signed on December 27, 2020 extends this temporary suspension through January 1, 2022. The Company elected such option from March 27, 2020 through December 31, 2021. Refer to Note 2 for additional information. Loans Held For Sale Loans held for sale include student loans and certain fixed rate residential mortgage loans. These loans are typically classified as held for sale upon origination based upon management's intent to sell the production of these loans. The student loans are carried at the lower of aggregate cost or fair value, and their fair value is determined based on sale contract prices. The mortgage loans are carried at fair value under the elected fair value option. Their fair value is based on secondary market prices for loans with similar characteristics, including an adjustment for embedded servicing value. Changes in fair value and gains and losses on sales are included in loan fees and sales. Deferred fees and costs related to these loans are not amortized but are recognized as part of the cost basis of the loan at the time it is sold. Interest income related to loans held for sale is accrued based on the principal amount outstanding and the loan's contractual interest rate. Occasionally, other types of loans may be classified as held for sale in order to manage credit concentration. These loans are carried at the lower of cost or fair value with gains and losses on sales recognized in loan fees and sales. Allowance for Credit Losses on Loans The allowance for credit losses on loans is a valuation amount that is deducted from the amortized cost basis of loans not held at fair value to present the net amount expected to be collected over the contractual term of the loans. The allowance for credit losses on loans is measured using 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. An allowance will be created upon origination or acquisition of a loan and is updated at subsequent reporting dates. The methodology is applied consistently for each reporting period and reflects management’s current expectations of credit losses. Changes to the allowance for credit losses on loans resulting from periodic evaluations are recorded through increases or decreases to the credit loss expense for loans, which is recorded in provision for credit losses on the consolidated statements of income. Loans that are deemed to be uncollectible are charged off against the related allowance for credit losses on loans. The allowance for credit losses on loans 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. The allowance for credit losses on a troubled debt restructuring which continues to accrue interest is also measured on a collective basis. Loans that do not share similar risk characteristics, primarily large loans on non-accrual status, are evaluated on an individual basis. The allowance related to these large non-accrual loans is measured using the fair value of the collateral (less selling cost, if applicable) as most of these loans are collateral dependent and the borrower is facing financial difficulty. As noted above, the allowance for credit losses on loans does not include an allowance for accrued interest. Liability for Unfunded Lending Commitments The Company’s unfunded lending commitments are primarily unfunded loan commitments and letters of credit. Expected credit losses for these unfunded lending commitments are calculated over the contractual period during which the Company is exposed to the credit risk. The methodology used to measure credit losses for unfunded lending commitments is the same as the methodology used for loans, however, the estimate of credit risk for unfunded lending commitments takes into 74 Table of Conte nts consideration the likelihood that funding will occur. The liability for unfunded lending commitments excludes any exposures that are unconditionally cancellable by the Company. The loss estimate is recorded within other liabilities on the consolidated balance sheet. Changes to the liability for unfunded lending commitments are recorded through increases or decreases to the provision for credit losses on the consolidated statements of income. Direct Financing and Sales Type Leases The net investment in direct financing and sales type leases is included in loans on the Company’s consolidated balance sheets and consists of the present values of the sum of the future minimum lease payments and estimated residual value of the leased asset. Revenue consists of interest earned on the net investment and is recognized over the lease term as a constant percentage return thereon. Investments in Debt and Equity Securities The majority of the Company's investment portfolio is comprised of debt securities that are classified as available for sale. From time to time, the Company sells securities and utilizes the proceeds to reduce borrowings, fund loan growth, or modify its interest rate profile. Securities classified as available for sale are carried at fair value. Changes in fair value are reported in other comprehensive income (loss), a component of stockholders’ equity. Securities are periodically evaluated for credit losses in accordance with the guidance provided in Accounting Standards Codification (ASC) 326. Further discussion of this evaluation is provided in " Allowance for Credit Losses on Available for Sale Debt Securities" below. Gains and losses realized upon sales of securities are calculated using the specific identification method and are included in investment securities gains (losses), net, in the consolidated statements of income. Purchase premiums and discounts are amortized to interest income using a level yield method over the estimated lives of the securities. For certain callable debt securities purchased at a premium, the amortization is recorded to the earliest call date. For mortgage and asset-backed securities, prepayment experience is evaluated quarterly to determine if a change in a bond's estimated remaining life is necessary. A corresponding adjustment is then made in the related amortization of premium or discount accretion. Accrued interest receivable on available for sale debt securities is reported in other assets on the consolidated balance sheet. The Company has elected the practical expedient to exclude the accrued interest from all required disclosures of amortized cost of debt securities. Additionally, an election was made not to measure an allowance for credit losses for accrued interest receivables. Interest accrued but not received is reversed against interest income. Equity securities include common and preferred stock and are carried at fair value. Certain equity securities do not have readily determinable fair values. The Company has elected under ASU 2016-01 to measure these equity securities without a 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. The Company has not recorded any impairment or other adjustments to the carrying amount of these equity securities without readily determinable fair values. Other securities include the Company's investments in Federal Reserve Bank stock and Federal Home Loan Bank stock, equity method investments, and private equity investments. Federal Reserve Bank stock and Federal Home Loan Bank stock are held for debt and regulatory purposes, are carried at cost and are periodically evaluated for impairment. 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. The Company's private equity investments in portfolio concerns, consisting of both debt and equity instruments, are held by the Company’s private equity subsidiary, which is a small business investment company licensed by the Small Business Administration. The Company's private equity investments are carried at fair value in accordance with investment company accounting guidance (ASC 946-10-15), with changes in fair value reported in current income. In the absence of readily ascertainable market values, fair value is estimated using internally developed methods. Changes in fair value which are recognized in current income and gains and losses from sales are included in investment securities gains (losses), net, in the consolidated statements of income. Trading account securities, which are debt securities bought and held principally for the purpose of resale in the near term, are carried at fair value. Gains and losses, both realized and unrealized, are recorded in non-interest income. Purchases and sales of securities are recognized on a trade date basis. A receivable or payable is recognized for transaction pending settlements. Allowance for Credit Losses on Available for Sale Debt Securities For available for sale debt securities in an unrealized loss position, the entire loss in fair value is required to be recognized in current earnings if the Company intends to sell the securities or believes it more likely than not that it will be required to sell the 75 Table of Conte nts security before the anticipated recovery. If neither condition is met, and the Company does not expect to recover the amortized cost basis, the Company determines whether the decline in fair value resulted from credit losses or other factors. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss has occurred, and an allowance for credit losses is recorded. The allowance for credit losses is limited by the amount that the fair value is less than the amortized cost basis. Any impairment not recorded through the provision for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses on the consolidated statements of income. Losses are charged against the allowance for credit losses on securities when management believes the uncollectibility of an available for sale security is confirmed or when either of the conditions regarding intent or requirement to sell is met. Accrued interest receivable on available for sale debt securities is excluded from the estimate of credit losses. Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions, not as purchases and sales of the underlying securities. The agreements are recorded at the amount of cash advanced or received. The Company periodically enters into securities purchased under agreements to resell with large financial institutions. Securities pledged by the counterparties to secure these agreements are delivered to a third party custodian. Securities sold under agreements to repurchase are a source of funding to the Company and are offered to cash management customers as an automated, collateralized investment account. From time to time, securities sold may also be used by the Bank to obtain additional borrowed funds at favorable rates. These borrowings are secured by a portion of the Company's investment security portfolio and delivered either to the dealer custody account at the Federal Reserve Bank or to the applicable counterparty. The fair value of collateral either received from or provided to a counterparty is monitored daily, and additional collateral is obtained, returned, or provided by the Company in order to maintain full collateralization for these transactions. As permitted by current accounting guidance, the Company offsets certain securities purchased under agreements to resell against securities sold under agreements to repurchase in its balance sheet presentation. These agreements are further discussed in Note 20, Resale and Repurchase Agreements. Premises and Equipment Land is stated at cost, and buildings and equipment are stated at cost, including capitalized interest when appropriate, less accumulated depreciation. Depreciation is computed using a straight-line method, utilizing estimated useful lives; generally 30 to 40 years for buildings, 10 years for building improvements, and 3 to 10 years for equipment. Leasehold improvements are amortized over the shorter of 10 years or the remaining lease term. Maintenance and repairs are charged to non-interest expense as incurred. Also included in premises and equipment is construction in process, which represents facilities construction projects underway that have not yet been placed into service, as well as the Company's right-of-use leased assets, which are mainly comprised of operating leases for branches, office space, ATM locations, and certain equipment. Foreclosed Assets Foreclosed assets consist of property that has been repossessed and is comprised of commercial and residential real estate and other non-real estate property, including auto and recreational and marine vehicles. The assets are initially recorded at fair value less estimated selling costs, establishing a new cost basis. Initial valuation adjustments are charged to the allowance for credit losses. Fair values are estimated primarily based on appraisals, third-party price opinions, or internally developed pricing models. After initial recognition, fair value estimates are updated periodically. Declines in fair value below cost are recognized through valuation allowances which may be reversed when supported by future increases in fair value. These valuation adjustments, in addition to gains and losses realized on sales and net operating expenses, are recorded in other non-interest expense. Foreclosed assets are included in other assets on the consolidated balance sheets. 76 Table of Conte nts Goodwill and Intangible Assets Goodwill and intangible assets that have indefinite useful lives, such as property easement intangible assets, are not amortized but are assessed for impairment on an annual basis or more frequently in certain circumstances. When testing for goodwill impairment, the Company may initially perform a qualitative assessment. Based on the results of this qualitative assessment, if the Company concludes it is more likely than not that a reporting unit's fair value is less than its carrying amount, a quantitative analysis is performed. Quantitative valuation methodologies include a combination of formulas using current market multiples, based on recent sales of financial institutions within the Company's geographic marketplace. If the fair value of a reporting unit is less than the carrying amount, an impairment has occurred and is measured as the amount by which the carrying amount exceeds the reporting unit's fair value. The Company has not recorded impairment resulting from goodwill impairment tests. However, adverse changes in the economic environment, operations of the reporting unit, or other factors could result in a decline in fair value. Intangible assets that have finite useful lives, such as core deposit intangibles and mortgage servicing rights, are amortized over their estimated useful lives. Core deposit intangibles are generally amortized over periods of 8 to 14 years, representing their estimated lives, using accelerated methods. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, considering appropriate prepayment assumptions. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate their carrying amount may not be recoverable. Impairment is indicated if the sum of the undiscounted estimated future net cash flows is less than the carrying value of the intangible asset. Mortgage servicing rights, while initially recorded at fair value, are subsequently amortized and carried at the lower of the initial capitalized amount (net of accumulated amortization), or estimated fair value. The Company evaluates its mortgage servicing rights for impairment on a quarterly basis, using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans. A valuation allowance has been established, through a charge to earnings, to the extent the amortized cost exceeds the estimated fair value. However, the Company has not recorded other-than-temporary impairment losses on its intangible assets. Income Taxes Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income taxes are provided for temporary differences between the financial reporting bases and income tax bases of the Company’s assets and liabilities, net operating losses, and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income when such assets and liabilities are anticipated to be settled or realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as tax expense or benefit in the period that includes the enactment date of the change. In determining the amount of deferred tax assets to recognize in the financial statements, the Company evaluates the likelihood of realizing such benefits in future periods. A valuation allowance is established if it is more likely than not that all or some portion of the deferred tax asset will not be realized. The Company recognizes interest and penalties related to income taxes within income tax expense in the consolidated statements of income. The Company and its eligible subsidiaries file a consolidated federal income tax return. State and local income tax returns are filed on a combined, consolidated or separate return basis based upon each jurisdiction’s laws and regulations. Additional information about current and deferred income taxes is provided in Note 9, Income Taxes. Non-Interest Income Non-interest income is mainly comprised of revenue from contracts with customers. For that revenue (excluding certain revenue associated with financial instruments, derivative and hedging instruments, guarantees, lease contracts, transferring and servicing of financial assets, and other specific revenue transactions), the Company applies the following five-step approach when recognizing revenue: (i) identify the contract with the customer, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) the performance obligation is satisfied. The Company’s contracts with customers are generally short term in nature, with a duration of one year or less, and most contracts are cancellable by either the Company or its customer without penalty. Performance obligations for customer contracts are generally satisfied at a single point in time, typically when the transaction is complete and the customer has received the goods or service, or over time. For performance obligations satisfied over time, the Company recognizes the value of the goods or services transferred to the customer when the performance obligations have been transferred and received by the customer. Payments for satisfied performance obligations are typically due when or as the goods or services are completed, or shortly thereafter, which usually occurs within a single financial reporting period. 77 Table of Conte nts In situations where payment is made before the performance obligation is satisfied, the fees are deferred until the performance obligations pertaining to those goods or services are completed. In cases where payment has not been received despite satisfaction of its performance obligations, the Company accrues an estimate of the amount due in the period that the performance obligations have been satisfied. For contracts with variable components, the Company only recognizes revenue to the extent that it is probable that the cumulative amount recognized will not be subject to a significant reversal in future periods. Generally, the Company’s contracts do not include terms that require significant judgment to determine whether a variable component is included within the transaction price. The Company generally acts in a principal capacity, on its own behalf, in most of its contracts with customers. For these transactions, revenue and the related costs to provide the goods or services are presented on a gross basis in the financial statements. In some cases, the Company acts in an agent capacity, deriving revenue through assisting third parties in transactions with the Company’s customers. In such transactions, revenue and the related costs to provide services is presented on a net basis in the financial statements. These transactions primarily relate to fees earned from bank card and related network and rewards costs and the sales of annuities and certain limited insurance products. Derivatives Most of the Company's derivative contracts are accounted for as free-standing instruments. These instruments are carried at fair value, and changes in fair value are recognized in current earnings. They include interest rate swaps and caps, which are offered to customers to assist in managing their risks of adverse changes in interest rates. Each contract between the Company and a customer is offset by a contract between the Company and an institutional counterparty, thus minimizing the Company's exposure to rate changes. The Company also enters into certain contracts, known as credit risk participation agreements, to buy or sell credit protection on specific interest rate swaps. It also purchases and sells forward foreign exchange contracts, either in connection with customer transactions, or for its own trading purposes. Additionally, the Company originates and sells certain personal real estate mortgages. Derivative instruments under this program include mortgage loan commitments, forward loan sale contracts, and forward contracts to sell certain to-be-announced (TBA) securities. The Company's interest rate risk management policy permits the use of hedge accounting for derivatives, and the Company has entered into interest rate floor contracts as protection from the potential for declining interest rates in the commercial loan portfolio. These floors were designated and qualified as cash flow hedges. In a cash flow hedge, the changes in fair value are recorded in accumulated other comprehensive income and recognized in the income statement when the hedged cash flows affect earnings. Both at hedge inception and on an ongoing basis, the Company assesses whether the interest rate floors used in the hedging relationships are highly effective in offsetting changes in the cash flows of the hedged items. From time to time, the Company has monetized its interest rate floors that had previously been designated and qualified as cash flow hedges. In such case, the monetized cash flow hedge is derecognized and the amounts recorded in accumulated other comprehensive income (AOCI) remain in AOCI until the underlying forecasted transaction impacts earnings, unless the forecasted transaction becomes probable of not occurring. The Company has master netting arrangements with various counterparties but does not offset derivative assets and liabilities under these arrangements in its consolidated balance sheets. However, interest rate swaps that are executed under central clearing requirements are presented net of variation margin as mandated by the statutory terms of the Company's contract with its clearing counterparty. Additional information about derivatives held by the Company and valuation methods employed is provided in Note 17, Fair Value Measurements and Note 19, Derivative Instruments. Pension Plan The Company’s pension plan is described in Note 10, Employee Benefit Plans. In accordance with ASU 2017-07, the Company has reported the service cost component of net periodic pension cost in salaries and employee benefits in the accompanying consolidated statements of income, while the other components are reported in other non-interest expense. The funded status of the plan is recognized as an other asset or other liability in the consolidated balance sheets, and changes in that funded status are recognized in the year in which the changes occur through other comprehensive income. Plan assets and benefit obligations are measured as of the fiscal year end of the plan. The measurement of the projected benefit obligation and pension expense involve actuarial valuation methods and the use of various actuarial and economic assumptions. The Company monitors the assumptions and updates them periodically. Due to the long-term nature of the pension plan obligation, actual results may differ significantly from estimations. Such differences are adjusted over time as the assumptions are replaced by facts and values are recalculated. 78 Table of Conte nts Stock-Based Compensation The Company’s stock-based compensation plan is described in Note 11, Stock-Based Compensation and Directors Stock Purchase Plan. In accordance with the requirements of ASC 718-10-30-3 and 35-2, the Company measures the cost of stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite service period, which is generally the vesting period. The fair value of stock appreciation rights is estimated using the Black-Scholes option-pricing model while the fair value of a nonvested stock award is the common stock (CBSH) market price. The expense recognized for stock-based compensation is included in salaries and benefits in the accompanying consolidated statements of income. The Company recognizes forfeitures as a reduction to expense only when they have occurred. Treasury Stock Purchases of the Company’s common stock are recorded at cost. Upon re-issuance for acquisitions, exercises of stock-based awards or other corporate purposes, treasury stock is reduced based upon the average cost basis of shares held. Income per Share Basic income per share is computed using the weighted average number of common shares outstanding during each year. Diluted income per share includes the effect of all dilutive potential common shares (primarily stock appreciation rights) outstanding during each year. The Company applies the two-class method of computing income per share. The two-class method is an earnings allocation formula that determines income per share for common stock and for participating securities, according to dividends declared and participation rights in undistributed earnings. The Company’s nonvested stock awards are considered to be a class of participating security. All per share data has been restated to reflect the 5 % stock dividend distributed in December 2022. 79 Table of Conte nts 2. Loans and Allowance for Credit Losses Major classifications within the Company’s held for investment loan portfolio at December 31, 2022 and 2021 are as follows: (In thousands) 2022 2021 Commercial: Business $ 5,661,725 $ 5,303,535 Real estate — construction and land 1,361,095 1,118,266 Real estate — business 3,406,981 3,058,837 Personal Banking: Real estate — personal 2,918,078 2,805,401 Consumer 2,059,088 2,032,225 Revolving home equity 297,207 275,945 Consumer credit card 584,000 575,410 Overdrafts 14,957 6,740 Total loans (1) $ 16,303,131 $ 15,176,359 (1) Accrued interest receivable totaled $ 55.5 million and $ 25.9 million at December 31, 2022 and 2021, respectively, and was included within other assets on the consolidated balance sheet. For the year ended December 31, 2022, the Company wrote-off accrued interest by reversing interest income of $ 145 thousand and $ 3.2 million in the Commercial and Personal Banking portfolios, respectively. Loans to directors and executive officers of the Parent and the Bank, and to their affiliates, are summarized as follows: (In thousands) Balance at January 1, 2022 $ 36,141 Additions 16,999 Amounts collected ( 15,372 ) Amounts written off — Balance, December 31, 2022 $ 37,768 Management believes all loans to directors and executive officers have been made in the ordinary course of business with normal credit terms, including interest rate and collateral considerations, and do not represent more than a normal risk of collection. The activity in the table above includes draws and repayments on several lines of credit with business entities. There were no outstanding loans at December 31, 2022 to principal holders (over 10% ownership) of the Company’s common stock. The Company’s lending activity is generally centered in Missouri, Kansas, Illinois and other nearby states including Oklahoma, Colorado, Iowa, Ohio, and Texas. The Company maintains a diversified portfolio with limited industry concentrations of credit risk. Loans and loan commitments are extended under the Company’s normal credit standards, controls, and monitoring procedures. Most loan commitments are short or intermediate term in nature. Commercial loan maturities generally range from one to seven years. Collateral is commonly required and would include such assets as marketable securities, cash equivalent assets, accounts receivable, inventory, equipment, other forms of personal property, and real estate. At December 31, 2022, unfunded loan commitments totaled $ 14.3 billion (which included $ 5.2 billion in unused approved lines of credit related to credit card loan agreements) which could be drawn by customers subject to certain review and terms of agreement. At December 31, 2022, loans totaling $ 3.0 billion were pledged at the FHLB 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. The Company has a net investment in direct financing and sales type leases to commercial and industrial and tax-exempt entities o f $ 779.9 million and $ 725.6 million at December 31, 2022 and 2021, respectively, which is included in business loans on the Company’s consolidated balance sheets. This investment includes deferred income of $ 73.2 million and $ 55.0 million at December 31, 2022 and 2021, respectively. 80 Table of Conte nts 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, unemployment rate, various interest rates, 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. 81 Table of Conte nts Key assumptions in the Company’s allowance for credit loss model include the economic forecast, the reasonable and supportable period, forecasted macro-economic variables, prepayment assumptions and qualitative factors applied for portfolio composition changes, underwriting practices, or significant unique events or conditions. The assumptions utilized in estimating the Company’s allowance for credit losses at December 31, 2022 and 2021 are discussed below. Key Assumption December 31, 2022 December 31, 2021 Overall economic forecast • Continued high inflation and higher cost of borrowing create a mild recession in 2023 with stalled job growth and possible job losses • Assumes interest rates hikes will taper • 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 • Reasonable and supportable period of one year • Reversion to historical average loss rates within two quarters using a straight-line method • Reasonable and supportable period of one year • Reversion to historical average loss rates within two quarters using a straight-line method Forecasted macro-economic variables • Unemployment rate ranging from 3.8% to 4.7% during the reasonable and supportable forecast period • Real GDP growth ranging from (.9)% to 1.3% • Prime rate from 7.6% to 7.7% • BBB corporate yield from 5.1% to 5.8% • Unemployment rate ranging from 4.1% to 3.7% during the reasonable and 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 8.3% to 24.8% for most loan pools • 67.9% 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 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 credit losses. The current forecast continues to reflect a mild recession in 2023 due to high inflation, higher interest rates, and a weaker job market. The impacts of the stressed geopolitical environment, trends in health conditions, and market responses to the usually high inflation could significantly modify economic projections used in the estimation of the allowance for credit losses and liability for unfunded lending commitments. 82 Table of Conte nts A summary of the activity in the allowance for credit losses on loans and the liability for unfunded lending commitments during the years ended December 31, 2022 and 2021 follows: For the Year Ended December 31 (In thousands) Commercial Personal Banking Total ALLOWANCE FOR CREDIT LOSSES ON LOANS Balance December 31, 2021 $ 97,776 $ 52,268 $ 150,044 Provision for credit losses on loans 6,550 12,605 19,155 Deductions: Loans charged off 1,480 27,762 29,242 Less recoveries on loans 447 9,732 10,179 Net loan charge-offs 1,033 18,030 19,063 Balance December 31, 2022 $ 103,293 $ 46,843 $ 150,136 LIABILITY FOR UNFUNDED LENDING COMMITMENTS Balance December 31, 2021 $ 23,271 $ 933 $ 24,204 Provision for credit losses on unfunded lending commitments 8,472 444 8,916 Balance December 31, 2022 $ 31,743 $ 1,377 $ 33,120 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 135,036 $ 48,220 $ 183,256 ALLOWANCE FOR CREDIT LOSSES ON LOANS Balance at December 31, 2020 121,549 99,285 220,834 Provision for credit losses on loans ( 28,594 ) ( 23,629 ) ( 52,223 ) Deductions: Loans charged off 968 34,659 35,627 Less recoveries on loans 5,789 11,271 17,060 Net loan charge-offs (recoveries) ( 4,821 ) 23,388 18,567 Balance December 31, 2021 $ 97,776 $ 52,268 $ 150,044 LIABILITY FOR UNFUNDED LENDING COMMITMENTS Balance at December 31, 2020 37,259 1,048 38,307 Provision for credit losses on unfunded lending commitments ( 13,988 ) ( 115 ) ( 14,103 ) Balance December 31, 2021 $ 23,271 $ 933 $ 24,204 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND UNFUNDED LENDING COMMITMENTS $ 121,047 $ 53,201 $ 174,248 83 Table of Conte nts 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 December 31, 2022 and 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 December 31, 2022 Commercial: Business $ 5,652,710 $ 1,759 $ 505 $ 6,751 $ 5,661,725 Real estate – construction and land 1,361,095 — — — 1,361,095 Real estate – business 3,406,207 585 — 189 3,406,981 Personal Banking: Real estate – personal 2,895,742 14,289 6,681 1,366 2,918,078 Consumer 2,031,827 25,089 2,172 — 2,059,088 Revolving home equity 295,303 1,201 703 — 297,207 Consumer credit card 572,213 6,238 5,549 — 584,000 Overdrafts 14,090 647 220 — 14,957 Total $ 16,229,187 $ 49,808 $ 15,830 $ 8,306 $ 16,303,131 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 December 31, 2022 and 2021, the Company had $ 3.8 million and $ 5.3 million, respectively, of 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 years ended December 31, 2022 and 2021. 84 Table of Conte nts 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 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. 85 Table of Conte nts The risk category of loans in the Commercial portfolio as of December 31, 2022 and 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 December 31, 2022 Business Risk Rating: Pass $ 1,456,476 $ 782,409 $ 464,201 $ 360,844 $ 180,375 $ 219,053 $ 2,146,380 $ 5,609,738 Special mention 3,113 2,548 7,757 1,063 67 — 1,319 15,867 Substandard 5,752 10,004 685 37 810 10,342 1,739 29,369 Non-accrual 195 1,987 — 1 792 3,776 — 6,751 Total Business: $ 1,465,536 $ 796,948 $ 472,643 $ 361,945 $ 182,044 $ 233,171 $ 2,149,438 $ 5,661,725 Real estate-construction Risk Rating: Pass $ 538,022 $ 596,465 $ 129,632 $ 27,331 $ 1,305 $ 2,029 $ 18,559 $ 1,313,343 Special mention 352 — — — — — — 352 Substandard — 19,494 — — 14,766 13,140 — 47,400 Total Real estate-construction: $ 538,374 $ 615,959 $ 129,632 $ 27,331 $ 16,071 $ 15,169 $ 18,559 $ 1,361,095 Real estate- business Risk Rating: Pass $ 1,085,379 $ 616,516 $ 555,648 $ 424,641 $ 163,628 $ 271,579 $ 90,799 $ 3,208,190 Special mention 4,608 — 618 9,737 976 279 — 16,218 Substandard 2,795 30,944 61,141 10,490 30,782 46,232 — 182,384 Non-accrual 14 45 — — 124 6 — 189 Total Real-estate business: $ 1,092,796 $ 647,505 $ 617,407 $ 444,868 $ 195,510 $ 318,096 $ 90,799 $ 3,406,981 Commercial loans Risk Rating: Pass $ 3,079,877 $ 1,995,390 $ 1,149,481 $ 812,816 $ 345,308 $ 492,661 $ 2,255,738 $ 10,131,271 Special mention 8,073 2,548 8,375 10,800 1,043 279 1,319 32,437 Substandard 8,547 60,442 61,826 10,527 46,358 69,714 1,739 259,153 Non-accrual 209 2,032 — 1 916 3,782 — 6,940 Total Commercial loans: $ 3,096,706 $ 2,060,412 $ 1,219,682 $ 834,144 $ 393,625 $ 566,436 $ 2,258,796 $ 10,429,801 86 Table of Conte nts 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 87 Table of Conte nts The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided as of December 31, 2022 and 2021 below: Term Loans Amortized Cost Basis by Origination Year (In thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total December 31, 2022 Real estate-personal Current to 90 days past due $ 535,283 $ 589,658 $ 783,651 $ 290,580 $ 132,305 $ 568,380 $ 10,174 $ 2,910,031 Over 90 days past due 514 967 1,338 81 1,388 2,393 — 6,681 Non-accrual — — 52 169 102 1,043 — 1,366 Total Real estate-personal: $ 535,797 $ 590,625 $ 785,041 $ 290,830 $ 133,795 $ 571,816 $ 10,174 $ 2,918,078 Consumer Current to 90 days past due $ 536,429 $ 378,118 $ 205,849 $ 106,733 $ 36,096 $ 62,255 $ 731,436 $ 2,056,916 Over 90 days past due 326 251 203 58 267 228 839 2,172 Total Consumer: $ 536,755 $ 378,369 $ 206,052 $ 106,791 $ 36,363 $ 62,483 $ 732,275 $ 2,059,088 Revolving home equity Current to 90 days past due $ — $ — $ — $ — $ — $ — $ 296,504 $ 296,504 Over 90 days past due — — — — — — 703 703 Total Revolving home equity: $ — $ — $ — $ — $ — $ — $ 297,207 $ 297,207 Consumer credit card Current to 90 days past due $ — $ — $ — $ — $ — $ — $ 578,451 $ 578,451 Over 90 days past due — — — — — — 5,549 5,549 Total Consumer credit card: $ — $ — $ — $ — $ — $ — $ 584,000 $ 584,000 Overdrafts Current to 90 days past due $ 14,737 $ — $ — $ — $ — $ — $ — $ 14,737 Over 90 days past due 220 — — — — — — 220 Total Overdrafts: $ 14,957 $ — $ — $ — $ — $ — $ — $ 14,957 Personal banking loans Current to 90 days past due $ 1,086,449 $ 967,776 $ 989,500 $ 397,313 $ 168,401 $ 630,635 $ 1,616,565 $ 5,856,639 Over 90 days past due 1,060 1,218 1,541 139 1,655 2,621 7,091 15,325 Non-accrual — — 52 169 102 1,043 — 1,366 Total Personal banking loans: $ 1,087,509 $ 968,994 $ 991,093 $ 397,621 $ 170,158 $ 634,299 $ 1,623,656 $ 5,873,330 88 Table of Conte nts 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 December 31, 2022 and 2021. December 31, 2022 December 31, 2021 (In thousands) Business Assets Oil & Gas Assets Total Business Assets Oil & Gas Assets Total Commercial: Business $ 2,778 $ 1,824 $ 4,602 $ 1,604 $ 2,459 $ 4,063 Total $ 2,778 $ 1,824 $ 4,602 $ 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 often underwritten with other collateral considerations. These loans totaled $ 179.2 million at December 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 $ 197.5 million at December 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 89 Table of Conte nts 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 December 31, 2022 and 2021 by FICO score. Personal Banking Loans % of Loan Category Real Estate - Personal Consumer Revolving Home Equity Consumer Credit Card December 31, 2022 FICO score: Under 600 1.4 % 2.2 % 1.5 % 3.4 % 600 – 659 2.2 4.2 2.8 11.4 660 – 719 8.1 14.5 9.7 30.8 720 – 779 23.7 26.7 21.4 27.1 780 and over 64.6 52.4 64.6 27.3 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. Section 4013 of the CARES Act was signed into law on March 27, 2020, and includes 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. If it is deemed the modification is 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 will evaluate the loan modifications under its existing framework and account for the modification as a troubled debt restructuring. 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 relief offered under the CARES Act related to the accounting and disclosure requirements for troubled debt restructurings as a result of COVID-19. The Company elected to extend its application of this guidance through December 31, 2021. 90 Table of Conte nts The table below shows the balances of troubled debt restructurings by accrual status at December 31, 2022 and 2021. December 31 (In thousands) 2022 2021 Accruing loans: Commercial $ 184,388 $ 46,867 Assistance programs 5,156 6,146 Other consumer 4,049 4,787 Non-accrual loans 5,078 7,087 Total troubled debt restructurings $ 198,671 $ 64,887 The table below shows the balance of troubled debt restructurings by loan classification at December 31, 2022, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal. (In thousands) December 31, 2022 Balance 90 days past due at any time during previous 12 months Commercial: Business $ 12,311 $ — Real estate – construction and land 57,547 — Real estate – business 118,654 — Personal Banking: Real estate – personal 2,809 419 Consumer 2,250 268 Revolving home equity 17 — Consumer credit card 5,083 452 Total troubled debt restructurings $ 198,671 $ 1,139 For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. However, the effects of modifications to loans under various debt management and assistance programs were estimated to decrease interest income by approximately $ 661 thousand on an annual, pre-tax basis, compared to amounts contractually owed. Performing consumer loans where the debt was not reaffirmed in bankruptcy did not result in a concession, as no changes to loan terms occurred in that process. 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. 91 Table of Conte nts 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 $ 12.6 million commitments at December 31, 2022 to lend additional funds to borrowers with restructured loans, compared to no commitments at December 31, 2021. 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 19. The loans are primarily sold to FNMA and FHLMC. At December 31, 2022, there was no personal real estate loans held for sale. 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 December 31, 2022 totaled $ 4.9 million. At December 31, 2022, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing. Foreclosed real estate/repossessed assets The Company’s holdings of foreclosed real estate totaled $ 96 thousand and $ 115 thousand at December 31, 2022 and 2021, respectively. Personal property acquired in repossession, generally autos, marine and recreational vehicles (RV), totaled $ 1.6 million and $ 1.1 million at December 31, 2022 and 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 December 31, 2022 and 2021: (In thousands) 2022 2021 Available for sale debt securities $ 12,238,316 $ 14,450,027 Trading debt securities 43,523 46,235 Equity securities: Readily determinable fair value 6,210 7,153 No readily determinable fair value 6,094 2,049 Other: Federal Reserve Bank stock 34,795 34,379 Federal Home Loan Bank stock 10,678 10,428 Equity method investments 1,434 1,834 Private equity investments 178,127 147,406 Total investment securities (1) $ 12,519,177 $ 14,699,511 (1) Accrued interest receivable totaled $ 38.8 million and $ 39.5 million at December 31, 2022 and December 31, 2021, respectively, and was included within other assets on the consolidated balance sheet. 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 year-ended December 31, 2022, the Company did not record any impairment or significant 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 92 Table of Conte nts investing bank, and investment in FHLB stock is tied to 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 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 December 31, 2022 is shown in the following table. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security at December 31, 2022. Yields on tax exempt securities have not been adjusted for tax exempt status. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as FHLMC, FNMA, and 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 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. (Dollars in thousands) Amortized Cost Fair Value Weighted Average Yield U.S. government and federal agency obligations: Within 1 year $ 350,398 $ 343,843 1.80 *% After 1 but within 5 years 537,661 515,773 1.19 * After 5 but within 10 years 190,748 175,790 .28 * Total U.S. government and federal agency obligations 1,078,807 1,035,406 1.23 * Government-sponsored enterprise obligations: After 5 but within 10 years 4,987 4,531 2.94 After 10 years 50,742 38,577 2.32 Total government-sponsored enterprise obligations 55,729 43,108 2.38 State and municipal obligations: Within 1 year 223,656 222,705 2.54 After 1 but within 5 years 635,080 608,254 2.02 After 5 but within 10 years 937,670 792,158 1.83 After 10 years 168,622 143,992 2.11 Total state and municipal obligations 1,965,028 1,767,109 2.00 Mortgage and asset-backed securities: Agency mortgage-backed securities 5,087,893 4,308,427 2.07 Non-agency mortgage-backed securities 1,423,469 1,211,607 2.30 Asset-backed securities 3,588,025 3,397,801 2.07 Total mortgage and asset-backed securities 10,099,387 8,917,835 2.10 Other debt securities: Within 1 year 16,795 16,699 2.50 After 1 but within 5 years 265,853 244,826 1.90 After 5 but within 10 years 247,347 206,042 1.82 After 10 years 9,260 7,291 1.89 Total other debt securities 539,255 474,858 1.88 % Total available for sale debt securities $ 13,738,206 $ 12,238,316 * Rate does not reflect inflation adjustment on inflation-protected securities Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $ 373.8 million, at fair value, at December 31, 2022. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the non-seasonally adjusted Consumer Price Index (CPI-U). At maturity, the principal paid is the greater of an inflation-adjusted principal or the original principal. 93 Table of Conte nts Allowance for credit losses on available for sale debt securities Securities for which fair value is less than amortized cost are reviewed for impairment. Special emphasis is placed on securities whose credit rating has fallen below Baa3 (Moody's) or BBB- (Standard & Poor's), whose fair values have fallen more than 20 % below purchase price, or 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. Certain securities are analyzed using a projected cash flow model, discounted to present value, and compared to the current amortized cost bases of the securities. The model uses input factors such as cash flow projections, contractual payments required, expected delinquency rates, credit support from other tranches, prepayment speeds, collateral loss severity rates (including loan to values), and various other information related to the underlying collateral. Securities not analyzed using the cash flow model are analyzed by reviewing risk ratings, credit support agreements, and industry knowledge to project future cash flows and any possible credit impairment. At December 31, 2022, the fair value of securities on this watch list was $ 1.3 billion compared to $ 13.4 million at December 31, 2021. The majority of the securities included on the Company's watch list were experiencing unrealized loss positions due to the significant increase in interest rates and were analyzed outside of the cash flow model. At December 31, 2022, the securities on the Company's watch list that were not deemed to be solely related to increasing interest rates were securities backed by government-guaranteed student loans and are expected to perform as contractually required. As of December 31, 2022, the Company did not identify any securities for which a credit loss exists, and for the years ended December 31, 2022 and 2021, the Company did not recognize a credit loss expense on any available for sale debt securities. 94 Table of Conte nts 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 December 31, 2022 and 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. At December 31, 2022, the Company does not intend to sell the securities, nor is it anticipated that it would be required to sell any of its impaired securities at a loss. Less than 12 months 12 months or longer Total (In thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses December 31, 2022 U.S. government and federal agency obligations $ 605,840 $ 17,490 $ 380,573 $ 25,940 $ 986,413 $ 43,430 Government-sponsored enterprise obligations 25,068 4,650 18,040 7,971 43,108 12,621 State and municipal obligations 814,799 26,708 875,329 171,385 1,690,128 198,093 Mortgage and asset-backed securities: Agency mortgage-backed securities 1,323,938 125,330 2,966,851 654,327 4,290,789 779,657 Non-agency mortgage-backed securities 135,984 16,736 1,069,222 195,218 1,205,206 211,954 Asset-backed securities 1,331,055 50,056 2,006,188 140,424 3,337,243 190,480 Total mortgage and asset-backed securities 2,790,977 192,122 6,042,261 989,969 8,833,238 1,182,091 Other debt securities 166,040 9,690 308,818 54,707 474,858 64,397 Total $ 4,402,724 $ 250,660 $ 7,625,021 $ 1,249,972 $ 12,027,745 $ 1,500,632 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 securities portfolio included $ 12.0 billion of securities that were in a loss position at December 31, 2022, compared to $ 9.0 billion at December 31, 2021. The total amount of unrealized loss on these securities was $ 1.5 billion at December 31, 2022, an increase of $ 1.4 billion 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. 95 Table of Conte nts 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 December 31, 2022 and 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 December 31, 2022 U.S. government and federal agency obligations $ 1,078,807 $ 29 $ ( 43,430 ) $ — $ 1,035,406 Government-sponsored enterprise obligations 55,729 — ( 12,621 ) — 43,108 State and municipal obligations 1,965,028 174 ( 198,093 ) — 1,767,109 Mortgage and asset-backed securities: Agency mortgage-backed securities 5,087,893 191 ( 779,657 ) — 4,308,427 Non-agency mortgage-backed securities 1,423,469 92 ( 211,954 ) — 1,211,607 Asset-backed securities 3,588,025 256 ( 190,480 ) — 3,397,801 Total mortgage and asset-backed securities 10,099,387 539 ( 1,182,091 ) — 8,917,835 Other debt securities 539,255 — ( 64,397 ) — 474,858 Total $ 13,738,206 $ 742 $ ( 1,500,632 ) $ — $ 12,238,316 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 96 Table of Conte nts 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 Year Ended December 31 (In thousands) 2022 2021 2020 Proceeds from sales of securities: Available for sale debt securities $ 86,240 $ 69,809 $ 602,475 Equity securities 17 — 2 Other 20,714 11,002 — Total proceeds $ 106,971 $ 80,811 $ 602,477 Investment securities gains (losses), net: Available for sale debt securities: Gains realized on sales $ — $ — $ 21,096 Losses realized on sales ( 20,273 ) ( 3,284 ) — Equity securities: Gains realized on sales 17 — 2 Fair value adjustments, net ( 943 ) 187 37 Other: Gains realized on sales 1,670 1,611 — Losses realized on sales ( 3,798 ) ( 159 ) — Fair value adjustments, net 43,833 31,704 ( 10,103 ) Total investment securities gains, net $ 20,506 $ 30,059 $ 11,032 At December 31, 2022, securities totaling $ 4.7 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 $ 211.0 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeds 10 % of stockholders’ equity. 97 Table of Conte nts 4. Premises and Equipment Premises and equipment consist of the following at December 31, 2022 and 2021: (In thousands) 2022 2021 Land $ 89,342 $ 91,003 Buildings and improvements 673,802 622,642 Equipment 237,867 242,455 Right of use leased assets 26,030 25,677 Total 1,027,041 981,777 Less accumulated depreciation 608,132 593,039 Net premises and equipment $ 418,909 $ 388,738 Depreciation expense of $ 32.3 million in 2022, $ 31.9 million in 2021, and $ 32.2 million in 2020, was included in occupancy expense and equipment expense in the consolidated statements of income. Repairs and maintenance expense of $ 17.7 million, $ 16.0 million, and $ 16.4 million for 2022, 2021 and 2020, respectively, was included in occupancy expense and equipment expense. Interest expense capitalized on constructions projects totaled $ 1.4 million, $ 29 thousand, and $ 14 thousand in 2022, 2021 and 2020, respectively. Right of use leased assets are comprised mainly of operating leases for branches, office space, ATM locations, and certain equipment, as described in Note 6. 5. Goodwill and Other Intangible Assets The following table presents information about the Company's intangible assets which have estimable useful lives. December 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 $ ( 30,565 ) $ — $ 705 $ 31,270 $ ( 30,266 ) $ — $ 1,004 Mortgage servicing rights 22,187 ( 11,258 ) — 10,929 20,870 ( 9,600 ) ( 304 ) 10,966 Total $ 53,457 $ ( 41,823 ) $ — $ 11,634 $ 52,140 $ ( 39,866 ) $ ( 304 ) $ 11,970 The carrying amount of goodwill and its allocation among segments at December 31, 2022 and 2021 is shown in the table below. As a result of ongoing assessments, no impairment of goodwill was recorded in 2022, 2021 or 2020. Further, the annual assessment of qualitative factors on January 1, 2023 revealed no likelihood of impairment as of that date. (In thousands) December 31, 2022 December 31, 2021 Consumer segment $ 70,721 $ 70,721 Commercial segment 67,454 67,454 Wealth segment 746 746 Total goodwill $ 138,921 $ 138,921 98 Table of Conte nts Changes in the net carrying amount of goodwill and other net intangible assets for the years ended December 31, 2022 and 2021 are shown in the following table. During the year ended December 31, 2020, the Company purchased an easement for $ 3.6 million in connection with the Developer Services Agreement that was signed during the third quarter of 2020 to develop a commercial office complex in Clayton, Missouri. The easement, which grants the Company access to all portions of the parking facility and terrace garden, is perpetual and will be assessed for impairment at least annually, or whenever events or circumstances indicate an impairment may have occurred. No impairment was identified at December 31, 2022. (In thousands) Goodwill Easement Core Deposit Premium Mortgage Servicing Rights Balance at December 31, 2020 $ 138,921 $ 3,600 $ 1,358 $ 6,249 Originations, net of disposals — — — 5,632 Amortization — — ( 354 ) ( 2,714 ) Impairment recovery — — — 1,799 Balance at December 31, 2021 138,921 3,600 1,004 10,966 Originations, net of disposals — — — 1,317 Amortization — — ( 299 ) ( 1,658 ) Impairment recovery — — — 304 Balance at December 31, 2022 $ 138,921 $ 3,600 $ 705 $ 10,929 Mortgage servicing rights (MSRs) are initially recorded at fair value and subsequently amortized over the period of estimated servicing income. They are periodically reviewed for impairment at a tranche level, and if impairment is indicated, recorded at fair value. Temporary impairment, including impairment recovery, is effected through a change in a valuation allowance. During 2022, impairment recovery of $ 304 thousand was recognized. The fair value of the MSRs is based on the present value of expected future cash flows, as further discussed in Note 17 on Fair Value Measurements. Aggregate amortization expense on intangible assets for the years ended December 31, 2022, 2021 and 2020 was $ 2.0 million, $ 3.1 million and $ 2.4 million, respectively. The following table shows the estimated future amortization expense based on existing asset balances and the interest rate environment as of December 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) 2023 $ 1,403 2024 1,243 2025 1,101 2026 963 2027 830 99 Table of Conte nts 6. Leases The Company's leasing activities include leasing certain real estate and equipment, providing lease financing to commercial customers, and leasing office space to third parties. The Company uses the FHLB fixed-advance rate at lease commencement or at any subsequent remeasurement event date based on the remaining lease term to calculate the liability for each lease. Lessee The Company primarily has operating leases for branches, office space, ATM locations, and certain equipment. As of December 31, 2022, the right-of-use asset for operating leases, reported within premises and equipment, net , and lease liability, reported within other liabilities , recognized on the Company's consolidated balance sheets totaled $ 24.9 million and $ 25.2 million, respectively, compared to right-of-use assets of $ 25.2 million and lease liability of $ 27.2 million at December 31, 2021. Total lease cost for the year ended December 31, 2022 was $ 7.9 million, compared to $ 7.7 million for the year ended December 31, 2021. For leases with a term of 12 months or less, an election was made not to recognize lease assets and lease liabilities for all asset classes, and to recognize lease expense for these leases on a straight-line basis over the lease term. The Company's leases have remaining terms of 1 month to 29 years, most of which contain renewal options. However, the renewal options are generally not included in the leased asset or liability because the option exercises are uncertain. The maturities of operating leases are included in the table below. (in thousands) Operating Leases (1) 2023 $ 6,168 2024 4,684 2025 3,001 2026 2,434 2027 2,204 After 2027 13,743 Total lease payments $ 32,234 Less: Interest 7,003 Present value of lease liabilities $ 25,231 (1) Excludes $ 2.1 million of legally binding minimum lease payments for operating leases signed but not yet commenced. The following table presents the average lease term and discount rate of operating leases. December 31, 2022 December 31, 2021 Weighted-average remaining lease term 10.6 years 11.1 years Weighted-average discount rate 3.73 % 3.05 % Supplemental cash flow information related to operating leases is included in the table below. For the Year Ended December 31 (in thousands) 2022 2021 Operating cash paid toward lease liabilities $ 6,529 6,180 Leased assets obtained in exchange for new lease liabilities $ 5,161 4,407 Lessor 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 to expand the leased space, and currently the leases have remaining terms of 3 months to 16 years. 100 Table of Conte nts The following table provides the components of lease income. For the Year Ended December 31 (in thousands) 2022 2021 Direct financing and sales-type leases 22,144 22,736 Operating leases (1) 8,948 7,488 Total lease income $ 31,092 $ 30,224 (1) Includes rent from Tower Properties, a related party, of $ 76 thousand for the years ended both December 31, 2022 and 2021. The following table presents the components of the net investments in direct financing and sales-type leases. (in thousands) December 31, 2022 December 31, 2021 Lease payment receivable $ 704,509 $ 655,885 Unguaranteed residual assets 72,157 66,638 Total net investments in direct financing and sales-type leases $ 776,666 $ 722,523 Deferred origination cost 3,222 3,035 Total net investment included within business loans $ 779,888 $ 725,558 The maturities of lease receivables are included in the table below. (in thousands) Direct Financing and Sale-Type Leases Operating Leases Total 2023 $ 200,282 $ 9,451 $ 209,733 2024 169,469 11,518 180,987 2025 132,892 10,248 143,140 2026 103,897 9,595 113,492 2027 74,193 11,716 85,909 After 2027 87,260 62,977 150,237 Total lease receipts 767,993 $ 115,505 $ 883,498 Less: Net present value adjustment 63,484 Present value of lease receipts $ 704,509 101 Table of Conte nts 7. Deposits At December 31, 2022, the scheduled maturities of certificates of deposit were as follows: (In thousands) Due in 2023 $ 726,984 Due in 2024 187,440 Due in 2025 44,678 Due in 2026 29,009 Due in 2027 5,910 Thereafter 82 Total $ 994,103 The aggregate amount of certificates of deposit that exceeded the $250,000 FDIC insurance limit totaled $ 426.5 million at December 31, 2022. 8. Borrowings At December 31, 2022, the Company's borrowings primarily consisted of federal funds purchased and securities sold under agreements to repurchase (repurchase agreements). The following table sets forth selected information for federal funds purchased and repurchase agreements. (Dollars in thousands) Year End Weighted Rate Average Weighted Rate Average Balance Outstanding Maximum Outstanding at any Month End Balance at December 31 Federal funds purchased and repurchase agreements: 2022 2.01 % 1.1 % $ 2,439,279 $ 2,841,734 $ 2,841,734 2021 .06 .1 2,334,837 3,022,967 3,022,967 2020 .04 .3 1,966,479 2,314,756 2,098,383 Federal funds purchased and repurchase agreements comprised the majority of the Company's short-term borrowings (borrowings with an original maturity of less than one year at December 31, 2022), and $ 2.7 billion of these borrowings were repurchase agreements, which generally have one day maturities and are mainly comprised of non-insured customer funds secured by a portion of the Company's investment portfolio. Additional information about the securities pledged for repurchase agreements and repurchase agreement maturity is provided in Note 20 on Resale and Repurchase Agreements. The Bank is a member of the Des Moines FHLB and has access to term financing from the FHLB. These borrowings are secured under a blanket collateral agreement including primarily residential mortgages as well as all unencumbered assets and stock of the borrowing bank. At December 31, 2022, the Bank had no outstanding advances from the FHLB. The FHLB also issues letters of credit to secure the Bank's obligations to certain depositors of public funds, which totaled $ 678.2 million at December 31, 2022. 102 Table of Conte nts 9. Income Taxes The components of income tax expense from operations for the years ended December 31, 2022, 2021 and 2020 were as follows: (In thousands) Current Deferred Total Year ended December 31, 2022: U.S. federal $ 96,849 $ 19,990 $ 116,839 State and local 13,793 1,726 15,519 Total $ 110,642 $ 21,716 $ 132,358 Year ended December 31, 2021: U.S. federal $ 104,924 $ 22,184 $ 127,108 State and local 15,174 3,429 18,603 Total $ 120,098 $ 25,613 $ 145,711 Year ended December 31, 2020: U.S. federal $ 92,035 $ ( 14,055 ) $ 77,980 State and local 14,798 ( 5,485 ) 9,313 Total $ 106,833 $ ( 19,540 ) $ 87,293 The components of income tax (benefit) expense recorded directly to stockholders’ equity for the years ended 2022, 2021 and 2020 were as follows: (In thousands) 2022 2021 2020 Unrealized gain (loss) on available for sale debt securities $ ( 382,697 ) $ ( 80,211 ) $ 53,909 Change in fair value on cash flow hedges ( 6,446 ) ( 6,040 ) 20,795 Accumulated pension (benefit) loss 1,161 1,484 ( 1,059 ) Adoption of ASU 2016-13 — — 1,183 Income tax (benefit) expense allocated to stockholders’ equity $ ( 387,982 ) $ ( 84,767 ) $ 74,828 Significant components of the Company’s deferred tax assets and liabilities at December 31, 2022 and 2021 were as follows: (In thousands) 2022 2021 Deferred tax assets: Unrealized loss on available for sale debt securities $ 374,973 $ — Loans, principally due to allowance for credit losses 43,553 $ 41,507 Deferred compensation 7,864 7,777 Equity-based compensation 7,491 7,348 Accrued expenses 6,748 6,340 Unearned fee income 5,534 5,258 Other 1,737 3,284 Total deferred tax assets 447,900 71,514 Deferred tax liabilities: Equipment lease financing 91,913 74,827 Cash flow hedges 19,747 23,633 Land, buildings, and equipment 17,210 18,728 Private equity investments 9,393 3,034 Intangible assets 7,519 7,459 Unrealized gain on available for sale debt securities — 7,724 Other 8,138 8,396 Total deferred tax liabilities 153,920 143,801 Net deferred tax assets (liabilities) $ 293,980 $ ( 72,287 ) Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the total deferred tax assets, therefore, no valuation allowance is needed for the deferred tax assets at year end. 103 Table of Conte nts A reconciliation between the expected federal income tax expense using the federal statutory tax rate of 21 %, and the Company's actual income tax expense for 2022, 2021, and 2020 is provided below. The effective tax rate is calculated by dividing income taxes by income before income taxes less the non-controlling interest expense. (In thousands) 2022 2021 2020 Computed “expected” tax expense $ 130,359 $ 142,060 $ 92,683 Increase (decrease) in income taxes resulting from: Tax-exempt interest, net of cost to carry ( 8,473 ) ( 9,002 ) ( 10,013 ) State and local income taxes, net of federal tax benefit 12,260 14,697 7,357 Share-based award payments ( 1,669 ) ( 2,941 ) ( 3,090 ) Other ( 119 ) 897 356 Total income tax expense $ 132,358 $ 145,711 $ 87,293 The gross amount of unrecognized tax benefits was $ 1.2 million and $ 1.3 million at December 31, 2022 and 2021, respectively, and the total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was $ 1.0 million at both December 31, 2022 and 2021. The activity in the accrued liability for unrecognized tax benefits for the years ended December 31, 2022 and 2021 was as follows: (In thousands) 2022 2021 Unrecognized tax benefits at beginning of year $ 1,276 $ 1,331 Gross increases – tax positions in prior period 21 15 Gross decreases – tax positions in prior period — ( 8 ) Gross increases – current-period tax positions 235 222 Lapse of statute of limitations ( 327 ) ( 284 ) Unrecognized tax benefits at end of year $ 1,205 $ 1,276 The Company and its subsidiaries are subject to income tax by federal, state and local government taxing authorities. Tax years 2019 through 2022 remain open to examination for U.S. federal income tax and for major state taxing jurisdictions. 10. Employee Benefit Plans Employee benefits charged to operating expenses are summarized in the table below. Substantially all of the Company’s employees are covered by a defined contribution (401(k)) plan, under which the Company makes matching contributions. (In thousands) 2022 2021 2020 Payroll taxes $ 29,580 $ 28,084 $ 27,664 Medical plans 31,004 31,131 30,002 401(k) plan 18,590 17,237 16,834 Pension plans 516 388 410 Other 3,097 1,170 1,990 Total employee benefits $ 82,787 $ 78,010 $ 76,900 A portion of the Company’s employees are covered by a noncontributory defined benefit pension plan, however, participation in the pension plan is not available to employees hired after June 30, 2003. All participants are fully vested in their benefit payable upon normal retirement date, which is based on years of participation and compensation. Since January 2011, all benefits accrued under the pension plan have been frozen. However, the accounts continue to accrue interest at a stated annual rate. Certain key executives also participate in a supplemental executive retirement plan (the CERP) that the Company funds only as retirement benefits are disbursed. The CERP carries no segregated assets. The CERP continues to provide credits based on hypothetical contributions in excess of those permitted under the 401(k) plan. In the tables presented below, the pension plan and the CERP are presented on a combined basis. Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to satisfy the statutory minimum required contribution as defined by the Pension Protection Act, which is intended to provide for current service accruals and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these 104 Table of Conte nts requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. No contributions to the defined benefit plan were made in 2022, 2021 or 2020. The minimum required contribution for 2023 is expected to be zero . The Company does not expect to make any further contributions in 2023 other than the necessary funding contributions to the CERP. Contributions to the CERP were $ 14 thousand, $ 14 thousand and $ 80 thousand during 2022, 2021 and 2020, respectively. The following items are components of the net pension cost for the years ended December 31, 2022, 2021 and 2020. (In thousands) 2022 2021 2020 Service cost-benefits earned during the year $ 516 $ 388 $ 410 Interest cost on projected benefit obligation 2,725 2,169 3,282 Expected return on plan assets ( 4,515 ) ( 4,532 ) ( 5,214 ) Amortization of prior service cost ( 271 ) ( 271 ) ( 271 ) Amortization of unrecognized net (gain) loss 1,717 2,578 2,138 Net periodic pension cost $ 172 $ 332 $ 345 The following table sets forth the pension plans’ funded status, using valuation dates of December 31, 2022 and 2021. (In thousands ) 2022 2021 Change in projected benefit obligation Projected benefit obligation at prior valuation date $ 121,738 $ 127,163 Service cost 516 388 Interest cost 2,725 2,169 Benefits paid ( 6,933 ) ( 6,735 ) Actuarial (gain) loss ( 22,204 ) ( 1,247 ) Projected benefit obligation at valuation date 95,842 121,738 Change in plan assets Fair value of plan assets at prior valuation date 109,807 109,615 Actual return on plan assets ( 14,492 ) 6,913 Employer contributions 14 14 Benefits paid ( 6,933 ) ( 6,735 ) Fair value of plan assets at valuation date 88,396 109,807 Funded status and net amount recognized at valuation date $ ( 7,446 ) $ ( 11,931 ) The pension benefit obligation decreased from the prior year primarily due to an increase in the discount rate from 2.58 % to 5.19 %, which decreased the pension benefit liability by approximately $ 23.8 million. This decrease was slightly offset by updates to lump sum payment assumptions. The accumulated benefit obligation, which represents the liability of a plan using only benefits as of the measurement date, was $ 95.8 million and $ 121.7 million for the combined plans on December 31, 2022 and 2021, respectively. 105 Table of Conte nts Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) at December 31, 2022 and 2021 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis. (In thousands) 2022 2021 Prior service credit (cost) $ 452 $ 723 Accumulated gain (loss) ( 23,363 ) ( 28