COMMERCE BANCSHARES INC /MO/ - Quarter Report: 2022 June (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
			SECURITIES EXCHANGE ACT OF 1934

________________________________________________________

For the quarterly period ended June 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
			SECURITIES EXCHANGE ACT OF 1934

____________________________________________________________

For the transition period from to

Commission File No. 001-36502


			COMMERCE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)


Missouri		43-0889454
(State of Incorporation)		(IRS Employer Identification No.)
1000 Walnut
Kansas City,	MO	64106
(Address of principal executive offices)		(Zip Code)

(816) 234-2000

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:

Title of class	Trading symbol(s)	Name of exchange on which registered
$5 Par Value Common Stock	CBSH	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of August 3, 2022, the registrant had outstanding 119,882,772 shares of its $5 par value common stock, registrant’s only class of common stock.

Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q


			Page
INDEX
Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021	3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (unaudited)	8
		Notes to Consolidated Financial Statements	9
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	45
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	69
	Item 4.	Controls and Procedures	70

Part II	Other Information
	Item 1.	Legal Proceedings	71
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
	Item 6.	Exhibits	71
Signatures			72

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PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


	June 30, 2022		December 31, 2021
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	15,686,627	$	15,176,359
Allowance for credit losses on loans	(138,039)		(150,044)
Net loans	15,548,588		15,026,315
Loans held for sale (including $1,036,000 and $5,570,000 of residential mortgage loans carried at fair value at June 30, 2022 and December 31, 2021, respectively)	6,467		8,615
Investment securities:
Available for sale debt, at fair value (amortized cost of $14,783,369,000 and $14,419,133,000 at
June 30, 2022 and December 31, 2021, respectively, and allowance for credit losses of $—
at both June 30, 2022 and December 31, 2021)	13,700,308		14,450,027
Trading debt	34,195		46,235
Equity	8,546		9,202
Other	207,989		194,047
Total investment securities	13,951,038		14,699,511
Federal funds sold	26,000		2,800
Securities purchased under agreements to resell	1,450,000		1,625,000
Interest earning deposits with banks	684,994		3,971,217
Cash and due from banks	355,524		305,539
Premises and equipment – net	397,877		388,738
Goodwill	138,921		138,921
Other intangible assets – net	15,853		15,570
Other assets	860,108		506,862
Total assets	$	33,435,370	$	36,689,088
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing	$	11,102,585	$	11,772,374
Savings, interest checking and money market	16,063,064		16,598,085
Certificates of deposit of less than $100,000	404,096		435,960
Certificates of deposit of $100,000 and over	601,488		1,006,654
Total deposits	28,171,233		29,813,073
Federal funds purchased and securities sold under agreements to repurchase	2,234,296		3,022,967
Other borrowings	6,025		12,560
Other liabilities	348,503		392,164
Total liabilities	30,760,057		33,240,764
Commerce Bancshares, Inc. stockholders’ equity:



Common stock, $5 par value
Authorized 140,000,000; issued 122,160,705 shares at June 30, 2022 and December 31, 2021	610,804		610,804
Capital surplus	2,682,161		2,689,894
Retained earnings	262,363		92,493
Treasury stock of 1,881,806 shares at June 30, 2022
and 476,392 shares at December 31, 2021, at cost	(129,588)		(32,973)
Accumulated other comprehensive income	(766,894)		77,080
Total Commerce Bancshares, Inc. stockholders' equity	2,658,846		3,437,298
Non-controlling interest	16,467		11,026
Total equity	2,675,313		3,448,324
Total liabilities and equity	$	33,435,370	$	36,689,088

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME


	For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands, except per share data)	2022		2021		2022		2021
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	142,526	$	144,584	$	274,601	$	290,922
Interest and fees on loans held for sale	161		245		311		549
Interest on investment securities	88,635		55,143		161,740		106,700
Interest on federal funds sold	19		2		20		2
Interest on securities purchased under agreements to resell	4,385		10,416		9,685		21,544
Interest on deposits with banks	2,428		743		3,579		1,113
Total interest income	238,154		211,133		449,936		420,830
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	2,278		1,844		4,038		3,947
Certificates of deposit of less than $100,000	205		327		344		800
Certificates of deposit of $100,000 and over	470		661		897		1,723
Interest on federal funds purchased and securities sold under
agreements to repurchase	2,926		320		3,615		632
Interest on other borrowings	(110)		(1)		(129)		(2)
Total interest expense	5,769		3,151		8,765		7,100
Net interest income	232,385		207,982		441,171		413,730
Provision for credit losses	7,162		(45,655)		(2,696)		(51,887)
Net interest income after credit losses	225,223		253,637		443,867		465,617
NON-INTEREST INCOME
Bank card transaction fees	43,873		42,608		85,918		80,303
Trust fees	46,792		46,257		94,603		90,384
Deposit account charges and other fees	25,564		23,988		47,871		46,563
Capital market fees	3,327		3,327		7,452		8,308
Consumer brokerage services	5,068		4,503		9,514		8,584
Loan fees and sales	3,246		7,446		7,481		17,630
Other	11,557		11,014		18,357		23,416
Total non-interest income	139,427		139,143		271,196		275,188





INVESTMENT SECURITIES GAINS, NET	1,029		16,804		8,192		26,657
NON-INTEREST EXPENSE
Salaries and employee benefits	142,243		130,751		278,196		259,784
Net occupancy	12,503		11,527		24,799		23,548
Equipment	4,734		4,605		9,302		8,958
Supplies and communication	4,361		4,033		9,074		8,158
Data processing and software	27,635		24,954		54,651		50,417
Marketing	5,836		5,680		12,180		10,838
Other	16,193		16,576		30,951		28,996
Total non-interest expense	213,505		198,126		419,153		390,699
Income before income taxes	152,174		211,458		304,102		376,763
Less income taxes	32,021		45,209		63,923		77,285
Net income	120,153		166,249		240,179		299,478
Less non-controlling interest expense	4,359		3,923		6,231		6,180
Net income attributable to Commerce Bancshares, Inc.	$	115,794	$	162,326	$	233,948	$	293,298


Net income per common share — basic	$	.96	$	1.32	$	1.93	$	2.38
Net income per common share — diluted	$	.96	$	1.32	$	1.93	$	2.38

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands)	2022		2021		2022		2021
	(Unaudited)
Net income	$	120,153	$	166,249	$	240,179	$	299,478
Other comprehensive income (loss):


Net unrealized losses on available for sale debt securities	(328,201)		55,725		(835,466)		(102,951)
Pension loss amortization	322		438		645		875
Unrealized losses on cash flow hedge derivatives	(4,615)		(4,525)		(9,153)		(8,911)
Other comprehensive income (loss)	(332,494)		51,638		(843,974)		(110,987)
Comprehensive income (loss)	(212,341)		217,887		(603,795)		188,491
Less non-controlling interest expense	4,359		3,923		6,231		6,180
Comprehensive income (loss) attributable to Commerce Bancshares, Inc.	$	(216,700)	$	213,964	$	(610,026)	$	182,311

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Three Months Ended June 30, 2022 and 2021


	Commerce Bancshares, Inc. Shareholders
(In thousands, except per share data)	Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Non-Controlling Interest		Total
	(Unaudited)
Balance March 31, 2022	$	610,804	$	2,678,025	$	178,504	$	(72,293)	$	(434,400)	$	12,762	$	2,973,402
Net income					115,794						4,359		120,153
Other comprehensive loss									(332,494)				(332,494)
Distributions to non-controlling interest											(654)		(654)
Purchases of treasury stock							(57,350)						(57,350)


Issuance of stock under purchase and equity compensation plans			(55)				55						—
Stock-based compensation			4,191										4,191
Cash dividends paid on common stock ($0.265 per share)					(31,935)								(31,935)

Balance June 30, 2022	$	610,804	$	2,682,161	$	262,363	$	(129,588)	$	(766,894)	$	16,467	$	2,675,313
Balance March 31, 2021	$	589,352	$	2,420,393	$	173,173	$	(39,080)	$	168,752	$	4,795	$	3,317,385

Net Income					162,326						3,923		166,249
Other comprehensive loss									51,638				51,638
Distributions to non-controlling interest											(508)		(508)
Purchases of treasury stock							(13,964)						(13,964)
Issuance of stock under purchase and equity compensation plans			(26)				26						—
Stock-based compensation			3,790										3,790
Cash dividends paid on common stock ($.250 per share)					(30,760)								(30,760)

Balance June 30, 2021	$	589,352	$	2,424,157	$	304,739	$	(53,018)	$	220,390	$	8,210	$	3,493,830

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Six Months Ended June 30, 2022 and 2021


	Commerce Bancshares, Inc. Shareholders
(In thousands, except per share data)	Common Stock		Capital Surplus		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Non-Controlling Interest		Total
	(Unaudited)
Balance December 31, 2021	$	610,804	$	2,689,894	$	92,493	$	(32,973)	$	77,080	$	11,026	$	3,448,324


Net income					233,948						6,231		240,179
Other comprehensive loss									(843,974)				(843,974)
Distributions to non-controlling interest											(790)		(790)

Purchases of treasury stock							(113,205)						(113,205)

Issuance of stock under purchase and equity compensation plans			(16,142)				16,590						448
Stock-based compensation			8,409										8,409
Cash dividends on common stock ($.530 per share)					(64,078)								(64,078)

Balance June 30, 2022	$	610,804	$	2,682,161	$	262,363	$	(129,588)	$	(766,894)	$	16,467	$	2,675,313
Balance December 31, 2020	$	589,352	$	2,436,288	$	73,000	$	(32,970)	$	331,377	$	2,925	$	3,399,972



Net income					293,298						6,180		299,478
Other Comprehensive Loss									(110,987)				(110,987)
Distributions to non-controlling interest											(895)		(895)
Purchases of treasury stock							(39,887)						(39,887)

Issuance of stock under purchase and equity compensation plans			(19,854)				19,839						(15)
Stock-based compensation			7,723										7,723
Cash dividends on common stock ($.500 per share)					(61,559)								(61,559)

Balance June 30, 2021	589,352		2,424,157		304,739		(53,018)		220,390		8,210		3,493,830

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Six Months Ended June 30
(In thousands)	2022		2021
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	240,179	$	299,478
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	(2,696)		(51,887)
Provision for depreciation and amortization	23,638		22,525
Amortization of investment security premiums, net	5,946		41,270
Investment securities gains, net (A)	(8,192)		(26,657)
Net gains on sales of loans held for sale	(1,944)		(13,677)
Originations of loans held for sale	(93,439)		(325,714)
Proceeds from sales of loans held for sale	96,282		356,559
Net decrease in trading debt securities, excluding unsettled transactions	870		1,287
Stock-based compensation	8,409		7,723
(Increase) decrease in interest receivable	(11,739)		6,688
Increase (decrease) in interest payable	247		(2,809)
Increase (decrease) in income taxes payable	(1,855)		19,095


Other changes, net	30,464		(6,632)
Net cash provided by operating activities	286,170		327,249
INVESTING ACTIVITIES:


Distributions received from equity-method investment	400		—
Proceeds from sales of investment securities (A)	3,712		10,060
Proceeds from maturities/pay downs of investment securities (A)	1,462,151		1,789,405
Purchases of investment securities (A)	(1,894,221)		(2,707,024)
Net (increase) decrease in loans	(518,899)		678,554
Securities purchased under agreements to resell	(200,000)		(450,000)
Repayments of securities purchased under agreements to resell	375,000		—
Purchases of premises and equipment	(28,985)		(21,944)
Sales of premises and equipment	1,401		4,786
Net cash used in investing activities	(799,441)		(696,163)
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits	(1,302,692)		685,582
Net decrease in certificates of deposit	(437,030)		(98,436)


Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase	(788,671)		219,845


Net increase (decrease) in other borrowings	(6,535)		1,392

Purchases of treasury stock	(113,205)		(39,887)

Issuance of stock under equity compensation plans	448		(15)

Cash dividends paid on common stock	(64,078)		(61,559)

Net cash provided by (used in) financing activities	(2,711,763)		706,922
Increase (decrease) in cash, cash equivalents and restricted cash	(3,225,034)		338,008
Cash, cash equivalents and restricted cash at beginning of year	4,296,954		2,208,328
Cash, cash equivalents and restricted cash at June 30	$	1,071,920	$	2,546,336

Income tax payments, net	$	62,588	$	55,440
Interest paid on deposits and borrowings	$	8,518	$	9,909
Loans transferred to foreclosed real estate	$	25	$	172

(A) Available for sale debt securities, equity securities, and other securities.

See accompanying notes to consolidated financial statements.

Restricted cash is comprised of cash collateral posted by the Company to secure interest rate swap agreements. This balance is included in other assets in the consolidated balance sheets and totaled $5.4 million and $20.6 million at June 30, 2022 and 2021, respectively.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022 (Unaudited)

1. Principles of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2021 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and revenues and expenses for the periods. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the six month period ended June 30, 2022 are not necessarily indicative of results to be attained for the full year or any other interim period.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company's most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto.

2. Loans and Allowance for Credit Losses

Major classifications within the Company’s held for investment loan portfolio at June 30, 2022 and December 31, 2021 are as follows:


(In thousands)	June 30, 2022		December 31, 2021
Commercial:
Business	$	5,441,592	$	5,303,535
Real estate – construction and land	1,266,260		1,118,266
Real estate – business	3,215,578		3,058,837
Personal Banking:
Real estate – personal	2,836,835		2,805,401
Consumer	2,089,592		2,032,225
Revolving home equity	271,854		275,945
Consumer credit card	558,102		575,410
Overdrafts	6,814		6,740
Total loans	$	15,686,627	$	15,176,359

Accrued interest receivable totaled $36.1 million and $25.9 million at June 30, 2022 and December 31, 2021, respectively, and was included within other assets on the consolidated balance sheets. For the three months ended June 30, 2022, the Company wrote-off accrued interest by reversing interest income of $26 thousand and $762 thousand in the Commercial and Personal Banking portfolios, respectively. Similarly, for the six months ended June 30, 2022, the Company wrote-off accrued interest of $55 thousand and $1.7 million in the Commercial and Personal Banking portfolios, respectively.

At June 30, 2022, loans of $3.1 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.3 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

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Allowance for credit losses

The allowance for credit losses is measured using an average historical loss model which incorporates relevant information about past events (including historical credit loss experience on loans with similar risk characteristics), current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily large loans on non-accrual status, are evaluated on an individual basis.

For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using the Company’s historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and outstanding loan balances during a lookback period. Lookback periods can be different based on the individual pool and represent management’s credit expectations for the pool of loans over the remaining contractual life. In certain loan pools, if the Company’s own historical loss rate is not reflective of the loss expectations, the historical loss rate is augmented by industry and peer data. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given a single path economic forecast of key macroeconomic variables including GDP, disposable income, various interest rates, unemployment rate, consumer price index (CPI) inflation rate, housing price index (HPI), commercial real estate price index (CREPI) and market volatility. The adjustments are based on results from various regression models projecting the impact of the macroeconomic variables to loss rates. The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method. The forecast adjusted loss rate is applied to the amortized cost of loans over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions (except for contractual extensions at the option of the customer), renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring will be executed. Credit cards and certain similar consumer lines of credit do not have stated maturities and therefore, for these loan classes, remaining contractual lives are determined by estimating future cash flows expected to be received from customers until payments have been fully allocated to outstanding balances. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.

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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 June 30, 2022 and March 31, 2022 are discussed below.


Key Assumption	June 30, 2022	March 31, 2022

Overall economic forecast	•Positive economic momentum faced with continued COVID challenges, supply constraints and high inflation •Continued monetary policy tightening to rein in inflation •Uncertainties related to supply chain issues and the timing and likelihood of a recession	•Improving health situation supports positive economic momentum in the short term •Projects significant monetary policy tightening to rein in inflation •Projects continued high inflation •Uncertainties related to supply chain issues
Reasonable and supportable period and related reversion period	•One year for commercial and personal banking loans •Reversion to historical average loss rates within two quarters using straight-line method	•One year for commercial and personal banking loans •Reversion to historical average loss rates within two quarters using straight-line method
Forecasted macro-economic variables	•Unemployment rate ranging from 3.5% to 3.7% during the supportable forecast period •Real GDP growth ranging from 1.5% to 2.7% •Prime rate from 4.9% to 6.2%	•Unemployment rate ranging from 3.6% to 3.4% during the supportable forecast period •Real GDP growth ranging from 2.6% to 3.7% •Prime rate from 4.0% to 5.2%
Prepayment assumptions	Commercial loans •5% for most loan pools Personal banking loans •Ranging from 28.5% to 16.5% for most loan pools •67.0% for consumer credit cards	Commercial loans •5% for most loan pools Personal banking loans •Ranging from 28.3% to 16.5% for most loan pools •66.0% for consumer credit cards
Qualitative factors	Added qualitative factors related to: •Certain portfolios sensitive to pandemic economic uncertainties •Changes in the composition of the loan portfolios •Uncertainty related to unusually high rate of inflation, geopolitical environment, and supply chain issues •Loans downgraded to special mention, substandard, or non-accrual status	Added qualitative factors related to: •Certain portfolios sensitive to pandemic economic uncertainties •Changes in the composition of the loan portfolios •Uncertainty related to unusually high rate of inflation, geopolitical environment, and supply chain issues •Loans downgraded to special mention, substandard, or non-accrual status

The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans, however, the liability for unfunded lending commitments incorporates an assumption for the portion of unfunded commitments that are expected to be funded.

Sensitivity in the Allowance for Credit Loss model

The allowance for credit losses is an estimate that requires significant judgment including projections of the macro-economic environment. The forecasted macro-economic environment continuously changes which can cause fluctuations in estimated expected credit losses.

The current forecast projects a continued positive economic momentum faced with pandemic complications, high inflation, supply chain constraints, and uncertainty related to the Russian invasion of Ukraine. The geopolitical environment, trends in health conditions and impacted supply constraints could significantly modify economic projections used in the estimation of the allowance for credit losses and liability for unfunded lending commitments.

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A summary of the activity in the allowance for credit losses on loans and the liability for unfunded lending commitments during the six months ended June 30, 2022 and 2021, respectively, follows:


	For the Three Months Ended June 30, 2022						For the Six Months Ended June 30, 2022
(In thousands)	Commercial		Personal Banking		Total		Commercial		Personal Banking		Total
ALLOWANCE FOR CREDIT LOSSES ON LOANS


Balance at beginning of period	$	94,827	$	39,883	$	134,710	$	97,776	$	52,268	$	150,044
Provision for credit losses on loans	4,716		2,571		7,287		1,837		(5,236)		(3,399)
Deductions:
Loans charged off	207		6,533		6,740		384		13,818		14,202
Less recoveries on loans	189		2,593		2,782		296		5,300		5,596
Net loan charge-offs (recoveries)	18		3,940		3,958		88		8,518		8,606
Balance June 30, 2022	$	99,525	$	38,514	$	138,039	$	99,525	$	38,514	$	138,039
LIABILITY FOR UNFUNDED LENDING COMMITMENTS


Balance at beginning of period	$	23,780	$	1,252	$	25,032	$	23,271	$	933	$	24,204
Provision for credit losses on unfunded lending commitments	(163)		38		(125)		346		357		703
Balance June 30, 2022	$	23,617	$	1,290	$	24,907	$	23,617	$	1,290	$	24,907
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS	$	123,142	$	39,804	$	162,946	$	123,142	$	39,804	$	162,946


	For the Three Months Ended June 30, 2021						For the Six Months Ended June 30, 2021
(In thousands)	Commercial		Personal Banking		Total		Commercial		Personal Banking		Total
ALLOWANCE FOR CREDIT LOSSES ON LOANS


Balance at beginning of period	$	119,623	$	80,904	$	200,527	$	121,549	$	99,285	$	220,834
Provision for credit losses on loans	(26,579)		(854)		(27,433)		(28,488)		(9,300)		(37,788)
Deductions:
Loans charged off	270		8,598		8,868		502		21,307		21,809
Less recoveries on loans	5,264		2,905		8,169		5,479		5,679		11,158
Net loan charge-offs	(4,994)		5,693		699		(4,977)		15,628		10,651
Balance June 30, 2021	$	98,038	$	74,357	$	172,395	$	98,038	$	74,357	$	172,395
LIABILITY FOR UNFUNDED LENDING COMMITMENTS


Balance at beginning of period	$	41,513	$	917	$	42,430	$	37,259	$	1,048	$	38,307
Provision for credit losses on unfunded lending commitments	(18,163)		(59)		(18,222)		(13,909)		(190)		(14,099)
Balance June 30, 2021	$	23,350	$	858	$	24,208	$	23,350	$	858	$	24,208
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS	$	121,388	$	75,215	$	196,603	$	121,388	$	75,215	$	196,603

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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 June 30, 2022 and December 31, 2021.


(In thousands)	Current or Less Than 30 Days Past Due		30 – 89 Days Past Due		90 Days Past Due and Still Accruing		Non-accrual		Total
June 30, 2022
Commercial:
Business	$	5,432,582	$	2,278	$	418	$	6,314	$	5,441,592
Real estate – construction and land	1,266,203		57		—		—		1,266,260
Real estate – business	3,212,739		2,313		359		167		3,215,578
Personal Banking:
Real estate – personal	2,821,955		9,762		3,682		1,436		2,836,835
Consumer	2,069,092		18,001		2,499		—		2,089,592
Revolving home equity	270,572		464		818		—		271,854
Consumer credit card	549,589		4,385		4,128		—		558,102
Overdrafts	6,305		504		5		—		6,814
Total	$	15,629,037	$	37,764	$	11,909	$	7,917	$	15,686,627
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 June 30, 2022, the Company had $4.5 million in non-accrual business loans that had no allowance for credit loss. At December 31, 2021, the Company had $5.3 million in non-accrual business loans that had no allowance for credit loss. The Company did not record any interest income on non-accrual loans during the three and six months ended June 30, 2022 and 2021, respectively.

Credit quality indicators

The following table provides information about the credit quality of the Commercial loan portfolio. The Company utilizes an internal risk rating system comprised of a series of grades to categorize loans according to perceived risk associated with the expectation of debt repayment based on borrower specific information including, but not limited to, current financial information, historical payment experience, industry information, collateral levels and collateral types. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. A loan is assigned the risk rating at origination and then monitored throughout the contractual term for possible risk rating changes. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.

All loans are analyzed for risk rating updates annually. For larger loans, rating assessments may be more frequent if relevant information is obtained earlier through debt covenant monitoring or overall relationship management. Smaller loans

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are monitored as identified by the loan officer based on the risk profile of the individual borrower or if the loan becomes past due related to credit issues. Loans rated Special Mention, Substandard or Non-accrual are subject to quarterly review and monitoring processes. In addition to the regular monitoring performed by the lending personnel and credit committees, loans are subject to review by a credit review department which verifies the appropriateness of the risk ratings for the loans chosen as part of its risk-based review plan.

The risk category of loans in the Commercial portfolio as of June 30, 2022 and December 31, 2021 are as follows:


	Term Loans Amortized Cost Basis by Origination Year
(In thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
June 30, 2022
Business
Risk Rating:
Pass	$	668,983	$	1,026,985	$	562,836	$	456,621	$	206,448	$	337,860	$	2,129,662	$	5,389,395
Special mention	2,202		648		232		972		74		7,336		2,043		13,507
Substandard	2,298		880		1,028		4,249		4,077		10,352		9,492		32,376
Non-accrual	267		82		—		4		1,433		4,528		—		6,314
Total Business:	$	673,750	$	1,028,595	$	564,096	$	461,846	$	212,032	$	360,076	$	2,141,197	$	5,441,592
Real estate-construction
Risk Rating:
Pass	$	329,256	$	606,428	$	190,785	$	58,550	$	536	$	2,278	$	18,310	$	1,206,143
Special mention	—		—		—		—		967		—		—		967
Substandard	—		19,487		11,580		—		14,908		13,175		—		59,150

Total Real estate-construction:	$	329,256	$	625,915	$	202,365	$	58,550	$	16,411	$	15,453	$	18,310	$	1,266,260
Real estate-business
Risk Rating:
Pass	$	587,973	$	686,505	$	596,190	$	485,665	$	184,182	$	341,348	$	86,789	$	2,968,652
Special mention	—		3,492		646		8,891		4,970		2,079		—		20,078
Substandard	1,534		31,028		61,741		12,844		33,504		85,069		961		226,681
Non-accrual	—		—		—		—		157		10		—		167
Total Real estate-business:	$	589,507	$	721,025	$	658,577	$	507,400	$	222,813	$	428,506	$	87,750	$	3,215,578
Commercial loans
Risk Rating:
Pass	$	1,586,212	$	2,319,918	$	1,349,811	$	1,000,836	$	391,166	$	681,486	$	2,234,761	$	9,564,190
Special mention	2,202		4,140		878		9,863		6,011		9,415		2,043		34,552
Substandard	3,832		51,395		74,349		17,093		52,489		108,596		10,453		318,207
Non-accrual	267		82		—		4		1,590		4,538		—		6,481
Total Commercial loans:	$	1,592,513	$	2,375,535	$	1,425,038	$	1,027,796	$	451,256	$	804,035	$	2,247,257	$	9,923,430

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	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

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The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided as of June 30, 2022 and December 31, 2021 below:


	Term Loans Amortized Cost Basis by Origination Year
(In thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
June 30, 2022
Real estate-personal
Current to 90 days past due	$	287,827	$	635,806	$	824,919	$	310,349	$	143,554	$	618,438	$	10,824	$	2,831,717
Over 90 days past due	—		349		1,258		127		140		1,808		—		3,682
Non-accrual	—		—		—		174		106		1,156		—		1,436
Total Real estate-personal:	$	287,827	$	636,155	$	826,177	$	310,650	$	143,800	$	621,402	$	10,824	$	2,836,835
Consumer
Current to 90 days past due	$	315,284	$	454,310	$	275,200	$	142,639	$	54,300	$	84,426	$	760,934	$	2,087,093
Over 90 days past due	26		403		158		183		352		373		1,004		2,499

Total Consumer:	$	315,310	$	454,713	$	275,358	$	142,822	$	54,652	$	84,799	$	761,938	$	2,089,592
Revolving home equity
Current to 90 days past due	$	—	$	—	$	—	$	—	$	—	$	—	$	271,036	$	271,036
Over 90 days past due	—		—		—		—		—		—		818		818

Total Revolving home equity:	$	—	$	—	$	—	$	—	$	—	$	—	$	271,854	$	271,854
Consumer credit card
Current to 90 days past due	$	—	$	—	$	—	$	—	$	—	$	—	$	553,974	$	553,974
Over 90 days past due	—		—		—		—		—		—		4,128		4,128

Total Consumer credit card:	$	—	$	—	$	—	$	—	$	—	$	—	$	558,102	$	558,102
Overdrafts
Current to 90 days past due	$	6,809	$	—	$	—	$	—	$	—	$	—	$	—	$	6,809
Over 90 days past due	5		—		—		—		—		—		—		5

Total Overdrafts:	$	6,814	$	—	$	—	$	—	$	—	$	—	$	—	$	6,814
Personal banking loans
Current to 90 days past due	$	609,920	$	1,090,116	$	1,100,119	$	452,988	$	197,854	$	702,864	$	1,596,768	$	5,750,629
Over 90 days past due	31		752		1,416		310		492		2,181		5,950		11,132
Non-accrual	—		—		—		174		106		1,156		—		1,436
Total Personal banking loans:	$	609,951	$	1,090,868	$	1,101,535	$	453,472	$	198,452	$	706,201	$	1,602,718	$	5,763,197

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	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 June 30, 2022 and December 31, 2021.


(In thousands)	Business Assets		Oil & Gas Assets		Total
June 30, 2022
Commercial:
Business	$	1,465	$	2,194	$	3,659








Total	$	1,465	$	2,194	$	3,659
December 31, 2021
Commercial:
Business	$	1,604	$	2,459	$	4,063








Total	$	1,604	$	2,459	$	4,063

Other Personal Banking loan information

As noted above, the credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above section on "Credit quality indicators." In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history and is considered supplementary information utilized by the Company, as management does not consider this information in evaluating the allowance for credit losses on loans. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain personal real estate loans for which FICO scores are not obtained because the loans generally pertain to commercial customer activities and are

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often underwritten with other collateral considerations. These loans totaled $186.0 million at June 30, 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 $186.6 million at June 30, 2022 and $186.6 million at December 31, 2021. As the healthcare loans are guaranteed by the hospital, customer FICO scores are not obtained for these loans. The personal real estate loans and consumer loans excluded below totaled less than 7% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at June 30, 2022 and December 31, 2021 by FICO score.


Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
June 30, 2022
FICO score:
Under 600	1.2	%	1.7	%	1.5	%	3.3	%
600 - 659	2.6		4.0		2.5		11.3
660 - 719	7.9		13.5		8.6		29.5
720 - 779	23.4		24.1		22.2		28.1
780 and over	64.9		56.7		65.2		27.8
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2021
FICO score:
Under 600	1.0	%	1.9	%	0.9	%	3.4	%
600 - 659	2.4		3.9		2.6		11.3
660 - 719	7.4		13.8		9.4		29.9
720 - 779	25.2		25.3		20.4		28.2
780 and over	64.0		55.1		66.7		27.2
Total	100.0	%	100.0	%	100.0	%	100.0	%

Troubled debt restructurings

Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected. Commercial performing restructured loans are primarily comprised of certain business, construction and business real estate loans classified as substandard but renewed at rates judged to be non-market. These loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card and other small consumer loans under various debt management and assistance programs. Modifications to these loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. Certain personal real estate, revolving home equity, and consumer loans were classified as consumer bankruptcy troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments. Other consumer loans classified as troubled debt restructurings consist of various other workout arrangements with consumer customers.


(In thousands)		June 30, 2022		December 31, 2021
Accruing restructured loans:
	Commercial	$	126,456	$	46,867
	Assistance programs	5,571		6,146

	Other consumer	4,347		4,787
Non-accrual loans		6,006		7,087
Total troubled debt restructurings		$	142,380	$	64,887

Section 4013 of the CARES Act was signed into law on March 27, 2020, and included a provision that short-term modifications are not troubled debt restructurings, if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to December 31, 2019. The Company elected such option under the CARES Act when determining if a customer’s modification is subject to troubled debt restructuring classification. The initial guidance issued under the CARES Act was due to expire on December 31, 2020. During January 2021, the Consolidated Appropriations Act, 2021 was enacted and extended through the end of 2021 the relief offered under the CARES Act related to the accounting and disclosure

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requirements for troubled debt restructurings as a result of COVID-19. The Company elected to extend its application of this guidance through December 31, 2021. During the period covered by the CARES Act, if it was deemed that the loan modification was not short-term, not COVID-19 related or the customer does not meet the criteria under the guidance to be scoped out of troubled debt restructuring classification, the Company evaluated the loan modifications under its existing framework and accounted for the modification as a troubled debt restructuring.

The table below shows the balance of troubled debt restructurings by loan classification at June 30, 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)	June 30, 2022		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	15,955	$	—
Real estate - construction and land	10,100		—
Real estate - business	105,350		—
Personal Banking:
Real estate - personal	2,964		661
Consumer	20		—
Revolving home equity	2,499		267
Consumer credit card	5,492		387
Total troubled debt restructurings	$	142,380	$	1,315

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 $673 thousand on an annual, pre-tax basis, compared to amounts contractually owed. Other modifications to consumer loans mainly involve extensions and other small modifications that did not include the forgiveness of principal or interest.

The allowance for credit losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms. Performing commercial loans having no other concessions granted other than being renewed at non-market interest rates are judged to have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.

If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for credit losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing troubled debt restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for credit losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begin.

The Company had commitments of $15.2 million at June 30, 2022 to lend additional funds to borrowers with restructured loans. Additionally, the Company had commitments at June 30, 2022 of $24.0 million related to letters of credit with an internal risk rating below substandard.

Loans held for sale

The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 11. The loans are primarily sold to Federal Home Loan Mortgage Corporation

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(FHLMC) and Federal National Mortgage Association (FNMA). At June 30, 2022, the fair value of these loans was $1.0 million, and the unpaid principal balance was $1.0 million.

The Company also designates certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which at June 30, 2022 totaled $5.4 million.

At June 30, 2022, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing interest.

Foreclosed real estate/repossessed assets

The Company’s holdings of foreclosed real estate totaled $296 thousand and $115 thousand at June 30, 2022 and December 31, 2021, respectively. Personal property acquired in repossession, generally autos, totaled $1.1 million at both June 30, 2022 and December 31, 2021. 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 June 30, 2022 and December 31, 2021.


(In thousands)	June 30, 2022		December 31, 2021
Available for sale debt securities	$	13,700,308	$	14,450,027
Trading debt securities	34,195		46,235
Equity securities:
Readily determinable fair value	6,130		7,153
No readily determinable fair value	2,416		2,049
Other:
Federal Reserve Bank stock	34,621		34,379
Federal Home Loan Bank stock	10,163		10,428
Equity method investments	1,434		1,834
Private equity investments	161,771		147,406
Total investment securities (1)	$	13,951,038	$	14,699,511

(1)Accrued interest receivable totaled $41.5 million and $39.5 million at June 30, 2022 and December 31, 2021, respectively, and was included within other assets on the consolidated balance sheets.

The Company has elected to measure equity securities with no readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. This portfolio includes the Company's holdings of Visa Class B shares, which have a carrying value of zero, as there have not been observable price changes in orderly transactions for identical or similar investments of the same issuer. During the six months ended June 30, 2022, the Company did not record any impairment or other adjustments to the carrying amount of its portfolio of equity securities with no readily determinable fair value.

Other investment securities include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, equity method investments, and investments in portfolio concerns held by the Company's private equity subsidiary. FRB stock and FHLB stock are held for debt and regulatory purposes. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the asset size of the borrowing bank and the level of borrowings from the FHLB. These holdings are carried at cost. Additionally, the Company's equity method investments are carried at cost, adjusted to reflect the Company's portion of income, loss, or dividends of the investee. These adjustments are included in non-interest income on the Company's consolidated statements of income. The Company's private equity investments are carried at estimated fair value.

The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in other comprehensive income (OCI). A summary of the available for sale debt securities by maturity groupings as of June 30, 2022 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as FHLMC, FNMA, and Government National Mortgage Association (GNMA), in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit

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cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.


(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	207,783	$	208,605
After 1 but within 5 years	731,507		718,407
After 5 but within 10 years	186,246		182,116

Total U.S. government and federal agency obligations	1,125,536		1,109,128
Government-sponsored enterprise obligations:


After 5 but within 10 years	5,000		4,922
After 10 years	50,758		42,186
Total government-sponsored enterprise obligations	55,758		47,108
State and municipal obligations:
Within 1 year	190,263		190,534
After 1 but within 5 years	731,959		719,545
After 5 but within 10 years	879,897		787,103
After 10 years	299,193		255,616
Total state and municipal obligations	2,101,312		1,952,798
Mortgage and asset-backed securities:
Agency mortgage-backed securities	5,464,292		4,923,683
Non-agency mortgage-backed securities	1,480,969		1,329,114
Asset-backed securities	3,959,409		3,794,487
Total mortgage and asset-backed securities	10,904,670		10,047,284
Other debt securities:
Within 1 year	64,757		64,704
After 1 but within 5 years	250,670		238,482
After 5 but within 10 years	271,406		232,905
After 10 years	9,260		7,899
Total other debt securities	596,093		543,990
Total available for sale debt securities	$	14,783,369	$	13,700,308

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $383.7 million, at fair value, at June 30, 2022. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. At maturity, the principal paid is the greater of an inflation-adjusted principal or the original principal.

Allowance for credit losses on available for sale debt securities

The Company’s model for establishing its allowance for credit losses uses cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Securities for which fair value is less than amortized cost are reviewed for impairment. Special emphasis is placed on securities whose credit rating has fallen below Baa3 (Moody's) or BBB- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price, or who have been identified based on management’s judgment. These securities are placed on a watch list and cash flow analyses are prepared on an individual security basis. Credit impairment is determined using input factors such as cash flow projections, contractual payments required, expected delinquency rates, credit support from other tranches, prepayment speeds, collateral loss severity rates (including loan to values), and various other information related to the underlying collateral. At June 30, 2022, the fair value of securities on this watch list was $106.4 million compared to $13.4 million at December 31, 2021.

Significant inputs to the cash flow model used at June 30, 2022 to quantify credit losses were primarily credit support agreements, as the securities on the Company's watch list at June 30, 2022 were securities backed by government-guaranteed student loans and are expected to perform as contractually required. As of June 30, 2022, the Company did not identify any securities for which a credit loss exists, and for the six months ended June 30, 2022 and 2021, the Company did not recognize a credit loss expense on any available for sale debt securities.

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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 June 30, 2022 and December 31, 2021. Unrealized losses on these available for sale securities have not been recognized into income because after review, the securities were deemed not to be impaired. The unrealized losses on these securities are primarily attributable to changes in interest rates and current market conditions. Additionally, management does not intend to sell the securities, and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery.


	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2022
U.S. government and federal agency obligations	$	609,636	$	20,883	$	—	$	—	$	609,636	$	20,883
Government-sponsored enterprise obligations	32,362		3,577		14,746		5,073		47,108		8,650
State and municipal obligations	1,239,029		127,348		137,304		24,739		1,376,333		152,087
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,727,959		351,355		1,162,478		190,021		4,890,437		541,376
Non-agency mortgage-backed securities	1,295,069		148,483		26,541		3,469		1,321,610		151,952
Asset-backed securities	3,416,797		152,152		247,462		12,906		3,664,259		165,058
Total mortgage and asset-backed securities	8,439,825		651,990		1,436,481		206,396		9,876,306		858,386
Other debt securities	390,367		28,962		141,592		23,154		531,959		52,116
Total	$	10,711,219	$	832,760	$	1,730,123	$	259,362	$	12,441,342	$	1,092,122
December 31, 2021
U.S. government and federal agency obligations	$	296,492	$	2,241	$	—	$	—	$	296,492	$	2,241
Government-sponsored enterprise obligations	—		—		18,899		919		18,899		919
State and municipal obligations	876,691		15,874		32,684		1,049		909,375		16,923
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,333,691		59,044		265,835		8,720		3,599,526		67,764
Non-agency mortgage-backed securities	1,285,611		17,222		1,948		19		1,287,559		17,241
Asset-backed securities	2,518,935		19,201		87,893		525		2,606,828		19,726
Total mortgage and asset-backed securities	7,138,237		95,467		355,676		9,264		7,493,913		104,731
Other debt securities	270,409		5,098		58,574		3,017		328,983		8,115
Total	$	8,581,829	$	118,680	$	465,833	$	14,249	$	9,047,662	$	132,929

The entire available for sale debt portfolio included $12.4 billion of securities that were in a loss position at June 30, 2022, compared to $9.0 billion at December 31, 2021. The total amount of unrealized loss on these securities was $1.1 billion at June 30, 2022, an increase of $959.2 million compared to the unrealized loss at December 31, 2021. Securities with significant unrealized losses are discussed in the "Allowance for credit losses on available for sale debt securities" section above.

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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 June 30, 2022 and December 31, 2021, and the corresponding amounts of gross unrealized gains and losses (pre-tax) in AOCI, by security type.


(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
June 30, 2022
U.S. government and federal agency obligations	$	1,125,536	$	4,475	$	(20,883)	$	—	$	1,109,128
Government-sponsored enterprise obligations	55,758		—		(8,650)		—		47,108
State and municipal obligations	2,101,312		3,573		(152,087)		—		1,952,798
Mortgage and asset-backed securities:
Agency mortgage-backed securities	5,464,292		767		(541,376)		—		4,923,683
Non-agency mortgage-backed securities	1,480,969		97		(151,952)		—		1,329,114
Asset-backed securities	3,959,409		136		(165,058)		—		3,794,487
Total mortgage and asset-backed securities	10,904,670		1,000		(858,386)		—		10,047,284
Other debt securities	596,093		13		(52,116)		—		543,990
Total	$	14,783,369	$	9,061	$	(1,092,122)	$	—	$	13,700,308
December 31, 2021
U.S. government and federal agency obligations	$	1,035,477	$	47,484	$	(2,241)	$	—	$	1,080,720
Government-sponsored enterprise obligations	50,773		1,901		(919)		—		51,755
State and municipal obligations	2,072,210		41,540		(16,923)		—		2,096,827
Mortgage and asset-backed securities:
Agency mortgage-backed securities	5,698,088		52,676		(67,764)		—		5,683,000
Non-agency mortgage-backed securities	1,383,037		681		(17,241)		—		1,366,477
Asset-backed securities	3,546,024		12,921		(19,726)		—		3,539,219
Total mortgage and asset-backed securities	10,627,149		66,278		(104,731)		—		10,588,696
Other debt securities	633,524		6,620		(8,115)		—		632,029
Total	$	14,419,133	$	163,823	$	(132,929)	$	—	$	14,450,027

The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.


	For the Six Months Ended June 30
(In thousands)	2022		2021
Proceeds from sales of securities:
Available for sale debt securities	$	51,948	$	—

Other investments	3,805		10,060
Total proceeds	$	55,753	$	10,060

Investment securities gains (losses), net:
Available for sale debt securities:


Losses realized on sales	$	(9,582)	$	—

Equity securities:



Fair value adjustments, net	(1,023)		15
Other:
Gains realized on sales	27		1,611
Losses realized on sales	(4,313)		—
Fair value adjustments, net	23,083		25,031
Total investment securities gains, net	$	8,192	$	26,657

Net gains on investment securities for the six months ended June 30, 2022 were mainly comprised of losses of $9.6 million on sales of available for sale securities, net losses of $4.3 million on sales of private equity investments, and net losses in fair value of $1.0 million on equity investments, offset by net gains in fair value of $23.1 million on private equity investments, due to fair value adjustments.

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At June 30, 2022, securities totaling $5.3 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 $209.9 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 exceeded 10% of stockholders’ equity.

4. Goodwill and Other Intangible Assets

The following table presents information about the Company's intangible assets which have estimable useful lives.


	June 30, 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	$	(30,424)	$	—	$	846	$	31,270	$	(30,266)	$	—	$	1,004
Mortgage servicing rights	21,959		(10,552)		—		11,407		20,870		(9,600)		(304)		10,966
Total	$	53,229	$	(40,976)	$	—	$	12,253	$	52,140	$	(39,866)	$	(304)	$	11,970

Aggregate amortization expense on intangible assets was $501 thousand and $745 thousand for the three month periods ended June 30, 2022 and 2021, respectively, and $1.1 million and $1.7 million for the six month periods ended June 30, 2022 and 2021, respectively. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of June 30, 2022. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.


(In thousands)
2022	$	1,885
2023	1,431
2024	1,272
2025	1,119
2026	974

Changes in the carrying amount of goodwill and net other intangible assets for the six month period ended June 30, 2022 are as follows:


(In thousands)	Goodwill		Easement		Core Deposit Premium		Mortgage Servicing Rights
Balance January 1, 2022	$	138,921	$	3,600	$	1,004	$	10,966

Originations, net of disposals	—		—		—		1,089
Amortization	—		—		(158)		(952)
Impairment recovery	—		—		—		304
Balance June 30, 2022	$	138,921	$	3,600	$	846	$	11,407

Goodwill allocated to the Company’s operating segments at June 30, 2022 and December 31, 2021 is shown below.


(In thousands)
Consumer segment	$	70,721
Commercial segment	67,454
Wealth segment	746
Total goodwill	$	138,921

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5. Guarantees

The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured, and in the event of nonperformance by customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.

Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At June 30, 2022, that net liability was $4.0 million, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $504.0 million at June 30, 2022.

The Company periodically enters into credit risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral and at June 30, 2022, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 2 years to 15 years. At June 30, 2022, the fair value of the Company's guarantee liabilities for RPAs was $162 thousand, and the notional amount of the underlying swaps was $366.2 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default.

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6. Leases

The Company has net investments in direct financing and sales-type leases to commercial, industrial, and tax-exempt entities. These leases are included within business loans on the Company's consolidated balance sheets. The Company primarily leases various types of equipment, trucks and trailers, and office furniture and fixtures. Lease agreements may include options for the lessee to renew or purchase the leased equipment at the end of the lease term. The Company has elected to adopt the lease component expedient in which the lease and nonlease components are combined into the total lease receivable. The Company also leases office space to third parties, and these leases are classified as operating leases. The leases may include options to renew or expand the leased space, and currently the leases have remaining terms of 3 months to 5 years.

The following table provides the components of lease income.


	For the Three Months Ended June 30				For the Six Months Ended June 30
(in thousands)	2022		2021		2022		2021
Direct financing and sales-type leases	$	5,114	$	5,795	$	10,361	$	11,916
Operating leases(a)	2,158		1,930		4,342		4,004
Total lease income	$	7,272	$	7,725	$	14,703	$	15,920

(a) Includes rent from Tower Properties Company, a related party, of $19 thousand for the three month periods ended June 30, 2022 and 2021, and $38 thousand for the six months ended June 30, 2022 and 2021.

7. Pension

The amount of net pension cost is shown in the table below:


	For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands)	2022		2021		2022		2021
Service cost - benefits earned during the period	$	131	$	94	$	263	$	189
Interest cost on projected benefit obligation	665		556		1,330		1,112
Expected return on plan assets	(1,125)		(1,124)		(2,251)		(2,248)
Amortization of prior service cost	(67)		(68)		(135)		(136)
Amortization of unrecognized net loss	497		651		995		1,302
Net periodic pension cost	$	101	$	109	$	202	$	219

All benefits accrued under the Company’s defined benefit pension plan have been frozen since January 1, 2011. During the first six months of 2022, the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets.

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8. Common Stock *

Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that pay nonforfeitable common stock dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 13.


	For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands, except per share data)	2022		2021		2022		2021
Basic income per common share:
Net income attributable to Commerce Bancshares, Inc.	$	115,794	$	162,326	$	233,948	$	293,298
Less income allocated to nonvested restricted stock	1,052		1,478		2,122		2,678
Net income allocated to common stock	$	114,742	$	160,848	$	231,826	$	290,620
Weighted average common shares outstanding	119,655		121,971		119,988		122,022
Basic income per common share	$	.96	$	1.32	$	1.93	$	2.38
Diluted income per common share:
Net income attributable to Commerce Bancshares, Inc.	$	115,794	$	162,326	$	233,948	$	293,298
Less income allocated to nonvested restricted stock	1,050		1,475		2,118		2,673
Net income allocated to common stock	$	114,744	$	160,851	$	231,830	$	290,625
Weighted average common shares outstanding	119,655		121,971		119,988		122,022

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	265		302		278		315
Weighted average diluted common shares outstanding	119,920		122,273		120,266		122,337
Diluted income per common share	$	.96	$	1.32	$	1.93	$	2.38

Unexercised stock appreciation rights of 168 thousand and 76 thousand for the three month periods ended June 30, 2022 and 2021, respectively, and 144 thousand and 53 thousand for the six month periods ended June 30, 2022 and 2021, respectively, were excluded from the computation of diluted income per common share because their inclusion would have been anti-dilutive.

* All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December 2021.

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9. Accumulated Other Comprehensive Income

The table below shows the activity and accumulated balances for components of other comprehensive income. Information about unrealized gains and losses on securities can be found in Note 3, and information about unrealized gains and losses on cash flow hedge derivatives is located in Note 11.


	Unrealized Gains (Losses) on Securities (1)		Pension Loss		Unrealized Gains (Losses) on Cash Flow Hedge Derivatives (2)		Total Accumulated Other Comprehensive Income (Loss)
(In thousands)

Balance January 1, 2022	$	23,174	$	(20,668)	$	74,574	$	77,080


Other comprehensive loss before reclassifications to current earnings	(1,123,536)		—		—		(1,123,536)
Amounts reclassified to current earnings from accumulated other comprehensive income	9,582		860		(12,204)		(1,762)
Current period other comprehensive income (loss), before tax	(1,113,954)		860		(12,204)		(1,125,298)
Income tax (expense) benefit	278,488		(215)		3,051		281,324
Current period other comprehensive income (loss), net of tax	(835,466)		645		(9,153)		(843,974)

Balance June 30, 2022	$	(812,292)	$	(20,023)	$	65,421	$	(766,894)
Balance January 1, 2021	$	263,801	$	(25,118)	$	92,694	$	331,377


Other comprehensive loss before reclassifications to current earnings	(137,270)		—		—		(137,270)
Amounts reclassified to current earnings from accumulated other comprehensive income	—		1,166		(11,881)		(10,715)
Current period other comprehensive income (loss), before tax	(137,270)		1,166		(11,881)		(147,985)
Income tax (expense) benefit	34,319		(291)		2,970		36,998
Current period other comprehensive income (loss), net of tax	(102,951)		875		(8,911)		(110,987)

Balance June 30, 2021	$	160,850	$	(24,243)	$	83,783	$	220,390

(1) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "investment securities gains (losses), net" in the consolidated statements of income.

(2) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "interest and fees on loans" in the consolidated statements of income.

10. Segments

The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial and Wealth. The Consumer segment consists of various consumer loan and deposit products offered through its retail branch network of approximately 150 locations. This segment also includes indirect and other consumer loan financing businesses, along with debit and credit card loan and fee businesses. Residential mortgage origination, sales and servicing functions are included in this Consumer segment, but residential mortgage loans retained by the Company are not considered part of this segment and are instead included in the Other/Elimination column. The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, and international services, along with business and governmental deposit products and commercial cash management services. This segment also includes both merchant and commercial bank card products as well as the Capital Markets Group, which sells fixed income securities and provides securities safekeeping and accounting services to its business and correspondent bank customers. The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management, and brokerage services. This segment also provides various loan and deposit related services to its private banking customers.

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The following table presents selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues between the three segments. Management periodically makes changes to methods of assigning costs and income to its business segments to better reflect operating results. If appropriate, these changes are reflected in prior year information presented below.


(In thousands)	Consumer		Commercial		Wealth		Segment Totals		Other/Elimination		Consolidated Totals
Three Months Ended June 30, 2022
Net interest income	$	83,633	$	109,646	$	19,226	$	212,505	$	19,880	$	232,385
Provision for credit losses	(3,924)		(63)		23		(3,964)		(3,198)		(7,162)
Non-interest income	30,924		56,815		53,983		141,722		(2,295)		139,427
Investment securities gains, net	—		—		—		—		1,029		1,029
Non-interest expense	(75,406)		(91,328)		(36,487)		(203,221)		(10,284)		(213,505)
Income before income taxes	$	35,227	$	75,070	$	36,745	$	147,042	$	5,132	$	152,174
Six Months Ended June 30, 2022
Net interest income	$	163,529	$	219,176	$	38,094	$	420,799	$	20,372	$	441,171
Provision for credit losses	(8,422)		(145)		(3)		(8,570)		11,266		2,696
Non-interest income	59,278		110,466		107,189		276,933		(5,737)		271,196
Investment securities gains, net	—		—		—		—		8,192		8,192
Non-interest expense	(148,400)		(180,852)		(72,773)		(402,025)		(17,128)		(419,153)
Income before income taxes	$	65,985	$	148,645	$	72,507	$	287,137	$	16,965	$	304,102
Three Months Ended June 30, 2021
Net interest income	$	80,807	$	114,185	$	17,654	$	212,646	$	(4,664)	$	207,982
Provision for loan losses	(5,664)		4,952		(4)		(716)		46,371		45,655
Non-interest income	36,905		52,259		52,505		141,669		(2,526)		139,143
Investment securities gains, net	—		—		—		—		16,804		16,804
Non-interest expense	(73,915)		(82,619)		(34,049)		(190,583)		(7,543)		(198,126)
Income before income taxes	$	38,133	$	88,777	$	36,106	$	163,016	$	48,442	$	211,458
Six Months Ended June 30, 2021
Net interest income	$	158,746	$	224,750	$	35,111	$	418,607	$	(4,877)	$	413,730
Provision for credit losses	(15,565)		4,925		1		(10,639)		62,526		51,887
Non-interest income	75,153		102,987		103,490		281,630		(6,442)		275,188
Investment securities gains, net	—		—		—		—		26,657		26,657
Non-interest expense	(144,284)		(161,900)		(67,092)		(373,276)		(17,423)		(390,699)
Income before income taxes	$	74,050	$	170,762	$	71,510	$	316,322	$	60,441	$	376,763

The information presented above was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting procedures and methods, which have been developed to reflect the underlying economics of the businesses. The methodologies are applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used (provided by) assets and liabilities based on their maturity, prepayment and/or repricing characteristics.

The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column include activity not related to the segments, such as that relating to administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. The provision for credit losses in this category contains the difference between net loan charge-offs assigned directly to the segments and the recorded provision for credit loss expense. Included in this category’s net interest income are earnings of the investment portfolio, which are not allocated to a segment.

The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities.

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11. Derivative Instruments

The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. At June 30, 2022, the Company’s derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings.


(In thousands)	June 30, 2022		December 31, 2021
Interest rate swaps	$	2,091,114	$	2,229,419

Interest rate caps	221,293		152,058
Credit risk participation agreements	526,651		485,633
Foreign exchange contracts	2,539		5,119
Mortgage loan commitments	8,352		21,787
Mortgage loan forward sale contracts	—		1,165
Forward TBA contracts	7,500		21,000
Total notional amount	$	2,857,449	$	2,916,181

The largest group of notional amounts relate to interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. The customers are engaged in a variety of businesses, including real estate, manufacturing, retail product distribution, education, and retirement communities. These interest rate swap contracts with customers are offset by matching interest rate swap contracts purchased by the Company from other financial institutions (dealers). Contracts with dealers that require central clearing are novated to a clearing agency who becomes the Company's counterparty. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings.

Many of the Company’s interest rate swap contracts with large financial institutions contain contingent features relating to debt ratings or capitalization levels. Under these provisions, if the Company’s debt rating falls below investment grade or if the Company ceases to be “well-capitalized” under risk-based capital guidelines, certain counterparties can require immediate and ongoing collateralization on interest rate swaps in net liability positions or instant settlement of the contracts. The Company maintains debt ratings and capital well above these minimum requirements.

During the year ended December 31, 2020, the Company monetized three interest rate floors that were previously classified as cash flow hedges with a combined notional balance of $1.5 billion and an asset fair value of $163.2 million. As of June 30, 2022, the total realized gains on the monetized cash flow hedges remaining in AOCI was $87.2 million (pre-tax), which will be reclassified into interest income over the next 4.5 years. The estimated amount of net gains related to the cash flow hedges remaining in AOCI at June 30, 2022 that is expected to be reclassified into income within the next 12 months is $24.2 million.

The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further discussed in Note 5 on Guarantees. In addition, the Company enters into foreign exchange contracts, which are mainly comprised of contracts to purchase or deliver foreign currencies for customers at specific future dates.

Under its program to sell residential mortgage loans in the secondary market, the Company designates certain newly-originated residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments and forward loan sale contracts. Changes in the fair values of the loan commitments and funded loans prior to sale that are due to changes in interest rates are economically hedged with forward contracts to sell residential mortgage-backed securities in the to-be-announced (TBA) market. These forward TBA contracts are also considered to be derivatives and are settled in cash at the security settlement date.

The fair values of the Company's derivative instruments, whose notional amounts are listed above, are shown in the table below. Information about the valuation methods used to determine fair value is provided in Note 17 on Fair Value Measurements in the 2021 Annual Report on Form 10-K.

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The Company's policy is to present its derivative assets and derivative liabilities on a gross basis in its consolidated balance sheets, and these are reported in other assets and other liabilities. Certain collateral posted to and from the Company's clearing counterparty has been applied to the fair values of the cleared swaps, such that at June 30, 2022 in the table below, the positive fair values of cleared swaps were reduced by $16.3 million and the negative fair values of cleared swaps were reduced by $929 thousand. At December 31, 2021, positive fair values of cleared swaps were reduced by $587 thousand and the negative fair values of cleared swaps were reduced by $29.7 million.


	Asset Derivatives				Liability Derivatives
	June 30, 2022		Dec. 31, 2021		June 30, 2022		Dec. 31, 2021
(In thousands)	Fair Value				Fair Value



Derivative instruments:
Interest rate swaps	$	10,484	$	40,752	$	(25,879)	$	(11,606)
Interest rate caps	1,550		147		(1,550)		(147)
Credit risk participation agreements	86		84		(162)		(277)
Foreign exchange contracts	37		77		(5)		(45)
Mortgage loan commitments	230		764		—		—
Mortgage loan forward sale contracts	—		5		—		(1)
Forward TBA contracts	17		13		(3)		(25)

Total	$	12,404	$	41,842	$	(27,599)	$	(12,101)

The pre-tax effects of derivative instruments on the consolidated statements of income and consolidated statements of comprehensive income are shown in the tables below.


	Amount of Gain or (Loss) Recognized in OCI						Location of Gain (Loss) Reclassified from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income

(In thousands)	Total		Included Component		Excluded Component			Total		Included Component		Excluded Component
For the Three Months Ended June 30, 2022
Derivatives in cash flow hedging relationships:
Interest rate floors	$	—	$	—	$	—	Interest and fees on loans	$	(6,154)	$	(7,687)	$	1,533
Total	$	—	$	—	$	—	Total	$	(6,154)	$	(7,687)	$	1,533
For the Six Months Ended June 30, 2022
Derivatives in cash flow hedging relationships:
Interest rate floors	$	—	$	—	$	—	Interest and fees on loans	$	(12,204)	$	(15,253)	$	3,049
Total	$	—	$	—	$	—	Total	$	(12,204)	$	(15,253)	$	3,049
For the Three Months Ended June 30, 2021
Derivatives in cash flow hedging relationships:
Interest rate floors	$	—	$	—	$	—	Interest and fees on loans	$	(6,033)	$	(7,566)	$	1,533
Total	$	—	$	—	$	—	Total	$	(6,033)	$	(7,566)	$	1,533
For the Six Months Ended June 30, 2021
Derivatives in cash flow hedging relationships:
Interest rate floors	$	—	$	—	$	—	Interest and fees on loans	$	(11,881)	$	(14,930)	$	3,049
Total	$	—	$	—	$	—	Total	$	(11,881)	$	(14,930)	$	3,049

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	Location of Gain or (Loss) Recognized in Consolidated Statements of Income	Amount of Gain or (Loss) Recognized in Income on Derivatives
		For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands)		2022		2021		2022		2021



Derivative instruments:
Interest rate swaps	Other non-interest income	$	870	$	875	$	1,682	$	1,950
Interest rate caps	Other non-interest income	—		—		16		15
Credit risk participation agreements	Other non-interest income	(82)		(385)		(92)		(20)
Foreign exchange contracts	Other non-interest income	14		(12)		—		84
Mortgage loan commitments	Loan fees and sales	(49)		(35)		(534)		(1,407)
Mortgage loan forward sale contracts	Loan fees and sales	(4)		(11)		(4)		28
Forward TBA contracts	Loan fees and sales	423		(1,046)		1,666		1,860
Total		$	1,172	$	(614)	$	2,734	$	2,510

The following table shows the extent to which assets and liabilities relating to derivative instruments have been offset in the consolidated balance sheets. It also provides information about these instruments which are subject to an enforceable master netting arrangement, irrespective of whether they are offset, and the extent to which the instruments could potentially be offset. Also shown is collateral received or pledged in the form of other financial instruments, which is generally cash or marketable securities. The collateral amounts in this table are limited to the outstanding balances of the related asset or liability (after netting is applied); thus, amounts of excess collateral are not shown. Most of the derivatives in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.

While the Company is party to master netting arrangements with most of its swap derivative counterparties, the Company does not offset derivative assets and liabilities under these agreements on its consolidated balance sheets. Collateral exchanged between the Company and dealer bank counterparties is generally subject to thresholds and transfer minimums, and usually consists of marketable securities. By contract, these may be sold or re-pledged by the secured party until recalled at a subsequent valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash or securities to its clearing agent. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below.

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							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
June 30, 2022
Assets:
Derivatives subject to master netting agreements	$	12,112	$	—	$	12,112	$	(809)	$	(8,770)	$	2,533
Derivatives not subject to master netting agreements	292		—		292
Total derivatives	$	12,404	$	—	$	12,404
Liabilities:
Derivatives subject to master netting agreements	$	27,490	$	—	$	27,490	$	(809)	$	—	$	26,681
Derivatives not subject to master netting agreements	109		—		109
Total derivatives	$	27,599	$	—	$	27,599
December 31, 2021
Assets:
Derivatives subject to master netting agreements	$	40,970	$	—	$	40,970	$	(347)	$	—	$	40,623
Derivatives not subject to master netting agreements	872		—		872
Total derivatives	$	41,842	$	—	$	41,842
Liabilities:
Derivatives subject to master netting agreements	$	12,019	$	—	$	12,019	$	(347)	$	(10,146)	$	1,526
Derivatives not subject to master netting agreements	82		—		82
Total derivatives	$	12,101	$	—	$	12,101

12. Resale and Repurchase Agreements

The Company regularly enters into resale and repurchase agreement transactions with other financial institutions and with its own customers. Resale and repurchase agreements are agreements to purchase/sell securities subject to an obligation to resell/repurchase the same or similar securities. They are accounted for as secured lending and collateralized borrowing (e.g. financing transactions), not as true sales and purchases of the underlying collateral securities. Some of the resale and repurchase agreements were transacted under master netting arrangements that contain a conditional right of offset, such as 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.

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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 June 30, 2022 and $400.0 million at December 31, 2021.

The following table shows the extent to which resale agreement assets and repurchase agreement liabilities with the same counterparty have been offset on the consolidated balance sheets, in addition to the extent to which they could potentially be offset. Also shown is collateral received or pledged, which consists of marketable securities. The collateral amounts in the table are limited to the outstanding balances of the related asset or liability (after offsetting is applied); thus amounts of excess collateral are not shown.


							Gross Amounts Not Offset in the Balance Sheet
(In thousands)	Gross Amount Recognized		Gross Amounts Offset in the Balance Sheet		Net Amounts Presented in the Balance Sheet		Financial Instruments Available for Offset		Securities Collateral Received/Pledged		Unsecured Amount
June 30, 2022
Total resale agreements, subject to master netting arrangements	$	1,650,000	$	(200,000)	$	1,450,000	$	—	$	(1,450,000)	$	—
Total repurchase agreements, subject to master netting arrangements	2,426,546		(200,000)		2,226,546		—		(2,226,546)		—
December 31, 2021
Total resale agreements, subject to master netting arrangements	$	2,025,000	$	(400,000)	$	1,625,000	$	—	$	(1,625,000)	$	—
Total repurchase agreements, subject to master netting arrangements	3,379,582		(400,000)		2,979,582		—		(2,979,582)		—

The table below shows the remaining contractual maturities of repurchase agreements outstanding at June 30, 2022 and December 31, 2021, in addition to the various types of marketable securities that have been pledged by the Company as collateral for these borrowings.


	Remaining Contractual Maturity of the Agreements
(In thousands)	Overnight and continuous		Up to 90 days		Greater than 90 days		Total
June 30, 2022
Repurchase agreements, secured by:
U.S. government and federal agency obligations	$	461,775	$	22,960	$	9,661	$	494,396


Agency mortgage-backed securities	1,393,803		—		200,100		1,593,903
Non-agency mortgage-backed securities	46,675		—		—		46,675
Asset-backed securities	279,591		—		—		279,591
Other debt securities	11,981		—		—		11,981
Total repurchase agreements, gross amount recognized	$	2,193,825	$	22,960	$	209,761	$	2,426,546
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

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13. Stock-Based Compensation

The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights (SARs). Historically, most of the awards have been issued during the first quarter of each year. The stock-based compensation expense charged against income was $4.2 million and $3.8 million in the three months ended June 30, 2022 and 2021, respectively, and $8.4 million and $7.7 million in the six months ended June 30, 2022 and 2021, respectively.

Nonvested stock awards granted generally vest in 4 to 7 years and contain restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant. A summary of the status of the Company’s nonvested share awards as of June 30, 2022, and changes during the six month period then ended, is presented below.


	Shares	Weighted Average Grant Date Fair Value
Nonvested at January 1, 2022	1,120,491	$55.58
Granted	236,483	70.82
Vested	(247,869)	47.64
Forfeited	(18,367)	59.80

Nonvested at June 30, 2022	1,090,738	$60.62

SARs are granted with exercise prices equal to the market price of the Company’s stock at the date of grant. SARs vest ratably over 4 years of continuous service and have contractual terms of 10 years. All SARs must be settled in stock under provisions of the plan. In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs on date of grant. The current year per share average fair value and the model assumptions are shown in the table below.


Weighted per share average fair value at grant date	$17.42
Assumptions:
Dividend yield	1.5	%
Volatility	28.4	%
Risk-free interest rate	1.6	%
Expected term	5.7 years

A summary of SAR activity during the first six months of 2022 is presented below.


(Dollars in thousands, except per share data)	Rights	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2022	896,348	$	46.21
Granted	96,318	70.64
Forfeited	(6,390)	60.86
Expired	(1,013)	60.19
Exercised	(30,216)	44.26
Outstanding at June 30, 2022	955,047	$	48.62	5.7 years	$	17,024

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14. Revenue from Contracts with Customers

ASC 606 "Revenue from Contracts with Customers" requires revenue recognition for 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 six months ended June 30, 2022, approximately 62% of the Company’s total revenue was comprised of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services.

The following table disaggregates non-interest income subject to ASC 606 by major product line.


	Three Months Ended June 30				Six Months Ended June 30
(In thousands)	2022		2021		2022		2021
Bank card transaction fees	$	43,873	$	42,608	$	85,918	$	80,303
Trust fees	46,792		46,257		94,603		90,384
Deposit account charges and other fees	25,564		23,988		47,871		46,563
Consumer brokerage services	5,068		4,503		9,514		8,584
Other non-interest income	10,750		6,962		15,245		14,658
Total non-interest income from contracts with customers	132,047		124,318		253,151		240,492
Other non-interest income (1)	7,380		14,825		18,045		34,696
Total non-interest income	$	139,427	$	139,143	$	271,196	$	275,188

(1) This revenue is not within the scope of ASC 606, and includes fees relating to capital market activities, loan fees and sales, derivative instruments, standby letters of credit and various other transactions.

For bank card transaction fees, nearly all of debit and credit card fees are earned in the Consumer segment, while corporate card and merchant fees are earned in the Commercial segment. The Consumer and Commercial segments contribute approximately 40% and 60%, respectively, of the Company's deposit account charge revenue. All trust fees and nearly all consumer brokerage services income are earned in the Wealth segment.

The following table presents the opening and closing receivable balances for the six month periods ended June 30, 2022 and 2021 for the Company’s significant revenue categories subject to ASC 606.


(In thousands)	June 30, 2022		December 31, 2021		June 30, 2021		December 31, 2020
Bank card transaction fees	$	14,598	$	16,424	$	13,248	$	14,199
Trust fees	1,975		2,222		2,253		2,071
Deposit account charges and other fees	6,898		6,702		6,616		6,933
Consumer brokerage services	678		391		355		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.

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15. Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale debt securities, equity securities, trading debt securities, certain investments relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or fair value accounting or write-downs of individual assets.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

•Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

•Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).

•Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.

The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value Measurements note in the Company's 2021 Annual Report on Form 10-K. There have been no significant changes in these methodologies since then.

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Instruments Measured at Fair Value on a Recurring Basis

The table below presents the June 30, 2022 and December 31, 2021 carrying values of assets and liabilities measured at fair value on a recurring basis. There were no transfers among levels during the first six months of 2022 or the year ended December 31, 2021.


			Fair Value Measurements Using
(In thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2022
Assets:
Residential mortgage loans held for sale	$	1,036	$	—	$	1,036	$	—
Available for sale debt securities:
U.S. government and federal agency obligations	1,109,128		1,109,128		—		—
Government-sponsored enterprise obligations	47,108		—		47,108		—
State and municipal obligations	1,952,798		—		1,950,982		1,816
Agency mortgage-backed securities	4,923,683		—		4,923,683		—
Non-agency mortgage-backed securities	1,329,114		—		1,329,114		—
Asset-backed securities	3,794,487		—		3,794,487		—
Other debt securities	543,990		—		543,990		—
Trading debt securities	34,195		—		34,195		—
Equity securities	6,130		6,130		—		—
Private equity investments	161,771		—		—		161,771
Derivatives *	12,404		—		12,088		316
Assets held in trust for deferred compensation plan	17,862		17,862		—		—
Total assets	13,933,706		1,133,120		12,636,683		163,903
Liabilities:
Derivatives *	27,599		—		27,437		162
Liabilities held in trust for deferred compensation plan	17,862		17,862		—		—
Total liabilities	$	45,461	$	17,862	$	27,437	$	162
December 31, 2021
Assets:
Residential mortgage loans held for sale	$	5,570	$	—	$	5,570	$	—
Available for sale debt securities:
U.S. government and federal agency obligations	1,080,720		1,080,720		—		—
Government-sponsored enterprise obligations	51,755		—		51,755		—
State and municipal obligations	2,096,827		—		2,094,843		1,984
Agency mortgage-backed securities	5,683,000		—		5,683,000		—
Non-agency mortgage-backed securities	1,366,477		—		1,366,477		—
Asset-backed securities	3,539,219		—		3,539,219		—
Other debt securities	632,029		—		632,029		—
Trading debt securities	46,235		—		46,235		—
Equity securities	7,153		7,153		—		—
Private equity investments	147,406		—		—		147,406
Derivatives *	41,842		—		40,994		848
Assets held in trust for deferred compensation plan	21,794		21,794		—		—
Total assets	14,720,027		1,109,667		13,460,122		150,238
Liabilities:
Derivatives *	12,101		—		11,824		277
Liabilities held in trust for deferred compensation plan	21,794		21,794		—		—
Total liabilities	$	33,895	$	21,794	$	11,824	$	277

* The fair value of each class of derivative is shown in Note 11.

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The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(In thousands)	State and Municipal Obligations		Private Equity Investments		Derivatives		Total
For the three months ended June 30, 2022
Balance March 31, 2022	$	1,902	$	153,411	$	221	$	155,534
Total gains or losses (realized/unrealized):
Included in earnings	—		15,633		(131)		15,502
Included in other comprehensive income *	(87)		—		—		(87)

Discount accretion	1		—		—		1
Purchases of private equity investments	—		822		—		822
Sale/pay down of private equity investments	—		(8,095)		—		(8,095)

Purchase of risk participation agreement	—		—		314		314
Sale of risk participation agreements	—		—		(250)		(250)
Balance June 30, 2022	$	1,816	$	161,771	$	154	$	163,741
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2022	$	—	$	15,633	$	148	$	15,781
*Total gains or losses for the three months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2022	$	(87)	$	—	$	—	$	(87)
For the six months ended June 30, 2022
Balance January 1, 2022	$	1,984	$	147,406	$	571	$	149,961
Total gains or losses (realized/unrealized):
Included in earnings	—		23,083		(626)		22,457
Included in other comprehensive income *	(170)		—		—		(170)

Discount accretion	2		—		—		2
Purchases of private equity investments	—		1,122		—		1,122
Sale/pay down of private equity investments	—		(9,840)		—		(9,840)

Purchase of risk participation agreement	—		—		459		459
Sale of risk participation agreement	—		—		(250)		(250)
Balance June 30, 2022	$	1,816	$	161,771	$	154	$	163,741
Total gains or losses for the six months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2022	$	—	$	23,033	$	136	$	23,169
*Total gains or losses for the six months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2022	$	(170)	$	—	$	—	$	(170)

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	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(In thousands)	State and Municipal Obligations		Private Equity Investments		Derivatives		Total
For the three months ended June 30, 2021
Balance March 31, 2021	$	7,970	$	94,257	$	1,636	$	103,863
Total gains or losses (realized/unrealized):
Included in earnings	—		16,666		(420)		16,246
Included in other comprehensive income *	18		—		—		18

Discount accretion	3		—		—		3
Purchases of private equity investments	—		5,656		—		5,656
Sale/pay down of private equity investments	—		(356)		—		(356)
Capitalized interest/dividends	—		23		—		23
Purchase of risk participation agreement	—		—		445		445
Sale of risk participation agreement	—		—		(32)		(32)
Balance June 30, 2021	$	7,991	$	116,246	$	1,629	$	125,866
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2021	$	—	$	16,666	$	1,434	$	18,100
*Total gains or losses for the three months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2021	$	18	$	—	$	—	$	18
For the six months ended June 30, 2021
Balance January 1, 2021	$	7,968	$	94,368	$	2,741	$	105,077
Total gains or losses (realized/unrealized):
Included in earnings	—		25,031		(1,427)		23,604
Included in other comprehensive income *	17		—		—		17

Discount accretion	6		—		—		6
Purchases of private equity investments	—		5,656		—		5,656
Sale/pay down of private equity investments	—		(8,832)		—		(8,832)
Capitalized interest/dividends	—		23		—		23
Purchase of risk participation agreement	—		—		445		445
Sale of risk participation agreement	—		—		(130)		(130)
Balance June 30, 2021	$	7,991	$	116,246	$	1,629	$	125,866
Total gains or losses for the six months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2021	$	—	$	25,031	$	1,629	$	26,660
*Total gains or losses for the six months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2021	$	17	$	—	$	—	$	17

* Included in "net unrealized gains (losses) on available for sale debt securities" in the consolidated statements of comprehensive income.

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Gains and losses included in earnings for the Level 3 assets and liabilities in the previous table are reported in the following line items in the consolidated statements of income:


(In thousands)	Loan Fees and Sales		Other Non-Interest Income		Investment Securities Gains (Losses), Net		Total
For the three months ended June 30, 2022
Total gains or losses included in earnings	$	(49)	$	(82)	$	15,633	$	15,502
Change in unrealized gains or losses relating to assets still held at June 30, 2022	$	230	$	(82)	$	15,633	$	15,781
For the six months ended June 30, 2022
Total gains or losses included in earnings	$	(534)	$	(92)	$	23,083	$	22,457
Change in unrealized gains or losses relating to assets still held at June 30, 2022	$	230	$	(94)	$	23,033	$	23,169
For the three months ended June 30, 2021
Total gains or losses included in earnings	$	(35)	$	(385)	$	16,666	$	16,246
Change in unrealized gains or losses relating to assets still held at June 30, 2021	$	1,820	$	(386)	$	16,666	$	18,100
For the six months ended June 30, 2021
Total gains or losses included in earnings	$	(1,407)	$	(20)	$	25,031	$	23,604
Change in unrealized gains or losses relating to assets still held at June 30, 2021	$	1,820	$	(191)	$	25,031	$	26,660

Level 3 Inputs

The Company's significant Level 3 measurements, which employ unobservable inputs that are readily quantifiable, pertain to auction rate securities (ARS), investments in portfolio concerns held by the Company's private equity subsidiaries, and held for sale residential mortgage loan commitments. ARS are included in state and municipal securities and totaled $1.8 million at June 30, 2022, while private equity investments, included in other securities, totaled $161.8 million.

Information about these inputs is presented in the table below.


Quantitative Information about Level 3 Fair Value Measurements						Weighted
	Valuation Technique	Unobservable Input	Range			Average*
Auction rate securities	Discounted cash flow	Estimated market recovery period			5 years	5 years
		Estimated market rate	4.6%	-	5.3%	5.0%
Private equity investments	Market comparable companies	EBITDA multiple	4.0	-	7.0	5.5
Mortgage loan commitments	Discounted cash flow	Probability of funding	67.2%	-	100.0%	88.6%
		Embedded servicing value	.9%	-	1.5%	1.2%

* Unobservable inputs were weighted by the relative fair value of the instruments.

Instruments Measured at Fair Value on a Nonrecurring Basis

For assets measured at fair value on a nonrecurring basis during the first six months of 2022 and 2021, and still held as of June 30, 2022 and 2021, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation inputs used to determine each adjustment, and the carrying value of the related individual assets or portfolios at June 30, 2022 and 2021.


		Fair Value Measurements Using
(In thousands)	Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total Gains (Losses) Recognized During the Six Months Ended June 30
June 30, 2022


Mortgage servicing rights	11,407	—	—	11,407	304

Long-lived assets	484	—	—	484	(965)

June 30, 2021
Mortgage servicing rights	9,376	—	—	9,376	1,299

Long- lived assets	984	—	—	984	(276)

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The Company's significant Level 3 measurements that are measured on a nonrecurring basis pertain to the Company's mortgage servicing rights retained on certain fixed rate personal real estate loan originations. Mortgage servicing rights are included in other intangible assets-net on the consolidated balance sheets, and information about these inputs at June 30, 2022 is presented in the table below.


Quantitative Information about Level 3 Fair Value Measurements										Weighted
	Valuation Technique	Unobservable Input	Range							Average*
Mortgage servicing rights	Discounted cash flow	Discount rate	9.01		%	-	9.31		%	9.11		%
		Prepayment speeds (CPR)*	6.42		%	-	8.17		%	6.66		%
		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.

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16. Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as follows at June 30, 2022 and December 31, 2021:


	Carrying Amount		Estimated Fair Value at June 30, 2022
(In thousands)			Level 1		Level 2		Level 3		Total
Financial Assets
Loans:
Business	$	5,441,592	$	—	$	—	$	5,326,823	$	5,326,823
Real estate - construction and land	1,266,260		—		—		1,249,488		1,249,488
Real estate - business	3,215,578		—		—		3,128,428		3,128,428
Real estate - personal	2,836,835		—		—		2,686,693		2,686,693
Consumer	2,089,592		—		—		2,054,657		2,054,657
Revolving home equity	271,854		—		—		268,543		268,543
Consumer credit card	558,102		—		—		522,025		522,025
Overdrafts	6,814		—		—		6,704		6,704
Total loans	15,686,627		—		—		15,243,361		15,243,361
Loans held for sale	6,467		—		6,467		—		6,467




Investment securities	13,947,188		1,115,258		12,623,559		208,371		13,947,188
Federal funds sold	26,000		26,000		—		—		26,000
Securities purchased under agreements to resell	1,450,000		—		—		1,423,660		1,423,660
Interest earning deposits with banks	684,994		684,994		—		—		684,994
Cash and due from banks	355,524		355,524		—		—		355,524
Derivative instruments	12,404		—		12,088		316		12,404
Assets held in trust for deferred compensation plan	17,862		17,862		—		—		17,862
Total	$	32,187,066	$	2,199,638	$	12,642,114	$	16,875,708	$	31,717,460
Financial Liabilities
Non-interest bearing deposits	$	11,102,585	$	11,102,585	$	—	$	—	$	11,102,585
Savings, interest checking and money market deposits	16,063,064		16,063,064		—		—		16,063,064
Certificates of deposit	1,005,584		—		—		992,566		992,566
Federal funds purchased	7,750		7,750		—		—		7,750
Securities sold under agreements to repurchase	2,226,546		—		—		2,227,167		2,227,167
Other borrowings	4,390		—		4,390		—		4,390
Derivative instruments	27,599		—		27,437		162		27,599
Liabilities held in trust for deferred compensation plan	17,862		17,862		—		—		17,862
Total	$	30,455,380	$	27,191,261	$	31,827	$	3,219,895	$	30,442,983

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	Carrying Amount		Estimated Fair Value at December 31, 2021
(In thousands)			Level 1		Level 2		Level 3		Total
Financial Assets
Loans:
Business	$	5,303,535	$	—	$	—	$	5,229,153	$	5,229,153
Real estate - construction and land	1,118,266		—		—		1,099,747		1,099,747
Real estate - business	3,058,837		—		—		3,054,481		3,054,481
Real estate - personal	2,805,401		—		—		2,809,490		2,809,490
Consumer	2,032,225		—		—		2,031,408		2,031,408
Revolving home equity	275,945		—		—		273,450		273,450
Consumer credit card	575,410		—		—		536,468		536,468
Overdrafts	6,740		—		—		6,458		6,458
Total loans	15,176,359		—		—		15,040,655		15,040,655
Loans held for sale	8,615		—		8,615		—		8,615




Investment securities	14,695,628		1,087,873		13,413,558		194,197		14,695,628
Federal funds sold	2,800		2,800		—		—		2,800
Securities purchased under agreements to resell	1,625,000		—		—		1,623,856		1,623,856
Interest earning deposits with banks	3,971,217		3,971,217		—		—		3,971,217
Cash and due from banks	305,539		305,539		—		—		305,539
Derivative instruments	41,842		—		40,994		848		41,842
Assets held in trust for deferred compensation plan	21,794		21,794		—		—		21,794
Total	$	35,848,794	$	5,389,223	$	13,463,167	$	16,859,556	$	35,711,946
Financial Liabilities
Non-interest bearing deposits	$	11,772,374	$	11,772,374	$	—	$	—	$	11,772,374
Savings, interest checking and money market deposits	16,598,085		16,598,085		—		—		16,598,085
Certificates of deposit	1,442,614		—		—		1,438,919		1,438,919
Federal funds purchased	43,385		43,385		—		—		43,385
Securities sold under agreements to repurchase	2,979,582		—		—		2,979,677		2,979,677
Other borrowings	12,514		—		12,514		—		12,514
Derivative instruments	12,101		—		11,824		277		12,101
Liabilities held in trust for deferred compensation plan	21,794		21,794		—		—		21,794
Total	$	32,882,449	$	28,435,638	$	24,338	$	4,418,873	$	32,878,849

17. Legal and Regulatory Proceedings

The Company has various legal proceedings pending at June 30, 2022, arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at early stages of the legal process. The Company records a loss accrual for all legal and regulatory matters for which it deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet progressed to the point where a loss amount can be determined to be probable and estimable.

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2021 Annual Report on Form 10-K. Results of operations for the six month periods ended June 30, 2022 are not necessarily indicative of results to be attained for any other period.

Forward-Looking Information

This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, the effects of the COVID-19 pandemic, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2021 Annual Report on Form 10-K and in Part II Item 1A of this Quarterly Report on Form 10-Q. During the quarter ended June 30, 2022, there were no material changes to the Risk Factors disclosed in the Company's 2021 Annual Report on Form 10-K.

Critical Accounting Estimates and Related Policies

The Company has identified certain policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates and related policies are the Company's allowance for credit losses and fair value measurement policies. A discussion of these estimates and related policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2021 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2021.

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Selected Financial Data


	Three Months Ended June 30						Six Months Ended June 30
	2022			2021			2022			2021
Per Share Data
Net income per common share — basic	$	.96		$	1.32	*	$	1.93		$	2.38	*
Net income per common share — diluted	.96			1.32		*	1.93			2.38		*
Cash dividends on common stock	.265			.250		*	.530			.500		*
Book value per common share							22.29			28.47		*
Market price							65.65			71.01		*
Selected Ratios
(Based on average balance sheets)
Loans to deposits (1)	53.93		%	57.78		%	52.91		%	59.73		%
Non-interest bearing deposits to total deposits	39.02			40.09			39.18			39.76
Equity to loans (1)	18.41			21.26			20.10			20.97
Equity to deposits	9.93			12.29			10.63			12.53
Equity to total assets	8.37			10.07			8.82			10.22
Return on total assets	1.36			1.93			1.35			1.78

Return on common equity	16.29			19.12			15.28			17.42
(Based on end-of-period data)
Non-interest income to revenue (2)	37.50			40.08			38.07			39.94
Efficiency ratio (3)	57.29			56.90			58.72			56.64
Tier I common risk-based capital ratio							13.95			14.20
Tier I risk-based capital ratio							13.95			14.20
Total risk-based capital ratio							14.64			15.07
Tangible common equity to tangible assets ratio (4)							7.56			9.91
Tier I leverage ratio							9.45			9.36

* Restated for the 5% stock dividend distributed in December 2021.

(1) Includes loans held for sale.

(2) Revenue includes net interest income and non-interest income.

(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.

(4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization.

It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP.

The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets.


	June 30
(Dollars in thousands)	2022			2021
Total equity	$	2,675,313		$	3,493,830
Less non-controlling interest	16,467			8,210

Less goodwill	138,921			138,921
Less core deposit premium	4,446			4,772
Total tangible common equity (a)	$	2,515,479		$	3,341,927
Total assets	$	33,435,370		$	33,856,162
Less goodwill	138,921			138,921
Less core deposit premium	4,446			4,772
Total tangible assets (b)	$	33,292,003		$	33,712,469
Tangible common equity to tangible assets ratio (a)/(b)	7.56		%	9.91		%

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Results of Operations

Summary


	Three Months Ended June 30						Six Months Ended June 30
(Dollars in thousands)	2022		2021		% change			2022		2021		% change
Net interest income	$	232,385	$	207,982	11.7	%		$	441,171	$	413,730	6.6	%
Provision for credit losses	(7,162)		45,655		115.7			2,696		51,887		94.8
Non-interest income	139,427		139,143		.2			271,196		275,188		(1.5)
Investment securities gains, net	1,029		16,804		(93.9)			8,192		26,657		(69.3)
Non-interest expense	(213,505)		(198,126)		7.8			(419,153)		(390,699)		7.3
Income taxes	(32,021)		(45,209)		(29.2)			(63,923)		(77,285)		(17.3)
Non-controlling interest expense	(4,359)		(3,923)		11.1			(6,231)		(6,180)		.8
Net income attributable to Commerce Bancshares, Inc.	$	115,794	$	162,326	(28.7	%)		$	233,948	$	293,298	(20.2	%)

For the quarter ended June 30, 2022, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $115.8 million, a decrease of $46.5 million, or 28.7%, compared to the second quarter of the previous year. For the current quarter, the annualized return on average assets was 1.36%, the annualized return on average equity was 16.29%, and the efficiency ratio was 57.29%. Diluted earnings per common share was $.96, a decrease of 27.3% compared to $1.32 per share in the second quarter of 2021, and decreased 1.0% compared to $.97 per share in the previous quarter.

Compared to the second quarter of last year, net interest income increased $24.4 million, or 11.7%, mainly due to an increase of $33.5 million in interest income on investment securities, partly offset by decreases in interest on loans and securities purchased under agreements to resell of $2.1 million and $6.0 million, respectively. The provision for credit losses increased $52.8 million due to an increase in the estimate of the allowance for credit losses on loans and unfunded lending commitments and higher net loan charge-offs, coupled with the release of allowances associated with certain pandemic-related estimates in the prior quarter. Non-interest income increased $284 thousand, or .2%, compared to the second quarter of 2021, mainly due to growth in deposit, bank card, and cash sweep fees, offset by lower loan fees and sales and a fair value adjustment on the Company's deferred compensation plan assets. Net gains on investment securities totaled $1.0 million in the current quarter compared to net gains of $16.8 million in the same quarter of last year. Net securities gains in the current quarter primarily resulted from net fair value gains of $15.6 million in the Company's private equity investment portfolio, mostly offset by losses of $9.6 million on sales of available for sale securities and a $4.3 million loss on the sale of an investment in the Company's private equity portfolio. Non-interest expense increased $15.4 million, or 7.8%, over the second quarter of 2021 mainly due to higher salaries, data processing and software, and travel and entertainment expense.

Net income for the first six months of 2022 was $233.9 million, a decrease of $59.4 million, or 20.2%, from the same period last year. Diluted earnings per common share was $1.93, a decrease of 18.9% compared to $2.38 per share in the same period last year. For the first six months of 2022, the annualized return on average assets was 1.35%, the annualized return on average equity was 15.28%, and the efficiency ratio was 58.72%. Net interest income increased $27.4 million, or 6.6%, over the same period last year. This growth was largely due to an increase of $55.0 million in interest income on investment securities, partly offset by decreases in interest on loans and securities purchased under agreements to resell of $16.6 million and $11.9 million, respectively. The provision for credit losses was a recovery of $2.7 million for the first six months of 2022, compared to a recovery of $51.9 million in the same period last year, resulting in an increase in provision expense of $49.2 million. Non-interest income decreased $4.0 million, or 1.5%, from the first six months of last year mainly due to lower loan fees and sales and other non-interest income, partly offset by higher trust fees and net bank card fees. Non-interest expense increased $28.5 million, or 7.3%, over the first six months of last year mainly due to increases in salaries and benefits expense and data processing and software expense.

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Net Interest Income

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.

Analysis of Changes in Net Interest Income


	Three Months Ended June 30, 2022 vs. 2021						Six Months Ended June 30, 2022 vs. 2021
	Change due to						Change due to
(In thousands)	Average Volume		Average Rate		Total		Average Volume		Average Rate		Total
Interest income, fully taxable equivalent basis:
Loans:
Business	$	(6,530)	$	88	$	(6,442)	$	(15,788)	$	(1,936)	$	(17,724)
Real estate - construction and land	1,214		1,605		2,819		1,587		2,216		3,803
Real estate - business	1,293		1,657		2,950		1,918		589		2,507
Real estate - personal	175		(295)		(120)		36		(1,158)		(1,122)
Consumer	631		(1,112)		(481)		1,546		(3,247)		(1,701)
Revolving home equity	(126)		178		52		(339)		243		(96)
Consumer credit card	(1,064)		133		(931)		(2,909)		642		(2,267)
Overdrafts	—		—		—		—		—		—
Total interest on loans	(4,407)		2,254		(2,153)		(13,949)		(2,651)		(16,600)
Loans held for sale	(139)		55		(84)		(340)		102		(238)
Investment securities:
U.S. government and federal agency securities	5,497		(1,639)		3,858		7,773		860		8,633
Government-sponsored enterprise obligations	29		8		37		35		5		40
State and municipal obligations	961		(606)		355		1,685		(1,505)		180
Mortgage-backed securities	1,309		15,829		17,138		2,454		26,455		28,909
Asset-backed securities	4,314		1,036		5,350		10,489		(1,282)		9,207
Other securities	1,800		4,715		6,515		3,292		4,322		7,614
Total interest on investment securities	13,910		19,343		33,253		25,728		28,855		54,583
Federal funds sold	4		13		17		5		13		18
Securities purchased under agreements to resell	8,520		(14,551)		(6,031)		19,876		(31,735)		(11,859)
Interest earning deposits with banks	(405)		2,090		1,685		(99)		2,565		2,466
Total interest income	17,483		9,204		26,687		31,221		(2,851)		28,370
Interest expense:
Deposits:
Savings	27		(147)		(120)		72		(291)		(219)
Interest checking and money market	236		318		554		544		(234)		310
Certificates of deposit of less than $100,000	(55)		(67)		(122)		(135)		(321)		(456)
Certificates of deposit of $100,000 and over	(88)		(103)		(191)		(48)		(778)		(826)
Total interest on deposits	120		1		121		433		(1,624)		(1,191)
Federal funds purchased	11		210		221		10		213		223
Securities sold under agreements to repurchase	17		2,368		2,385		104		2,656		2,760
Other borrowings	2		8		10		2		7		9
Total interest expense	150		2,587		2,737		549		1,252		1,801
Net interest income, tax equivalent basis	$	17,333	$	6,617	$	23,950	$	30,672	$	(4,103)	$	26,569

Net interest income in the second quarter of 2022 was $232.4 million, an increase of $24.4 million over the second quarter of 2021. On a tax equivalent (T/E) basis, net interest income totaled $235.0 million in the second quarter of 2022, up $24.0 million over the same period last year and up $23.6 million over the previous quarter. The increase in net interest income

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compared to the second quarter of 2021 was mainly due to higher interest income earned on on investment securities (T/E) of $33.3 million, partly offset by lower interest earned on loans (T/E) of $2.2 million and securities purchased under agreements to resell of $6.0 million and higher interest expense on securities sold under agreements to repurchase of $2.4 million. The increase in interest earned on investment securities (T/E) was due to higher average balances and rates, an increase of $3.4 million in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS), the receipt of $6.5 million in non-accrual interest on the sale of a private equity investment during the current quarter and a $5.0 million adjustment to premium amortization on mortgage-backed securities. The decrease in total interest earned on loans (T/E) was the result of a decline in average balances, partly offset by higher rates earned, while the decrease in securities purchased under agreements to resell declined due to lower average rates, partly offset by higher average balances. Interest expense on securities sold under agreements to repurchase increased due to higher average rates. The Company's net yield on earning assets (T/E) was 2.79% in the current quarter compared to 2.60% in the second quarter of 2021.

Total interest income (T/E) increased $26.7 million over the second quarter of 2021. Interest income on loans (T/E) was $143.5 million during the second quarter of 2022, a decrease of $2.2 million, or 1.5%, from the same quarter last year. The decrease in interest income from the same quarter last year was primarily due to a decline of $504.9 million, or 3.2%, in average loan balances, partly offset by an increase of seven basis points in the average rate earned. Most of the decrease in interest income occurred in the business, consumer credit card and consumer loan categories. These decreases were partly offset by increases in interest income in the business real estate and construction and land loan categories. Business loan interest income decreased $6.4 million due to a decline of $826.4 million in average balances. The decline in business loan average balances was mainly due to a decrease of $1.2 billion in Paycheck Protection Program (PPP) loans, while interest earned on PPP loans declined $11.2 million from the same quarter last year. Consumer credit card loan interest decreased $931 thousand mainly due to a decline of $38.0 million in average balances, slightly offset by a ten basis point increase in the average rate earned. Consumer loan interest declined $481 thousand due to a decrease of 22 basis points in the average rate earned, partly offset by a $65.9 million, or 3.3%, increase in average balances. Personal real estate loan interest income fell $120 thousand due to a four basis point decrease in the average rate earned, partly offset by higher average balances of $21.2 million. These decreases to interest income (T/E) were partly offset by an increase of $2.8 million in interest earned on construction and land loans, due to an increase of 53 basis points in the average rate earned and growth of $136.8 million, or 12.6%, in average loan balances. In addition, interest earned on business real estate loans increased $3.0 million due to a 21 basis point increase in the average rate earned and higher average balances of $148.6 million, or 4.9%.

Interest income on investment securities (T/E) was $90.4 million during the second quarter of 2022, which was an increase of $33.3 million over the same quarter last year. The increase in interest income occurred mainly in interest earned on mortgage-backed securities, which increased $17.1 million, partly due to a $5.0 million increase in premium amortization, reflecting slower forward prepayment speed estimates in the current quarter, compared to a premium amortization adjustment decrease of $1.9 million in the prior year. In addition, the average rate earned on mortgage-backed securities increased 88 basis points and the average balance increased $472.8 million, or 7.1%. Interest on U.S. government and federal agency obligations grew $3.9 million mainly due to higher average loan balances of $399.5 million, or 55.5%, and an increase in inflation income on the Company's TIPS, while an overall decrease of 59 basis points in the average rate earned partially offset these increases in income. Interest income related to TIPS, which is tied to the Consumer Price Index, increased $3.4 million over the same quarter last year. Interest on asset-backed securities rose $5.4 million due to higher average balances of $1.4 billion, or 52.2%, coupled with an increase of ten basis points in the average rate earned. Interest earned on other securities increased $6.2 million mainly due to the receipt of non-accrual interest of $6.5 million, mentioned above. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $15.4 billion in the second quarter of 2022, compared to $12.9 billion in the second quarter of 2021.

Interest income on securities purchased under agreements to resell decreased $6.0 million from the same quarter last year, due to a decrease of 343 basis points in the average rate earned, partly offset by growth of $766.2 million in the average balance. Interest income on balances at the Federal Reserve grew $1.7 million due to an increase of 67 basis points in the average rate earned, partly offset by a decrease of $1.5 billion in the average balance invested.

The average tax equivalent yield on total interest earning assets was 2.86% in the second quarter of 2022, up from 2.64% in the second quarter of 2021.

Total interest expense increased $2.7 million compared to the second quarter of 2021 due to a increases in interest expense of $121 thousand on interest bearing deposits and $2.6 million on borrowings. The increase in deposit interest expense resulted mainly from an increase of $554 thousand in interest expense on interest checking and money market deposit accounts due to a one basis point increase in the average rate paid and higher average balances of $1.6 billion. Partially offsetting the increase in income earned on interest checking and money market deposits was a lower average rate earned on savings deposits (partially offset by higher average balances), as well as lower average rates earned and lower average balances of certificates of deposit.

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Interest expense on borrowings was higher due to an increase of 42 basis points in the average rate paid on customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .12% and .07% in the second quarters of 2022 and 2021, respectively.

Net interest income (T/E) for the first six months of 2022 was $446.4 million compared to $419.8 million for the same period in 2021. For the first six months of 2022, the net interest margin was 2.62% compared to 2.65% for the same period in 2021.

Total interest income (T/E) for the first six months of 2022 increased $28.4 million over the same period last year mainly due to higher interest income on investment securities (T/E), partly offset by lower interest earned on loans (T/E) and securities purchased under agreements to resell. Loan interest income (T/E) declined $16.6 million, or 5.7%, due to an $805.7 million decrease in average loan balances and a three basis point decrease in the average rate earned. Most of the decrease in loan interest occurred in the business loan category due to lower average balances and rates. In addition, consumer credit card loan interest declined due to lower average balances, partly offset by higher rates earned, while consumer and personal real estate loan interest declined due to lower average rates earned, partly offset by higher average balances. These decreases were partly offset by higher interest earned on business real estate and construction and land development loans due to higher average balances and rates earned. Interest income on investment securities (T/E) increased $54.6 million due to a 42 basis point increase in the average rate earned and a $2.6 billion increase in average balances. Interest earned on U.S. government and federal agency obligations increased $8.6 million, mainly due to higher TIPS interest income. Interest earned on mortgage-backed securities increased $28.9 million due to higher average rates earned and growth in average balances, while interest on asset-backed securities increased $9.2 million due to higher average balances, partly offset by lower average rates earned. Interest income on securities purchased under agreements to resell decreased $11.9 million due to lower rates earned, partly offset by higher average balances, while interest income on balances at the Federal Reserve increased $2.5 million due to higher average rates earned.

Total interest expense for the first six months of 2022 increased $1.8 million compared to the same period last year. Interest expense on borrowings increased $3.0 million, mainly due to higher rates paid on customer repurchase agreements. This increase was partly offset by a decline of $1.2 million in interest expense on interest bearing deposits, mainly due to a two basis point decrease in the average rate paid. The overall cost of total interest bearing liabilities increased to .09% compared to .08% in the same period last year.

Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.

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Non-Interest Income


	Three Months Ended June 30						Increase (Decrease)				Six Months Ended June 30						Increase (Decrease)
(Dollars in thousands)	2022			2021			Amount		% change		2022			2021			Amount		% change
Bank card transaction fees	$	43,873		$	42,608		$	1,265	3.0	%	$	85,918		$	80,303		$	5,615	7.0	%
Trust fees	46,792			46,257			535		1.2		94,603			90,384			4,219		4.7
Deposit account charges and other fees	25,564			23,988			1,576		6.6		47,871			46,563			1,308		2.8
Capital market fees	3,327			3,327			—		—		7,452			8,308			(856)		(10.3)
Consumer brokerage services	5,068			4,503			565		12.5		9,514			8,584			930		10.8
Loan fees and sales	3,246			7,446			(4,200)		(56.4)		7,481			17,630			(10,149)		(57.6)
Other	11,557			11,014			543		4.9		18,357			23,416			(5,059)		(21.6)
Total non-interest income	$	139,427		$	139,143		$	284	.2	%	$	271,196		$	275,188		(3,992)		(1.5	%)
Non-interest income as a % of total revenue*	37.5		%	40.1		%					38.1		%	39.9		%

* Total revenue includes net interest income and non-interest income.

The table below is a summary of net bank card transaction fees for the three and six month periods ended June 30, 2022 and 2021.


	Three Months Ended June 30								Six Months Ended June 30
(Dollars in thousands)	2022		2021		$ change		% change		2022		2021		$ change		% change
Net debit card fees	$	10,533	$	10,505	$	28	.3	%	$	20,085	$	19,872	$	213	1.1	%
Net credit card fees	3,712		4,105		(393)		(9.6)		7,434		7,526		(92)		(1.2)
Net merchant fees	4,934		4,895		39		.8		9,914		9,509		405		4.3
Net corporate card fees	24,694		23,103		1,591		6.9		48,485		43,396		5,089		11.7
Total bank card transaction fees	$	43,873	$	42,608	$	1,265	3.0	%	$	85,918	$	80,303	$	5,615	7.0	%

For the second quarter of 2022, total non-interest income amounted to $139.4 million compared to $139.1 million in the same quarter last year, which was an increase of $284 thousand, or .2%. The increase was mainly due to higher bank card and deposit fees, offset by lower loan fees and sales. Bank card transaction fees for the current quarter grew $1.3 million, or 3.0%, over the same period last year, mainly due to growth of $1.6 million in net corporate card fees, partly offset by lower net credit card fees of $393 thousand. The growth in net corporate card fees was mainly due to higher interchange income, partly offset by higher rewards expense, while the decline in net credit card fees was due to higher rewards expense, partly offset by higher interchange income. Trust fees for the quarter increased $535 thousand, or 1.2%, over the same quarter last year, resulting from higher private client fees, which were up 3.1%. Compared to the second quarter of last year, deposit account fees increased $1.6 million, or 6.6%, mainly due to higher corporate cash management fees. Consumer brokerage service fees increased $565 thousand, or 12.5%, due to growth in annuity, advisory, and mutual fund fees, while loan fees and sales decreased $4.2 million, or 56.4%, due to a decline in mortgage banking revenue. Other non-interest income increased $543 thousand, or 4.9%, mainly due to $2.3 million higher cash sweep commissions, $450 thousand higher tax credit sales fees, and income of $2.2 million from a life insurance death benefit. Partly offsetting these increases was a decrease of $3.7 million in fair value adjustments on the Company's deferred compensation plan assets, which are held in a trust, recorded as both an asset and a liability, and affect both other income and other expense.

Non-interest income for the first six months of 2022 was $271.2 million, compared to $275.2 million in the first six months of 2021, resulting in a decrease of $4.0 million, or 1.5%. Bank card fees increased $5.6 million, or 7.0%, mainly due to growth of $5.1 million in net corporate card fees. Trust fees increased $4.2 million, or 4.7%, mainly due to continued growth in private client trust fees. Deposit account fees increased $1.3 million, or 2.8%, mainly due to higher corporate cash management fees and overdraft and return item fees, partly offset by lower personal account deposit fees. Capital market fees declined $856 thousand, or 10.3%, while consumer brokerage service fees increased $930 thousand, or 10.8%, due to higher advisory and annuity fees. Loan fees and sales decreased $10.1 million, or 57.6%, due to lower mortgage banking revenue. Other income decreased $5.1 million, or 21.6%, due to a gain of $2.4 million on the sale of a branch location recorded last year coupled with a write-down of $965 thousand on a branch location recorded in the first quarter of 2022. In addition, fair value adjustments on the Company's deferred compensation plan assets decreased $5.6 million from the same period last year. Partly offsetting these decreases were $1.9 million higher cash sweep commissions and income of $2.2 million from a life insurance death benefit.

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Investment Securities Gains (Losses), Net


	Three Months Ended June 30				Six Months Ended June 30
(In thousands)	2022		2021		2022		2021
Net losses on sales of available for sale debt securities	$	(9,582)	$	—	$	(9,582)	$	—

Fair value adjustments on equity securities, net	(736)		50		(1,023)		15
Net gains (losses) on sales of private equity investments	(4,286)		88		(4,286)		1,611
Fair value adjustments on private equity investments	15,633		16,666		23,083		25,031



Total investment securities gains, net	$	1,029	$	16,804	$	8,192	$	26,657

Net gains on investment securities, which were recognized in earnings during the three months ended June 30, 2022 and 2021, are shown in the table above. Net securities gains of $1.0 million were reported in the second quarter of 2022, compared to net gains of $16.8 million in the same period last year. The net gains in the second quarter of 2022 were primarily comprised of $15.6 million of net gains in fair value on the Company’s private equity investments, partially offset by losses of $9.6 million and $4.3 million on sales of available for sale securities and a private equity investment, respectively. The Company received $6.5 million in nonaccrual interest, recorded in net interest income, upon the sale of the private investment. The net gains on investment securities for the same quarter last year were mainly comprised of $16.7 million of net gains in fair value on the Company’s private equity investments.

Net gains on investment securities of $8.2 million were recognized in earnings for the six months ended June 30, 2022, compared to net gains of $26.7 million for the same period in 2021. Net gains in the first half of 2022 were mainly comprised of net gains in fair value of $23.1 million on private equity investments, due to fair value adjustments, offset by losses of $9.6 million on sales of available for sale securities, net losses of $4.3 million on sales of private equity investments, and net losses in fair value of $1.0 million on equity investments. Net gains in the first half of 2021 were mainly comprised of a gain of $1.6 million on the sale of a private equity investment and $25.0 million of net gains in fair value on private equity investments. The portion of private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in expense of $3.8 million during the first six months of 2022 and expense of $5.2 million during the first six months of 2021.

Non-Interest Expense


	Three Months Ended June 30				Increase (Decrease)				Six Months Ended June 30				Increase (Decrease)
(Dollars in thousands)	2022		2021		Amount		% change		2022		2021		Amount		% change
Salaries and employee benefits	$	142,243	$	130,751	$	11,492	8.8	%	$	278,196	$	259,784	$	18,412	7.1	%
Net occupancy	12,503		11,527		976		8.5		24,799		23,548		$	1,251	5.3
Equipment	4,734		4,605		129		2.8		9,302		8,958		$	344	3.8
Supplies and communication	4,361		4,033		328		8.1		9,074		8,158		$	916	11.2
Data processing and software	27,635		24,954		2,681		10.7		54,651		50,417		$	4,234	8.4
Marketing	5,836		5,680		156		2.7		12,180		10,838		$	1,342	12.4
Other	16,193		16,576		(383)		(2.3)		30,951		28,996		$	1,955	6.7
Total non-interest expense	$	213,505	$	198,126	$	15,379	7.8	%	$	419,153	$	390,699	$	28,454	7.3	%

Non-interest expense for the second quarter of 2022 amounted to $213.5 million, an increase of $15.4 million, or 7.8%, compared to expense of $198.1 million in the second quarter of last year. The increase in expense over the same period last year was mainly due to higher salaries and benefits expense, data processing and software expense and occupancy expense. Salaries expense increased $10.6 million, or 9.5%, due to growth in full-time salaries expense and an accrual of $5.4 million for special bonuses to be paid to non-incentivized full-time and part-time employees in the second half of 2022. Employee benefits expense totaled $19.9 million, reflecting growth of $862 thousand, or 4.5%, mainly due to higher payroll taxes and 401(k) expense, partly offset by lower healthcare expense. Full-time equivalent employees totaled 4,579 at June 30, 2022, compared to 4,590 at June 30, 2021. Occupancy expense increased $976 thousand, or 8.5%, mainly due to increases in rent expense, outside services expense, depreciation expense, and building repairs and supplies. Equipment expense increased $129 thousand, or 2.8%, while supplies and communication expense increased $328 thousand, or 8.1%, due to higher postage and courier expense and bank card reissuance fees. Data processing and software expense increased $2.7 million, or 10.7%, due to higher software amortization, bank card processing fees and increased costs for service providers. Other non-interest expense

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decreased $383 thousand, or 2.3%, mainly due to a decline of $3.7 million in the deferred compensation adjustment previously mentioned, mostly offset by increases in travel and entertainment expense of $1.3 million, loan collection fees of $430 thousand, and legal and professional fees of $339 thousand.

Non-interest expense amounted to $419.2 million for the first six months of 2022, an increase of $28.5 million, or 7.3%, over the first six months of 2021. Salaries and benefits expense increased $18.4 million, or 7.1%, mainly due to higher costs for salaries, payroll taxes, 401(k) expense, and the special bonus accrual mentioned above. Occupancy expense increased $1.3 million, or 5.3%, mainly due to higher rent expense, outside services expense, and building repairs and supplies expense, while equipment expense increased $344 thousand, or 3.8%. Marketing expense increased $1.3 million, or 12.4%, while supplies and communication expense increased $916 thousand, or 11.2%, mainly due to higher postage and courier expense and bank card reissuance fees. Data processing and software expense increased $4.2 million, or 8.4%, due to higher costs for service providers, software amortization and bank card processing fees. Other non-interest expense increased $2.0 million, or 6.7%, mainly due to an increase in travel and entertainment expense of $2.4 million, higher loan collection fees, professional and legal fees and insurance expense, in addition to lower deferred origination costs. These increases to expense were partly offset by the previously mentioned fair value equity adjustments (decrease of $5.6 million) on the Company's deferred compensation plan assets.

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Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments


	Three Months Ended						Six Months Ended June 30
	June 30, 2022		Mar. 31, 2022		June 30, 2021		2022		2021
ALLOWANCE FOR CREDIT LOSSES ON LOANS


Balance at beginning of period	$	134,710	$	150,044	$	200,527	$	150,044	$	220,834
Provision for credit losses on loans	7,287		(10,686)		(27,433)		$	(3,399)	$	(37,788)
Net loan charge-offs (recoveries):
Commercial:
Business	19		77		(4,909)		96		(4,913)
Real estate-construction and land	—		—		—		—		1
Real estate-business	(1)		(7)		(85)		(8)		(65)
Commercial net loan charge-offs (recoveries)	18		70		(4,994)		88		(4,977)
Personal Banking:
Real estate-personal	(41)		22		(16)		(19)		(1)
Consumer	633		808		378		1,441		1,141
Revolving home equity	(14)		18		28		4		51
Consumer credit card	2,937		3,372		5,155		6,309		14,136
Overdrafts	425		358		148		783		301
Personal banking net loan charge-offs	3,940		4,578		5,693		8,518		15,628
Total net loan charge-offs	3,958		4,648		699		8,606		10,651
Balance at end of period	$	138,039	$	134,710	$	172,395	$	138,039	$	172,395
LIABILITY FOR UNFUNDED LENDING COMMITMENTS


Balance at beginning of period	25,032		24,204		42,430		24,204		38,307
Provision for credit losses on unfunded lending commitments	(125)		828		(18,222)		703		(14,099)
Balance at end of period	24,907		25,032		24,208		24,907		24,208
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS	$	162,946	$	159,742	$	196,603	$	162,946	$	196,603


	Three Months Ended						Six Months Ended June 30
	June 30, 2022		Mar. 31, 2022		June 30, 2021		2022		2021
Annualized net loan charge-offs (recoveries)*:
Commercial:
Business	—	%	.01	%	(.32	%)	—	%	(.16	%)
Real estate-construction and land	—		—		—		—		—
Real estate-business	—		—		(.01)		—		—
Commercial net loan charge-offs (recoveries)	—		—		(.19)		—		(.10)
Personal Banking:
Real estate-personal	(.01)		—		—		—		—
Consumer	.12		.16		.08		.14		.12
Revolving home equity	(.02)		.03		.04		—		.04
Consumer credit card	2.19		2.53		3.59		2.36		4.81
Overdrafts	30.86		28.04		15.89		29.50		16.67
Personal banking net loan charge-offs	.28		.33		.40		.30		.55
Total annualized net loan charge-offs	.10	%	.12	%	.02	%	.11	%	.13	%

* as a percentage of average loans (excluding loans held for sale)

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To determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, the Company has an established process which assesses the risks and losses expected in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded lending commitments, as well as a second, smaller component based on certain individually evaluated loans and unfunded lending commitments. The Company's policies and processes for determining the allowance for credit losses on loans and the liability for unfunded lending commitments are discussed in Note 1 to the consolidated financial statements and in the "Allowance for Credit Losses" discussion within Critical Accounting Estimates and Related Policies in Item 7 of the 2021 Annual Report on Form 10-K.

Net loan charge-offs in the second quarter of 2022 amounted to $4.0 million, compared to $4.6 million in the prior quarter and $699 thousand in the second quarter of last year. During the second quarter of 2022, the Company recorded net charge-offs on commercial loans of $18 thousand, compared to net charge-offs of $70 thousand in the prior quarter and net recoveries of $4.9 million in the second quarter of 2021. Business loan net charge-offs decreased $58 thousand in the second quarter of 2022, compared to the prior quarter, but increased $4.9 million compared to the same quarter in the prior year due to two large recoveries in 2021. Compared to the same period last year, net loan charge-offs in the second quarter of 2022 increased $3.3 million. This increase was primarily driven by the increase in net charge-offs on business loans created by the two non-recurring recoveries, but partially offset by a $2.2 million decrease in net charge-offs on consumer credit card loans.

For the three months ended June 30, 2022, annualized net charge-offs on average consumer credit card loans totaled 2.19%, compared to 2.53% in the previous quarter and 3.59% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .12%, compared to .16% in the prior quarter and .08% in the same period last year. In the second quarter of 2022, total annualized net loan charge-offs were .10%, compared to .12% in the previous quarter and .02% in the same period last year.

For the six months ended June 30, 2022, net loan charge-offs amounted to $8.6 million, compared to $10.7 million during the same period in the prior year. The decrease in net loan charge-offs in the six months ended June 30, 2022 was primarily driven by a $7.8 million decline in net charge-offs on consumer credit card loans, but partly offset by a $5.0 million increase in net charge-offs on business loans due to the non-recurring recoveries in 2021. For the six months ended June 30, 2022, annualized net charge-offs on average consumer credit card loans totaled 2.36%, compared to 4.81% during the same period last year, while consumer loan annualized net charge-offs in the six months ended June 30, 2022 amounted to .14%, compared to .12% during the same period last year. During the first half of 2022, total annualized net loan charge-offs were .11%, compared to .13% during the same period last year.

The provision for credit losses on loans was $7.3 million in the current quarter, which was an $18.0 million increase from the $10.7 million benefit recorded in the prior quarter and an increase of $34.7 million over the benefit recorded for the three months ended June 30, 2021. The increase in the provision from the prior quarter was due to higher loan balances and economic uncertainties associated with the possibility of a future recession as inflation rises and supply chain issues continue, coupled with the release of allowances associated with certain pandemic estimates in the prior quarter. The provision for credit losses on loans for the second quarter of the prior year reflected lower than projected net charge-offs and an improved forecast at that point in time. For the six months ended June 30, 2022, the provision for credit losses on loans was a recovery of $3.4 million, compared to a recovery of $37.8 million during the same period in the prior year.

For the six months ended June 30, 2022, the allowance for credit losses on loans decreased $12.0 million, compared to the allowance for credit losses on loans as of December 31, 2021. The decrease was primarily the net result of lower than projected net loan charge-offs during the first quarter of 2022 and the improved economic forecast as pandemic economic concerns lessened compared to December 31, 2021, slightly offset by an emerging uncertainty introduced in 2022 related to the geopolitical environment, high inflation, and supply constraints on the economy. The allowance for credit losses on commercial loans decreased by $1.7 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, decreased $13.8 million, mostly related to decreases in consumer credit card loans experienced in first quarter of 2022.

While the forecast reflects a continued economic recovery from the recession driven by the COVID-19 pandemic, the allowance considered the uncertainty of disruptions caused by higher inflation, the geopolitical environment, and ongoing supply constraints on the economy and on the consumer and commercial loan portfolios. At June 30, 2022, the allowance for credit losses on loans amounted to $138.0 million, compared to $134.7 million at March 31, 2022. This increase in the allowance for credit losses on loans compared to the prior quarter is due to the higher loan balances and the economic uncertainties associated with the possibility of a future recession as inflation rises and supply chain issues continue. The allowance for credit losses on loans was $172.4 million at June 30, 2021, reflecting pandemic uncertainties and the economic forecast at that point in time, and was .88%, .87% and 1.10% of total loans at June 30, 2022, March 31, 2022 and June 30, 2021, respectively.

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In the current quarter, the provision for credit losses on unfunded lending commitments was a benefit of $125 thousand, reflecting a $953 thousand decrease over the provision in the prior quarter and a $18.1 million increase compared to the second quarter of 2021. For the six months ended June 30, 2022, the provision for credit losses on unfunded lending commitments was $703 thousand, compared to a benefit of $14.1 million during the same period in the prior year. At June 30, 2022, the liability for unfunded lending commitments was $24.9 million, compared to $25.0 million at March 31, 2022 and $24.2 million at June 30, 2021. The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans. See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses.

The Company considers the allowance for credit losses on loans and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at June 30, 2022.

The allowance for credit losses on loans and the liability for unfunded lending commitments are estimates that require significant judgment including projections of the macro-economic environment. The Company utilizes a third-party macro-economic forecast that continuously changes due to economic conditions and events. These changes in the forecast cause fluctuations in the allowance for credit losses on loans and the liability for unfunded lending commitments. The Company uses its best judgment to assess the macro-economic forecast and internal loss data in estimating the allowance for credit losses on loans and the liability for unfunded lending commitments. These estimates are subject to periodic refinement based on changes in the underlying external and internal data.

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Risk Elements of Loan Portfolio

The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual.


(Dollars in thousands)	June 30, 2022			December 31, 2021







Non-accrual loans	$	7,917		$	9,157
Foreclosed real estate	296			115
Total non-performing assets	$	8,213		$	9,272
Non-performing assets as a percentage of total loans	.05		%	.06		%
Non-performing assets as a percentage of total assets	.02		%	.03		%








Total loans past due 90 days and still accruing interest	$	11,909		$	11,726

Non-accrual loans totaled $7.9 million at June 30, 2022, a decrease of $1.2 million from the balance at December 31, 2021. The decrease occurred mainly in business loans which decreased $998 thousand. At June 30, 2022, non-accrual loans were comprised of business (79.8%), personal real estate (18.1%), and business real estate (2.1%) loans. Foreclosed real estate totaled $296 thousand at June 30, 2022, an increase of $181 thousand when compared to December 31, 2021. Total loans past due 90 days or more and still accruing interest were $11.9 million as of June 30, 2022, an increase of $183 thousand from December 31, 2021. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements.

In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $319.2 million at June 30, 2022 compared with $278.7 million at December 31, 2021, resulting in an increase of $40.5 million, or 14.5%.


(In thousands)	June 30, 2022		December 31, 2021
Potential problem loans:
Business	$	32,338	$	37,143
Real estate – construction and land	59,229		40,259
Real estate – business	227,158		200,766
Real estate – personal	436		526

Total potential problem loans	$	319,161	$	278,694

At June 30, 2022, the Company had $142.4 million of loans whose terms have been modified or restructured under a troubled debt restructuring. These loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession, as defined by accounting guidance, and are further discussed in the "Troubled debt restructurings" section in Note 2 to the consolidated financial statements. This balance includes certain commercial loans totaling $126.5 million which are classified as substandard and included in the table above because of this classification.

Loans with Special Risk Characteristics

Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon.

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Real Estate – Construction and Land Loans

The Company's portfolio of construction and land loans, as shown in the table below, amounted to 8.1% of total loans outstanding at June 30, 2022. The largest component of construction and land loans was commercial construction, which increased $114.7 million during the six months ended June 30, 2022. At June 30, 2022, multi-family residential construction loans totaled approximately $238.3 million, or 23.0%, of the commercial construction loan portfolio, compared to $155.9 million, or 16.9%, at December 31, 2021.


(Dollars in thousands)	June 30, 2022		% of Total		% of Total Loans		December 31, 2021		% of Total		% of Total Loans
Commercial construction	$	1,037,311	81.9	%	6.6	%	$	922,654	82.5	%	6.1	%
Residential construction	130,388		10.3		.9		96,618		8.6		.7
Commercial land and land development	52,062		4.1		.3		48,481		4.3		.3
Residential land and land development	46,499		3.7		.3		50,513		4.6		.3
Total real estate - construction and land loans	$	1,266,260	100.0	%	8.1	%	$	1,118,266	100.0	%	7.4	%

Real Estate – Business Loans

Total business real estate loans were $3.2 billion at June 30, 2022 and comprised 20.5% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At June 30, 2022, 37.4% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans.


(Dollars in thousands)	June 30, 2022		% of Total		% of Total Loans		December 31, 2021		% of Total		% of Total Loans
Owner-occupied	$	1,202,576	37.4	%	7.7	%	$	1,188,469	38.9	%	7.8	%
Office	503,895		15.7		3.2		380,101		12.4		2.5
Retail	333,391		10.4		2.1		339,874		11.1		2.2
Multi-family	332,799		10.3		2.1		354,282		11.6		2.3
Hotels	232,191		7.2		1.5		234,673		7.7		1.5
Farm	196,527		6.1		1.3		178,780		5.8		1.2
Senior living	147,433		4.6		.9		174,871		5.7		1.2
Industrial	142,074		4.4		.9		99,800		3.3		.7
Other	124,692		3.9		.8		107,987		3.5		.8
Total real estate - business loans	$	3,215,578	100.0	%	20.5	%	$	3,058,837	100.0	%	20.2	%

Revolving Home Equity Loans

The Company had $271.9 million in revolving home equity loans at June 30, 2022 that were generally collateralized by residential real estate. Most of these loans (92.3%) are written with terms requiring interest-only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of June 30, 2022, the outstanding principal of loans with an original LTV higher than 80% was $29.4 million, or 10.8% of the portfolio, compared to $30.9 million as of December 31, 2021. Total revolving home equity loan balances over 30 days past due were $1.3 million at June 30, 2022 and $1.6 million at December 31, 2021, and there were no revolving home equity loans on non-accrual status at June 30, 2022 or December 31, 2021. The weighted average FICO score for the total current portfolio balance is 791. At maturity, the accounts are re-underwritten, and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of 2022 through 2024, approximately 14% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 87% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels.

Consumer Loans

Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs. Auto loans comprised 38.0% of the consumer loan portfolio at June 30, 2022, and outstanding balances for auto loans were $794.9 million and $855.4 million at June 30, 2022 and December 31, 2021,

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respectively. The balances over 30 days past due amounted to $7.6 million at June 30, 2022 and $9.0 million at December 31, 2021, respectively and comprised 1.0% of the outstanding balances of these loans at June 30, 2022 and 1.1% at December 31, 2021, respectively. For the six months ended June 30, 2022, $153.5 million of new auto loans were originated, compared to $228.5 million during the first six months of 2021. At June 30, 2022, the automobile loan portfolio had a weighted average FICO score of 756, and net charge-offs on auto loans were .2% of average auto loans.

The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 11% of the consumer loan portfolio at June 30, 2022. Losses on these loans have historically been low, and the Company saw net recoveries of $35 thousand for the first six months of 2022. Private banking loans comprised 34% of the consumer loan portfolio at June 30, 2022. The Company's private banking loans are generally well-collateralized, and at June 30, 2022 were secured primarily by assets held by the Company's trust department. The remaining portion of the Company's consumer loan portfolio is comprised of health services financing, motorcycles, marine and RV loans. Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $779 thousand in the first six months of 2022 and were .2% of the average balances of these loans at June 30, 2022.

Consumer Credit Card Loans

The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at June 30, 2022 of $558.1 million in consumer credit card loans outstanding, approximately $90.4 million, or 16.2%, carried a low promotional rate. Within the next six months, $32.1 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters.

Oil and Gas Energy Lending

The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $289.1 million, or 1.8% of total loans at June 30, 2022, an increase of $28.5 million from year end 2021, as shown in the table below.


(In thousands)	June 30, 2022		December 31, 2021		Unfunded commitments at June 30, 2022
Extraction	$	213,398	$	184,840	$	192,997
Mid-stream shipping and storage	38,732		36,850		70,283
Downstream distribution and refining	25,953		24,915		18,037
Support activities	11,037		14,039		7,055
Total energy lending portfolio	$	289,120	$	260,644	$	288,372

Shared National Credits

The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled $1.2 billion at June 30, 2022 and December 31, 2021. Additional unfunded commitments at June 30, 2022 totaled $1.8 billion.

Income Taxes

Income tax expense was $32.0 million in the second quarter of 2022, compared to $31.9 million in the first quarter of 2022 and $45.2 million in the second quarter of 2021. The Company's effective tax rate, including the effect of non-controlling interest, was 21.7% in the second quarter of 2022, compared to 21.3% in the first quarter of 2022 and 21.8% in the second quarter of 2021. For the six months ended June 30, 2022, income tax expense was $63.9 million, compared to $77.3 million for the same period during the previous year, resulting in effective tax rates of 21.5% and 20.9%, respectively.

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Financial Condition

Balance Sheet

Total assets of the Company were $33.4 billion at June 30, 2022 and $36.7 billion at December 31, 2021. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $32.9 billion at June 30, 2022 and $35.5 billion at December 31, 2021, and consisted of 48% in loans and 46% in investment securities at June 30, 2022.

At June 30, 2022, total loans increased $510.3 million, or 3.4%, compared to balances at December 31, 2021. The increase was mainly due to growth in business real estate, construction and business loans of $156.7 million, $148.0 million and $138.1 million, respectively. The growth in business loans was mainly the result of increased commercial and industrial and commercial card lending, partly offset by declines in tax free and lease loans. Personal real estate loans increased $31.4 million. Consumer loans, which includes automobile, marine and RV, fixed rate home equity and other consumer loans, increased $57.4 million, as declines in auto loans were offset by growth in other consumer loans. These increases were partly offset by a decline in consumer credit card loans of $17.3 million.

Available for sale debt securities, excluding fair value adjustments, increased $364.2 million at June 30, 2022 compared to December 31, 2021. Purchases of securities during this period totaled $1.9 billion, offset by sales, maturities and pay downs of $1.5 billion. The largest increases in outstanding balances occurred in asset-backed securities, non-agency mortgage-backed securities, and U.S. government and federal agency obligations, which increased $413.4 million, $97.9 million, and $90.1 million, respectively. These increases were partially offset by a decrease in agency mortgage-backed securities of $233.8 million at June 30, 2022 compared to December 31, 2021. At June 30, 2022, the duration of the investment portfolio was 3.8 years, and maturities and pay downs of approximately $2.2 billion are expected to occur during the next 12 months.

Total deposits at June 30, 2022 amounted to $28.2 billion, a decrease of $1.6 billion compared to December 31, 2021. The decline in deposits largely resulted from a decrease in demand deposits, mainly in business demand deposits (decrease of $1.0 billion). Additionally, certificates of deposit decreased $437.0 million, interest checking deposits decreased $412.2 million, and money market deposits decreased $200.0 million, at June 30, 2022 compared to balances at December 31, 2021. The Company's borrowings totaled $2.2 billion at June 30, 2022, a decrease of $795.2 million from balances at December 31, 2021, mainly due to a decline in customer repurchase agreements.

Liquidity and Capital Resources

Liquidity Management

The Company’s most liquid assets are comprised of available for sale debt securities, federal funds sold, securities purchased under agreements to resell (resale agreements), and balances at the Federal Reserve Bank, as follows:


(In thousands)	June 30, 2022		June 30, 2021		December 31, 2021
Liquid assets:
Available for sale debt securities	$	13,700,308	$	13,291,506	$	14,450,027
Federal funds sold	26,000		5,945		2,800
Securities purchased under agreements to resell	1,450,000		1,300,000		1,625,000
Balances at the Federal Reserve Bank	684,994		2,161,644		3,971,217
Total	$	15,861,302	$	16,759,095	$	20,049,044

Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $26.0 million as of June 30, 2022. Resale agreements, maturing through 2025, totaled $1.5 billion at June 30, 2022. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled $1.5 billion in fair value at June 30, 2022. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $685.0 million at June 30, 2022. The fair value of the available for sale debt portfolio was $13.7 billion at June 30, 2022 and included an unrealized net loss of $1.1 billion.

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Approximately $2.2 billion of the available for sale debt portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet new loan demand or help offset potential reductions in the Company's deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows:


(In thousands)	June 30, 2022		June 30, 2021		December 31, 2021
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	14,854	$	25,179	$	17,465
FHLB borrowings and letters of credit	2,405		4,296		3,218
Securities sold under agreements to repurchase *	2,506,986		2,573,314		3,475,589
Other deposits and swaps	2,767,433		2,982,225		2,897,576
Total pledged securities	5,291,678		5,585,014		6,393,848
Unpledged and available for pledging	7,390,389		6,369,604		6,913,721
Ineligible for pledging	1,018,241		1,336,888		1,142,458
Total available for sale debt securities, at fair value	$	13,700,308	$	13,291,506	$	14,450,027

* Includes securities pledged for collateral swaps, as discussed in Note 12 to the consolidated financial statements.

Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At June 30, 2022, such deposits totaled $27.2 billion and represented 96.4% of total deposits. These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources. Certificates of deposit of $100,000 and over totaled $601.5 million at June 30, 2022. These accounts are normally considered more volatile with higher cost and comprised 2.1% of total deposits at June 30, 2022.


(In thousands)	June 30, 2022		June 30, 2021		December 31, 2021
Core deposit base:
Non-interest bearing	$	11,102,585	$	11,085,286	$	11,772,374
Interest checking	2,815,600		2,192,932		3,227,822
Savings and money market	13,247,464		12,461,764		13,370,263
Total	$	27,165,649	$	25,739,982	$	28,370,459

Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company's outside borrowings are mainly comprised of federal funds purchased and repurchase agreements, as follows:


(In thousands)	June 30, 2022		June 30, 2021		December 31, 2021
Borrowings:
Federal funds purchased	$	7,750	$	12,335	$	43,385
Securities sold under agreements to repurchase	2,226,546		2,305,893		2,979,582

Other debt	6,025		2,194		12,560
Total	$	2,240,321	$	2,320,422	$	3,035,527

Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Repurchase agreements are borrowings by the Company from its customers in the form of securities sold under agreements to repurchase. These repurchase agreements, which generally mature overnight, are comprised of non-insured customer funds totaling $2.2 billion at June 30, 2022 and are collateralized by securities in the Company's investment portfolio. At June 30, 2022, the value of the collateral pledged for the benefit of customers was $2.3 billion. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were no advances outstanding from the FHLB at June 30, 2022.

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The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral. Also, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at June 30, 2022.


	June 30, 2022
(In thousands)	FHLB		Federal Reserve		Total
Collateral value established by FHLB and FRB	$	1,927,044	$	982,080	$	2,909,124

Letters of credit issued	(162,645)		—		(162,645)
Available for future advances	$	1,764,399	$	982,080	$	2,746,479

In addition to those mentioned above, several other sources of liquidity are available. No commercial paper has been issued or outstanding during the past ten years. The Company has no subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that through its Capital Markets Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit or privately placed corporate notes or other forms of debt. The Company receives strong outside rankings from both Standard & Poor's and Moody's on both the consolidated company level and its subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise. These ratings are as follows:


	Standard & Poor’s	Moody’s
Commerce Bancshares, Inc.
Issuer rating	A-

Rating outlook	Stable

Commerce Bank
Issuer rating	A	A2
Baseline credit assessment		a1
Short-term rating	A-1	P-1
Rating outlook	Stable	Stable

The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash equivalents and restricted cash of $3.2 billion during the first six months of 2022, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $286.2 million and has historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, used cash of $799.4 million. Activity in the investment securities portfolio used cash of $428.4 million from purchases (net of sales, maturities and pay downs), securities purchased under agreements to resell used cash of $200.0 million, and an increase in the loan portfolio used cash of $518.9 million. These cash outflows were partially offset by repayments related to securities purchased under agreements to resell, which provided cash of $375.0 million. Financing activities used cash of $2.7 billion, largely resulting from a decrease in federal funds purchased and securities sold under agreements to repurchase of $788.7 million, paired with a decrease in deposits of $1.7 billion.

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Capital Management

The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at June 30, 2022 and December 31, 2021, as shown in the following table.


(Dollars in thousands)	June 30, 2022			December 31, 2021			Minimum Ratios under Capital Adequacy Guidelines		Minimum Ratios for Well-Capitalized Banks *
Risk-adjusted assets	$	23,597,076		$	22,483,748
Tier I common risk-based capital	3,290,703			3,225,044
Tier I risk-based capital	3,290,703			3,225,044
Total risk-based capital	3,454,090			3,399,880
Tier I common risk-based capital ratio	13.95		%	14.34		%	7.00	%	6.50	%
Tier I risk-based capital ratio	13.95			14.34			8.50		8.00
Total risk-based capital ratio	14.64			15.12			10.50		10.00
Tier I leverage ratio	9.45			9.13			4.00		5.00

*Under Prompt Corrective Action requirements

The Company is subject to a 2.5% capital conservation buffer, which is an amount above the minimum ratios under capital adequacy guidelines, and is required under Basel III. The capital conservation buffer is intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, share repurchases, and executive compensation.

In the first quarter of 2020, the interim final rule of the Federal Reserve Bank and other U.S. banking agencies became effective, providing banks that adopt CECL (ASU 2016-13) during the 2020 calendar year the option to delay recognizing the estimated impact on regulatory capital until after a two year deferral period, followed by a three year transition period. In connection with the adoption of CECL on January 1, 2020, the Company elected to utilize this option. As a result, the two year deferral period for the Company extended through December 31, 2021. Beginning on January 1, 2022, the Company began to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025.

The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and normally purchases stock in the open market. During the six months ended June 30, 2022, the Company purchased 1,641,610 shares at an average price of $68.96 in open market purchases and through stock-based compensation transactions. At June 30, 2022, 4,155,115 shares remained available for purchase under the current Board authorization.

The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.265 per share cash dividend on its common stock in the second quarter of 2022, which was a 6.0% increase compared to its 2021 quarterly dividend.

Material Cash Requirements, Commitments, Off-Balance Sheet Arrangements and Contingencies

The Company's material cash requirements include commitments for contractual obligations (both short-term and long-term), commitments to extend credit, and off-balance sheet arrangements. The Company's material cash requirements for the next 12 months are primarily to fund loan growth. Additionally, the Company will utilize cash to fund deposit maturities and withdrawals that may occur in the next 12 months. Other contractual obligations, purchase commitments, lease obligations, and unfunded commitments may require cash payments by the Company, and these are further discussed in the Company's 2021 Annual Report on Form 10-K. There have been no changes in the Company's material cash requirements since December 31, 2021. Further discussion of the Company's longer-term material cash obligations is below.

In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at June 30, 2022 totaled $13.1 billion (including $5.0 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $504.0 million and $1.2 million, respectively, at June 30, 2022. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to $4.0 million at June 30, 2022. The allowance for these commitments is recorded in the Company’s

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liability for unfunded lending commitments within other liabilities on its consolidated balance sheets. At June 30, 2022, the liability for unfunded commitments totaled $24.9 million. See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements.

During the third quarter of 2020, the Company signed a $106.7 million agreement with U.S. Capital Development to develop a 280,000 square foot commercial office building in a two building complex in Clayton, Missouri, which is expected to be completed near the end of 2022. As of June 30, 2022, the Company has made payments totaling $71.8 million. While the Company intends to occupy a portion of the office building for executive offices, a 15 year lease agreement has been signed by an anchor tenant to lease approximately 50% of the office building.

The Company regularly purchases various state tax credits arising from third party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first six months of 2022, purchases and sales of tax credits amounted to $62.3 million and $78.9 million, respectively. Fees from sales of tax credits were $2.7 million for the six months ended June 30, 2022, compared to $2.6 million in the same period last year. At June 30, 2022, the Company expected to fund outstanding purchase commitments of $122.6 million during the remainder of 2022.

The Company's sound equity base, along with its long-term low debt level, common and preferred stock availability, and excellent debt ratings, provide several alternatives for future financing. Future acquisitions may utilize partial funding through one or more of these options. Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations. The Company is not aware of any trends, events, or commitments that are reasonably likely to increase or decrease its liquidity in a material way.

Segment Results

The table below is a summary of segment pre-tax income results for the first six months of 2022 and 2021.


(Dollars in thousands)	Consumer			Commercial			Wealth			Segment Totals			Other/ Elimination			Consolidated Totals
Six Months Ended June 30, 2022
Net interest income	$	163,529		$	219,176		$	38,094		$	420,799		$	20,372		$	441,171
Provision for credit losses	(8,422)			(145)			(3)			(8,570)			11,266			2,696
Non-interest income	59,278			110,466			107,189			276,933			(5,737)			271,196
Investment securities gains, net	—			—			—			—			8,192			8,192
Non-interest expense	(148,400)			(180,852)			(72,773)			(402,025)			(17,128)			(419,153)
Income before income taxes	$	65,985		$	148,645		$	72,507		$	287,137		$	16,965		$	304,102
Six Months Ended June 30, 2021
Net interest income	$	158,746		$	224,750		$	35,111		$	418,607		$	(4,877)		$	413,730
Provision for credit losses	(15,565)			4,925			1			(10,639)			62,526			51,887
Non-interest income	75,153			102,987			103,490			281,630			(6,442)			275,188
Investment securities gains, net	—			—			—			—			26,657			26,657
Non-interest expense	(144,284)			(161,900)			(67,092)			(373,276)			(17,423)			(390,699)
Income before income taxes	$	74,050		$	170,762		$	71,510		$	316,322		$	60,441		$	376,763
Increase (decrease) in income before income taxes:
Amount	$	(8,065)		$	(22,117)		$	997		$	(29,185)		$	(43,476)		$	(72,661)
Percent	(10.9		%)	(13.0		%)	1.4		%	(9.2		%)	(71.9		%)	(19.3		%)

Consumer

For the six months ended June 30, 2022, income before income taxes for the Consumer segment decreased $8.1 million, or 10.9%, compared to the first six months of 2021. The decrease in income before income taxes was mainly due to a decline in non-interest income of $15.9 million, or 21.1%, and higher non-interest expense of $4.1 million, or 2.9%. These decreases to income were partly offset by growth in net interest income of $4.8 million, or 3.0%, and a decrease in the provision for credit losses of $7.1 million, or 45.9%. Net interest income increased due to a $7.8 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and a $1.8 million decrease in deposit interest expense. These increases to income were partly offset by a $4.8 million decline in loan interest income. Non-interest income decreased mainly due to a decline of $14.9 million in mortgage banking revenue. Non-interest expense increased over the same period in the previous year mainly due to higher salaries expense, marketing expense and allocated service and support costs for information

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technology and bank card fraud operations, partly offset by lower allocated service costs for branch employees. The provision for credit losses totaled $8.4 million, a $7.1 million decrease from the first six months of 2021, mainly due to lower credit card loan net charge-offs.

Commercial

For the six months ended June 30, 2022, income before income taxes for the Commercial segment decreased $22.1 million, or 13.0%, compared to the same period in the previous year. This decrease was mainly due to an increase in non-interest expense and a decline in net interest income, partly offset by an increase in non-interest income. Net interest income decreased $5.6 million, or 2.5%, due to lower loan interest income of $12.8 million and higher interest expense on customer repurchase agreements and deposits of $2.8 million and $1.1 million, respectively. These decreases to income were partly offset by a $10.9 million increase in net allocated funding credits. Non-interest income increased $7.5 million, or 7.3%, over the previous year mainly due to growth in net bank card fees (mainly corporate card fees) and deposit account fees (mainly corporate cash management fees), partly offset by a decline in capital market fees. Non-interest expense increased $19.0 million, or 11.7%, mainly due to higher salaries and benefits expense, data processing and software expense, allocated service and support costs (mainly information technology, branch employee expense and commercial banking and payments expense), and lower deferred origination costs. The provision for credit losses increased $5.1 million over the same period last year, mainly due to lower recoveries on business loans.

Wealth

Wealth segment pre-tax profitability for the six months ended June 30, 2022 increased $997 thousand, or 1.4%, over the same period in the previous year. Net interest income increased $3.0 million, or 8.5%, mainly due to a $3.1 million increase in loan interest income. Non-interest income increased $3.7 million, or 3.6%, over the prior year largely due to higher trust fees (mainly private client trust fees), cash sweep commissions and brokerage fees, partly offset by lower mortgage banking revenue. Non-interest expense increased $5.7 million, or 8.5%, mainly due to higher salaries and benefits expense, travel and entertainment expense, marketing expense and allocated costs for management fees. The provision for credit losses increased $4 thousand over the same period last year, due to higher overdraft loan net charge-offs.

The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was lower than in the same period last year by $43.5 million. Unallocated securities gains were $8.2 million in the first six months of 2022 compared to gains of $26.7 million in 2021. Also, the unallocated provision for credit losses increased $51.3 million, primarily driven by increases in the liability for unfunded lending commitments and in the provision for credit losses on loans, which are both not allocated to the segments for management reporting purposes. Net charge-offs are allocated to the segments when incurred for management reporting purposes. The provision for credit losses on loans was $12.0 million lower than net charge-offs, as the provision was a benefit in 2022, while the provision was $48.4 million lower than net charge-offs, as the provision was also a benefit in 2021. For the six months ended June 30, 2022, the Company's provision on unfunded lending commitments was expense of $699 thousand. These decreases to pre-tax profitability were partly offset by higher net interest income of $25.2 million, non-interest income of $705 thousand, and lower non-interest expense of $295 thousand.

Impact of Recently Issued Accounting Standards

Reference Rate Reform The Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting", in March 2020, and has been followed by additional clarifying guidance related to derivatives that are modified as a result of reference rate reform. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if they reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Further, the guidance applies to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The expedients and exceptions provided by the new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated for effectiveness after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022. In April 2022, the FASB proposed extending the sunset date under Topic 848 to December 31, 2024. The change is to align the temporary accounting relief guidance with the expected cessation date of LIBOR, which was postponed by administrators earlier this year to June 2023, a year after the current sunset date of ASU 2020-04.

In order to assess the impact of transition and ensure a successful transition process, the Company established a LIBOR Transition Program led by the LIBOR Transition Steering Committee (the Committee), which is an internal, cross-functional

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team with representatives from all relevant business lines, support functions and legal counsel. A LIBOR impact and risk assessment has been performed, and the Committee has developed and prioritized action items. All financial contracts that reference LIBOR have been identified and LIBOR fallback language has been included in key loan provisions of new and renewed loans in preparation from transition from LIBOR. The Company ceased originating new loans with LIBOR as a reference rate at the end of 2021 and is actively working with customers to modify existing loans that reference LIBOR to a new reference rate. The Company plans to finish transitioning the impacted loans by late spring of 2023.

Credit Losses The FASB issued ASU 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures", in March 2022. This ASU eliminates the troubled debt restructuring recognition and measurement guidance and, instead, requires that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The amendments require that an entity disclose current period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. The guidance is effective January 1, 2023. The Company is evaluating the guidance to determine the impact on the Company's consolidated financial statements.

Fair Value Measurement The FASB issued ASU 2022-03 "Fair Value Measurement of Equity Securities Subject to

Contractual Sale Restrictions", in June 2022. ASU 2022-3 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The guidance is effective January 1, 2024. The Company is evaluating the guidance to determine the impact on the Company's consolidated financial statements.

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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Three Months Ended June 30, 2022 and 2021


	Second Quarter 2022						Second Quarter 2021
(Dollars in thousands)	Average Balance		Interest Income/Expense		Avg. Rates Earned/Paid		Average Balance		Interest Income/Expense		Avg. Rates Earned/Paid
ASSETS:
Loans:
Business(A)	$	5,385,181	$	42,402	3.16	%	$	6,211,610	$	48,844	3.15	%
Real estate — construction and land	1,225,267		12,489		4.09		1,088,433		9,670		3.56
Real estate — business	3,163,508		29,173		3.70		3,014,955		26,223		3.49
Real estate — personal	2,825,578		23,043		3.27		2,804,388		23,163		3.31
Consumer	2,070,560		18,697		3.62		2,004,625		19,178		3.84
Revolving home equity	272,280		2,507		3.69		287,031		2,455		3.43
Consumer credit card	537,681		15,170		11.32		575,725		16,101		11.22
Overdrafts	5,524		—		—		3,735		—		—
Total loans	15,485,579		143,481		3.72		15,990,502		145,634		3.65
Loans held for sale	7,933		161		8.14		23,389		245		4.20
Investment securities:
U.S. government and federal agency obligations	1,119,305		13,770		4.93		719,849		9,912		5.52
Government-sponsored enterprise obligations	55,762		332		2.39		50,793		295		2.33
State and municipal obligations(A)	2,126,380		12,189		2.30		1,966,673		11,834		2.41
Mortgage-backed securities	7,158,252		35,602		1.99		6,685,407		18,464		1.11
Asset-backed securities	4,038,113		13,612		1.35		2,653,928		8,262		1.25
Other debt securities	643,463		3,157		1.97		605,772		3,118		2.06
Trading debt securities(A)	43,904		269		2.46		34,955		104		1.19
Equity securities(A)	9,094		610		26.90		4,914		528		43.10
Other securities(A)	195,090		10,886		22.38		156,984		4,657		11.90
Total investment securities	15,389,363		90,427		2.36		12,879,275		57,174		1.78
Federal funds sold	4,269		19		1.79		1,338		2		.60
Securities purchased under agreements to resell	1,703,569		4,385		1.03		937,372		10,416		4.46
Interest earning deposits with banks	1,248,942		2,428		.78		2,724,782		743		.11
Total interest earning assets	33,839,655		240,901		2.86		32,556,658		214,214		2.64
Allowance for credit losses on loans	(134,670)						(200,801)
Unrealized gain (loss) on debt securities	(851,110)						197,124
Cash and due from banks	315,352						329,366
Premises and equipment, net	401,663						403,810
Other assets	521,478						525,813
Total assets	$	34,092,368					$	33,811,970
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	$	1,609,694	157		.04		$	1,474,391	277		.08
Interest checking and money market	14,847,306		2,121		.06		13,283,481		1,567		.05
Certificates of deposit of less than $100,000	411,655		205		.20		491,446		327		.27
Certificates of deposit of $100,000 and over	648,728		470		.29		1,354,685		661		.20
Total interest bearing deposits	17,517,383		2,953		.07		16,604,003		2,832		.07
Borrowings:
Federal funds purchased	$	113,128	$	224	.79		23,292		$	3	.05
Securities sold under agreements to repurchase	2,258,184		2,702		.48		2,142,404		317		.06
Other borrowings(B)	2,029		12		2.37		978		2		.82
Total borrowings	2,373,341		2,938		.50		2,166,674		322		.06
Total interest bearing liabilities	19,890,724		5,891		.12	%	18,770,677		3,154		.07	%
Non-interest bearing deposits	11,209,680						11,109,198
Other liabilities	139,986						527,401
Equity	2,851,978						3,404,694
Total liabilities and equity	$	34,092,368					$	33,811,970
Net interest margin (T/E)			$	235,010					$	211,060
Net yield on interest earning assets					2.79	%					2.60	%

(A) Stated on a tax equivalent basis using a federal income tax rate of 21%.

(B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above.

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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Six Months Ended June 30, 2022 and 2021



	Six Months 2022						Six Months 2021
(Dollars in thousands)	Average Balance		Interest Income/Expense		Avg. Rates Earned/Paid		Average Balance		Interest Income/Expense		Avg. Rates Earned/Paid
ASSETS:
Loans:
Business(A)	$	5,354,845	$	80,818	3.04	%	$	6,371,378	$	98,542	3.12	%
Real estate — construction and land	1,180,334		23,015		3.93		1,090,191		19,212		3.55
Real estate — business	3,129,477		54,974		3.54		3,018,945		52,467		3.50
Real estate — personal	2,817,325		45,739		3.27		2,815,190		46,861		3.36
Consumer	2,055,464		36,781		3.61		1,976,132		38,482		3.93
Revolving home equity	273,065		4,854		3.58		293,167		4,950		3.40
Consumer credit card	539,254		30,300		11.33		592,145		32,567		11.09
Overdrafts	5,352		—		—		3,641		—		—
Total loans	15,355,116		276,481		3.63		16,160,789		293,081		3.66
Loans held for sale	8,654		311		7.25		29,567		549		3.74
Investment securities:
U.S. government and federal agency obligations	1,111,570		23,087		4.19		722,593		14,454		4.03
Government-sponsored enterprise obligations	53,777		630		2.36		50,797		590		2.34
State and municipal obligations(A)	2,102,125		23,897		2.29		1,962,677		23,717		2.44
Mortgage-backed securities	7,236,993		71,372		1.99		6,841,099		42,463		1.25
Asset-backed securities	3,985,877		24,596		1.24		2,371,280		15,389		1.31
Other debt securities	639,875		6,291		1.98		588,042		6,138		2.10
Trading debt securities(A)	42,304		454		2.16		33,645		190		1.14
Equity securities(A)	9,295		1,219		26.45		4,619		1,056		46.10
Other securities(A)	193,708		13,688		14.25		155,515		6,654		8.63
Total investment securities	15,375,524		165,234		2.17		12,730,267		110,651		1.75
Federal funds sold	2,670		20		1.51		676		2		.60
Securities purchased under agreements to resell	1,718,644		9,685		1.14		893,927		21,544		4.86
Interest earning deposits with banks	1,924,731		3,579		.37		2,105,994		1,113		.11
Total interest earning assets	34,385,339		455,310		2.67		31,921,220		426,940		2.70
Allowance for credit losses on loans	(142,136)						(210,602)
Unrealized gain (loss) on debt securities	(514,573)						240,079
Cash and due from banks	327,728						341,898
Premises and equipment, net	404,317						402,527
Other assets	539,219						538,986
Total assets	$	34,999,894					$	33,234,108
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	$	1,586,522	335		.04		$	1,404,174	554		.08
Interest checking and money market	14,898,234		3,703		.05		13,127,919		3,393		.05
Certificates of deposit of less than $100,000	420,703		344		.16		504,017		800		.32
Certificates of deposit of $100,000 and over	754,890		897		.24		1,292,724		1,723		.27
Total interest bearing deposits	17,660,349		5,279		.06		16,328,834		6,470		.08
Borrowings:
Federal funds purchased	$	68,490	$	231	.68		$	30,125	8		.05
Securities sold under agreements to repurchase	2,484,071		3,384		.27		2,135,758		624		.06
Other borrowings(B)	1,402		13		1.87		905		4		.89
Total borrowings	2,553,963		3,628		.29		2,166,788		636		.06
Total interest bearing liabilities	20,214,312		8,907		.09	%	18,495,622		7,106		.08	%
Non-interest bearing deposits	11,376,265						10,775,770
Other liabilities	321,805						567,584
Equity	3,087,512						3,395,132
Total liabilities and equity	$	34,999,894					$	33,234,108
Net interest margin (T/E)			$	446,403					$	419,834
Net yield on interest earning assets					2.62	%					2.65	%

(A) Stated on a tax equivalent basis using a federal income tax rate of 21%.

(B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest income sensitivity to movement in interest rates. The Company performs monthly simulations that model interest rate movements and risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2021 Annual Report on Form 10-K.

The tables below show the effects of gradual shifts in interest rates over a twelve month period on the Company’s net interest income versus the Company's net interest income in a flat rate scenario. Simulation A presents three rising rate scenarios and one falling rate scenario, and in each scenario, rates are assumed to change evenly over 12 months. In these scenarios, the balance sheet remains flat.

The sensitivity of deposit balances to changes in rates is particularly difficult to estimate in low interest rate environments. Since the future effects of changes in rates on deposit balances cannot be known with certainty, the Company conservatively models alternate scenarios with deposit attrition as rates rise. Simulation B illustrates results from these higher attrition scenarios to provide added perspective on potential effects of higher rates.

The Company utilizes these simulations both for monitoring interest rate risk and for liquidity planning purposes. While the future effects of rising rates on deposit balances cannot be known, the Company maintains a practice of running multiple rate scenarios to better understand interest rate risk and its effect on the Company’s performance.


Simulation A	June 30, 2022						March 31, 2022
(Dollars in millions)	$ Change in Net Interest Income		% Change in Net Interest Income		Assumed Deposit (Attrition)/Growth		$ Change in Net Interest Income		% Change in Net Interest Income		Assumed Deposit (Attrition)/Growth
300 basis points rising	$	45.2	4.91	%	$	—	$	75.3	9.21	%	$	—
200 basis points rising	36.9		4.01		—		57.5		7.03		—
100 basis points rising	23.5		2.55		—		31.5		3.86		—
100 basis points falling	(35.3)		(3.83)		—		—		—		—


Simulation B	June 30, 2022						March 31, 2022
(Dollars in millions)	$ Change in Net Interest Income		% Change in Net Interest Income		Assumed Deposit (Attrition)/Growth		$ Change in Net Interest Income		% Change in Net Interest Income		Assumed Deposit (Attrition)/Growth
300 basis points rising	$	(35.2)	(4.01)	%	$	(1,770.5)	$	7.6	.94	%	$	(2,001.8)
200 basis points rising	(14.2)		(1.62)		(1,208.0)		14.1		1.73		(1,414.9)
100 basis points rising	(2.7)		(.31)		(612.5)		12.9		1.58		(673.4)
100 basis points falling	(2.7)		(.31)	%	1,086.4		—		—		—

Under Simulation A, in the three rising rate scenarios and 100 basis points falling rate scenario, interest rate risk is less asset sensitive than the previous quarter, primarily due to an increase in the Federal funds rate, which impacts surge deposit runoff and increases non-maturity deposit rates. Deposit attrition was removed from the simulation in both the current and previous quarters.

In Simulation B, the assumed levels of deposit attrition were modeled to capture the results of a shrinking balance sheet. Under this Simulation, in the three rising rate scenarios and the 100 basis points falling rate scenario, interest rate risk is liability sensitive, while in the previous quarter it was asset sensitive. This was primarily due to an increase in the Federal funds rate, which impacts surge deposit runoff and puts upward pressure on non-maturity deposit rates.

Projecting deposit activity in a period of historically low interest rates is difficult, and the Company cannot predict how deposits will actually react to shifting rates. The comparisons above provide insight into potential effects of changes in rates and deposit levels on net interest income. The Company believes that its approach to interest rate risk has appropriately

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considered its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of interest rate risk.

Item 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2022. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The information required by this item is set forth in Part I, Item 1 under Note 17, Legal and Regulatory Proceedings.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information about the Company's purchases of its $5 par value common stock, its only class of common stock registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.


Period	Total Number of Shares Purchased	Average Price Paid per Share			Total Number of Shares Purchased as part of Publicly Announced Program	Maximum Number that May Yet Be Purchased Under the Program
April 1 - 30, 2022	125,388		$	70.65	125,388	4,875,950
May 1 - 31, 2022	435,791		$	67.74	435,791	4,440,159
June 1 - 30, 2022	285,044		$	66.56	285,044	4,155,115
Total	846,223		$	67.77	846,223	4,155,115

The Company's stock purchases shown above were made under authorizations by the Board of Directors. In April 2022, the Board approved the purchase of additional shares, bringing the total shares authorized for purchase to 5,000,000 at April 20, 2022. At June 30, 2022, 4,155,115 shares remained available for purchase.

Item 6. EXHIBITS

10 — Amend me nt 12 to Development S ervices Agreemen t . (Development Services Agreement filed in the Company's quarterly report on Form 10-Q dated November 5, 2020.) *

31.1 — Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 — Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 — Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 — Interactive data files in Inline XBRL pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

104 — Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* In accordance with Item 601(a)(5) of Regulation S-K, certain schedules and exhibits to this exhibit have been omitted from this filing. The Company will furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission or its staff upon request. In accordance with Item 601(b)(10)(iv) of Regulation S-K, certain portions of this exhibit have been redacted because they are both (i) not material and (ii) would likely cause competitive harm to the Company if publicly disclosed. The Company will provide an unredacted copy of the exhibit on a supplemental basis to the Securities and Exchange Commission or its staff upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	COMMERCE BANCSHARES, INC.



	By	/s/ MARGARET M. ROWE
		Margaret M. Rowe
Date: August 5, 2022		Vice President & Secretary


	By	/s/ PAUL A. STEINER
		Paul A. Steiner
		Controller
Date: August 5, 2022		(Chief Accounting Officer)