COMMERCE BANCSHARES INC /MO/ 10-K

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 ) ( 28,277 ) Accumulated other comprehensive income (loss) ( 22,911 ) ( 27,554 ) Cumulative employer contributions in excess of net periodic benefit cost 15,465 15,623 Net amount recognized as an accrued benefit liability on the December 31 balance sheet $ ( 7,446 ) $ ( 11,931 ) Net gain (loss) arising during period 3,197 3,627 Amortization of net (gain) loss 1,717 2,578 Amortization of prior service cost ( 271 ) ( 271 ) Total recognized in other comprehensive income (loss) $ 4,643 $ 5,934 Total income (expense) recognized in net periodic pension cost and other comprehensive income $ 4,471 $ 5,602 The following assumptions, on a weighted average basis, were used in accounting for the plans. 2022 2021 2020 Determination of benefit obligation at year end: Effective discount rate on benefit obligations 5.19 % 2.58 % 2.25 % Assumed cash balance interest crediting rate 5.00 % 5.00 % 5.00 % Determination of net periodic benefit cost for year ended: Effective discount rate on benefit obligations 2.64 % 2.25 % 3.08 % Effective rate for interest cost on benefit obligations 2.15 % 1.63 % 2.69 % Long-term rate of return on assets 4.25 % 4.25 % 5.00 % Assumed cash balance interest crediting rate 5.00 % 5.00 % 5.00 % 106 Table of Conte nts The following table shows the fair values of the Company’s pension plan assets by asset category at December 31, 2022 and 2021. Information about the valuation techniques and inputs used to measure fair value are provided in Note 17 on Fair Value Measurements. Fair Value Measurements (In thousands) Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2022 Assets: U.S. government obligations $ 9,960 $ 9,960 $ — $ — Government-sponsored enterprise obligations (a) 1,022 — 1,022 — State and municipal obligations 6,840 — 6,840 — Agency mortgage-backed securities (b) 2,871 — 2,871 — Non-agency mortgage-backed securities 2,527 — 2,527 — Asset-backed securities 6,768 — 6,768 — Corporate bonds (c) 35,234 — 35,234 — Equity securities and mutual funds: (d) Mutual funds 4,395 4,395 — — Common stocks 15,868 15,868 — — International developed markets funds 2,604 2,604 — — Emerging markets funds 307 307 — — Total $ 88,396 $ 33,134 $ 55,262 $ — December 31, 2021 Assets: U.S. government obligations $ 6,824 $ 6,824 $ — $ — Government-sponsored enterprise obligations (a) 2,066 — 2,066 — State and municipal obligations 8,000 — 8,000 — Agency mortgage-backed securities (b) 3,266 — 3,266 — Non-agency mortgage-backed securities 2,974 — 2,974 — Asset-backed securities 7,648 — 7,648 — Corporate bonds (c) 40,832 — 40,832 — Equity securities and mutual funds: (d) Mutual funds 6,004 6,004 — — Common stocks 27,702 27,702 — — International developed markets funds 3,943 3,943 — — Emerging markets funds 548 548 — — Total $ 109,807 $ 45,021 $ 64,786 $ — (a) This category represents bonds (excluding mortgage-backed securities) issued by agencies such as the Government National Mortgage Association, the Federal Home Loan Mortgage Corp and the Federal National Mortgage Association. (b) This category represents mortgage-backed securities issued by the agencies mentioned in (a). (c) This category represents investment grade bonds issued in the U.S., primarily by domestic issuers, representing diverse industries. (d) This category represents investments in individual common stocks and equity funds. These holdings are diversified, largely across the financial services, technology services, electronic technology, healthcare technology, and retail trade industries. The investment policy of the pension plan is designed for growth in principal, within limits designed to safeguard against significant losses within the portfolio. The policy sets guidelines, which may change from time to time, regarding the types and percentages of investments held. Currently, the policy includes guidelines such as holding bonds rated investment grade or better and prohibiting investment in Company stock. The plan does not utilize derivatives. Management believes there are no significant concentrations of risk within the plan asset portfolio at December 31, 2022. Under the current policy, the long-term investment target mix for the plan is 25 % equity securities and 75 % fixed income securities. The Company regularly reviews its policies on investment mix and may make changes depending on economic conditions and perceived investment risk. 107 Table of Conte nts The assumed overall expected long-term rate of return on pension plan assets used in calculating 2022 pension plan expense was 4.25 %. Determination of the plan’s expected rate of return is based upon historical and anticipated returns of the asset classes invested in by the pension plan and the allocation strategy currently in place among those classes. The rate used in plan calculations may be adjusted by management for current trends in the economic environment. The 10-year annualized return for the Company’s pension plan was 5.0 %. During 2022, the plan’s assets lost 12.0 % of their value, compared to a gain of 5.9 % in 2021. Returns for any plan year may be affected by changes in the stock market and interest rates. The Company expects to incur pension expense of $ 2.5 million in 2023, compared to $ 172 thousand in 2022. The following future benefit payments are expected to be paid: (In thousands) 2023 $ 7,988 2024 7,884 2025 7,810 2026 7,722 2027 7,597 2028 - 2032 34,819 11. Stock-Based Compensation and Directors Stock Purchase Plan* The Company’s stock-based compensation is provided under a stockholder-approved plan that allows for issuance of various types of awards, including stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards and stock-based awards. During the past three years, stock-based compensation has been issued in the form of nonvested restricted stock awards and stock appreciation rights. At December 31, 2022, 1,586,377 shares remained available for issuance under the plan. The stock-based compensation expense that was charged against income was $ 17.0 million, $ 15.4 million and $ 14.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $ 3.0 million, $ 2.7 million and $ 3.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. Nonvested Restricted Stock Awards Nonvested stock is awarded to key employees by action of the Company's Compensation and Human Resources Committee and Board of Directors. These awards generally vest after 4 to 7 years of continued employment, but vesting terms may vary according to the specifics of the individual grant agreement. There are restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant of restricted stock awards. A summary of the status of the Company’s nonvested share awards as of December 31, 2022 and changes during the year then ended is presented below. Shares Weighted Average Grant Date Fair Value Nonvested at January 1, 2022 1,176,253 $ 52.93 Granted 283,970 67.40 Vested ( 282,845 ) 45.45 Forfeited ( 28,505 ) 57.94 Nonvested at December 31, 2022 1,148,873 $ 58.20 The total fair value (at vest date) of shares vested during 2022, 2021 and 2020 was $ 18.8 million, $ 17.6 million and $ 18.0 million, respectively. 108 Table of Conte nts Stock Appreciation Rights Stock appreciation rights (SARs) are granted with exercise prices equal to the market price of the Company’s stock at the date of grant. SARs generally vest ratably over 4 years of continuous service and have 10 -year contractual terms. All SARs must be settled in stock under provisions of the plan. A summary of SAR activity during 2022 is presented below. ( Dollars in thousands, except per share data) Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at January 1, 2022 940,722 $ 44.01 Granted 101,044 67.28 Forfeited ( 9,057 ) 58.82 Expired ( 2,493 ) 54.17 Exercised ( 81,489 ) 38.14 Outstanding at December 31, 2022 948,727 $ 46.82 5.2 years $ 20,163 Exercisable at December 31, 2022 667,936 $ 41.11 4.2 years $ 18,007 In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs on date of grant. The Black-Scholes model is a closed-end model that uses various assumptions as shown in the following table. Expected volatility is based on historical volatility of the Company’s stock. The Company uses historical exercise behavior and other factors to estimate the expected term of the SARs, which represents the period of time that the SARs granted are expected to be outstanding. The risk-free rate for the expected term is based on the U.S. Treasury zero coupon spot rates in effect at the time of grant. The per share average fair value and the model assumptions for SARs granted during the past three years are shown in the table below. 2022 2021 2020 Weighted per share average fair value at grant date $ 16.59 $ 15.22 $ 8.74 Assumptions: Dividend yield 1.5 % 1.4 % 1.7 % Volatility 28.4 % 28.2 % 20.2 % Risk-free interest rate 1.6 % .7 % 1.0 % Expected term 5.7 years 5.7 years 5.8 years Additional information about SARs exercised is presented below. (In thousands) 2022 2021 2020 Intrinsic value of SARs exercised $ 2,448 $ 7,664 $ 6,278 Tax benefit realized SARs exercised 462 1,488 1,252 As of December 31, 2022, there was $ 31.6 million of unrecognized compensation cost related to unvested SARs and stock awards. This cost is expected to be recognized over a weighted average period of approximately 3.2 years. Directors Stock Purchase Plan The Company has a directors stock purchase plan whereby outside directors of the Company and its subsidiaries may elect to use their directors’ fees to purchase Company stock at market value each month end. Remaining shares available for issuance under this plan were 129,665 at December 31, 2022. Shares authorized for issuance under the plan were increased to 150,000 shares in February 2022. In 2022, 21,725 shares were purchased at an average price of $ 67.27 , and in 2021, 14,057 shares were purchased at an average price of $ 65.86 . * All share and per share amounts in this note have been restated for the 5 % common stock dividend distributed in 2022. 109 Table of Conte nts 12. Accumulated Other Comprehensive Income The table below shows the activity and accumulated balances for components of other comprehensive income. The largest component is the unrealized holding gains and losses on available for sale debt securities. Another component is the amortization from other comprehensive income of losses associated with pension benefits, which occurs as the losses are included in current net periodic pension cost. The remaining component is gains and losses in fair value on certain interest rate floors that have been designated as cash flow hedges, including interest rate floors terminated in prior years. For those terminated floors, the realized gains are amortized into interest income through the original maturity dates of the floors. Information about unrealized gains and losses on securities can be found in Note 3, information about unrealized gains and losses on pension plans can be found in Note 10, and information about unrealized gains and losses on cash flow hedge derivatives is located in Note 19. (In thousands) Unrealized Gains (Losses) on Securities (1) Pension Loss Unrealized Gains (Losses) on Cash Flow Hedge Derivatives (2) Total Accumulated Other Comprehensive Income (Loss) Balance January 1, 2022 $ 23,174 $ ( 20,668 ) $ 74,574 $ 77,080 Other comprehensive income (loss) before reclassifications to current earnings ( 1,551,059 ) 3,197 ( 2,428 ) ( 1,550,290 ) Amounts reclassified to current earnings from accumulated other comprehensive income 20,273 1,446 ( 23,355 ) ( 1,636 ) Current period other comprehensive income (loss), before tax ( 1,530,786 ) 4,643 ( 25,783 ) ( 1,551,926 ) Income tax (expense) benefit 382,697 ( 1,161 ) 6,446 387,982 Current period other comprehensive income (loss), net of tax ( 1,148,089 ) 3,482 ( 19,337 ) ( 1,163,944 ) Balance December 31, 2022 $ ( 1,124,915 ) $ ( 17,186 ) $ 55,237 $ ( 1,086,864 ) Balance January 1, 2021 $ 263,801 $ ( 25,118 ) $ 92,694 $ 331,377 Other comprehensive income (loss) before reclassifications to current earnings ( 324,122 ) 3,627 — ( 320,495 ) Amounts reclassified to current earnings from accumulated other comprehensive income 3,284 2,307 ( 24,160 ) ( 18,569 ) Current period other comprehensive income (loss), before tax ( 320,838 ) 5,934 ( 24,160 ) ( 339,064 ) Income tax (expense) benefit 80,211 ( 1,484 ) 6,040 84,767 Current period other comprehensive income (loss), net of tax ( 240,627 ) 4,450 ( 18,120 ) ( 254,297 ) Balance December 31, 2021 $ 23,174 $ ( 20,668 ) $ 74,574 $ 77,080 (1) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "investment securities gains (losses), net" in the consolidated statements of income. (2) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "interest and fees on loans" in the consolidated statements of income. 13. Segments The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial, and Wealth. The Consumer segment consists of various consumer loan and deposit products offered through its retail branch network of approximately 150 locations. This segment also includes indirect and other consumer loan financing businesses, along with debit and credit card loan and fee businesses. Residential mortgage origination, sales and servicing functions are included in this Consumer segment, but residential mortgage loans retained by the Company are not considered part of this segment and are instead included in the Other/Elimination column. The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, and international services, along with business and governmental deposit products and commercial cash management services. This segment also includes both merchant and commercial bank card products as well as the Capital Markets Group, which sells fixed income securities and provides securities safekeeping and accounting services to its business and correspondent bank customers. The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management, and brokerage services. This segment also provides various loan and deposit related services to its private banking customers. The Company’s business line reporting system derives segment information from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting procedures and methods, which have been developed to reflect the underlying economics of the businesses. These methodologies are applied in connection with funds transfer pricing and assignment of overhead costs 110 Table of Conte nts among segments. Funds transfer pricing was used in the determination of net interest income. A standard cost for funds used is applied to assets, and a credit for funds provided is applied to liabilities based on their maturity, prepayment and/or repricing characteristics. Income and expense that directly relate to segment operations are recorded in the segment when incurred. Expenses that indirectly support the segments are allocated based on the most appropriate method available. The Company uses a funds transfer pricing method to value funds used (e.g., loans, fixed assets, and cash) and funds provided (e.g., 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 following tables present selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues between the three segments. Management periodically makes changes to methods of assigning costs and income to its business segments to better reflect operating results. If appropriate, these changes are reflected in prior year information presented below. Segment Income Statement Data (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 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 The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column include activity not related to the segments, such as that relating to administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. The provision for credit losses in this category contains the difference between net loan charge-offs assigned directly to the segments and the recorded provision for credit loss expense. Included in this category’s net interest income are earnings of the investment portfolio, which are not allocated to a segment. 111 Table of Conte nts Segment Balance Sheet Data (In thousands) Consumer Commercial Wealth Segment Totals Other/Elimination Consolidated Totals Average balances for 2022: Assets $ 1,973,907 $ 10,239,825 $ 1,838,023 $ 14,051,755 $ 19,553,562 $ 33,605,317 Loans, including held for sale 1,828,792 10,021,057 1,827,283 13,677,132 1,892,609 15,569,741 Goodwill and other intangible assets 82,566 67,727 746 151,039 3,600 154,639 Deposits 13,398,484 11,941,396 2,804,781 28,144,661 ( 43,964 ) 28,100,697 Average balances for 2021: Assets $ 2,066,625 $ 10,550,065 $ 1,584,765 $ 14,201,455 $ 19,962,280 $ 34,163,735 Loans, including held for sale 1,924,297 10,237,980 1,575,058 13,737,335 1,948,577 15,685,912 Goodwill and other intangible assets 80,448 67,832 746 149,026 3,600 152,626 Deposits 12,838,702 11,990,753 2,965,818 27,795,273 ( 11,157 ) 27,784,116 The above segment balances include only those items directly associated with the segment. The “Other/Elimination” column includes unallocated bank balances not associated with a segment (such as investment securities and federal funds sold), balances relating to certain other administrative and corporate functions, and eliminations between segment and non-segment balances. This column also includes the resulting effect of allocating such items as float, deposit reserve and capital for the purpose of computing the cost or credit for funds used/provided. The Company’s reportable segments are strategic lines of business that offer different products and services. They are managed separately because each line services a specific customer need, requiring different performance measurement analyses and marketing strategies. The performance measurement of the segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments’ financial condition and results of operations if they were independent entities. 112 Table of Conte nts 14. Common and Preferred Stock* On December 19, 2022, the Company distributed a 5 % stock dividend on its $ 5 par common stock for the 29th consecutive year. All per common share data in this report has been restated to reflect the stock dividend. The Company applies the two-class method of computing income per share, as nonvested share-based awards that pay nonforfeitable common stock dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the following table. Nonvested share-based awards are further discussed in Note 11, Stock-Based Compensation. Basic income per share is based on the weighted average number of common shares outstanding during the year. Diluted income per share gives effect to all dilutive potential common shares that were outstanding during the year. Presented below is a summary of the components used to calculate basic and diluted income per common share, which have been restated for all stock dividends. (In thousands, except per share data) 2022 2021 2020 Basic income per common share: 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 Less income allocated to nonvested restricted stock 4,450 4,846 3,215 Net income allocated to common stock $ 483,949 $ 525,919 $ 338,876 Weighted average common shares outstanding 125,275 127,738 128,286 Basic income per common share $ 3.86 $ 4.12 $ 2.64 Diluted income per common share: Net income available to common shareholders $ 488,399 $ 530,765 $ 342,091 Less income allocated to nonvested restricted stock 4,442 4,838 3,211 Net income allocated to common stock $ 483,957 $ 525,927 $ 338,880 Weighted average common shares outstanding 125,275 127,738 128,286 Net effect of the assumed exercise of stock-based awards - based on the treasury stock method using the average market price for the respective periods 285 300 248 Weighted average diluted common shares outstanding 125,560 128,038 128,534 Diluted income per common share $ 3.85 $ 4.11 $ 2.64 Unexercised stock appreciation rights of 163 thousand, 92 thousand and 333 thousand were excluded from the computation of diluted income per share for the years ended December 31, 2022, 2021 and 2020, respectively, because their inclusion would have been anti-dilutive. On September 1, 2020, the Company redeemed all outstanding shares of its 6.00 % Series B Non-Cumulative Perpetual Preferred Stock, $ 1.00 par value per share, (Series B Preferred Stock) and the corresponding depositary shares representing fractional interests in the Series B Preferred Stock (Series B Depositary Shares). The 6,000,000 depositary shares, each representing a 1/1,000th interest in a share of Series B Preferred Stock, were redeemed simultaneously with the redemption of the Series B Preferred Stock at a redemption price of $ 25 per depositary share. Regular dividends on the outstanding shares of the Series B Preferred Stock were paid separately on September 1, 2020 to all holders of record as of August 14, 2020, in the customary manner, and future dividends ceased to accrue. For the year ended December 31, 2020, preferred stock dividends totaled $ 12.0 million, and included $ 5.2 million related to the preferred stock redemption, which is the excess of the redemption costs over the book value of the preferred stock. The Company maintains a treasury stock buyback program authorized by its Board of Directors. The most recent authorization in April 2022 approved future purchases of 5,000,000 shares of the Company's common stock. At December 31, 2022, 3,112,058 shares of common stock remained available for purchase under the current authorization. 113 Table of Conte nts The table below shows activity in the outstanding shares of the Company’s common stock during the past three years. Shares in the table below are presented on an historical basis and have not been restated for the annual 5% stock dividends. Years Ended December 31 (In thousands) 2022 2021 2020 Shares outstanding at January 1 121,436 117,138 112,132 Issuance of stock: Awards and sales under employee and director plans 306 328 335 5% stock dividend 5,953 5,790 5,574 Other purchases of treasury stock ( 2,684 ) ( 1,807 ) ( 887 ) Other ( 12 ) ( 13 ) ( 16 ) Shares outstanding at December 31 124,999 121,436 117,138 * Except as noted in the above table, all share and per share amounts in this footnote have been restated for the 5% common stock dividend distributed in 2022. 114 Table of Conte nts 15. Regulatory Capital Requirements The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and additional discretionary actions by regulators that could have a direct material effect on the Company’s financial statements. The regulations require the Company to meet specific capital adequacy guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The following tables show the capital amounts and ratios for the Company (on a consolidated basis) and the Bank, together with the minimum capital adequacy and well-capitalized capital requirements, at the last two year ends. Actual Minimum Capital Adequacy Requirement Well-Capitalized Capital Requirement (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio December 31, 2022 Total Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 3,600,920 14.89 % $ 1,934,274 8.00 % N.A. N.A. Commerce Bank 3,125,987 13.05 1,916,529 8.00 $ 2,395,661 10.00 % Tier I Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 3,417,223 14.13 % $ 1,450,705 6.00 % N.A. N.A. Commerce Bank 2,942,291 12.28 1,437,397 6.00 $ 1,916,529 8.00 % Tier I Common Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 3,417,223 14.13 % $ 1,088,029 4.50 % N.A. N.A. Commerce Bank 2,942,291 12.28 1,078,047 4.50 $ 1,557,180 6.50 % Tier I Capital (to adjusted quarterly average assets): (Leverage Ratio) Commerce Bancshares, Inc. (consolidated) $ 3,417,223 10.34 % $ 1,322,102 4.00 % N.A. N.A. Commerce Bank 2,942,291 8.86 1,328,220 4.00 $ 1,660,275 5.00 % December 31, 2021 Total Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 3,399,880 15.12 % $ 1,798,700 8.00 % N.A. N.A. Commerce Bank 2,939,345 13.19 1,783,288 8.00 $ 2,229,110 10.00 % Tier I Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 3,225,044 14.34 % $ 1,349,025 6.00 % N.A. N.A. Commerce Bank 2,764,509 12.40 1,337,466 6.00 $ 1,783,288 8.00 % Tier I Common Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 3,225,044 14.34 % $ 1,011,769 4.50 % N.A. N.A. Commerce Bank 2,764,509 12.40 1,003,100 4.50 $ 1,448,922 6.50 % Tier I Capital (to adjusted quarterly average assets): (Leverage Ratio) Commerce Bancshares, Inc. (consolidated) $ 3,225,044 9.13 % $ 1,412,370 4.00 % N.A. N.A. Commerce Bank 2,764,509 7.86 1,406,785 4.00 $ 1,758,482 5.00 % The minimum required ratios for well-capitalized banks (under prompt corrective action provisions) are 6.5 % for Tier I common capital, 8.0 % for Tier I capital, 10.0 % for Total capital and 5.0 % for the leverage ratio. At December 31, 2022 and 2021, the Company met all capital requirements to which it is subject, and the Bank’s capital position exceeded the regulatory definition of well-capitalized. 115 Table of Conte nts 16. Revenue from Contracts with Customers The core principle of ASU 2014-09 Revenue from Contracts with Customers is that an entity should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For the year ended December 31, 2022, approximately 63 % of the Company’s total revenue was comprised of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services. The following table disaggregates non-interest income subject to ASU 2014-09 by major product line. For the Years Ended December 31 (In thousands) 2022 2021 2020 Bank card transaction fees $ 176,144 $ 167,891 $ 151,797 Trust fees 184,719 188,227 160,637 Deposit account charges and other fees 94,381 97,217 93,227 Consumer brokerage services 19,117 18,362 15,095 Other non-interest income 34,742 27,223 31,040 Total non-interest income from contracts with customers 509,103 498,920 451,796 Other non-interest income (1) 37,432 61,473 54,071 Total non-interest income $ 546,535 $ 560,393 $ 505,867 (1) This revenue is not within the scope of ASU 2014-09, and includes fees relating to capital market activities, loan fees and sales, derivative instruments, standby letters of credit and various other transactions. The following table presents the opening and closing receivable balances for the years ended December 31, 2022 and 2021 for the Company’s significant revenue categories subject to ASU 2014-09. (In thousands) December 31, 2022 December 31, 2021 December 31, 2020 Bank card transaction fees $ 17,254 $ 16,424 $ 14,199 Trust fees 2,038 2,222 2,071 Deposit account charges and other fees 6,631 6,702 6,933 Consumer brokerage services 949 391 432 For these revenue categories, none of the transaction price has been allocated to performance obligations that are unsatisfied as of the end of a reporting period. A description of these revenue categories follows. 116 Table of Conte nts Bank Card Transaction Fees The following table presents the components of bank card fee income. For the Years Ended December 31 (In thousands) 2022 2021 2020 Debit card: Fee income $ 44,240 $ 44,170 $ 39,862 Expense for network charges ( 3,272 ) ( 3,160 ) ( 2,218 ) Net debit card fees 40,968 41,010 37,644 Credit card: Fee income 31,609 29,214 24,921 Expense for network charges and rewards ( 17,049 ) ( 14,070 ) ( 11,528 ) Net credit card fees 14,560 15,144 13,393 Corporate card: Fee income 217,539 197,483 179,251 Expense for network charges and rewards ( 117,527 ) ( 105,782 ) ( 96,877 ) Net corporate card fees 100,012 91,701 82,374 Merchant: Fee income 34,583 33,019 29,660 Fees to cardholder banks ( 10,425 ) ( 9,640 ) ( 8,115 ) Expense for network charges ( 3,554 ) ( 3,343 ) ( 3,159 ) Net merchant fees 20,604 20,036 18,386 Total bank card transaction fees $ 176,144 $ 167,891 $ 151,797 The majority of debit and credit card fees are reported in the Consumer segment, while corporate card and merchant fees are reported in the Commercial segment. Debit and Credit Card Fees The Company issues debit and credit cards to its retail and commercial banking customers who use the cards to purchase goods and services from merchants through an electronic payment system. As a card issuer, the Company earns fees, including interchange income, for processing the cardholder’s purchase transaction with a merchant through a settlement network. Purchases are charged directly to a customer’s checking account (in the case of a debit card), or are posted to a customer’s credit card account. The fees earned are established by the settlement network and are dependent on the type of transaction processed but are typically based on a per unit charge. Interchange income, the largest component of debit and credit card fees, is settled daily through the networks. The services provided to the cardholders include issuing and maintaining cards, settling purchases with merchants, and maintaining memberships in various card networks to facilitate processing. These services are considered one performance obligation, as one of the services would not be performed without the others. The performance obligation is satisfied as services are rendered for each purchase transaction, and income is immediately recognized. In order to participate in the settlement network process, the Company must pay various transaction-related costs, established by the networks, including membership fees and a per unit charge for each transaction. These expenses are recorded net of the card fees earned. Consumer credit card products offer cardholders rewards that can be later redeemed for cash, goods or services to encourage card usage. Reward programs must meet network requirements based on the type of card issued. The expense associated with the rewards granted are recorded net of the credit card fees earned. Commercial card products offer cash rewards to corporate cardholders to encourage card usage in facilitating corporate payments. The Company pays cash rewards based on contractually agreed upon amounts, normally as a percent of each sales transaction. The expense associated with the cash rewards program is recorded net of the corporate card fees earned. 117 Table of Conte nts Merchant Fees The Company offers merchant processing services to its business customers to enable them to accept credit and debit card payments. Merchant processing activities include gathering merchant sales information, authorizing sales transactions and collecting the funds from card issuers using the networks. The merchant is charged a merchant discount fee for the services based on agreed upon pricing between the merchant and the Company. Merchant fees are recorded net of outgoing interchange costs paid to the card issuing banks and net of other network costs as shown in the table above. Merchant services provided are considered one performance obligation, as one of the services would not be performed without the others. The performance obligation is satisfied as services are rendered for each settlement transaction and income is immediately recognized. Income earned from merchant fees settles with the customer according to terms negotiated in individual customer contracts. The majority of customers settle with the Company at least monthly. Trust Fees The following table shows the components of revenue within trust fees, which are reported within the Wealth segment. For the Years Ended December 31 (In thousands) 2022 2021 2020 Private client $ 147,239 $ 147,653 $ 123,941 Institutional 31,525 33,890 30,544 Other 5,955 6,684 6,152 Total trust fees $ 184,719 $ 188,227 $ 160,637 The Company provides trust and asset management services to both private client and institutional trust customers including asset custody, investment advice, and reporting and administrative services. Other specialized services such as tax preparation, financial planning, representation and other related services are provided as needed. Trust fees are generally earned monthly and billed based on a rate multiplied by the fair value of the customer's trust assets. The majority of customer trust accounts are billed monthly. However, some accounts are billed quarterly, and a small number of accounts are billed semi-annually or annually, in accordance with agreements in place with the customer. The Company accrues trust fees monthly based on an estimate of fees due and either directly charges the customer’s account the following month or invoices the customer for fees due according to the billing schedule. The Company maintains written product pricing information which is used to bill each trust customer based on the services provided. Providing trust services is considered to be a single performance obligation that is satisfied on a monthly basis, involving the monthly custody of customer assets, statement rendering, periodic investment advice where applicable, and other specialized services as needed. As such, performance obligations are considered to be satisfied at the conclusion of each month while trust fee income is also recognized monthly. Deposit Account Charges and Other Fees The following table shows the components of revenue within deposit account charges and other fees. For the Years Ended December 31 (In thousands) 2022 2021 2020 Corporate cash management fees $ 52,501 $ 50,051 $ 46,762 Overdraft and return item fees 19,938 24,157 22,951 Other service charges on deposit accounts 21,942 23,009 23,514 Total deposit account charges and other fees $ 94,381 $ 97,217 $ 93,227 Approximately 60 % of this revenue is reported in the Commercial segment, while the remainder is reported in the Consumer segment. The Company provides corporate cash management services to its business and non-profit customers to meet their various transaction processing needs. Such services include deposit and check processing, lockbox, remote deposit, reconciliation, online banking and other similar transaction processing services. The Company maintains unit prices for each type of service, and the customer is billed based on transaction volumes processed monthly. The customer is usually billed either monthly or 118 Table of Conte nts quarterly, however, some customers may be billed semi-annually or annually. The customer may pay for the cash management services either by paying in cash or using the value of deposit balances (formula provided to the customer) held at the Company. The Company’s performance obligation for corporate cash management services is the processing of items over a monthly term, and the obligations are satisfied at the conclusion of each month. Overdraft fees are charged to customers when daily checks and other withdrawals to customers’ accounts exceed balances on hand. Fees are based on a unit price multiplied by the number of items processed whose total amounts exceed the available account balance. The daily overdraft charge is calculated and the fee is posted to the customer’s account each day. The Company’s performance obligation for overdraft transactions is based on the daily transaction processed and the obligation is satisfied as each day’s transaction processing is concluded. In September 2022, as discussed in the Non-Interest Income section of Item 7, the Company implemented enhancements to consumer checking accounts that eliminated return item fees and are expected to lower future overdraft fees for customers. Other deposit fees include numerous smaller fees such as monthly statement fees, foreign ATM processing fees, identification restoration fees, and stop payment fees. Such fees are mostly billed to customers directly on their monthly deposit account statements, or in the case of foreign ATM processing fees, the fee is charged to the customer on the day that transactions are processed. Performance obligations for all of these various services are satisfied at the time that the service is rendered. Consumer Brokerage Services The following shows the components of revenue within consumer brokerage services, and nearly all of this revenue is reported in the Company's Wealth segment. For the Years Ended December 31 (In thousands) 2022 2021 2020 Commission income $ 10,359 $ 9,328 $ 8,002 Managed account services 8,758 9,034 7,093 Total consumer brokerage services $ 19,117 $ 18,362 $ 15,095 Consumer brokerage services revenue is comprised of commissions received upon the execution of purchases and sales of mutual fund shares and equity securities, in addition to sales of annuities and certain limited insurance products in an agency capacity. Also, fees are earned on professionally managed advisory programs through arrangements with sub-advisors. Payment from the customer is due upon settlement date for purchases and sales of securities, at the purchase date for annuities and insurance products, and upon inception of the service period for advisory programs. Most of the contracts (except advisory contracts) encompass two types of performance obligations. The first is an obligation to provide account maintenance, record keeping and custodial services throughout the contract term. The second is the obligation to provide trade execution services for the customers' purchases and sales of products mentioned above. The first obligation is satisfied over time as the service period elapses, while the second type of obligation is satisfied upon the execution of each purchase/sale transaction. Contracts for advisory services contain a single performance obligation comprised of providing the management services and related reporting/administrative services over the contract term. The transaction price of the contracts (except advisory contracts) is a commission charged at the time of trade execution. The commission varies across different security types, insurance products and mutual funds. It is generally determined by standardized price lists published by the Company and its mutual fund and insurance vendors. Because the transaction price relates specifically to the trade execution, it has been allocated to that performance obligation and is recorded at the time of execution. The fee for advisory services is charged to the customer in advance of the quarterly service period, based on the account balance at the beginning of the period. Revenue is recognized ratably over the service period. Other Non-Interest Income from Contracts with Customers Other non-interest income from contracts with customers consists mainly of various customer deposit related fees such as ATM fees and gains on sales of tax credits, foreclosed assets, and bank premises and equipment. Performance obligations for these services consist mainly of the execution of transactions for sales of various properties or providing specific deposit related transactions. Fees from these revenue sources are recognized when the performance obligation is completed, at which time cash is received by the Company. 119 Table of Conte nts 17. Fair Value Measurements The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale debt securities, equity securities, trading debt securities, certain investments relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets and liabilities at fair value on a nonrecurring basis, such as mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or fair value accounting, or write-downs of individual assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: • Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. • Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds). • Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider. When determining the fair value measurements for assets and liabilities required or permitted to be recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. Nevertheless, 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. 120 Table of Conte nts Instruments Measured at Fair Value on a Recurring Basis The table below presents the carrying values of assets and liabilities measured at fair value on a recurring basis at December 31, 2022 and 2021. There were no transfers among levels during these years. Fair Value Measurements Using (In thousands) Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2022 Assets: Residential mortgage loans held for sale $ — $ — $ — $ — Available for sale debt securities: U.S. government and federal agency obligations 1,035,406 1,035,406 — — Government-sponsored enterprise obligations 43,108 — 43,108 — State and municipal obligations 1,767,109 — 1,765,268 1,841 Agency mortgage-backed securities 4,308,427 — 4,308,427 — Non-agency mortgage-backed securities 1,211,607 — 1,211,607 — Asset-backed securities 3,397,801 — 3,397,801 — Other debt securities 474,858 — 474,858 — Trading debt securities 43,523 — 43,523 — Equity securities 6,210 6,210 — — Private equity investments 178,127 — — 178,127 Derivatives * 60,492 — 60,458 34 Assets held in trust for deferred compensation plan 17,856 17,856 — — Total assets 12,544,524 1,059,472 11,305,050 180,002 Liabilities: Derivatives * 54,984 — 54,865 119 Liabilities held in trust for deferred compensation plan 17,856 17,856 — — Total liabilities $ 72,840 $ 17,856 $ 54,865 $ 119 December 31, 2021 Assets: Residential mortgage loans held for sale $ 5,570 $ — $ 5,570 $ — Available for sale debt securities: U.S. government and federal agency obligations 1,080,720 1,080,720 — — Government-sponsored enterprise obligations 51,755 — 51,755 — State and municipal obligations 2,096,827 — 2,094,843 1,984 Agency mortgage-backed securities 5,683,000 — 5,683,000 — Non-agency mortgage-backed securities 1,366,477 — 1,366,477 — Asset-backed securities 3,539,219 — 3,539,219 — Other debt securities 632,029 — 632,029 — Trading debt securities 46,235 — 46,235 — Equity securities 7,153 7,153 — — Private equity investments 147,406 — — 147,406 Derivatives * 41,842 — 40,994 848 Assets held in trust for deferred compensation plan 21,794 21,794 — — Total assets 14,720,027 1,109,667 13,460,122 150,238 Liabilities: Derivatives * 12,101 — 11,824 277 Liabilities held in trust for deferred compensation plan 21,794 21,794 — — Total liabilities $ 33,895 $ 21,794 $ 11,824 $ 277 *The fair value of each class of derivative is shown in Note 19. 121 Table of Conte nts Valuation methods for instruments measured at fair value on a recurring basis Following is a description of the Company’s valuation methodologies used for instruments measured at fair value on a recurring basis: Residential mortgage loans held for sale The Company originates fixed rate, first lien residential mortgage loans that are intended for sale in the secondary market. Fair value is based on quoted secondary market prices for loans with similar characteristics, which are adjusted to include the embedded servicing value in the loans. This adjustment represents an unobservable input to the valuation but is not considered significant given the relative insensitivity of the valuation to changes in this input. Accordingly, these loan measurements are classified as Level 2. Available for sale debt securities For available for sale securities, changes in fair value are recorded in other comprehensive income. This portfolio comprises the majority of the assets which the Company records at fair value. Most of the portfolio, which includes government-sponsored enterprise, mortgage-backed and asset-backed securities, are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. These measurements are classified as Level 2 in the fair value hierarchy. Where quoted prices are available in an active market, the measurements are classified as Level 1. Most of the Level 1 measurements apply to U.S. Treasury obligations. The fair values of Level 1 and 2 securities in the available for sale portfolio are prices provided by a third-party pricing service. The prices provided by the third-party pricing service are based on observable market inputs, as described in the sections below. On a quarterly basis, the Company compares these prices to other independent sources for the same and similar securities. Variances are analyzed, and, if appropriate, additional research is conducted with the third-party pricing service. Based on this research, the pricing service may affirm or revise its quoted price. No significant adjustments have been made to the prices provided by the pricing service. The pricing service also provides documentation on an ongoing basis that includes reference data, inputs and methodology by asset class, which is reviewed by the Company to ensure that security placement within the fair value hierarchy is appropriate. Valuation methods and inputs, by class of security: • U.S. government and federal agency obligations U.S. treasury bills, bonds and notes, including inflation-protected securities, are valued using live data from active market makers and inter-dealer brokers. Valuations for stripped coupon and principal issues are derived from yield curves generated from various dealer contacts and live data sources. • Government-sponsored enterprise obligations Government-sponsored enterprise obligations are evaluated using cash flow valuation models. Inputs used are live market data, cash settlements, Treasury market yields, and floating rate indices such as LIBOR, CMT, and Prime. • State and municipal obligations, excluding auction rate securities A yield curve is generated and applied to bond sectors, and individual bond valuations are extrapolated. Inputs used to generate the yield curve are bellwether issue levels, established trading spreads between similar issuers or credits, historical trading spreads over widely accepted market benchmarks, new issue scales, and verified bid information. Bid information is verified by corroborating the data against external sources such as broker-dealers, trustees/paying agents, issuers, or non-affiliated bondholders. • Mortgage and asset-backed securities Collateralized mortgage obligations and other asset-backed securities are valued at the tranche level. For each tranche valuation, the process generates predicted cash flows for the tranche, applies a market based (or benchmark) yield/spread for each tranche, and incorporates deal collateral performance and tranche level attributes to determine tranche-specific spreads to adjust the benchmark yield. Tranche cash flows are generated from new deal files and prepayment/default assumptions. Tranche spreads are based on tranche characteristics such as average life, type, volatility, ratings, underlying collateral and performance, and prevailing market conditions. The appropriate tranche spread is applied to the corresponding benchmark, and the resulting value is used to discount the cash flows to generate an evaluated price. 122 Table of Conte nts Valuation of agency pass-through securities, typically issued under GNMA, FNMA, FHLMC, and SBA programs, are primarily derived from information from the to-be-announced (TBA) market. This market consists of generic mortgage pools which have not been received for settlement. Snapshots of the TBA market, using live data feeds distributed by multiple electronic platforms, are used in conjunction with other indices to compute a price based on discounted cash flow models. • Other debt securities Other debt securities are valued using active markets and inter-dealer brokers as well as bullet spread scales and option adjusted spreads. The spreads and models use yield curves, terms and conditions of the bonds, and any special features (e.g., call or put options and redemption features). • Auction rate securities The available for sale portfolio includes certain auction rate securities. Due to the illiquidity in the auction rate securities market in recent years, the fair value of these securities cannot be based on observable market prices. The fair values of these securities are estimated using a discounted cash flows analysis which is discussed more fully in the Level 3 Inputs section of this note. Because many of the inputs significant to the measurement are not observable, these measurements are classified as Level 3 measurements. Trading debt securities The securities in the Company’s trading portfolio are priced by averaging several broker quotes for similar instruments and are classified as Level 2 measurements. Equity securities with readily determinable fair values Equity securities are priced using the market prices for each security from the major stock exchanges or other electronic quotation systems. These are generally classified as Level 1 measurements. Stocks which trade infrequently are classified as Level 2. Private equity investments These securities are held by the Company’s private equity subsidiary and are included in other investment securities in the consolidated balance sheets. Due to the absence of quoted market prices, valuation of these nonpublic investments requires significant management judgment. These fair value measurements, which are discussed in the Level 3 Inputs section of this note, are classified as Level 3. Derivatives The Company’s derivative instruments include interest rate swaps and floors , foreign exchange forward contracts, and certain credit risk guarantee agreements. When appropriate, the impact of credit standing as well as any potential credit enhancements, such as collateral, has been considered in the fair value measurement. • Valuations for interest rate swaps are derived from a proprietary model whose significant inputs are readily observable market parameters, primarily yield curves used to calculate current exposure. Counterparty credit risk is incorporated into the model and calculated by applying a net credit spread over LIBOR to the swap's total expected exposure over time. The net credit spread is comprised of spreads for both the Company and its counterparty, derived from probability of default and other loss estimate information obtained from a third party credit data provider or from the Company's Credit Department when not otherwise available. The credit risk component is not significant compared to the overall fair value of the swaps. The results of the model are constantly validated through comparison to active trading in the marketplace. Parties to swaps requiring central clearing are required to post collateral (generally in the form of cash or marketable securities) to an authorized clearing agency that holds and monitors the collateral. The Company's clearing counterparty characterizes a component of this collateral, known as variation margin, as a legal settlement of the derivative contract exposure, and as a result, the variation margin is considered in determining the fair value of the derivative. Valuations for interest rate floors are also derived from a proprietary model whose significant inputs are readily observable market parameters, primarily yield curves and volatility surfaces. The model uses market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below the strike rates of the floors. The model also incorporates credit valuation adjustments of both the Company's and the 123 Table of Conte nts counterparties' non-performance risk. The credit valuation adjustment component is not significant compared to the overall fair value of the floors. The fair value measurements of interest rate swaps and floors are classified as Level 2 due to the observable nature of the significant inputs utilized. • Fair value measurements for foreign exchange contracts are derived from a model whose primary inputs are quotations from global market makers and are classified as Level 2. • The Company’s contracts related to credit risk guarantees are valued under a proprietary model which uses unobservable inputs and assumptions about the creditworthiness of the counterparty (generally a Bank customer). Customer credit spreads, which are based on probability of default and other loss estimates, are calculated internally by the Company's Credit Department, as mentioned above, and are based on the Company's internal risk rating for each customer. Because these inputs are significant to the measurements, they are classified as Level 3. • Derivatives relating to residential mortgage loan sale activity include commitments to originate mortgage loans held for sale, forward loan sale contracts, and forward commitments to sell TBA securities. The fair values of loan commitments and sale contracts are estimated using quoted market prices for loans similar to the underlying loans in these instruments. The valuations of loan commitments are further adjusted to include embedded servicing value and the probability of funding. These assumptions are considered Level 3 inputs and are significant to the loan commitment valuation; accordingly, the measurement of loan commitments is classified as Level 3. The fair value measurement of TBA contracts is based on security prices published on trading platforms and is classified as Level 2. Assets held in trust for deferred compensation plan Assets held in an outside trust for the Company’s deferred compensation plan consist of investments in mutual funds. The fair value measurements are based on quoted prices in active markets and classified as Level 1. The Company has recorded an asset representing the total investment amount. The Company has also recorded a corresponding liability, representing the Company’s liability to the plan participants. 124 Table of Conte nts The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows: Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In thousands) State and Municipal Obligations Private Equity Investments Derivatives Total Year ended December 31, 2022: Balance at January 1, 2022 $ 1,984 $ 147,406 $ 571 $ 149,961 Total gains or losses (realized/unrealized): Included in earnings — 43,833 ( 591 ) 43,242 Included in other comprehensive income * ( 148 ) — — ( 148 ) Discount accretion 5 — — 5 Purchases of private equity securities — 12,281 — 12,281 Sale / pay down of private equity securities — ( 25,437 ) — ( 25,437 ) Capitalized interest/dividends — 44 — 44 Purchase of risk participation agreement — — 459 459 Sale of risk participation agreement — — ( 524 ) ( 524 ) Balance at December 31, 2022 $ 1,841 $ 178,127 $ ( 85 ) $ 179,883 Total gains or losses for the year included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2022 $ — $ 35,333 $ 170 $ 35,503 Total gains or losses for the year included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2022 $ ( 148 ) $ — $ — $ ( 148 ) Year ended December 31, 2021: Balance at January 1, 2021 $ 7,968 $ 94,368 $ 2,741 $ 105,077 Total gains or losses (realized/unrealized): Included in earnings — 36,344 ( 2,650 ) 33,694 Included in other comprehensive income * ( 170 ) — — ( 170 ) Investment securities called ( 6,000 ) — — ( 6,000 ) Discount accretion 186 — — 186 Purchases of private equity securities — 31,449 — 31,449 Sale / pay down of private equity securities — ( 16,523 ) — ( 16,523 ) Capitalized interest/dividends — 1,768 — 1,768 Purchase of risk participation agreement — — 685 685 Sale of risk participation agreement — — ( 205 ) ( 205 ) Balance at December 31, 2021 $ 1,984 $ 147,406 $ 571 $ 149,961 Total gains or losses for the year included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2021 $ — $ 28,654 $ 475 $ 29,129 Total gains or losses for the year included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2021 $ 11 $ — $ — $ 11 * Included in "net unrealized gains (losses) on securities" in the consolidated statements of comprehensive income. 125 Table of Conte nts Gains and losses on the Level 3 assets and liabilities in the table above are reported in the following income categories: (In thousands) Loan Fees and Sales Other Non-Interest Income Investment Securities Gains (Losses), Net Total Year ended December 31, 2022: Total gains or losses included in earnings $ ( 763 ) $ 172 $ 43,833 $ 43,242 Change in unrealized gains or losses relating to assets still held at December 31, 2022 $ — $ 170 $ 35,333 $ 35,503 Year ended December 31, 2021: Total gains or losses included in earnings $ ( 2,463 ) $ ( 187 ) $ 36,344 $ 33,694 Change in unrealized gains or losses relating to assets still held at December 31, 2021 $ 764 $ ( 289 ) $ 28,654 $ 29,129 Level 3 Inputs As shown above, the Company's significant Level 3 measurements which employ unobservable inputs that are readily quantifiable pertain to auction rate securities (ARS) held by the Bank, investments in portfolio concerns held by the Company's private equity subsidiary, and held for sale residential mortgage loan commitments. ARS are included in state and municipal securities and totaled $ 1.8 million at December 31, 2022, while private equity investments, included in other securities, totaled $ 178.1 million. At December 31, 2022, there were no mortgage loan commitments outstanding. For the the Company's significant Level 3 measurements at December 31, 2022, information about the significant unobservable inputs is presented in the table and discussions below. Quantitative Information about Level 3 Fair Value Measurements Weighted Valuation Technique Unobservable Input Range Average* Auction rate securities Discounted cash flow Estimated market recovery period 5 years 5 years Estimated market rate 7.2 % - 7.8 % 7.5 % Private equity investments Market comparable companies EBITDA multiple 4.0 - 6.5 5.4 * Unobservable inputs were weighted by the relative fair value of the instruments. The fair values of ARS are estimated using a discounted cash flows analysis in which estimated cash flows are based on mandatory interest rates paid under failing auctions and projected over an estimated market recovery period. Under normal conditions, ARS traded in weekly auctions and were considered liquid investments. The Company's estimate of when these auctions might resume is highly judgmental and subject to variation depending on current and projected market conditions. Few auctions of these securities have been successful in recent years, and most secondary transactions have been privately arranged. Estimated cash flows during the period over which the Company expects to hold the securities are discounted at an estimated market rate. These securities are comprised of bonds issued by various states and municipalities for healthcare and student lending purposes, and market rates are derived for each type. Market rates are calculated at each valuation date using a LIBOR or Treasury based rate plus spreads representing adjustments for liquidity premium and nonperformance risk. The spreads are developed internally by employees in the Company's bond department. An increase in the holding period alone would result in a higher fair value measurement, while an increase in the estimated market rate (the discount rate) alone would result in a lower fair value measurement. The valuation of the ARS portfolio is reviewed on a quarterly basis by the Company's chief investment officers. The fair values of the Company's private equity investments are based on a determination of fair value of the investee company less preference payments assuming the sale of the investee company. Investee companies are normally non-public entities. The fair value of the investee company is determined by reference to the investee's total earnings before interest, depreciation/amortization, and income taxes (EBITDA) multiplied by an EBITDA factor. EBITDA is normally determined based on a trailing prior period adjusted for specific factors including current economic outlook, investee management, and specific unique circumstances such as sales order information, major customer status, regulatory changes, etc. The EBITDA multiple is based on management's review of published trading multiples for recent private equity transactions and other judgments and is derived for each individual investee. The fair value of the Company's investment is then calculated based on its ownership percentage in the investee company. On a quarterly basis, these fair value analyses are reviewed by a valuation committee consisting of investment managers and senior Company management. The significant unobservable inputs used in the fair value measurement of the Company’s derivative commitments to originate residential mortgage loans are the percentage of commitments that are actually funded and the mortgage servicing 126 Table of Conte nts value that is inherent in the underlying loan value. A significant increase in the rate of loans that fund would result in a larger derivative asset or liability. A significant increase in the inherent mortgage servicing value would result in an increase in the derivative asset or a reduction in the derivative liability. The probability of funding and the inherent mortgage servicing values are directly impacted by changes in market rates and will generally move in the same direction as interest rates. Instruments Measured at Fair Value on a Nonrecurring Basis For assets measured at fair value on a nonrecurring basis during 2022 and 2021, and still held as of December 31, 2022 and 2021, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation assumptions used to determine each adjustment, and the carrying value of the related individual assets or portfolios at December 31, 2022 and 2021. Fair Value Measurements Using (In thousands) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Balance at December 31, 2022 Collateral dependent loans $ 1,988 $ — $ — $ 1,988 $ ( 2,090 ) Mortgage servicing rights 10,929 — — 10,929 304 Long-lived assets 480 — — 480 ( 965 ) Balance at December 31, 2021 Collateral dependent loans $ 1,664 $ — $ — $ 1,664 $ ( 213 ) Mortgage servicing rights 10,966 — — 10,966 1,799 Long-lived assets 1,018 — — 1,018 ( 1,101 ) The Company's significant Level 3 measurements that are measured on a nonrecurring basis pertain to the Company's mortgage servicing rights retained on certain fixed rate personal real estate loan originations. Mortgage servicing rights are included in other intangible assets on the consolidated balance sheets, and information about these inputs is presented in the table below. Quantitative Information about Level 3 Fair Value Measurements Weighted Valuation Technique Unobservable Input Range Average* Mortgage servicing rights Discounted cash flow Discount rate 9.51 % - 9.72 % 9.60 % Prepayment speeds (CPR)* 6.26 % - 7.28 % 6.43 % Loan servicing costs - annually per loan Performing loans $ 70 - $ 72 $ 71 Delinquent loans $ 200 - $ 750 Loans in foreclosure $ 1,000 *Ranges and weighted averages based on interest rate tranches. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are updated periodically for changes in market conditions. Actual rates may differ from our estimates. Increases in prepayment speed and discount rates negatively impact the fair value of our mortgage servicing rights. Valuation methods for instruments measured at fair value on a nonrecurring basis Following is a description of the Company’s valuation methodologies used for other financial and nonfinancial instruments measured at fair value on a nonrecurring basis. Collateral dependent loans While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for credit losses on loans. Such amounts are generally based on the fair value of the underlying collateral supporting 127 Table of Conte nts the loan. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. The Company maintains a staff of qualified appraisers who also review third party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by credit administration. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. These measurements are classified as Level 3. Nonrecurring adjustments to the carrying value of loans based on fair value measurements at December 31, 2022 and 2021 are shown in the table above. Mortgage servicing rights The Company initially measures its mortgage servicing rights at fair value and amortizes them over the period of estimated net servicing income. They are periodically assessed for impairment based on fair value at the reporting date. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the fair value is estimated based on a valuation model which calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The fair value measurements are classified as Level 3. Long-lived assets When investments in branch facilities and various office buildings are determined to be impaired, their carrying values are written down to estimated fair value, or estimated fair value less cost to sell if the property is held for sale. Fair value is estimated in a process which considers current local commercial real estate market conditions and the judgment of the sales agent and often involves obtaining third party appraisals from certified real estate appraisers. The carrying amounts of these real estate holdings are regularly monitored by real estate professionals employed by the Company. These fair value measurements are classified as Level 3. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. 128 Table of Conte nts 18. Fair Value of Financial Instruments The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for many of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as follows at December 31, 2022 and 2021: Carrying Amount Estimated Fair Value at December 31, 2022 (In thousands) Level 1 Level 2 Level 3 Total Financial Assets Loans: Business $ 5,661,725 $ — $ — $ 5,506,128 $ 5,506,128 Real estate - construction and land 1,361,095 — — 1,347,328 1,347,328 Real estate - business 3,406,981 — — 3,289,655 3,289,655 Real estate - personal 2,918,078 — — 2,654,423 2,654,423 Consumer 2,059,088 — — 1,999,788 1,999,788 Revolving home equity 297,207 — — 295,005 295,005 Consumer credit card 584,000 — — 538,268 538,268 Overdrafts 14,957 — — 14,666 14,666 Total loans 16,303,131 — — 15,645,261 15,645,261 Loans held for sale 4,964 — 4,964 — 4,964 Investment securities 12,511,649 1,041,616 11,244,592 225,441 12,511,649 Federal funds sold 49,505 49,505 — — 49,505 Securities purchased under agreements to resell 825,000 — — 795,574 795,574 Interest earning deposits with banks 389,140 389,140 — — 389,140 Cash and due from banks 452,496 452,496 — — 452,496 Derivative instruments 60,492 — 60,458 34 60,492 Assets held in trust for deferred compensation plan 17,856 17,856 — — 17,856 Total $ 30,614,233 $ 1,950,613 $ 11,310,014 $ 16,666,310 $ 29,926,937 Financial Liabilities Non-interest bearing deposits $ 10,066,356 $ 10,066,356 $ — $ — $ 10,066,356 Savings, interest checking and money market deposits 15,126,981 15,126,981 — — 15,126,981 Certificates of deposit 994,103 — — 982,613 982,613 Federal funds purchased 159,860 159,860 — — 159,860 Securities sold under agreements to repurchase 2,681,874 — — 2,684,471 2,684,471 Other borrowings 8,831 — 8,831 — 8,831 Derivative instruments 54,984 — 54,865 119 54,984 Liabilities held in trust for deferred compensation plan 17,856 17,856 — — 17,856 Total $ 29,110,845 $ 25,371,053 $ 63,696 $ 3,667,203 $ 29,101,952 129 Table of Conte nts Carrying Amount Estimated Fair Value at December 31, 2021 (In thousands) Level 1 Level 2 Level 3 Total Financial Assets Loans: Business $ 5,303,535 $ — $ — $ 5,229,153 $ 5,229,153 Real estate - construction and land 1,118,266 — — 1,099,747 1,099,747 Real estate - business 3,058,837 — — 3,054,481 3,054,481 Real estate - personal 2,805,401 — — 2,809,490 2,809,490 Consumer 2,032,225 — — 2,031,408 2,031,408 Revolving home equity 275,945 — — 273,450 273,450 Consumer credit card 575,410 — — 536,468 536,468 Overdrafts 6,740 — — 6,458 6,458 Total loans 15,176,359 — — 15,040,655 15,040,655 Loans held for sale 8,615 — 8,615 — 8,615 Investment securities 14,695,628 1,087,873 13,413,558 194,197 14,695,628 Federal funds sold 2,800 2,800 — — 2,800 Securities purchased under agreements to resell 1,625,000 — — 1,623,856 1,623,856 Interest earning deposits with banks 3,971,217 3,971,217 — — 3,971,217 Cash and due from banks 305,539 305,539 — — 305,539 Derivative instruments 41,842 — 40,994 848 41,842 Assets held in trust for deferred compensation plan 21,794 21,794 — — 21,794 Total $ 35,848,794 $ 5,389,223 $ 13,463,167 $ 16,859,556 $ 35,711,946 Financial Liabilities Non-interest bearing deposits $ 11,772,374 $ 11,772,374 $ — $ — $ 11,772,374 Savings, interest checking and money market deposits 16,598,085 16,598,085 — — 16,598,085 Certificates of deposit 1,442,614 — — 1,438,919 1,438,919 Federal funds purchased 43,385 43,385 — — 43,385 Securities sold under agreements to repurchase 2,979,582 — — 2,979,677 2,979,677 Other borrowings 12,514 — 12,514 — 12,514 Derivative instruments 12,101 — 11,824 277 12,101 Liabilities held in trust for deferred compensation plan 21,794 21,794 — — 21,794 Total $ 32,882,449 $ 28,435,638 $ 24,338 $ 4,418,873 $ 32,878,849 130 Table of Conte nts 19. Derivative Instruments The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. With the exception of the interest rate floors (discussed below), the Company's derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings. December 31 (In thousands) 2022 2021 Interest rate swaps $ 1,981,821 $ 2,229,419 Interest rate floors 1,000,000 — Interest rate caps 152,784 152,058 Credit risk participation agreements 579,925 485,633 Foreign exchange contracts 27,991 5,119 Mortgage loan commitments — 21,787 Mortgage loan forward sale contracts — 1,165 Forward TBA contracts — 21,000 Total notional amount $ 3,742,521 $ 2,916,181 The largest group of notional amounts relate to interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. Those customers are engaged in a variety of businesses, including real estate, manufacturing, retail product distribution, education, and retirement communities. These interest rate swap contracts with customers are offset by matching interest rate swap contracts purchased by the Company from other financial institutions (dealers). Contracts with dealers that require central clearing are novated to a clearing agency who becomes the Company's counterparty. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings. Many of the Company’s interest rate swap contracts with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions or instant settlement of the contracts. The Company maintains debt ratings and capital well above those minimum requirements. As of December 31, 2022, the Company holds two interest rate floors with a combined notional value of $ 1.0 billion to hedge the risk of declining interest rates on certain floating rate commercial loans. The first floor has a purchased strike rate of 2.50%, is forward-starting beginning on January 1, 2024 and matures on January 1, 2030. In the event that the index rate falls below zero, the maximum rate spread the Company can earn on the notional amount is limited to 2.50%. The second floor has a purchased strike rate of 3.00%, is forward-starting beginning on April 1, 2024 and matures on April 1, 2030. In the event that the index rate on the second floor falls below zero, the maximum rate the Company can earn on the notional amount of the second floor is limited to 3.00%. The premium paid for these floors totaled $ 35.8 million. As of December 31, 2022, the maximum length of time over which the Company is hedging its exposure to lower rates is approximately 6 years. These interest rate floors qualified and were designated as cash flow hedges and were assessed for effectiveness using regression analysis. The change in the fair value of these interest rate floors is recorded in AOCI, net of the amortization of the premiums paid, which are recorded against interest and fees on loans in the consolidated statements of income. As of December 31, 2022, net deferred gains on the interest rate floors totaled $ 2.4 million (pre-tax) and were recorded in AOCI in the consolidated balance sheet. As of December 31, 2022, it is expected that $ 4.9 million (pre-tax) interest rate floor premium amortization will be reclassified from AOCI into earnings over the next 12 months. During the year ended December 31, 2020, the Company monetized three interest rate floors that were previously classified as cash flow hedges with a combined notional balance of $ 1.5 billion and an asset fair value of $ 163.2 million. As of December 31, 2022, the total unrealized gains on the monetized cash flow hedges remaining in AOCI was $ 74.9 million (pre-tax). The unrealized gains will be reclassified into interest income as the underlying forecasted transactions impact earnings through the original maturity dates of the hedged forecasted transactions, or approximately within 4.0 years. The estimated amount of net gains related to the cash flow hedges remaining in AOCI at December 31, 2022 that is expected to be reclassified into income within the next 12 months is $ 23.6 million. 131 Table of Conte nts The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further discussed in Note 21 on Commitments, Contingencies and Guarantees. In addition, the Company enters into foreign exchange contracts, which are mainly comprised of contracts with customers to purchase or deliver specific foreign currencies at specific future dates. Under its program to sell residential mortgage loans in the secondary market, the Company designates certain newly-originated residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments and forward loan sale contracts. Changes in the fair values of the loan commitments and funded loans prior to sale that are due to changes in interest rates are economically hedged with forward contracts to sell residential mortgage-backed securities in the to-be-announced (TBA) market. These forward TBA contracts are also considered to be derivatives and are settled in cash at the security settlement date. In late 2022, the Company temporarily paused sales of these loans and halted entering into the forward contracts, as lower demand for mortgage loans coupled with volatility in the TBA market made it difficult to effectively hedge the Company's mortgage loan production . The fair values of the Company’s derivative instruments, whose notional amounts are listed above, are shown in the table below. Information about the valuation methods used to determine fair value is provided in Note 17 on Fair Value Measurements. The Company presents derivative assets and derivative liabilities on a gross basis, as other assets and other liabilities, on its consolidated balance sheets. Asset Derivatives Liability Derivatives December 31 December 31 2022 2021 2022 2021 (In thousands ) Fair Value Fair Value Derivatives designated as hedging instruments: Interest rate floors $ 33,371 $ — $ — $ — Total derivatives designated as hedging instruments $ 33,371 $ — $ — $ — Derivatives not designated as hedging instruments: Interest rate swaps * $ 23,894 $ 40,752 $ ( 51,742 ) $ ( 11,606 ) Interest rate caps 2,705 147 ( 2,705 ) ( 147 ) Credit risk participation agreements 34 84 ( 119 ) ( 277 ) Foreign exchange contracts 488 77 ( 418 ) ( 45 ) Mortgage loan commitments — 764 — — Mortgage loan forward sale contracts — 5 — ( 1 ) Forward TBA contracts — 13 — ( 25 ) Total derivatives not designated as hedging instruments $ 27,121 $ 41,842 $ ( 54,984 ) $ ( 12,101 ) Total $ 60,492 $ 41,842 $ ( 54,984 ) $ ( 12,101 ) * Certain collateral was posted to and from the Company's clearing party and has been applied to the fair values of the cleared swaps. As a result, these values are net of variation margin of $ 27.8 million and $ 587 thousand for interest rate swaps in an asset position, and $ — million and $ 29.7 million for interest rate swaps in a liability position, at December 31, 2022 and 2021, respectively. 132 Table of Conte nts The Company made an election to exclude the initial premiums paid on the interest rate floors from the hedge effectiveness measurement. Those initial premiums are amortized over the periods between the premium payment month and the contract maturity month. The pre-tax effects of the gains and losses (both the included and excluded amounts for hedge effectiveness assessment) recognized in the other comprehensive income from the cash flow hedging instruments and the amounts reclassified from accumulated other comprehensive income into income (both included and excluded amounts for hedge effectiveness measurement) are shown in the table below. Amount of Gain or (Loss) Recognized in OCI Location of Gain (Loss) Reclassified from AOCI into Income Amount of Gain (Loss) Reclassified from AOCI into Income (In thousands) Total Included Component Excluded Component (In thousands) Total Included Component Excluded Component For the Year Ended December 31, 2022 Derivatives in cash flow hedging relationships: Interest rate floors $ ( 2,428 ) $ — $ ( 2,428 ) Interest and fees on loans $ 23,355 $ 30,679 $ ( 7,324 ) Total $ ( 2,428 ) $ — $ ( 2,428 ) Total $ 23,355 $ 30,679 $ ( 7,324 ) For the Year Ended December 31, 2021 Derivatives in cash flow hedging relationships: Interest rate floors $ — $ — $ — Interest and fees on loans $ 24,160 $ 30,310 $ ( 6,150 ) Total $ — $ — $ — Total $ 24,160 $ 30,310 $ ( 6,150 ) For the Year Ended December 31, 2020 Derivatives in cash flow hedging relationships: Interest rate floors $ 93,497 $ 120,140 $ ( 26,643 ) Interest and fees on loans $ 10,319 $ 15,257 $ ( 4,938 ) Total $ 93,497 $ 120,140 $ ( 26,643 ) Total $ 10,319 $ 15,257 $ ( 4,938 ) The gain and loss recognized through various derivative instruments on the consolidated statements of income are shown in the table below. Location of Gain/(Loss) Recognized in the Consolidated Statements of Income Amount of Gain/(Loss) Recognized in Income on Derivative For the Years Ended December 31 (In thousands) 2022 2021 2020 Derivative instruments: Interest rate swaps Other non-interest income $ 2,472 $ 3,170 $ 317 Interest rate caps Other non-interest income 16 15 20 Credit risk participation agreements Other non-interest income 172 ( 187 ) 413 Foreign exchange contracts Other non-interest income 38 78 ( 111 ) Mortgage loan commitments Loan fees and sales ( 763 ) ( 2,463 ) 2,768 Mortgage loan forward sale contracts Loan fees and sales ( 4 ) 4 ( 4 ) Forward TBA contracts Loan fees and sales 1,773 1,777 ( 1,440 ) Total $ 3,704 $ 2,394 $ 1,963 133 Table of Conte nts The following table shows the extent to which assets and liabilities relating to derivative instruments have been offset in the consolidated balance sheets. It also provides information about these instruments which are subject to an enforceable master netting arrangement, irrespective of whether they are offset, and the extent to which the instruments could potentially be offset. Also shown is collateral received or pledged in the form of other financial instruments, which is generally cash or marketable securities. The collateral amounts in this table are limited to the outstanding balances of the related asset or liability (after netting is applied); thus amounts of excess collateral are not shown. Most of the derivatives in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default. While the Company is party to master netting arrangements with most of its swap counterparties, the Company does not offset derivative assets and liabilities under these arrangements on its consolidated balance sheets. Collateral exchanged between the Company and dealer bank counterparties is generally subject to thresholds and transfer minimums, and usually consist of marketable securities. By contract, this collateral may be sold or re-pledged by the secured party until recalled at a subsequent valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash or securities to its clearing agent. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below. Gross Amounts Not Offset in the Balance Sheet (In thousands) Gross Amount Recognized Gross Amounts Offset in the Balance Sheet Net Amounts Presented in the Balance Sheet Financial Instruments Available for Offset Collateral Received/Pledged Net Amount December 31, 2022 Assets: Derivatives subject to master netting agreements $ 60,270 $ — $ 60,270 $ ( 1,007 ) $ ( 56,816 ) $ 2,447 Derivatives not subject to master netting agreements 222 — 222 Total derivatives $ 60,492 $ — $ 60,492 Liabilities: Derivatives subject to master netting agreements $ 54,609 $ — $ 54,609 $ ( 1,007 ) $ — $ 53,602 Derivatives not subject to master netting agreements 375 — 375 Total derivatives $ 54,984 $ — $ 54,984 December 31, 2021 Assets: Derivatives subject to master netting agreements $ 40,970 $ — $ 40,970 $ ( 347 ) $ — $ 40,623 Derivatives not subject to master netting agreements 872 — 872 Total derivatives $ 41,842 $ — $ 41,842 Liabilities: Derivatives subject to master netting agreements $ 12,019 $ — $ 12,019 $ ( 347 ) $ ( 10,146 ) $ 1,526 Derivatives not subject to master netting agreements 82 — 82 Total derivatives $ 12,101 $ — $ 12,101 134 Table of Conte nts 20. Resale and Repurchase Agreements The Company regularly enters into resale and repurchase agreement transactions with other financial institutions and with its own customers. Resale and repurchase agreements are agreements to purchase/sell securities subject to an obligation to resell/repurchase the same or similar securities. They are accounted for as secured lending and collateralized borrowing (e.g. financing transactions), not as true sales and purchases of the underlying collateral securities. Some of the resale and repurchase agreements were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default. The security collateral accepted or pledged in resale and repurchase agreements with other financial institutions may be sold or re-pledged by the secured party, but is usually delivered to and held by third party trustees. The Company generally retains custody of securities pledged for repurchase agreements with its customers. Additional information about the Company's repurchase agreements is included in Note 8. The Company is party to agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase and resale agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the consolidated balance sheets, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $ 200.0 million at December 31, 2022 and $ 400.0 million at December 31, 2021. The following table shows the extent to which resale agreement assets and repurchase agreement liabilities with the same counterparty have been offset on the consolidated balance sheets, in addition to the extent to which they could potentially be offset. Also shown is collateral received or pledged, which consists of marketable securities. The collateral amounts in the table are limited to the outstanding balances of the related asset or liability (after offsetting is applied); thus amounts of excess collateral are not shown. Gross Amounts Not Offset in the Balance Sheet (In thousands) Gross Amount Recognized Gross Amounts Offset on the Balance Sheet Net Amounts Presented on the Balance Sheet Financial Instruments Available for Offset Securities Collateral Received/Pledged Unsecured amount December 31, 2022 Total resale agreements, subject to master netting arrangements $ 1,025,000 $ ( 200,000 ) $ 825,000 $ — $ ( 825,000 ) $ — Total repurchase agreements, subject to master netting arrangements 2,881,874 ( 200,000 ) 2,681,874 — ( 2,681,874 ) — December 31, 2021 Total resale agreements, subject to master netting arrangements $ 2,025,000 $ ( 400,000 ) $ 1,625,000 $ — $ ( 1,625,000 ) $ — Total repurchase agreements, subject to master netting arrangements 3,379,582 ( 400,000 ) 2,979,582 — ( 2,979,582 ) — 135 Table of Conte nts The table below shows the remaining contractual maturities of repurchase agreements outstanding at December 31, 2022 and 2021, in addition to the various types of marketable securities that have been pledged by the Company as collateral for these borrowings. Remaining Contractual Maturity of the Agreements (In thousands) Overnight and continuous Up to 90 days Greater than 90 days Total December 31, 2022 Repurchase agreements, secured by: U.S. government and federal agency obligations $ 488,053 $ 26,928 $ 12,460 $ 527,441 Agency mortgage-backed securities 1,792,314 21,744 204,500 2,018,558 Non-agency mortgage-backed securities 40,950 — — 40,950 Asset-backed securities 293,001 — — 293,001 Other debt securities 1,924 — — 1,924 Total repurchase agreements, gross amount recognized $ 2,616,242 $ 48,672 $ 216,960 $ 2,881,874 December 31, 2021 Repurchase agreements, secured by: U.S. government and federal agency obligations $ 600,866 $ 33,373 $ 9,259 $ 643,498 Agency mortgage-backed securities 1,844,652 3,908 400,250 2,248,810 Non-agency mortgage-backed securities 32,299 — — 32,299 Asset-backed securities 422,525 — — 422,525 Other debt securities 32,450 — — 32,450 Total repurchase agreements, gross amount recognized $ 2,932,792 $ 37,281 $ 409,509 $ 3,379,582 136 Table of Conte nts 21. Commitments, Contingencies and Guarantees The Company engages in various transactions and commitments with off-balance sheet risk in the normal course of business to meet customer financing needs. The Company uses the same credit policies in making the commitments and conditional obligations described below as it does for on-balance sheet instruments. The following table summarizes these commitments at December 31: (In thousands) 2022 2021 Commitments to extend credit: Credit card $ 5,190,942 $ 5,007,409 Other unfunded loan commitments 9,102,525 8,319,715 Standby letters of credit, net of conveyance to other financial institutions 555,858 418,328 Commercial letters of credit 4,393 5,304 Commitments to extend credit are legally binding agreements to lend to a borrower providing there are no violations of any conditions established in the contract. As many of the commitments are expected to expire without being drawn upon, the total commitment does not necessarily represent future cash requirements. Refer to Note 2 on Loans and Allowance for Credit Losses for further discussion. The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential cash outflow by the Company, a significant amount of the commitments may expire without being drawn upon. To mitigate the potential loss exposure, the Company involves other financial institutions to participate in certain standby letters of credit. Even with such participation, the Company remains liable for the full amount of the standby letters of credit to the third party. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The standby letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured, and in the event of nonperformance by the customer, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. At December 31, 2022, the Company had recorded a liability of $ 3.9 million, representing the carrying value of the guarantee obligations associated with the standby letters of credit. This amount will be accreted into income over the remaining life of the respective commitments. Excluding amounts conveyed to others, commitments outstanding under these letters of credit were $ 614.5 million, which represents the maximum potential future payments guaranteed by the Company at December 31, 2022. Commercial letters of credit act as a means of ensuring payment to a seller upon shipment of goods to a buyer. The majority of commercial letters of credit issued are used to settle payments in international trade. Typically, letters of credit require presentation of documents which describe the commercial transaction, evidence shipment, and transfer title. The Company regularly purchases various state tax credits arising from third-party property redevelopment. These tax credits are either resold to third parties for a profit or retained for use by the Company. During 2022, the Company purchased and sold state tax credits amounting to $ 112.7 million and $ 126.9 million, respectively. At December 31, 2022, the Company had outstanding purchase commitments totaling $ 121.8 million that it expects to fund in 2023. The remaining purchase commitments amount to $ 398.8 million and are expected to be funded from 2024 through 2029. The Company periodically enters into credit risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral, and at December 31, 2022, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term, with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 1 to 14 years. At December 31, 2022, the fair value of the Company's guarantee liability RPAs was $ 119 thousand, and the notional 137 Table of Conte nts amount of the underlying swaps was $ 421.0 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated and is dependent upon the fair value of the interest rate swaps at the time of default. 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 has various legal proceedings pending at December 31, 2022, arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. The Company records a loss accrual for all legal and regulatory matters for which it deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet progressed to the point where a loss amount can be determined to be probable and estimable. 22. Related Parties The Company’s Chief Executive Officer, its Executive Chairman, and its former Vice Chairman are directors of Tower Properties Company (Tower) and, together with members of their immediate families, beneficially own approximately 66 % of the outstanding stock of Tower. At December 31, 2022, Tower owned 245,410 shares of Company stock. Tower is primarily engaged in the business of owning, developing, leasing and managing real property. Payments from the Company and its affiliates to Tower are summarized below. These payments, with the exception of dividend payments, relate to property management services, including construction oversight, on three Company-owned office buildings and related parking garages in downtown Kansas City. (In thousands) 2022 2021 2020 Leasing agent fees $ 125 $ 31 $ — Operation of parking garages 100 71 81 Building management fees 2,118 2,046 2,110 Property construction management fees 184 143 251 Project consulting fees — 84 335 Dividends paid on Company stock held by Tower 248 234 229 Total $ 2,775 $ 2,609 $ 3,006 Tower has a $ 13.5 million line of credit with the Bank which is subject to normal credit terms and has a variable interest rate. The line of credit is collateralized by Company stock and based on collateral value had a maximum borrowing amount of approximately $ 13.4 million at December 31, 2022. There were no borrowings under this line during 2022, and no balance outstanding at December 31, 2022. There were no borrowings during 2021 and 2020, and there was no balance outstanding at December 31, 2021 or 2020. Letters of credit may be collateralized under this line of credit; however, there were no letters of credit outstanding during 2022, 2021 or 2020, and thus, no fees were received during these periods. From time to time, the Bank extends additional credit to Tower for construction and development projects. No construction loans were outstanding during 2022, 2021 and 2020. Tower leases office space in the Kansas City bank headquarters building owned by the Company. Rent paid to the Company totaled $ 82 thousand in 2022, $ 83 thousand in 2021, and $ 87 thousand in 2020, at $ 17.44 , $ 17.25 and $ 17.19 per square foot, respectively. Directors of the Company and their beneficial interests have deposit accounts with the Bank and may be provided with cash management and other banking services, including loans, in the ordinary course of business. Such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unrelated persons and did not involve more than the normal risk of collectability. See Note 2 Loans and Allowance for Credit Losses for additional information for loans to directors and executive officers of the Company and the Bank, and to their affiliates. 138 Table of Conte nts 23. Parent Company Condensed Financial Statements Following are the condensed financial statements of Commerce Bancshares, Inc. (Parent only) for the periods indicated: Condensed Balance Sheets December 31 (In thousands) 2022 2021 Assets Investment in consolidated subsidiaries: Bank $ 2,008,454 $ 2,997,775 Non-banks 138,501 100,347 Cash 233,261 245,616 Investment securities: Available for sale debt 5,207 4,805 Equity 11,129 7,977 Note receivable due from bank subsidiary 50,000 50,000 Advances to subsidiaries, net of borrowings 20,529 40,525 Deferred tax assets 11,987 8,645 Other assets 26,539 29,393 Total assets $ 2,505,607 $ 3,485,083 Liabilities and stockholders’ equity Pension obligation $ 7,446 $ 11,931 Other liabilities 32,870 35,854 Total liabilities 40,316 47,785 Stockholders’ equity 2,465,291 3,437,298 Total liabilities and stockholders’ equity $ 2,505,607 $ 3,485,083 Condensed Statements of Income For the Years Ended December 31 (In thousands) 2022 2021 2020 Income Dividends received from consolidated bank subsidiary $ 300,001 $ 340,001 $ 210,001 Earnings of consolidated subsidiaries, net of dividends 203,965 200,461 148,435 Interest and dividends on investment securities 2,480 2,162 1,802 Management fees charged to subsidiaries 38,632 36,310 33,472 Investment securities gains ( 872 ) 79 53 Net interest income on advances and note to subsidiaries 1,403 51 233 Other 3,709 2,927 4,282 Total income 549,318 581,991 398,278 Expense Salaries and employee benefits 44,352 37,362 31,277 Professional fees 2,740 2,006 1,977 Data processing fees paid to affiliates 3,173 2,834 2,765 Other 15,595 12,973 11,850 Total expense 65,860 55,175 47,869 Income tax benefit ( 4,941 ) ( 3,949 ) ( 3,648 ) Net income $ 488,399 $ 530,765 $ 354,057 139 Table of Conte nts Condensed Statements of Cash Flows For the Years Ended December 31 (In thousands ) 2022 2021 2020 Operating Activities Net income $ 488,399 $ 530,765 $ 354,057 Adjustments to reconcile net income to net cash provided by operating activities: Earnings of consolidated subsidiaries, net of dividends ( 203,965 ) ( 200,461 ) ( 148,435 ) Other adjustments, net 2,557 8,842 5,504 Net cash provided by operating activities 286,991 339,146 211,126 Investing Activities (Increase) decrease in investment in subsidiaries, net ( 9 ) 6 3 Proceeds from maturities/pay downs of investment securities 38 22 1,410 Purchases of investment securities ( 4,534 ) ( 4,786 ) ( 4,863 ) (Increase) decrease in advances to subsidiaries, net 19,996 ( 8,618 ) ( 5,810 ) Net purchases of building improvements and equipment ( 741 ) ( 28 ) ( 94 ) Net cash provided by (used in) investing activities 14,750 ( 13,404 ) ( 9,354 ) Financing Activities 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 used in financing activities ( 314,096 ) ( 252,069 ) ( 331,742 ) Increase (decrease) in cash ( 12,355 ) 73,673 ( 129,970 ) Cash at beginning of year 245,616 171,943 301,913 Cash at end of year $ 233,261 $ 245,616 $ 171,943 Income tax receipts, net $ ( 587 ) $ ( 4,808 ) $ ( 3,663 ) Dividends paid by the Parent to its shareholders were substantially provided from Bank dividends. The Bank may distribute common dividends without prior regulatory approval, provided that the dividends do not exceed the sum of net income for the current year and retained net income for the preceding two years, subject to maintenance of minimum capital requirements. The Parent charges fees to its subsidiaries for management services provided, which are allocated to the subsidiaries based primarily on total average assets. The Parent makes cash advances to its private equity subsidiary for general short-term cash flow purposes. Advances may be made to the Parent by its subsidiary bank for temporary investment of idle funds. Interest on such advances is based on market rates. The Bank has $ 50.0 million of borrowings from the Parent as part of its strategy to manage FDIC insurance premiums. The note has a rolling 13 month maturity, and the interest rate is a variable rate equal to the one year treasury rate. For the past several years, the Parent has maintained a $ 20.0 million line of credit for general corporate purposes with the Bank. The Parent has not borrowed under this line during the past three years. At December 31, 2022, the fair value of the investment securities held by the Parent consisted of investments of $ 5.2 million in corporate bonds, $ 6.0 million in preferred and common stock with readily determinable fair values, and $ 5.1 million in equity securities that do not have readily determinable fair values. 140 Table of Conte nts Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure.