Commerce Bancshares Inc
Annual Report 2019

Plain-text annual report

Embracing a Growth Mindset. 2019 Annual Report & Form 10-K Team members featured from left to right: Renee Blake, Anthony Atencio, Kala Gebhard, Rod Campbell and Niaz Khan Embracing a Growth Mindset The world is changing, and it is changing more quickly than ever. New technologies, shifting customer demographics and expectations, and an evolving competitive landscape are reshaping the banking industry. Commerce understands that to thrive and endure for the long term, we need to stay curious, be agile in response to our customers’ needs and maintain a strategic vision that positions us to grow and innovate. Commerce is committed to changing with the times, and to do that, our organization embraces a growth mindset. We look at challenges as opportunities to innovate, at disruption as a chance to uncover new ways to create value. We build on the 154-year foundation of our successful franchise but look for ways to raise the performance bar even higher. To do this, we bring together best-in-class products with exceptional teams dedicated to understanding and accepting our customers’ unique challenges. As we enter a new and uncertain decade in financial services, it is Commerce’s growth mindset that underpins and enables our continued success. About the Cover Our ability to communicate and collaborate is one of our greatest strengths as an organization, and embracing a growth mindset will propel us beyond our current level of success. We encourage team members from across the bank to come together, bringing diverse perspectives and new ideas for helping our customers and growing our business. From left to right: Crystal Yang, Business Line Project Manager; Beth Feuring, Director of Talent Development; Felecia Hogan, Bank Operations Group Manager; and Matt White, Director of Commercial Strategy, Marketing and Sales Delivery COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT 1 Financial Highlights (In thousands, except per share data) 2015 2016 2017 2018 2019 OPERATING RESULTS Net interest income Provision for loan losses Non-interest income Investment securities gains (losses), net Non-interest expense Net income attributable to Commerce Bancshares, Inc. Net income available to common shareholders Cash dividends on common stock $ 634,320 28,727 422,444 6,320 650,792 263,730 254,730 84,961 $ 680,049 $ 36,318 733,679 $ 45,244 446,556 (53) 689,229 275,391 266,391 87,070 461,263 25,051 744,343 319,383 310,383 91,619 823,825 $ 821,293 42,694 501,341 (488) 737,821 433,542 424,542 100,238 50,438 524,703 3,626 767,398 421,231 412,231 113,466 AT YEAR END Total assets Loans, including held for sale Investment securities Deposits Equity Non-performing assets Common shares outstanding1 Tier I common risk-based capital ratio Tier I risk-based capital ratio Total risk-based capital ratio Tier I leverage ratio Tangible common equity to tangible assets ratio Efficiency ratio OTHER FINANCIAL DATA (based on average balances) Return on total assets Return on common equity Loans to deposits Equity to assets Net yield on interest earning assets (T/E) PER COMMON SHARE DATA Net income - basic1 Net income - diluted1 Market price1 Book value1 Cash dividends1 Cash dividend payout ratio $ 24,604,962 $ 25,641,424 $ 24,833,415 $ 25,463,842 $ 26,065,789 12,444,299 13,427,192 14,005,072 14,160,992 14,751,626 9,901,680 9,770,986 8,893,307 8,698,666 8,741,888 19,978,853 21,101,095 20,425,446 20,323,659 20,520,415 2,367,418 2,501,132 2,718,184 2,937,149 3,138,472 29,394 118,179 11.52% 12.33 13.28 9.23 8.48 61.42 14,649 117,454 11.62% 12.38 13.32 9.55 8.66 61.04 12,664 117,543 13,949 116,685 12.65% 14.22% 13.41 14.35 10.39 9.84 62.18 14.98 15.82 11.52 10.45 55.58 10,585 112,132 13.93% 14.66 15.48 11.38 10.99 56.87 1 . 1 1% 1 .1 2% 1.28% 1.76% 1.67 % 11.43 61.44 10.00 2.93 11.33 63.71 10.16 3.04 12.46 66.18 10.53 3.19 16.16 69.27 11.24 3.53 $ 2.11 $ 2.26 $ 2.63 $ 3.61 $ 2.10 35.00 18.81 0.705 33.35% 2.26 49.94 20.06 0.740 32.69 % 2.62 50.65 21.89 0.777 29.52% 3.60 53.69 23.93 0.853 23.61 % 14.06 71.54 12.20 3.48 3.59 3.58 67.94 26.70 0.990 27.52% 1Restated for the 5% stock dividend distributed December 2019 Return on Average Common Equity Return on Average Assets 20.0% 15.0% 10.0% 5.0% 0.0% 2.0% 1.5% 1.0% 0.5% 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Commerce Peers Large Banks Commerce Peers Large Banks Commerce 10-Year Average: 12.4% Peers’ 10-Year Average: 8.2% Commerce 10-Year Average: 1.3% Peers’ 10-Year Average: 1.0% Source: S&P Global Market Intelligence, and company reports and filings as of December 31, 2019 2 COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT Letter to Our Shareholders Commerce Bancshares enjoyed another strong year of financial performance in 2019. Modest loan growth and strong deposit retention, combined with low credit costs, partially offset the compressed net interest margin created by a flattening yield curve. Despite a slowdown in economic growth in 2019, the overall economy remains strong as we have now entered the longest business cycle expansion on record. The Federal Reserve’s interest rate cuts in the second half of the year provided an additional boost to keep the markets we serve growing and healthy. We expect this modest economic growth to continue as we head into 2020. The banking industry continues to face pressure due to consolidation, changing demographic trends and increased competition. Our team members remain committed to recognizing these trends as opportunities and strive to continually deliver innovative products and services to address our customers’ unique challenges. Our strong culture is the key driver of our long-term success. It’s a culture that embraces a growth mindset — continuously striving to improve — and provides us with the framework to build upon our success and deliver value-added solutions to our customers. The execution of our long-term strategic objectives allowed us to deliver one of the highest returns on equity among the 50 largest banks in the country. Consistent with our strong financial position, we returned capital to shareholders through increased dividends and share repurchases. In February 2020, we increased our quarterly common dividend 9% to $.27 per share, our 52nd consecutive year of dividend increases. Additionally, over the course of 2019, we repurchased approximately $285 million of common shares. Over the past 15 years, the annualized total return for shareholders has been 9.6% compared to the KBW Bank Index of 3.1%. We will continue to focus on the long-term growth and health of your company with an emphasis on building customer relationships, collaborating across business lines and providing innovative solutions. While the current interest rate environment will put pressure on banking industry earnings, I have confidence in our diversified business model and in our consistent approach to driving shareholder value. It is this approach that will position Commerce to deliver strong earnings growth for many years to come. I would like to thank our team members, customers and shareholders for their ongoing support, and look forward to our continued success in 2020. Long-Term Shareholder Return Cumulative Total Return Indexed, 12/31/2004 = $100 $450 $450 $400 $400 $350 $350 $300 $300 $250 $250 $200 $200 $150 $150 $100 $100 $50 $50 $0 $0 Over the past 15 years 9.6% Annualized Shareholder Return 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 COMMERCE (CBSH) NASDAQ BANK KBW BANK S&P Source: Bloomberg as of December 31, 2019 COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT 3 Embracing a Growth Mindset John W. Kemper President and Chief Executive Officer C O M M E R C E B A N C S H A R E S , I N C . F E B R U A R Y 2 5 , 2 0 2 0 Dear Commerce Shareholders: The past year for your company was marked by strong performance against the backdrop of healthy economic growth but also an increasingly challenging yield curve, which put pressure on net interest margins. This performance was driven by delivering innovative products and solutions to our customers, maintaining discipline related to credit and expense management, and investing in technology and talent that will pay dividends for years to come. Although we are certainly pleased with these financial results, we are equally encouraged by the underlying growth that makes this possible. At Commerce, when we talk about growth, we talk about the mindset that is needed to sustain and propel our organization into the future. This mindset, and the work that supports it, goes beyond merely showing growth for growth’s sake. Growth means more than a swelling balance sheet, increasing headcount and expansion into new geographic markets — though certainly these may be desired outcomes. To us, growth must be measured in terms of our capabilities and cohesion as a team. Having a growth mindset means challenging ourselves to adapt to a changing world and avoiding the complacency that can afflict any high-performing organization, much less one with a history and culture 154 years in the making. When we approach our customers’ needs with a growth mindset, we see their challenges as opportunities to help. This is how we strive to be a better partner, add more value to customers’ lives and enterprises and, through this collaboration, create rewards for our team members and shareholders. Our Results In some ways, 2019 had the misfortune of following 2018, an exceptional year for bank earnings, driven by an expanding net interest margin which was, itself, a product of rising short-term interest rates. These factors, combined with the benefits of tax reform and benign credit, created a near-ideal earnings environment. Despite the reversal of this interest rate situation and the resultant headwinds, our results in 2019 were nonetheless robust, reflecting the diversity of our business model, the steady geographic markets we serve and the focus on delivering on our “blue chip” strategic objectives. In 2019, net income available to common shareholders totaled $412 million. Returns on average assets and average common equity totaled 1.67% and 14.1%, respectively, positioning Commerce as having one of the best financial 4 COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT performances of the nation’s 50 largest banks. The bank grew year-end loan balances 4%, increased year-end deposit balances 1% and generally grew revenue across our business lines, all while keeping credit losses to a minimum and maintaining a strong balance sheet. We returned more than $407 million in capital to our shareholders in 2019, including $122 million in cash dividends and $285 million in common share repurchases. In February 2020, we increased our common dividend 9% to $.27 per share, the 52nd consecutive year of such increases. This steady shareholder return of Commerce stock, including dividends, has outpaced the KBW Bank Index by an annualized 6.5% over the last 15 years. Payout Ratio Capital Returned to Common Shareholders as a Percentage of Net Income Available to Common Shareholders 97% 35% 41% 2017 2018 Capital includes total cash dividends paid on common stock plus total common shares repurchased 2019 The strength of the Commerce franchise also depends on the diversity in our loan portfolio and fee-based businesses. Our significant presence in payments and wealth management provides consistent returns and positions Commerce uniquely among our peer bank and non-bank competitors. More importantly, these capabilities allow us to add more value to every customer relationship. Diverse Revenue Non-Interest Income as a Percentage of Total Revenue $550 s n o i l l i m n i $ $500 $450 $400 50% 40% 30% 20% 10% 0% 2017 2018 2019 Non-Interest Income (left) Non-Interest Income to Total Revenue (right) We ended 2019 with a tangible common equity to asset ratio of 11% and a total risk-based capital ratio of 15.5%. Our robust capital ratios position us well, both for future growth and for times of economic stress. Because of this strong position and steady earnings profile, Commerce enjoys an a1 baseline credit assessment rating from Moody’s. Only five other banks in the country maintain a credit rating at this level or better. Strength and Growth Across Our Business Segments Strength of Our Business Consumer Banking Commerce’s core strengths lie in the super- community model that distinguishes us from other banks — a model that emphasizes local connection, decision-making and service, coupled with the sophisticated products and advice typically found at larger banks. Our strong capital position, credit discipline, earnings profile and focus on operational efficiency enable us to invest in new products, services and markets. In the consumer banking segment, Commerce is focused on refining and improving the customer experience and, because all customers are different, doing so through the channels they prefer. During 2019, we introduced a host of new consumer enhancements, with particular emphasis on digital channels and personalizing the banking experience. Over the course COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT 5 of the year, Commerce delivered 22 new functionality releases in our mobile banking app while improving our app store rating to a 4.7 on both Android® and iOS platforms. In addition, we introduced CommercePremier — a new relationship management program designed to deepen our engagement with key retail clients. To better understand our customers’ needs, our branch bankers leverage a Customer Advising Referral Assistant (CARA) tool to help identify financial challenges and recommend proven solutions. We continue to innovate with new ideas for branch design to address changing customer preferences. We recently opened our first Commerce Bank Connect™ location in St. Louis. This location has many new capabilities compared to a traditional branch and is designed to connect our brand and solutions with people, ideas and the community as a whole. Another new location in Denver is designed as a collaborative space to engage small business and retail customers with relevant bank partners. We also introduced a new branch in Peoria, refreshed 27 locations across our footprint, and optimized 6 COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT our branch and ATM locations to align with customer needs. Our long-term focus continues to be on making investments in innovation while managing our expenses appropriately. These initiatives allowed us to grow retail deposits 2% while holding costs well below peer benchmarks. Commercial Banking and Commercial Payments Our commercial banking and payments teams serve more than 13,000 business clients. We recognize the value of having a financial partner that truly understands clients’ unique financial needs. Our teams are comprised of highly skilled bankers and payments experts with considerable knowledge of the markets where we operate and the industry verticals we serve. We use insights gained from working with clients across the U.S. to help businesses access the payments system, manage risk, fund growth and improve cash flow. Our commercial division continues to focus on the growing healthcare industry. Through our team of seasoned specialists, many of whom have direct experience in the healthcare field, CommerceHealthcare® delivers a fresh perspective on financial solutions, focusing on receivables, payments and financing. In close consultation with our existing customers, CommerceHealthcare® recently introduced new solutions for patient refunds and online bill pay, pre-service enrollment for patient financing and remote deposit for providers. Our tools help providers streamline financial processes, optimize revenue and payments, and improve cash flow. Our CommercePayments™ group thinks about the future of payments beyond the payer — focusing on the supplier to help balance the equation. As a payments leader, we take a pragmatic approach to payment solution development, keeping our customers at the forefront of all that we do. Our CommercePayments™ team strives to provide reimagined and simplified payables and receivables solutions that allow our customers to focus on what matters most to them. With the significant growth in our expansion markets, we continue efforts to ensure Commerce is positioned to effectively serve these communities through strategic locations, high-performing talent and local industry specialists. In 2019, we upgraded our commercial offices in Oklahoma City, Houston, Nashville and Indianapolis. We also opened an additional business banking center in the Highlands area of northwest Denver. We are committed to investing in and expanding our presence in these markets. Expansion Market Loan Growth 3-year CAGR 13% our peers in client satisfaction (96%) and are industry leading in our retention of individual investment assets (96%), reflecting the strong partnerships we form with our clients. We continue to find innovative ways to fuel growth in our wealth management business. We recently invested in a new private banking lending platform that will transform how we support unique client needs with highly specialized products. We launched a new client relationship management (CRM) system to better serve our clients and identify future opportunities. Additionally, we are expanding our brand awareness efforts and implementing a new consumer engagement process to increase our client relationships and the breadth of services we provide. We believe investments such as these will position us for continued growth and superior returns well into the future. 3% Trust Assets Under Administration Total Company Expansion Markets Wealth Management As one of the nation’s largest bank-managed trust companies, we have the scale, product depth and professional team to serve the needs of individual and institutional clients, while providing financial advice with an individualized approach and tailored solutions. Within our personal wealth service model, we oversee Commerce Brokerage Services, Inc., Commerce Trust Company and Commerce Family Office, delivering a suite of comprehensive solutions to address our clients’ unique needs. Our differentiated wealth management business was a strong contributor to our financial results in 2019. The team grew asset management revenue 7%, and assets under administration reached a record $56.7 billion. We continue to outperform s n o i l l i b n i $ $60 $55 $50 $45 $40 $57 $49 $50 2017 2018 2019 Our Culture - Raising the Bar by Embracing a Growth Mindset At Commerce, we cultivate a culture of high performance and continuous improvement. We believe our culture — in particular, our ability to communicate and work collaboratively on behalf of our customers — is our differentiating strength and the source of our long-term competitive advantage. COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT 7 Collaboration Across the Bank Collaboration is at the heart of everything we do. As mentioned in last year’s report, we have been immersed in the planning and building phases of a complete core deposit system conversion. This project is an example of an extraordinary collective effort, spanning business lines, operations and information technology, to create a successful implementation that is scheduled to go live in 2020. Recent CRM upgrades in our commercial, payments and trust areas have created the foundation for better information- sharing and collaboration across all corners of the bank. These tools enable the communication and collaboration that is at the heart of our Commerce culture, allowing us to work together with agility on behalf of our customers. Diversity, Inclusion and Equity Over the past few years, Commerce has made significant progress in building a more diverse and inclusive culture in which all team members can thrive. We believe our success is defined not only by our ability to help people meet their financial challenges, but also by the mark we leave on the world at large. That’s why we make ongoing investments in ideas, programs and technology that serve our customers, strengthen our communities and support a healthy working environment. As a socially responsible corporate citizen, we continuously seek opportunities to make a difference. Our community involvement, diversity and inclusion initiatives, and sustainability efforts are all products of a culture that emphasizes being a force for good in our region and in our industry. The common denominator behind these investments is our commitment to meeting people where they are, learning about their needs, and building strong and lasting relationships. In support of the diverse makeup of today’s labor force, Commerce offers a variety of internal resource groups, mentoring programs and networking opportunities to help team members feel connected to our bank and to each other. EMERGE, a resource group that focuses on creating a culture that attracts, develops and engages young professionals, now boasts nearly 600 members across Commerce. RISE, a similar group created to support the personal and professional growth among women at Commerce, has 1,200 engaged members. Recent launches of VIBE (multicultural) and PRIDE (LGBTQIA+) groups have brought even more diverse stakeholders into the fold. Supporting Our Communities As a bank, we know our success is tied inextricably to the communities we serve. Our team members volunteer for and serve a host of local nonprofit entities across our markets. In 2020, Commerce is offering all team members the opportunity to spend a day with full pay volunteering for causes of their choosing. Our people are also engaged in governance and leadership roles, serving on the boards of more than 500 nonprofits. According to the Federal Reserve, Commerce is considered a leader in providing community development services, and we have maintained an “outstanding” rating for community reinvestment for more than 20 years. Last year, Commerce bankers donated nearly $300,000 to the E2E Foundation, an 8 COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT employee-owned 501(c)(3) that launched in 2016, to support teammates in need. Additionally in 2019, Commerce Trust Company advised on more than $22 million of charitable investments into our communities on behalf of the Commerce Bancshares Foundation and private foundations that have engaged the bank as trustee. Looking Ahead in 2020 We have a lot to be proud of — and grateful for — as we enter 2020. Our consistently strong financial performance, our culture and values, and the strength of our team position us to take a long-term view. The markets we serve continue to be healthy, and economic activity remains strong. We will continue to invest in our banking activities in expansion markets outside of our legacy footprint. We have been successful in hiring experienced bankers in these markets who embrace our Commerce culture and deliver the entire suite of competitive products and solutions to our customers. The banking industry will continue to experience disruption from consolidation and non-bank competitors. Part of our growth mindset is to look at this disruption as a source of opportunity. As we look to the future, our bank will continue to invest in the people and technology needed to adapt to a changing landscape. We will focus on continuous improvement and efficiency while sustaining our investment and focus on “blue chip” objectives that drive our growth well into the future. Our team members come to work every day to accept as their own the challenges our customers face. Our customers are at the center of everything we do; their needs serve as our compass. While the future holds challenges, we will seek to learn and to grow, and to sustain the success of your company through this new decade. Growth in EPS and Stock Price e c i r P k c o t S $80.00 $60.00 $40.00 $20.00 $0.00 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 ) S P E ( e r a h S r e P s g n n r a E i 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Stock Price Earnings Per Share (EPS) COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT 9 Performance Highlights Total Loans $ in billions 5-year CAGR = 5.2% $14.8 $14.0 $12.4 2015 2017 2019 Fee Income in 2019 Million in Share Repurchases in 2019 10 COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT • Commerce reported earnings per share of $3.58, down less than 1% from 2018. Return on average assets totaled 1.67% in 2019, while the return on common average equity was 14.1%, which compares favorably to the top 50 bank industry average of 1.25% for return on average assets and 11.0% for return on average common equity. • Net income available to common shareholders totaled $412 million in 2019 compared to $425 million last year, reflecting 5% growth in our fee income and a disciplined approach to managing expenses, offset by higher loan losses. • In 2019, Commerce paid a regular cash dividend of $.99 per share (restated) on common shares, representing a 16% increase over the prior year. In February 2020, we announced a 9% increase in our regular cash dividend, marking the 52nd consecutive year in which regular cash dividends increased. Also in 2019, for the 26th year in a row, we paid a 5% stock dividend. • Total shareholders’ equity grew to $3.1 billion, while our Tier I common risk-based capital ratio decreased to 13.9%, compared to 14.2% last year. In 2019, we purchased $285 million in treasury stock of the company.• Period end total loans grew $591 million, or 4%, in 2019, driven mostly by increases in commercial and industrial loans and personal real estate loans, which grew 9% and 11%, respectively. • Loan growth in our expansion markets continued to outpace that of the company overall, with loans increasing 5% to $2.3 billion at year end. Revenue growth from our expansion markets increased 12% in 2019. We continued to support and develop our commercial banking teams in our expansion markets, adding new team members and opening a business banking center in Denver during 2019. • Fee income increased 5% overall on solid growth from trust fees, mortgage banking revenue and cash sweep commissions, which grew 5%, 32% and 29%, respectively. The diversity in our products continues to add consistency to our earnings and complements our lending activities to build stronger banking relationships.• Fee income from our wealth management businesses grew 6% to $184 million. Commerce Trust Company assets under administration now total $56.7 billion.• Credit quality remains strong. While net loan charge-offs grew to $50 million, mostly on higher consumer losses, net credit losses totaled only .35% of total loans. In addition, non- performing assets declined to .07% of total loans and remain at very low levels.• Commerce Bank was named among America’s Best Banks 2019 by Forbes. We were the top-ranked Missouri-based bank and ranked 17th in the nation overall.Commerce by the Numbers $26.1 Billion in Assets $7.6 Billion in Market Capitalization 47th Among U.S. Banks 18th Among U.S. Banks $34.4 Billion in Trust Assets Under Management 18th Among U.S. Banks1 $20.5 Billion in Total Deposits $14.8 Billion in Total Loans 12 th Largest Commercial Card Issuer2 154 Years in Business a1 Baseline Credit Assessment Commerce is 1 of 6 U.S. banks with an a1 or better Moody’s rating 4,858 Full-Time Equivalent Employees F U L L - S E RV I C E B A N K I N G F O OT P R I N T 164 full-service branches and 366 ATMs St. Louis • Kansas City Springfield • Central Missouri Central Illinois • Wichita Tulsa • Oklahoma City • Denver C O M M E R C I A L O F F I C E S Cincinnati • Nashville • Dallas Des Moines • Indianapolis Grand Rapids • Houston U. S . P R E S E N C E Extended Commercial Market Area Commercial Payments Services Offered in 48 states across the U.S. Source: S&P Global Market Intelligence, and company reports and filings as of December 31, 2019 1Regulated U.S. depositories, which includes commercial banks, bank holding companies and credit unions 2Based on Top 50 U.S. Banks by asset size as of 2018 and Nilson Report rankings COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT 11 Community Advisors Our Community Advisors help us understand the unique needs and challenges of our customers and communities. They are business owners, educators, professionals and civic leaders who take on the challenges of their organizations and communities every day. We’re continually impressed by their hard work and grateful to them for sharing their valuable insights. It is because of our Community Advisors in each of our markets that we’re able to say “Challenge Accepted.®” Missouri CAPE GIRARDEAU Nick Burger Commerce Bank Tim Coad Coad Chevrolet and Coad Toyota Gregg E. Hollabaugh Commerce Bancshares, Inc. Mike Kasten Beef Alliance Adam Kidd Kidd’s Gas & Convenience Store Frank Kinder Red Letter Communications, Inc. Steve Sowers Commerce Bank Susan Layton Tomlin Layton & Southard, LLC Allen Toole Schaefer’s Electrical Enclosures Ben Traxel Dille & Traxel CENTRAL MISSOURI Dan Atwill Boone County Commission Dr. Holly Bondurant Tiger Pediatrics Brent Bradshaw Orscheln Management Co. Philip Burger Burgers’ Smokehouse Brad Clay Commerce Bank Sarah Dubbert Commerce Bank Mark Fenner Former Energy Industry CEO Joe Hartman Retired, Commerce Bank Gregg E. Hollabaugh Commerce Bancshares, Inc. Robert S. Holmes Commerce Bancshares, Inc. Commerce Bank George M. Huffman Pearl Motor Company Jack W. Knipp Knipp Enterprises Rick Kruse Retired, Boone National Savings & Loan Assoc. Dr. Mike Lutz Mike Lutz, DDS Dr. Clifford J. Miller Green Hills Veterinary Clinic Robby Miller Mexico Heating Company Todd Norton Commerce Bank Mike Petrie Commerce Bancshares, Inc. Robert K. Pugh Retired, MBS Textbook Exchange Gina Raines Commerce Bank Jim Rolls Retired, Associated Electric Cooperative Steve Sowers Commerce Bank David Townsend Agents National Title Insurance Company Andy Waters AW Holdings, LLC Larry Webber Webber Pharmacy Robin Wenneker CPW Partnership Dave Whelan Commerce Bank Dr. John S. Williams Retired, Horton Animal Hospital HANNIBAL C. Todd Ahrens Hannibal Regional Healthcare System David M. Bleigh Bleigh Construction Company, Bleigh Ready Mix Company Jim Humphreys Luck, Humphreys and Associates, CPA, PC Darin D. Redd Commerce Bank Mike Scholes Reliable Termite & Pest Control, Inc. Steve Sowers Commerce Bank HARRISONVILLE Aaron Aurand Crouch, Spangler & Douglas Connie Aversman Commerce Bank Larry Dobson Real Estate Investments Mark Hense iFIL USA, LLC Scott Milner Max Ford Brent Probasco Cass Regional Medical Center, Inc. Aaron Rains Commerce Bank Laurence Smith Reece Nichols Smith Realty Dr. Larry Snider Retired, Snider Optometry Timothy Soulis Golden Classics Jewelers KANSAS CITY Ali H. Armistead Alaris Capital, LLC Kevin G. Barth Commerce Bancshares, Inc. Commerce Bank Rosana Privitera Biondo Mark One Electric Co., Inc. Clay C. Blair, III Clay Blair Services Corp. Timothy S. Dunn J.E. Dunn Construction Co., Inc. Jon D. Ellis Paradise Park, Inc. Stephen E. Gound Labconco Corp. Jonathan M. Kemper Commerce Bancshares, Inc. Commerce Bank David F. Kiersznowski DEMDACO Michael P. McCoy Intercontinental Engineering-Manufacturing Corporation Stephen G. Mos Central States Beverage Company Edward J. Reardon, II Commerce Bank Ora H. Reynolds Hunt Midwest Enterprises, Inc. Dr. Nelson R. Sabates Sabates Eye Centers Charles S. Sosland Sosland Publishing Company Thomas R. Willard Commerce Trust Company Tower Properties Company POPLAR BLUFF Edward L. Baker Edward L. Baker Enterprises John A. Clark Attorney at Law Larry Greenwall Greenwall Vending Co. Charles R. Hampton, Jr. Charles R. Hampton & Son Construction Co. Gregg E. Hollabaugh Commerce Bancshares, Inc. Kenny Rowland Commerce Bank Steve Sowers Commerce Bank Gregory West Mills Iron & Supply ST. JOSEPH Mark Barkman Commerce Trust Company Brett Carolus Hillyard, Inc. James H. Counts Morton, Reed, Counts & Briggs, LLC David Cripe Commerce Bank Pat Dillon Mosaic Life Care Corky Marquart Commerce Bank Todd Meierhoffer Meierhoffer Funeral Home & Crematory Patrick Modlin Room 108/Felix Street Gourmet Dr. Scott Murphy Murphy-Watson-Burr Eye Center Mike Petrie Commerce Bancshares, Inc. Edward J. Reardon, II Commerce Bank Matt Robertson CliftonLarsonAllen LLP Amy Ryan Commerce Bank Judy Sabbert Retired, Heartland Foundation Rick Schultz RS Electric Bill Severn NPG, Inc. Heidi Walker CBIZ Insurance Services Julie Walker Commerce Trust Company ST. LOUIS METRO Blackford F. Brauer Hunter Engineering Co. Kyle Chapman BW Forsyth Partners Charles L. Drury, Jr. Drury Hotels Frederick D. Forshaw Forshaw of St. Louis James G. Forsyth, III Moto, Inc. David S. Grossman Grossman Iron & Steel Tom Harmon Commerce Bank 12 COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT Juanita Hinshaw H & H Advisors Robert S. Holmes Commerce Bancshares, Inc. Commerce Bank Kristin Humes Tacony Corporation Donald A. Jubel Spartan Light Metal Products David W. Kemper Commerce Bancshares, Inc. John W. Kemper Commerce Bancshares, Inc. Commerce Bank Alois J. Koller, III Koller Enterprises, Inc. Kristopher G. Kosup Buckeye International, Inc. James B. Morgan Subsurface Constructors, Inc. Chrissy Nardini American Metal Supplies Co., Inc. Victor L. Richey, Jr. ESCO Technologies, Inc. Steven F. Schankman Contemporary Productions, LLC James E. Schiele Consultant Paul J. Shaughnessy BSI Constructors, Inc. Thomas H. Stillman Summit Distributing Christine Taylor Enterprise Holdings, Inc. Andrew Thome J.W. Terrill Gregory Twardowski Investments Kelvin R. Westbrook KRW Advisors, LLC ST. LOUIS METRO EAST Hamilton Callison Breakthru Beverage Harlan Ferry Retired, Commerce Bank Matthew Gomric Commerce Bank Jared Katt Chelar Tool & Die, Inc. Thomas Lippert Liese Lumber Company, Inc. Robert McClellan Retired, Hortica James Rauckman Rauckman High Voltage Sales, LLC Dr. James T. Rosborg McKendree University Richard Sauget Jr. Mayor of Sauget Jack Schmitt Jack Schmitt Family of Dealerships Kurt Schroeder Greensfelder, Hemker & Gale, PC Joe Wiley Quest Management Consultants Dr. Charles J. Willey Innovare Health Advocates ST. LOUIS BUSINESS BANKING Richard K. Brunk Attorney at Law James N. Foster McMahon Berger J.L. (Juggie) Hinduja Sinclair Industries, Inc. Susan Kalist Commerce Bank Greg Kendall Commerce Bank Myron J. Klevens Organizational Development Strategies Stuart Krawll Beam of St. Louis, Inc. Patrick N. Lawlor Lawlor Corporation Scott Lively CliftonLarsonAllen LLP Stephen Mattis Allied Industrial Equipment Corporation Lisa D. McLaughlin Reilly & McLaughlin McGraw Milhaven KTRS Elizabeth Powers Powers Insurance Sue Prapaisilp Global Foods Market Dennis Scharf Scharf Tax Services ST. CHARLES COUNTY NORTH Kevin Bray Commerce Bank Lou Helmsing Craftsmen Trailer Dr. Barbara Kavalier St. Charles Community College Susan Kalist Commerce Bank Greg Kendall Commerce Bank Dr. Art McCoy Jennings School District Peter J. Mihelich, Jr. Goellner Promotions Duane A. Mueller Cissell Mueller Construction Company Howard A. Nimmons, CPA, CFP Nimmons Wealth Management Tarlton J. Pitman Pitman Funeral Home, Inc. Lisle J. Wescott SSM Health – St. Joseph Hospital William J. Zollmann, III Attorney at Law Don Zykan Zykan Properties SPRINGFIELD Roger Campbell, Jr. Campbell Ford Brian Esther Commerce Bank James P. Ferguson Heart of America Beverage Co. Charles R. Greene American Sportsmen Holding Co. Bunch Greenwade Rancher Robert A. Hammerschmidt, Jr. Commerce Bank Brian Sutton Commerce Bank Clive Veri Commerce Bank Dr. Hal L. Higdon Ozarks Technical Community College Jerry Watley Able 2 Products Company, Inc. Gregg E. Hollabaugh Commerce Bancshares, Inc. Robert S. Holmes Commerce Bancshares, Inc. Commerce Bank Craig Lehman Shelter Insurance Agency Michael Meek Investments Alvin D. Meeker Retired, Commerce Bank James F. Moore Retired, American Products Robert Moreland Commerce Bank David Murray R.B. Murray Company Douglas D. Neff Commerce Bank Keith Noble Commerce Bank Richard Ollis Ollis/Akers/Arney Insurance & Business Advisors Mike Petrie Commerce Bancshares, Inc. Doug Russell The Durham Company Rusty Shadel Shadel’s Colonial Chapel David Waugh Independent Stave Company MOKAN Donald Cupps Ellis Cupps & Cole Harvey R. Dean Pitsco, Inc. Joe Dellasega U.S. Awards Adam Endicott Unique Metal Fabrication, Inc. Jay Hatfield Jay Hatfield Chevrolet Phil Hutchens Hutchens Construction Jerrod Hogan Anderson Engineering Wesley C. Houser Retired, Commerce Bank David C. Humphreys TAMKO Building Products, Inc. Don Kirk H & K Camper Sales, Inc. Barbara J. Majzoub Yorktown Properties Douglas D. Neff Commerce Bank Eric Schnelle S & H Farm Supply, Inc. Steve W. Sloan Midwest Minerals, Inc. Wendell L. Wilkinson Retired, Commerce Bank Kansas BUTLER COUNTY (EL DORADO) Vince Haines Gravity :: Works Architecture Ryan T. Murry ICI Marilyn B. Pauly Commerce Bank Jeremy Sundgren Sundgren Realty, Inc. Mark Utech Commerce Bank GARDEN CITY Monte Cook Commerce Bank Richard Harp Commerce Bank Gerald Miller Commerce Bank Mike Petrie Commerce Bancshares, Inc. Lee Reeve Reeve Cattle Company Patrick Rooney Rooney Farms Tamara Roth Allred & Company, CPA’s, Inc. Pat Sullivan Retired, Sullivan Analytical Service, Inc. HAYS D.G. Bickle, Jr. Warehouse, Inc. Monte Cook Commerce Bank Brian Dewitt Adams, Brown, Beran & Ball, CPAs Stuart Lowry Sunflower Electric Power Corporation Deron O’Connor Commerce Bank Marty Patterson Rome Corporation Mike Petrie Commerce Bancshares, Inc. Kevin Royer Midland Marketing Coop LAWRENCE Michele Hammann SS&C Solutions, Inc. Mark Heider Commerce Bank Russ Johnson Lawrence Memorial Hospital Eugene W. Meyer Retired, Lawrence Memorial Hospital Allison Vance Moore Colliers International COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT 13 Teresa L. Knox Community HigherEd Ken Lackey The NORDAM Group, Inc. Tom E. Maxwell Retired, Flintco, LLC Sanjay Meshri Advanced Research Chemicals, Inc. John Neas Neas Investments Shannon O’Doherty Commerce Bank John Peters Adwon Properties Tracy A. Poole McAfee Taft Dr. Andy Revelis Tulsa Pain Consultants Daryl Woodard SageNet Colorado DENVER Robert L. Cohen The IMA Financial Group, Inc. Joseph Freund, Jr. Running Creek Ranch R. Allan Fries i2 Construction, LLP Darren Lemkau Commerce Bank James C. Lewien Retired, Commerce Bank Randall H. Lortscher, M.D. Rocky Mountain Gamma Knife Center, LLC Alek Orloff Alpine Waste & Recycling David Schunk Volunteers of America, Colorado Branch Olivia Thompson Retired, AlloSource Jason Zickerman The Alternative Board Martin W. Moore Advanco, Inc. Kevin J. O’Malley O’Malley Beverage of Kansas, Inc. Edward J. Reardon, II Commerce Bank Dan C. Simons The World Company Michael Treanor TreanorHL LEAVENWORTH J. Sanford Bushman DeMaranville & Associate, CPAs, LLC Norman B. Dawson Retired, Commerce Bancshares, Inc. Sherry DeMaranville DeMaranville & Associate, CPAs, LLC Mark Denney J.F. Denney Plumbing & Heating Jeremy Greenamyre Greenamyre Rentals Chris Klimek Central Bag, Co. Lawrence W. O’Donnell, Jr. Lawrence W. O’Donnell, Jr., CPA Chartered Bill Petrie Commerce Bank Edward J. Reardon, II Commerce Bank Robert D. Schmitt, II Mama Mia’s, Inc. Kurt Seelbach Armed Forces Insurance Exchange MANHATTAN Mark Bachamp Olsson Associates Linda Cook Kansas State University Monte Cook Commerce Bank Shawn Drew Commerce Bank Neal Helmick Griffith Lumber Co. Dr. David Pauls Surgical Associates Mike Petrie Commerce Bancshares, Inc. WICHITA Michael E. Bukaty Retired, Latshaw Enterprises, Inc. Ray L. Connell Connell & Connell Monte A. Cook Commerce Bank Thomas E. Dondlinger Dondlinger Construction Craig Duerksen Commerce Bank Ronald W. Holt Retired, Sedgwick County Eric Ireland Commerce Bank Paul D. Jackson Vantage Point Properties, Inc. Kristi Krok Commerce Bank Brett Mattison Decker & Mattison Co., Inc. Derek L. Park Law Office of Derek Park, LLC Marilyn B. Pauly Commerce Bank Mike Petrie Commerce Bancshares, Inc. John Rolfe Kansas Leadership Center Barry L. Schwan House of Schwan, Inc. Thomas D. White White & Ellis Drilling, Inc. Illinois BLOOMINGTON-NORMAL Brent A. Eichelberger Commerce Bank Neil Finlin Farnsworth Group, Inc. Ron Greene Afni, Inc. Jared Hall Keplr Vision Services Mary Bennett Henrichs Integrity Technology Solutions Gregg E. Hollabaugh Commerce Bancshares, Inc. Robert S. Holmes Commerce Bancshares, Inc. Commerce Bank Colleen Kannaday AdvocateAuroraHealth Nick Kemp Vogo Cabinets William Phillips Commerce Bank Jay Reece Mueller, Reece & Hinch, LLC Alan Sender Retired, Chestnut Health Systems CHAMPAIGN-URBANA Mark Arends Arends Hogan Walker, LLC Matt Deering Meyer Capel Brian Egeberg Commerce Bank Brent A. Eichelberger Commerce Bank Donna Greene University of Illinois Foundation Tim Harrington Devonshire Group Gregg E. Hollabaugh Commerce Bancshares, Inc. Kim Martin Martin Hood, LLC Roger Rhodes Retired, Horizon Hobby, Inc. PEORIA Bruce L. Alkire Coldwell Banker Commercial Devonshire Realty David W. Altorfer United Facilities, Inc. Royal J. Coulter Coulter Companies, Inc. Peter T. Coyle Arthur J. Gallagher & Co. Dr. Michael A. Cruz OSF Healthcare System Brent A. Eichelberger Commerce Bank Gregg E. Hollabaugh Commerce Bancshares, Inc. Robert S. Holmes Commerce Bancshares, Inc. Commerce Bank Dr. James W. Maxey OSF Orthopaedics Richard D. Moore Caterpillar, Inc. Jonathan A. Williams Commerce Bank Janet M. Wright Central Illinois Business Publishers, Inc. Oklahoma OKLAHOMA CITY Gary Bridwell Orange Power Group Steve Brown Red Rock Distributing Co. Jim Cleaver Midsouth Financial Company Clay Cockrill Manhattan Construction Company Sherry Dale The Mettise Group Mark Fischer Fischer Investments Zane Fleming Eagle Drilling Fluids Mike McDonald Triad Energy Shannon O’Doherty Commerce Bank Vince Orza Retired, Family Broadcasting Corporation Kathy Potts Rees Associates, Inc. Joe Warren Cimarron Production TULSA Jack Allen HUB International Limited Stephanie Cameron AAON, Inc. R. Scott Case Case & Associates, Inc. Gary R. Christopher Christopher Energy Wade Edmundson Commerce Bank Dr. John R. Frame Breast Health Specialists of Oklahoma Gip Gibson Commerce Bank Kent J. Harrell Harrell Energy Ed Keller Titan Properties 14 COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT Officers Directors COMMERCE BANCSHARES, INC. | 2019 ANNUAL REPORT 15 David W. KemperExecutive Chairman John W. Kemper President and Chief Executive OfficerCharles G. Kim Chief Financial Officer and Executive Vice PresidentKevin G. Barth Executive Vice PresidentDaniel D. Callahan Chief Credit Officer and Executive Vice PresidentSara E. Foster Executive Vice PresidentJohn K. Handy Executive Vice PresidentRobert S. HolmesExecutive Vice PresidentJeffrey M. Burik Senior Vice PresidentPatricia R. Kellerhals Senior Vice PresidentDouglas D. Neff Senior Vice PresidentPaula S. Petersen Senior Vice PresidentDavid L. RollerSenior Vice PresidentThomas J. Noack Senior Vice President, Secretary and General CounselB. Lynn Tankesley Chief Risk Officer and Senior Vice President Paul A. SteinerControllerAaron C. Meinert AuditorTerry D. Bassham*Chief Executive Officer and President, Evergy, Inc.John R. Capps* Vice President, Weiss ToyotaKaren L. Daniel* Retired, Chief Financial Officer and Executive Director, Black & VeatchEarl H. Devanny, III Chief Executive Officer, Tract Manager W. Thomas Grant, II Vice Chairman, SelectQuote Senior Insurance ServicesDavid W. Kemper Executive Chairman, Commerce Bancshares, Inc.John W. Kemper President and Chief Executive Officer, Commerce Bancshares, Inc.Jonathan M. Kemper Chairman Emeritus, Commerce Bank, Kansas City RegionBenjamin F. Rassieur, III*President, Paulo Products CompanyTodd R. Schnuck* Chairman of the Board and Chief Executive Officer, Schnuck Markets, Inc.Andrew C. Taylor Executive Chairman, Enterprise Holdings, Inc.Kimberly G. Walker*Retired, Chief Investment Officer, Washington University in St. Louis*Audit and Risk Committee MemberUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ________________________________________________________ For the Fiscal Year Ended December 31, 2019 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ________________________________________________________ For the transition period from to Commission File No. 0-2989 COMMERCE BANCSHARES, INC. (Exact name of registrant as specified in its charter) Missouri (State of Incorporation) 1000 Walnut, Kansas City, MO (Address of principal executive offices) 43-0889454 (IRS Employer Identification No.) 64106 (Zip Code) Registrant's telephone number, including area code: (816) 234-2000 Securities registered pursuant to Section 12(b) of the Act: Title of class Trading symbol(s) Name of exchange on which registered $5 Par Value Common Stock Depositary Shrs, each representing a 1/1000th intrst in a shr of 6.0% Non-Cum. Perp Pref Stock, Srs B CBSH CBSHP NASDAQ Global Select Market NASDAQ Global Select Market Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No Securities registered pursuant to Section 12(g) of the Act: NONE 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 No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated Filer Non-accelerated filer Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No As of June 30, 2019, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $6,067,000,000. As of February 14, 2020, there were 112,086,942 shares of Registrant’s $5 Par Value Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive proxy statement for its 2020 annual meeting of shareholders, which will be filed within 120 days of December 31, 2019, are incorporated by reference into Part III of this Report. Commerce Bancshares, Inc. Form 10-K INDEX PART I Item 1. Business Item 1a. Risk Factors Item 1b. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7a. Quantitative and Qualitative Disclosures about Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9a. Controls and Procedures Item 9b. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules Item 16. Form 10-K Summary Signatures Page 3 8 13 13 13 13 15 16 16 58 58 126 126 128 128 128 128 128 128 129 130 131 2 Item 1. BUSINESS General PART I Commerce Bancshares, Inc., a bank holding company as defined in the Bank Holding Company Act of 1956, as amended, was incorporated under the laws of Missouri on August 4, 1966. Through a second tier wholly-owned bank holding company, it owns all the outstanding capital stock of Commerce Bank (the “Bank”), which is headquartered in Missouri. The Bank engages in general banking business, providing a broad range of retail, mortgage banking, corporate, investment, trust, and asset management products and services to individuals and businesses. Commerce Bancshares, Inc. also owns, directly or through the Bank, various non-banking subsidiaries. Their activities include private equity investment, securities brokerage, insurance agency, and leasing activities. A list of Commerce Bancshares, Inc.'s subsidiaries is included as Exhibit 21. Commerce Bancshares, Inc. and its subsidiaries (collectively, the "Company") is one of the nation’s top 50 bank holding companies, based on asset size. At December 31, 2019, the Company had consolidated assets of $26.1 billion, loans of $14.8 billion, deposits of $20.5 billion, and equity of $3.1 billion. The Company’s operations are consolidated for purposes of preparing the Company’s consolidated financial statements. The Company's principal markets, which are served by 164 branch facilities, are located throughout Missouri, Kansas, and central Illinois, as well as Tulsa and Oklahoma City, Oklahoma and Denver, Colorado. Its two largest markets are St. Louis and Kansas City, which serve as central hubs for the Company. The Company also has offices supporting its commercial customers in Dallas, Houston, Cincinnati, Nashville, Des Moines, Indianapolis, and Grand Rapids, and operates a commercial payments business with sales representatives covering the continental United States of America (“U.S.”). The Company’s goal is to be the preferred provider of financial services in its communities, based on strong customer relationships built through providing top quality service with a strong risk management culture, and employing a strong balance sheet with exceptional capital levels. The Company operates under a super-community banking format which incorporates large bank product offerings coupled with deep local market knowledge, augmented by experienced, centralized support in select, critical areas. The Company’s focus on local markets is supported by an experienced team of bankers assigned to each market coupled with industry specialists. The Company also uses regional advisory boards, comprised of local business persons, professionals and other community representatives, who assist the Company in responding to local banking needs. In addition to this local market, community-based focus, the Company offers sophisticated financial products usually only available at much larger financial institutions. The markets the Bank serves are mainly located in the lower Midwest, which provides natural sites for production and distribution facilities and serve as transportation hubs. The economy has been well-diversified in these markets with many major industries represented, including telecommunications, automobile, technology, financial services, aircraft and general manufacturing, health care, numerous service industries, and food and agricultural production. The real estate lending operations of the Bank are predominantly centered in its lower Midwestern markets. Historically, these markets have tended to be less volatile than in other parts of the country. Management believes the diversity and nature of the Bank’s markets has a mitigating effect on real estate loan losses in these markets. From time to time, the Company evaluates the potential acquisition of various financial institutions. In addition, the Company regularly considers the purchase and disposition of real estate assets and branch locations. The Company seeks merger or acquisition partners that are culturally similar, have experienced management and either possess significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services. The Company has not completed any bank acquisitions since 2013. Employees The Company employed 4,576 persons on a full-time basis and 259 persons on a part-time basis at December 31, 2019. The Company provides a comprehensive array of flexible benefit programs to its employees with a focus on financial and physical wellness. The Company's financial benefits package includes a company-matching 401(k) savings plan, a 529 college savings plan, and employee educational and adoption assistance programs. The Company's health and wellness package includes health, dental, vision, life and various other insurances, as well as a wellness program that incentivizes employees to live a healthy and balanced lifestyle. The Company has developed several training and development programs designed to challenge and develop the management and leadership skills of employees, promote collaboration amongst various internal departments and geographic locations, and share best-practices to meet the needs of customers and communities. The Company has also developed numerous training courses targeted to develop interpersonal and technical skills, as well as, to provide training on new banking regulations. None of the Company's employees are represented by collective bargaining agreements. 3 Competition The Company operates in the highly competitive environment of financial services. The Company regularly faces competition from banks, savings and loan associations, credit unions, brokerage companies, mortgage companies, insurance companies, trust companies, credit card companies, private equity firms, leasing companies, securities brokers and dealers, financial technology companies, e-commerce companies, mutual fund companies, and other companies providing financial services. Some of these competitors are not subject to the same regulatory restrictions as domestic banks and bank holding companies. Some other competitors are significantly larger than the Company, and therefore have greater economies of scale, greater financial resources, higher lending limits, and may offer products and services that the Company does not provide. The Company competes by providing a broad offering of products and services to support the needs of customers, matched with a strong commitment to customer service. The Company also competes based on quality, innovation, convenience, reputation, industry knowledge, and price. In its two largest markets, the Company has approximately 12% of the deposit market share in Kansas City and approximately 8% of the deposit market share in St. Louis. Operating Segments The Company is managed in three operating segments: Commercial, Consumer, and Wealth. The Commercial segment provides a full array of corporate lending, merchant and commercial bank card products, leasing, and international services, as well as business and government deposit, investment, and cash management services. The Consumer segment includes the retail branch network, consumer installment lending, personal mortgage banking, and consumer debit and credit bank card activities. The Wealth segment provides traditional trust and estate planning services, brokerage services, and advisory and discretionary investment portfolio management services to both personal and institutional corporate customers. In 2019, the Commercial, Consumer and Wealth segments contributed 52%, 24% and 24% of total segment pre-tax income, respectively. See the section captioned "Operating Segments" in Item 7, Management's Discussion and Analysis, of this report and Note 13 to the consolidated financial statements for additional discussion on operating segments. Government Policies The Company's operations are affected by federal and state legislative changes, by the United States government, and by policies of various regulatory authorities, including those of the numerous states in which they operate. These include, for example, the statutory minimum legal lending rates, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policy, international currency regulations and monetary policies, the U.S. Patriot Act, and capital adequacy and liquidity constraints imposed by federal and state bank regulatory agencies. Supervision and Regulation The following information summarizes existing laws and regulations that materially affect the Company's operations. It does not discuss all provisions of these laws and regulations, and it does not include all laws and regulations that affect the Company presently or may affect the Company in the future. General The Company, as a bank holding company, is primarily regulated by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended (BHC Act). Under the BHC Act, the Federal Reserve Board’s prior approval is required in any case in which the Company proposes to acquire all or substantially all the assets of any bank, acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or merge or consolidate with any other bank holding company. With certain exceptions, the BHC Act also prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any non-banking company. Under the BHC Act, the Company may not engage in any business other than managing and controlling banks or furnishing certain specified services to subsidiaries, and may not acquire voting control of non-banking companies unless the Federal Reserve Board determines such businesses and services to be closely related to banking. When reviewing bank acquisition applications for approval, the Federal Reserve Board considers, among other things, the Bank’s record in meeting the credit needs of the communities it serves in accordance with the Community Reinvestment Act of 1977, as amended (CRA). Under the terms of the CRA, banks have a continuing obligation, consistent with safe and sound operation, to help meet the credit needs of their communities, including providing credit to individuals residing in low- and moderate-income areas. The Bank has a current CRA rating of “outstanding.” The Company is required to file various reports and additional information with the Federal Reserve Board. The Federal Reserve Board regularly performs examinations of the Company. The Bank is a state-chartered Federal Reserve member bank and is subject to regulation, supervision and examination by the Federal Reserve Bank of Kansas City and the Missouri Division of Finance. The Bank is also subject to regulation by the Federal Deposit Insurance Corporation (FDIC). In addition, there are numerous other federal and state laws and regulations which control the activities of the Company, including requirements and limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates, 4 loan limits, mergers and acquisitions, issuance of securities, dividend payments, and extensions of credit. The Bank is subject to federal and state consumer protection laws, including laws designed to protect customers and promote fair lending. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and their respective state law counterparts. If the Company fails to comply with these or other applicable laws and regulations, it may be subject to civil monetary penalties, imposition of cease and desist orders or other written directives, removal of management and, in certain circumstances, criminal penalties. This regulatory framework is intended primarily for the protection of depositors and the preservation of the federal deposit insurance funds. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to employ assets and maximize income. In addition to its regulatory powers, the Federal Reserve Bank affects the conditions under which the Company operates by its influence over the national supply of bank credit. The Federal Reserve Board employs open market operations in U.S. government securities and oversees changes in the discount rate on bank borrowings, changes in the federal funds rate on overnight inter-bank borrowings, and changes in reserve requirements on bank deposits in implementing its monetary policy objectives. These methods are used in varying combinations to influence the overall level of the interest rates charged on loans and paid for deposits, the price of the dollar in foreign exchange markets, and the level of inflation. The monetary policies of the Federal Reserve have a significant effect on the operating results of financial institutions, most notably on the interest rate environment. In view of changing conditions in the national economy and in the money markets, as well as the effect of credit policies of monetary and fiscal authorities, the Company makes no prediction as to possible future changes in interest rates, deposit levels or loan demand, or their effect on the financial statements of the Company. The financial industry operates under laws and regulations that are under regular review by various agencies and legislatures and are subject to change. The Company currently operates as a bank holding company, as defined by the Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLB Act), and the Bank qualifies as a financial subsidiary under the GLB Act, which allows it to engage in investment banking, insurance agency, brokerage, and underwriting activities that were not available to banks prior to the GLB Act. The GLB Act also included privacy provisions that limit banks’ abilities to disclose non-public information about customers to non-affiliated entities. The Company must also comply with the requirements of the Bank Secrecy Act (BSA). The BSA is designed to help fight drug trafficking, money laundering, and other crimes. Compliance is monitored by the Federal Reserve. The BSA was enacted to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, criminal activity. Since its passage, the BSA has been amended several times. These amendments include the Money Laundering Control Act of 1986 which made money laundering a criminal act, as well as the Money Laundering Suppression Act of 1994 which required regulators to develop enhanced examination procedures and increased examiner training to improve the identification of money laundering schemes in financial institutions. The USA PATRIOT Act, established in 2001, substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the U.S. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent, and report money laundering and terrorist financing. The regulations include significant penalties for non-compliance. The Company is subject to regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2011 (Dodd- Frank Act). Among its many provisions, the Dodd-Frank Act required stress-testing for certain financial services companies and established a new council of “systemic risk” regulators. The Dodd Frank Act also established the Consumer Financial Protection Bureau (CFPB) which is authorized to supervise certain financial services companies and has responsibility to implement, examine for compliance with, and enforce “Federal consumer financial law.” The Company is subject to examinations by the CFPB. The Dodd-Frank Act, through Title VI, commonly known as the Volcker Rule, placed trading restrictions on financial institutions and separated investment banking, private equity and proprietary trading (hedge fund) sections of financial institutions from their consumer lending arms. The Volcker Rule also restricts financial institutions from investing in and sponsoring certain types of investments. In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law which provides a number of limited amendments to the Dodd-Frank Act. Notable provisions of the legislation include: an increase in the asset threshold from $50 billion to $250 billion, above which the Federal Reserve is required to apply enhanced prudential standards; an exemption from the Volker Rule for insured depository institutions with less than $10 billion in consolidated assets; modifications to the Liquidity Coverage and Supplementary Leverage ratios; and the elimination of Dodd-Frank company-run stress tests for banks and bank holding companies with less than $250 billion in assets. While most of these provisions affect institutions larger than the Company, the Company is no longer required to prepare stress testing as specified by the Dodd-Frank Act. 5 Subsidiary Bank Under Federal Reserve policy, the bank holding company, Commerce Bancshares, Inc. (the "Parent"), is expected to act as a source of financial strength to its bank subsidiary and to commit resources to support it in circumstances when it might not otherwise do so. In addition, loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Deposit Insurance Substantially all of the deposits held by the Bank are insured up to applicable limits (generally $250,000 per depositor for each account ownership category) by the FDIC's Deposit Insurance Fund (DIF) and are subject to deposit insurance assessments to maintain the DIF. In 2011, the FDIC released a final rule to implement provisions of the Dodd-Frank Act that affect deposit insurance assessments. Among other things, the Dodd-Frank Act raised the minimum designated reserve ratio from 1.15% to 1.35% of estimated insured deposits, removed the upper limit of the designated reserve ratio, required that the designated reserve ratio reach 1.35% by September 30, 2020, and required the FDIC to offset the effect of increasing the minimum designated reserve ratio on depository institutions with total assets of less than $10 billion. The Dodd-Frank Act provided the FDIC flexibility in the implementation of the increase in the designated reserve ratio and also required that the FDIC redefine the assessment base to average consolidated assets minus average tangible equity. On June 30, 2016, the DIF rose above 1.15%, resulting in a reduction of the initial assessment rate for all banks and implementing a 4.5 basis point surcharge on insured depository institutions with total consolidated assets of $10 billion or more. Effective October 1, 2018, this surcharge was eliminated as the DIF reached its required level of 1.35% of estimated insured deposits. This had the effect of reducing the Company’s insurance costs by $1.5 million in the fourth quarter of 2018. The Company's deposit insurance expense was $6.7 million in 2019 and $11.5 million in 2018. Payment of Dividends The Federal Reserve Board may prohibit the payment of cash dividends to shareholders by bank holding companies if their actions constitute unsafe or unsound practices. The principal source of the Parent's cash revenues is cash dividends paid by the Bank. The amount of dividends paid by the Bank in any calendar year is limited to the net profit of the current year combined with the retained net profits of the preceding two years, and permission must be obtained from the Federal Reserve Board for dividends exceeding these amounts. The payment of dividends by the Bank may also be affected by factors such as the maintenance of adequate capital. Capital Adequacy The Company is required to comply with the capital adequacy standards established by the Federal Reserve, which are based on the risk levels of assets and off-balance sheet financial instruments. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to judgments by regulators regarding qualitative components, risk weightings, and other factors. A new comprehensive capital framework was established by the Basel Committee on Banking Supervision, which was effective for large and internationally active U.S. banks and bank holding companies on January 1, 2015. A key goal of the new framework, known as "Basel III," was to strengthen the capital resources of banking organizations during normal and challenging business environments. Basel III increased minimum requirements for both the quantity and quality of capital held by banking organizations. The rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer is intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, stock repurchases and executive compensation. The rule also adjusted the methodology for calculating risk-weighted assets to enhance risk sensitivity. At December 31, 2019, the Company's capital ratios are well in excess of those minimum ratios required by Basel III. The Federal Deposit Insurance Corporation Improvement Act (FDICIA) requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. Pursuant to FDICIA, the FDIC promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under the prompt corrective action provisions of FDICIA, an insured depository institution generally will be classified as well-capitalized (under the Basel III rules mentioned above) if it has a Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6 6.5%, a total capital ratio of at least 10%, and a Tier 1 leverage ratio of at least 5%. An institution that, based upon its capital levels, is classified as “well-capitalized,” “adequately capitalized,” or “undercapitalized,” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if a bank is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the federal bank regulator, and the holding company must guarantee the performance of that plan. The Bank has consistently maintained regulatory capital ratios above the “well-capitalized” standards. Stress Testing As required by the Dodd-Frank Act, the Company performed stress tests as specified by the Federal Reserve requirement and published results beginning in 2014 through 2017. On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was enacted, which eliminated the required stress testing under the Dodd-Frank Act for banks with consolidated assets of less than $250 billion. The Company continues to perform periodic stress-testing based on its own internal criteria. Executive and Incentive Compensation Guidelines adopted by federal banking agencies prohibit excessive compensation as an unsafe and unsound practice, and describe compensation as "excessive" when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. The Federal Reserve Board has issued comprehensive guidance on incentive compensation intended to ensure that the incentive compensation policies do not undermine safety and soundness by encouraging excessive risk taking. This guidance covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, based on key principles that (i) incentives do not encourage risk-taking beyond the organization's ability to identify and manage risk, (ii) compensation arrangements are compatible with effective internal controls and risk management, and (iii) compensation arrangements are supported by strong corporate governance, including active and effective board oversight. Deficiencies in compensation practices may affect supervisory ratings and enforcement actions may be taken if incentive compensation arrangements pose a risk to safety and soundness. Transactions with Affiliates The Federal Reserve Board regulates transactions between the Bank and its subsidiaries. Generally, the Federal Reserve Act and Regulation W, as amended by the Dodd-Frank Act, limit the Company’s banking subsidiary and its subsidiaries to lending and other “covered transactions” with affiliates. The aggregate amount of covered transactions a banking subsidiary or its subsidiaries may enter into with an affiliate may not exceed 10% of the capital stock and surplus of the banking subsidiary. The aggregate amount of covered transactions with all affiliates may not exceed 20% of the capital stock and surplus of the banking subsidiary. Covered transactions with affiliates are also subject to collateralization requirements and must be conducted on arm’s length terms. Covered transactions include (a) a loan or extension of credit by the banking subsidiary, including derivative contracts, (b) a purchase of securities issued to a banking subsidiary, (c) a purchase of assets by the banking subsidiary unless otherwise exempted by the Federal Reserve, (d) acceptance of securities issued by an affiliate to the banking subsidiary as collateral for a loan, and (e) the issuance of a guarantee, acceptance or letter of credit by the banking subsidiary on behalf of an affiliate. Certain transactions with the Company's directors, officers or controlling persons are also subject to conflicts of interest regulations. Among other things, these regulations require that loans to such persons and their related interests be made on terms substantially the same as for loans to unaffiliated individuals, and must not create an abnormal risk of repayment or other unfavorable features for the financial institution. See Note 2 to the consolidated financial statements for additional information on loans to related parties. Available Information The Company’s principal offices are located at 1000 Walnut Street, Kansas City, Missouri (telephone number 816-234-2000). The Company makes available free of charge, through its website at www.commercebank.com, reports filed with the Securities and Exchange Commission as soon as reasonably practicable after the electronic filing. Additionally, a copy of our electronically filed materials can be found at www.sec.gov. These filings include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports. 7 Statistical Disclosure The information required by Securities Act Guide 3 — “Statistical Disclosure by Bank Holding Companies” is located on the pages noted below. II. III. I. Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan Portfolio Types of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturities and Sensitivities of Loans to Changes in Interest Rates . . . . . . . . . . . . . . . . . . . . . . . Risk Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Summary of Loan Loss Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on Equity and Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Short-Term Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Page 21, 54-57 37-39, 80-84 27 27-28 33-37 30-33 54, 88 17 88 Item 1a. RISK FACTORS Making or continuing an investment in securities issued by the Company, including its common and preferred stock, involves certain risks that you should carefully consider. If any of the following risks actually occur, the Company's business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Commerce Bancshares, Inc. Difficult market conditions may affect the Company’s industry. The concentration of the Company’s banking business in the United States particularly exposes it to downturns in the U.S. economy. While current economic conditions are favorable, there remain risks in that environment. In particular, the Company may face the following risks in connection with market conditions: • • • • • In 2019, the United States economy entered the longest expansion in its history. Despite some weakness in consumer confidence in late 2019, the expansion keeps progressing, seemingly boosted by tax reform in 2018 and a lower interest rate environment. Unemployment levels remain low and the stock market has performed well in 2019 and early 2020. The U.S. economy is affected by global events and conditions, including U.S. trade disputes and renewed trade agreements with various countries. Although the Company does not directly hold foreign debt or have significant activities with foreign customers, the global economy, the strength of the U.S. dollar, international trade conditions, and oil prices may ultimately affect interest rates, business import/export activity, capital expenditures by businesses, and investor confidence. Unfavorable changes in these factors may result in declines in consumer credit usage, adverse changes in payment patterns, reduced loan demand, and higher loan delinquencies and default rates. These could impact the Company’s future loan losses and provision for loan losses, as a significant part of the Company’s business includes consumer and credit card lending. In addition to the results above, a slowdown in economic activity may cause declines in financial services activity, including declines in bank card, corporate cash management and other fee businesses, as well as the fees earned by the Company on such transactions. The process used to estimate losses inherent in the Company’s loan portfolio requires difficult, subjective, and complex judgments, including consideration of economic conditions and how these economic predictions might impair the ability of its borrowers to repay their loans. If an instance occurs that renders these predictions no longer capable of accurate estimation, this may in turn impact the reliability of the process. Competition in the industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions, thereby reducing market prices for various products and services which could in turn reduce the Company’s revenues. 8 The performance of the Company is dependent on the economic conditions of the markets in which the Company operates. The Company’s success is heavily influenced by the general economic conditions of the specific markets in which it operates. Unlike larger national or other regional banks that are more geographically diversified, the Company provides financial services primarily throughout the states of Missouri, Kansas, central Illinois, Oklahoma, and Colorado. It also has a growing presence in additional states through its commercial banking offices in: Texas, Iowa, Indiana, Michigan, Ohio, and Tennessee. As the Company does not have a significant banking presence in other parts of the country, a prolonged economic downturn in these markets could have a material adverse effect on the Company’s financial condition and results of operations. The Company operates in a highly competitive industry and market area. The Company operates in the financial services industry and has numerous competitors including other banks and insurance companies, securities dealers, brokers, trust and investment companies, mortgage bankers, and financial technology companies. Consolidation among financial service providers and new changes in technology, product offerings and regulation continue to challenge the Company's marketplace position. As consolidation occurs, larger regional and national banks may enter the Company's markets and add to existing competition. Large, national financial institutions have substantial capital, technology and marketing resources. These new competitors may lower fees to grow market share, which could result in a loss of customers and lower fee revenue for the Company. They may have greater access to capital at a lower cost than the Company, and may have higher loan limits, both of which may adversely affect the Company’s ability to compete effectively. The Company must continue to make investments in its products and delivery systems to stay competitive with the industry, or its financial performance may suffer. The soundness of other financial institutions could adversely affect the Company. The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institution counterparties. Financial services institutions are interrelated because of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties and routinely executes transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual funds, and other institutional clients. Transactions with these institutions include overnight and term borrowings, interest rate swap agreements, securities purchased and sold, short-term investments, and other such transactions. Because of this exposure, defaults by, or rumors or questions about, one or more financial services institutions or the financial services industry in general, could lead to market-wide liquidity problems and defaults by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client, while other transactions expose the Company to liquidity risks should funding sources quickly disappear. In addition, the Company’s credit risk may be exacerbated when the collateral held cannot be realized or is liquidated at prices not sufficient to recover the full amount of the exposure due to the Company. Any such losses could materially and adversely affect results of operations. The Company is subject to extensive government regulation and supervision. As part of the financial services industry, the Company is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds, and the banking system, not shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products it may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition, and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. Significant changes in federal monetary policy could materially affect the Company’s business. The Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine in large part the cost of funds for lending and interest rates earned on loans and paid on borrowings and interest-bearing deposits. Credit conditions are influenced by its open market operations in U.S. government securities, changes in the member bank discount rate, and bank reserve requirements. Changes in Federal Reserve Board policies are beyond the Company’s control and difficult to predict, and such changes may result in lower interest margins and a lack of demand for credit products. The Company is subject to both interest rate and liquidity risk. With oversight from its Asset-Liability Management Committee, the Company devotes substantial resources to monitoring its liquidity and interest rate risk on a monthly basis. The Company's net interest income is the largest source of overall revenue to 9 the Company, representing 61% of total revenue for the year ended December 31, 2019. The interest rate environment in which the Company operates fluctuates in response to general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve Board, which regulates the supply of money and credit in the U.S. Changes in monetary policy, including changes in interest rates, will influence loan originations, deposit generation, demand for investments and revenues, and costs for earning assets and liabilities, and could significantly impact the Company’s net interest income. After raising rates four times in 2018, the Federal Reserve Board lowered the benchmark interest rate three times during 2019 for a total of 75 basis points. Future economic conditions or other factors could shift monetary policy resulting in increases or additional decreases in the benchmark rate. Furthermore, changes in interest rates could result in unanticipated changes to customer deposit balances and funding costs and affect the Company’s source of funds for future loan growth. The impact of the phase-out of LIBOR is uncertain. In 2017, the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that LIBOR would likely be discontinued at the end of 2021 as panel banks would no longer be required to submit estimates that are used to construct LIBOR. U.S. regulatory authorities have voiced similar support for phasing out LIBOR. The Company has a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The impact of alternatives to LIBOR on the valuations, pricing and operation of the Company's financial instruments is not yet known. The Company is coordinating with industry groups to identify an appropriate replacement rate for contracts expiring after 2021, as well as preparing for this transition as it relates to new and existing contracts and customers. The Company has established a LIBOR Transition Program, which is lead by the LIBOR Transition Steering Committee (Committee) whose purpose is to guide the overall transition process for the Company. The Committee is an internal, cross-functional team with representatives from all relevant business lines, support functions and legal counsel. An initial LIBOR impact and risk assessment has been performed, which identified the associated risks across products, systems, models, and processes. The Committee is assessing the results of the assessment and developing and prioritizing actions. Additionally, LIBOR fallback language has been included in key loan provisions of new and renewed loans in preparation for transition from LIBOR to the new benchmark rate when such transition occurs. The Company may be adversely affected if the interest rates currently tied to LIBOR on the Company's loans, derivatives, and other financial instruments are not able to be transitioned to an alternative rate. Furthermore, the Company may be faced with disputes or litigation with counterparties regarding interpretation and enforcement of fallback language in new and renewed loans as the transition to a new benchmark rate continues to evolve. The Company’s asset valuation may include methodologies, models, estimations and assumptions which are subject to differing interpretations and could result in changes to asset valuations that may materially adversely affect its results of operations or financial condition. The Company uses estimates, assumptions, and judgments when certain financial assets and liabilities are measured and reported at fair value. Assets and liabilities carried at fair value inherently result in greater financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices and/or other observable inputs provided by independent third-party sources, when available. When such third-party information is not available, fair value is estimated primarily by using cash flow and other financial modeling techniques utilizing assumptions such as credit quality, liquidity, interest rates and other relevant inputs. Changes in underlying factors, assumptions, or estimates in any of these areas could materially impact the Company’s future financial condition and results of operations. Furthermore, if models used to calculate fair value of financial instruments are inadequate or inaccurate due to flaws in their design or execution, upon sale, the Company may not realize the cash flows of a financial instrument as modeled and could incur material, unexpected losses. During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain assets if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes in active markets with significant observable data that become illiquid due to the current financial environment. In such cases, certain asset valuations may require more subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of assets as reported within the Company’s consolidated financial statements, and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on results of operations or financial condition. The Company’s investment portfolio values may be adversely impacted by deterioration in the credit quality of underlying collateral within the various categories of investment securities it owns. The Company generally invests in securities issued by municipal entities, government-backed agencies or privately issued securities, with collateral that are highly rated and evaluated at the time of purchase, however, these securities are subject to changes 10 in market value due to changing interest rates and implied credit spreads. While the Company maintains prudent risk management practices over bonds issued by municipalities, credit deterioration in these bonds could occur and result in losses. Certain mortgage and asset-backed securities (which are collateralized by residential mortgages, credit cards, automobiles, mobile homes or other assets) may decline in value due to actual or expected deterioration in the underlying collateral. Under accounting rules, when the impairment is due to declining expected cash flows, some portion of the impairment, depending on the Company’s intent to sell and the likelihood of being required to sell before recovery, must be recognized in current earnings. This could result in significant losses. The allowance for credit losses may be insufficient or future credit losses could increase. The allowance for loan losses at December 31, 2019 reflects management's best estimate of probable loan losses that have been incurred within the existing loan portfolio as of the balance sheet date. See the section captioned “Allowance for Loan Losses” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report for further discussion related to the Company’s process for determining the appropriate level of the allowance for probable loan losses at December 31, 2019. In 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard "Measurement of Credit Losses on Financial Instruments" (ASU 2016-13), which became effective January 1, 2020 and was adopted by the Company at that time. This new standard significantly altered the way the allowance for credit losses is determined. The new standard utilizes a life of loan loss concept and required significant operational changes, especially in data collection and analysis. The level of the allowance will be based on management’s methodology that utilizes historical net charge-off rates, and adjusts for the impacts in the reasonable and supportable forecast and other qualitative factors. Key assumptions include the application of historical loss rates, prepayment speeds, forecast results of a reasonable and supportable period, the period to revert to historical loss rates, and qualitative factors. Although credit losses have been stable during the past several years, an unforeseen deterioration of financial market conditions could result in larger credit losses, which may negatively affect the Company's results of operations and could significantly increase its allowance for credit losses. The Company’s allowance level is subject to review by regulatory agencies, and that review could also result in adjustments to the allowance for credit losses. Additionally, the Company's provision for credit losses may be more volatile in the future under the new standard, due to macroeconomic variables that influence the Company's loss estimates, and the volatility in credit losses may be material to the Company's earnings. New lines of business or new products and services may subject the Company to additional risk. From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and new products or services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business, or new product or service, could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and new products or services could have a material adverse effect on the Company’s financial condition and results of operations. A successful cyber attack or other computer system breach could significantly harm the Company, its reputation and its customers. The Company relies heavily on communications and information systems to conduct its business, and as part of its business, the Company maintains significant amounts of data about its customers and the products they use. Information security risks continue to increase due to new technologies, the increasing use of the Internet and telecommunication technologies (including mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, and others. The Company makes significant investments in various technology to identify and prevent intrusions into its information system. The Company also has policies and procedures designed to prevent or limit the effect of failure, interruption or security breach of its information systems, offers ongoing training to employees, hosts tabletop exercises to test response readiness, and performs regular audits using both internal and outside resources. However, there can be no assurances that any such failures, interruptions or security breaches will not occur, or if they do occur, that they will be adequately addressed. In addition to unauthorized access, denial-of-service attacks or other operational disruptions could overwhelm Company websites and prevent the Company from adequately serving customers. Should any of the Company's systems become compromised or customer information be obtained by unauthorized parties, the reputation of the Company could be damaged, relationships with existing customers may be impaired, and the Company could be subject to lawsuits, all of which could result in lost business and have a material adverse effect on the Company’s business, financial condition and results of operations. 11 The Company’s operations rely on certain external vendors. The Company relies on third-party vendors to provide products and services necessary to maintain day-to-day operations. For example, the Company outsources a portion of its information systems, communication, data management, and transaction processing to third parties. Accordingly, the Company is exposed to the risk that these vendors might not perform in accordance with the contracted arrangements or service level agreements because of changes in the vendor’s organizational structure, financial condition, support for existing products and services, or strategic focus. Such failure to perform could be disruptive to the Company’s operations, which could have a materially adverse impact on its business, financial condition and results of operations. These third parties are also sources of risk associated with operational errors, system interruptions or breaches and unauthorized disclosure of confidential information. If the vendors encounter any of these issues, the Company could be exposed to disruption of service, damage to reputation and litigation. Because the Company is an issuer of both debit and credit cards, it is periodically exposed to losses related to security breaches which occur at retailers that are unaffiliated with the Company (e.g., customer card data being compromised at retail stores). These losses include, but are not limited to, costs and expenses for card reissuance as well as losses resulting from fraudulent card transactions. The Company continually encounters technological change. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services, including the entrance of financial technology companies offering new financial service products. The Company regularly upgrades or replaces technological systems to increase efficiency, enhance product and service capabilities, eliminate risks of end-of-lifecycle products, reduce costs, and better serve our customers. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may encounter significant problems and may not be able to effectively implement new technology-driven products and services and may not be successful in marketing the new products and services to its customers. These problems might include significant time delays, cost overruns, loss of key people, and technological system failures. Failure to successfully keep pace with technological change affecting the financial services industry or failure to successfully complete the replacement of technological systems could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company plans to convert its core customer and deposit systems during 2020 and may encounter significant adverse developments. The Company will replace its core customer and deposit systems and other ancillary systems (collectively referred to as core system). The core system is used to track customer relationships and deposit accounts. The core system is integrated with channel applications that are used to service customer requests by bank personnel or directly by customers (such as online banking and mobile applications). The new core system will provide a new platform based on current technology and will enable the Company to integrate other systems more efficiently, and is a significant improvement compared to our current core system. However, changing the core system will subject the Company to operational risks during and after the conversion, including disruptions to our technology systems, which may adversely impact our customers. We have plans, policies and procedures designed to prevent or limit the risks of a failure during or after the conversion of our core system. However, there can be no assurance that any such adverse development will not occur or, if they do occur, that they will be timely and adequately remediated. The ultimate impact of any adverse development could damage our reputation, result in a loss of customer business, subject us to regulatory scrutiny, or expose us to civil litigation and possibly financial liability, any of which could have a material effect on the Company’s business, financial condition, and results of operations. Commerce Bancshares, Inc. relies on dividends from its subsidiary bank for most of its revenue. Commerce Bancshares, Inc. is a separate and distinct legal entity from its banking and other subsidiaries. It receives substantially all of its revenue from dividends from its subsidiary bank. These dividends, which are limited by various federal and state regulations, are the principal source of funds to pay dividends on its preferred and common stock and to meet its other cash needs. In the event the subsidiary bank is unable to pay dividends, the Company may not be able to pay dividends or other obligations, which would have a material adverse effect on the Company's financial condition and results of operations. The Company must attract and retain skilled employees. The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people can be intense, and the Company spends considerable time and resources attracting, hiring, and retaining qualified people for its various business lines and support units. The unexpected loss of the services of one or more of the Company’s key personnel could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, and years of industry experience, as well as the difficulty of promptly finding qualified replacement personnel. 12 Item 1b. UNRESOLVED STAFF COMMENTS None Item 2. PROPERTIES The main offices of the Company are located in Kansas City and St. Louis, Missouri. The Company owns its main offices and leases unoccupied premises to the public. The larger office buildings include: Building 1000 Walnut Kansas City, MO 922 Walnut Kansas City, MO 811 Main Kansas City, MO 8000 Forsyth Clayton, MO Net rentable square footage % occupied in total % occupied by Bank 391,000 256,000 237,000 178,000 97% 52% 95 100 100 93 100 100 The Company has an additional 159 branch locations in Missouri, Illinois, Kansas, Oklahoma and Colorado which are owned or leased. Item 3. LEGAL PROCEEDINGS The information required by this item is set forth in Item 8 under Note 21, Commitments, Contingencies and Guarantees on page 121. Item 4. MINE SAFETY DISCLOSURES Not applicable 13 Information about the Company's Executive Officers The following are the executive officers of the Company as of February 25, 2020, each of whom is designated annually. There are no arrangements or understandings between any of the persons so named and any other person pursuant to which such person was designated an executive officer. Name and Age Kevin G. Barth, 59 Jeffrey M. Burik, 61 Daniel D. Callahan, 63 Sara E. Foster, 59 John K. Handy, 56 Robert S. Holmes, 56 Positions with Registrant Executive Vice President of the Company since April 2005, and Community President and Chief Executive Officer of Commerce Bank since October 1998. Senior Vice President of the Company and Officer of Commerce Bank prior thereto. Senior Vice President of the Company since February 2013. Executive Vice President of Commerce Bank since November 2007. Executive Vice President and Chief Credit Officer of the Company since December 2010 and Senior Vice President of the Company prior thereto. Executive Vice President of Commerce Bank since May 2003. Executive Vice President of the Company since February 2012 and Senior Vice President of the Company prior thereto. Executive Vice President of Commerce Bank since January 2016 and Senior Vice President of Commerce Bank prior thereto. Executive Vice President of the Company since January 2018 and Senior Vice President of the Company prior thereto. Community President and Chief Executive Officer of Commerce Bank since January 2018 and Senior Vice President of Commerce Bank prior thereto. Executive Vice President of the Company since April 2015, and Community President and Chief Executive Officer of Commerce Bank since January 2016. Prior to his employment with Commerce Bank in March 2015, he was employed at a Midwest regional bank where he served as managing director and head of Regional Banking. Patricia R. Kellerhals, 62 Senior Vice President of the Company since February 2016 and Vice President of the Company prior thereto. Executive Vice President of Commerce Bank since 2005. David W. Kemper, 69 John W. Kemper, 42 Charles G. Kim, 59 Douglas D. Neff, 51 Paula S. Petersen, 53 David L. Roller, 49 Paul A. Steiner, 48 Executive Chairman of the Company and of the Board of Directors of the Company since August 2018. Prior thereto, he was Chief Executive Officer of the Company and Chairman of the Board of Directors of the Company. He was President of the Company from April 1982 until February 2013. He is the brother of Jonathan M. Kemper (a former Vice Chairman of the Company), and father of John W. Kemper, President and Chief Executive Officer of the Company. Chief Executive Officer of the Company and Chairman and Chief Executive Officer of Commerce Bank since August 2018. Prior thereto, he was Chief Operating Officer of the Company. President of the Company since February 2013 and President of Commerce Bank since March 2013. Member of Board of Directors since September 2015. He is the son of David W. Kemper, Executive Chairman of the Company and nephew of Jonathan M. Kemper (a former Vice Chairman of the Company). Chief Financial Officer of the Company since July 2009. Executive Vice President of the Company since April 1995 and Executive Vice President of Commerce Bank since January 2004. Prior thereto, he was Senior Vice President of Commerce Bank. Senior Vice President of the Company since January 2019 and Chairman and Chief Executive Officer of Commerce Bank Southwest Region since 2013. Senior Vice President of the Company since July 2016 and Executive Vice President of Commerce Bank since March 2012. Senior Vice President of the Company since July 2016 and Senior Vice President of Commerce Bank since September 2010. Controller of the Company since April 2019. He is also Controller of the Company's subsidiary bank, Commerce Bank. Assistant Controller and Director of Tax of the Company prior thereto. 14 PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Commerce Bancshares, Inc. Common Stock Data Commerce Bancshares, Inc. common shares are listed on the Nasdaq Global Select Market (NASDAQ) under the symbol CBSH. The Company had 3,557 common shareholders of record as of December 31, 2019. Certain of the Company's shares are held in "nominee" or "street" name and the number of beneficial owners of such shares is approximately 92,000. Performance Graph The following graph presents a comparison of Company (CBSH) performance to the indices named below. It assumes $100 invested on December 31, 2014 with dividends invested on a cumulative total shareholder return basis. Commerce (CBSH) 100.00 104.77 152.23 156.84 168.70 217.13 NASDAQ OMX Global-Bank 100.00 102.21 129.34 153.13 128.02 175.61 S&P 500 100.00 101.37 113.46 138.22 132.15 173.74 2014 2015 2016 2017 2018 2019 The Company has a long history of paying dividends. 2019 marked the 51st consecutive year of growth in our regular common dividend, and the Company has also issued an annual 5% common stock dividend for the past 26 years. However, payment of future dividends is within the discretion of the Board of Directors and will depend, among other factors, on earnings, capital requirements, and the operating and financial condition of the Company. The Board of Directors makes the dividend determination quarterly. 15 The following table sets forth information about the Company’s purchases of its $5 par value common stock, its only class of common stock registered pursuant to Section 12 of the Exchange Act, during the fourth quarter of 2019. Period October 1—31, 2019 November 1—30, 2019 December 1—31, 2019 Total 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 92,536 103,858 470,928 667,322 $64.05 $66.31 $84.13 $78.57 92,536 103,858 470,928 667,322 2,533,045 4,901,886 4,430,958 4,430,958 The Company’s stock purchases shown above were made under authorizations by the Board of Directors. December purchases include 438,009 shares purchased under the accelerated share repurchase ("ASR") program discussed in Note 14 to the consolidated financial statements. Under the most recent authorization in November 2019 of 5,000,000 shares, 4,430,958 shares remained available for purchase at December 31, 2019. Item 6. SELECTED FINANCIAL DATA The required information is set forth below in Item 7. Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This report may contain “forward-looking statements” that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of Commerce Bancshares, Inc. and its subsidiaries (the "Company"). This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as “expects”, “anticipates”, “believes”, “estimates”, variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include the risk factors identified in Item 1a Risk Factors and the following: changes in economic conditions in the Company’s market area; changes in policies by regulatory agencies, governmental legislation and regulation; fluctuations in interest rates; changes in liquidity requirements; demand for loans in the Company’s market area; changes in accounting and tax principles; estimates made on income taxes; failure of litigation settlement agreements to become final in accordance with their terms; and competition with other entities that offer financial services. Overview The Company operates as a super-community bank and offers a broad range of financial products to consumer and commercial customers, delivered with a focus on high-quality, personalized service. It is the largest bank holding company headquartered in Missouri, with its principal offices in Kansas City and St. Louis, Missouri. Customers are served from 316 locations in Missouri, Kansas, Illinois, Oklahoma and Colorado and commercial offices throughout the nation's midsection. A variety of delivery platforms are utilized, including an extensive network of branches and ATM machines, full-featured online banking, a mobile application, and a centralized contact center. The core of the Company’s competitive advantage is its focus on the local markets in which it operates, its offering of competitive, sophisticated financial products, and its concentration on relationship banking and high-touch service. In order to enhance shareholder value, the Company targets core revenue growth. To achieve this growth, the Company focuses on strategies that will expand new and existing customer relationships, offer opportunities for controlled expansion in additional markets, utilize improved technology, and enhance customer satisfaction. 16 Various indicators are used by management in evaluating the Company’s financial condition and operating performance. Among these indicators are the following: • • • • • Net income and earnings per share — Net income attributable to Commerce Bancshares, Inc. was $421.2 million, a decrease of 2.8% compared to the previous year. The return on average assets was 1.67% in 2019, and the return on average common equity was 14.06%. Diluted earnings per share decreased 0.6% in 2019 compared to 2018. Total revenue — Total revenue is comprised of net interest income and non-interest income. Total revenue in 2019 increased $20.8 million, or 1.6% over 2018, driven by growth in non-interest income of $23.4 million. Growth in non- interest income resulted principally from an increase in trust fees and a one-time gain of $11.5 million resulting from the sale of our corporate trust business. Non-interest expense — Total non-interest expense increased 4.0% this year compared to 2018, mainly due to higher expense for salaries and benefits. Asset quality — Net loan charge-offs totaled $49.7 million in 2019, an increase of $7.4 million over those recorded in 2018, and averaged .35% of loans compared to .30% in the previous year. Total non-performing assets, which include non-accrual loans and foreclosed real estate, amounted to $10.6 million at December 31, 2019, compared to $13.9 million at December 31, 2018, and represented .07% of loans outstanding at December 31, 2019. Shareholder return — During 2019, the Company paid cash dividends of $.99 per share on its common stock, representing an increase of 16.1% over the previous year, and paid dividends of 6% on its preferred stock. In 2019, the Company issued its 26th consecutive annual 5% common stock dividend, and in January 2020, the Company's Board of Directors authorized an increase of 8.9% in the common cash dividend. The Company purchased 4,670,114 shares of treasury stock in 2019. Total shareholder return, including the change in stock price and dividend reinvestment, was 16.8%, 13.7%, and 9.6% over the past 5, 10, and 15 years, respectively. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes. The historical trends reflected in the financial information presented below are not necessarily reflective of anticipated future results. Key Ratios (Based on average balances) Return on total assets Return on common equity Equity to total assets Loans to deposits (1) Non-interest bearing deposits to total deposits Net yield on interest earning assets (tax equivalent basis) (Based on end of period data) Non-interest income to revenue (2) Efficiency ratio (3) Tier I common risk-based capital ratio (4) Tier I risk-based capital ratio (4) Total risk-based capital ratio (4) Tier I leverage ratio (4) Tangible common equity to tangible assets ratio (5) Common cash dividend payout ratio (1) Includes loans held for sale. (2) Revenue includes net interest income and non-interest income. 2019 2018 2017 2016 2015 1.67% 14.06 12.20 71.54 32.03 3.48 38.98 56.87 13.93 14.66 15.48 11.38 10.99 27.52 1.76% 16.16 11.24 69.27 33.43 3.53 37.83 55.58 14.22 14.98 15.82 11.52 10.45 23.61 1.28% 12.46 10.53 66.18 34.85 3.20 39.88 62.18 12.65 13.41 14.35 10.39 9.84 29.52 1.12% 11.33 10.16 63.71 34.67 3.04 41.09 61.04 11.62 12.38 13.32 9.55 8.66 32.69 1.11% 11.43 10.00 61.44 35.12 2.94 41.40 61.42 11.52 12.33 13.28 9.23 8.48 33.35 (3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue. (4) Risk-based capital information was prepared under Basel III requirements, which were effective January 1, 2015. (5) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization. It provides a meaningful basis for period to period and company to company comparisons, and also assist regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP. 17 The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets. (Dollars in thousands) Total equity Less non-controlling interest Less preferred stock Less goodwill Less core deposit premium Total tangible common equity (a) Total assets Less goodwill Less core deposit premium Total tangible assets (b) Tangible common equity to tangible assets ratio (a)/(b) 2019 $ 3,138,472 3,788 144,784 138,921 1,785 $ 2,849,194 $ 26,065,789 138,921 1,785 $ 25,925,083 2018 $ 2,937,149 5,851 144,784 138,921 2,316 $ 2,645,277 $ 25,463,842 138,921 2,316 $ 25,322,605 2017 $ 2,718,184 1,624 144,784 138,921 2,965 $ 2,429,890 $ 24,833,415 138,921 2,965 $ 24,691,529 2016 $ 2,501,132 5,349 144,784 138,921 3,841 $ 2,208,237 $ 25,641,424 138,921 3,841 $ 25,498,662 2015 $ 2,367,418 5,428 144,784 138,921 5,031 $ 2,073,254 $ 24,604,962 138,921 5,031 $ 24,461,010 10.99% 10.45% 9.84% 8.66% 8.48% Selected Financial Data (In thousands, except per share data) Net interest income Provision for loan losses Non-interest income Investment securities gains (losses), net Non-interest expense 2019 2018 2017 2016 2015 $ 821,293 $ 50,438 524,703 3,626 767,398 823,825 $ 42,694 501,341 (488) 737,821 733,679 $ 45,244 461,263 25,051 744,343 680,049 $ 36,318 446,556 (53) 689,229 Net income attributable to Commerce Bancshares, Inc. Net income available to common shareholders Net income per common share-basic* Net income per common share-diluted* Cash dividends on common stock Cash dividends per common share* Market price per common share* Book value per common share* Common shares outstanding* Total assets Loans, including held for sale Investment securities Deposits Long-term debt Equity Non-performing assets 421,231 412,231 3.59 3.58 113,466 .990 67.94 26.70 112,132 26,065,789 14,751,626 8,741,888 20,520,415 2,418 3,138,472 10,585 433,542 424,542 3.61 3.60 100,238 .853 53.69 23.93 116,685 25,463,842 14,160,992 8,698,666 20,323,659 8,702 2,937,149 13,949 319,383 310,383 2.63 2.62 91,619 .777 50.65 21.89 117,543 24,833,415 14,005,072 8,893,307 20,425,446 1,758 2,718,184 12,664 275,391 266,391 2.26 2.26 87,070 .740 49.94 20.06 117,454 25,641,424 13,427,192 9,770,986 21,101,095 102,049 2,501,132 14,649 * Restated for the 5% stock dividend distributed in December 2019. 18 634,320 28,727 422,444 6,320 650,792 263,730 254,730 2.11 2.10 84,961 .705 35.00 18.81 118,179 24,604,962 12,444,299 9,901,680 19,978,853 103,818 2,367,418 29,394 Results of Operations (Dollars in thousands) Net interest income Provision for loan losses Non-interest income Investment securities gains (losses), net Non-interest expense Income taxes Non-controlling interest expense Net income attributable to Commerce Bancshares, Inc. Preferred stock dividends Net income available to common shareholders N.M. - Not meaningful. $ Change % Change '19-'18 '18-'17 '19-'18 '18-'17 $ 2019 821,293 $ (50,438) 524,703 3,626 (767,398) (109,074) 2018 823,825 $ (42,694) 501,341 (488) (737,821) (105,949) 2017 733,679 $ (45,244) 461,263 25,051 (744,343) (110,506) (2,532) $ 7,744 23,362 4,114 29,577 3,125 90,146 (2,550) 40,078 (25,539) (6,522) (4,557) (.3)% 18.1 4.7 N.M. 4.0 2.9 (1,481) (4,672) (517) (3,191) 4,155 (68.3) 421,231 (9,000) 433,542 (9,000) 319,383 (9,000) (12,311) — 114,159 — (2.8) N.M. 12.3% (5.6) 8.7 N.M. (.9) (4.1) N.M. 35.7 N.M. $ 412,231 $ 424,542 $ 310,383 $ (12,311) $ 114,159 (2.9)% 36.8% Net income attributable to Commerce Bancshares, Inc. (net income) for 2019 was $421.2 million, a decrease of $12.3 million, or 2.8%, compared to $433.5 million in 2018. Diluted income per common share was $3.58 in 2019, compared to $3.60 in 2018. The decline in net income resulted from a decrease of $2.5 million in net interest income, as well as increases of $29.6 million in non-interest expense, $7.7 million in the provision for loan losses and $3.1 million in income taxes. These decreases in net income were partly offset by increases of $23.4 million in non-interest income and $4.1 million in investment securities gains, coupled with a decrease of $3.2 million in non-controlling interest expense. The return on average assets was 1.67% in 2019 compared to 1.76% in 2018, and the return on average common equity was 14.06% in 2019 compared to 16.16% in 2018. At December 31, 2019, the ratio of tangible common equity to assets increased to 10.99%, compared to 10.45% at year end 2018. During 2019, net interest income declined mainly due to an increase of $38.0 million in interest expense on interest-bearing deposits and borrowings, largely due to higher rates paid, while lower average balances on investment securities also resulted in lower interest income this year. These decreases in interest income were partly offset by growth of $38.3 million in interest earned on loans, resulting from higher loan yields and average balances. Total rates earned on average earning assets grew 10 basis points this year, while funding costs for deposits and borrowings increased 23 basis points. The provision for loan losses totaled $50.4 million, an increase of $7.7 million over the previous year and exceeded net loan charge-offs by $750 thousand. Net loan charge- offs increased $7.4 million in 2019 compared to 2018, mainly due to higher credit card and business loan net charge-offs. The increase in business loan net charge-offs was primarily the result of a loan charge-off related to a single leasing customer. Non-interest income grew 4.7% in 2019, mainly due to growth in trust fees, loan fees and sales, and gains on sales of assets. Net investment securities gains of $3.6 million were recorded in 2019 and were mainly comprised of net gains realized on sales of equity investments. Non-interest expense grew $29.6 million in 2019 compared to 2018, largely due to higher salaries and benefits and data processing and software expense, which increased $24.7 million and $6.9 million, respectively. Net income attributable to Commerce Bancshares, Inc. for 2018 was $433.5 million, an increase of $114.2 million, or 35.7%, compared to $319.4 million in 2017. Diluted income per common share increased 37.0% to $3.60 in 2018, compared to $2.62 in 2017. The growth in net income resulted from increases of $90.1 million in net interest income and $40.1 million in non-interest income, as well as decreases of $6.5 million in non-interest expense, $4.6 million in income tax expense and $2.6 million in the provision for loan losses. These increases in net income were partly offset by a $25.5 million decrease in investment securities gains. The return on average assets was 1.76% in 2018 compared to 1.28% in 2017, and the return on average common equity was 16.16% in 2018 compared to 12.46% in 2017. At December 31, 2018, the ratio of tangible common equity to assets increased to 10.45%, compared to 9.84% at year end 2017. As compared to 2017, the increase in net interest income in 2018 resulted mainly from increased rates on the Company’s loan and investment portfolios, partially offset by higher rates paid on interest-bearing deposits and borrowings. Total rates earned on average earning assets grew 44 basis points in 2018, while funding costs for deposits and borrowings increased 15 basis points. Non-interest income grew 8.7% in 2018, primarily from growth in bank card, trust and deposit fee income. Investment securities net losses in 2018 were mainly comprised of net losses on sales of available for sale debt securities of $9.7 million and an $8.9 million adjustment to recognize dividend income on a liquidated equity security. These losses were offset by realized and unrealized net gains on the Company’s portfolio of private equity securities of $13.8 million, as well as gains of $4.3 million on sales and 19 fair value adjustments on equity securities. Additionally, net securities gains in 2017 included a gain of $32.0 million on the appreciation of securities donated to a related foundation, which did not recur in 2018. Non-interest expense declined $6.5 million in 2018 compared to 2017, with the decrease resulting from a $32.0 million donation of appreciated securities to a charitable organization in 2017 that did not recur in 2018. This decrease in non-interest expense was partly offset by increases in salaries and benefits, data processing and software, and marketing expense, which increased $19.9 million, $5.0 million, and $4.2 million, respectively. The provision for loan losses totaled $42.7 million, a decrease of $2.6 million from 2017. The Company distributed a 5% stock dividend for the 26th consecutive year on December 18, 2019. All per share and average share data in this report has been restated for the 2019 stock dividend. Critical Accounting Policies The Company's consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 to the consolidated financial statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations which may significantly affect the Company's reported results and financial position for the current period or future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Current economic conditions may require the use of additional estimates, and some estimates may be subject to a greater degree of uncertainty due to the current instability of the economy. The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan losses and fair value measurement. Allowance for Loan Losses The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects the Company's estimate of the losses inherent in the loan portfolio at any point in time. While these estimates are based on substantive methods for determining allowance requirements, actual outcomes may differ significantly from estimated results, especially when determining allowances for business, construction and business real estate loans. These loans are normally larger and more complex, and their collection rates are harder to predict. Personal banking loans, including personal real estate, credit card and consumer loans, are individually smaller and perform in a more homogenous manner, making loss estimates more predictable. Further discussion of the methodology used in establishing the allowance is provided in the Allowance for Loan Losses section of Item 7 and in Note 1 to the consolidated financial statements. Fair Value Measurement Investment securities, including available-for-sale, trading, equity and other securities, residential mortgage loans held for sale, derivatives and deferred compensation plan assets and associated liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, other assets and liabilities may be recorded at fair value on a nonrecurring basis, such as impaired loans that have been reduced based on the fair value of the underlying collateral, other real estate (primarily foreclosed property), non-marketable equity securities and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve write-downs of individual assets or application of lower of cost or fair value accounting. Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability. Fair value measurement and disclosure guidance establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The fair value hierarchy, the extent to which fair value is used to measure assets and liabilities and the valuation methodologies and key inputs used are discussed in Note 17 on Fair Value Measurements. At December 31, 2019, assets and liabilities measured using observable inputs that are classified as either Level 1 or Level 2 represented 98.8% and 99.1% of total assets and liabilities recorded at fair value, respectively. Valuations generated from model- based techniques that use at least one significant assumption not observable in the market are considered Level 3, and the Company's Level 3 assets totaled $104.6 million, or 1.2% of total assets recorded at fair value on a recurring basis. Unobservable assumptions reflect estimates of assumptions market participants would use in pricing the asset or liability. Fair value measurements for assets and liabilities where limited or no observable market data exists often involves significant judgments about assumptions, such as determining an appropriate discount rate that factors in both liquidity and risk premiums, and in many cases may not reflect amounts exchanged in a current sale of the financial instrument. In addition, changes in market conditions may reduce the availability 20 of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, the Company would use valuation techniques requiring more management judgment to estimate the appropriate fair value. Net Interest Income Net interest income, the largest source of revenue, results from the Company’s lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest bearing liabilities. The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate. 2019 Change due to Average Volume Average Rate Total 2018 Change due to Average Volume Average Rate (In thousands) Interest income, fully taxable equivalent basis Loans: Business Real estate- construction and land Real estate - business Real estate - personal Consumer Revolving home equity Consumer credit card Total interest on loans Loans held for sale Investment securities: U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Mortgage-backed securities Asset-backed securities Other securities Total interest on investment securities Federal funds sold and short-term securities purchased under agreements to resell Long-term securities purchased under agreements to resell Interest earning deposits with banks Total interest income Interest expense Interest bearing deposits: Savings Interest checking and money market Certificates of deposit of less than $100,000 Certificates of deposit of $100,000 and over Federal funds purchased and securities sold under agreements to repurchase Other borrowings Total interest expense Net interest income, fully taxable equivalent basis $ 9,730 $ (2,961) 5,199 3,261 (3,541) (979) (475) 10,234 (33) (1,667) (2,319) (5,766) 10,400 (1,953) (7,684) (8,989) (480) 1,018 (71) 1,679 57 (369) (16) 4,336 7,741 $ 3,223 4,920 1,978 6,881 1,670 1,960 28,373 (56) 915 778 1,261 1,720 5,208 (6,054) 3,828 17,471 $ 262 10,119 5,239 3,340 691 1,485 38,607 (89) (752) (1,541) (4,505) 12,120 3,255 (13,738) (5,161) 16 (464) (1,001) 536 31,696 (9) 12,230 3,169 7,951 17 465 33,375 48 11,861 3,153 12,287 Total 30,156 12,125 15,507 5,098 8,009 1,997 3,940 76,832 298 2,023 (1,223) (19,206) 22,063 (2,534) 12,116 13,239 25,921 $ 8,511 13,870 2,333 9,027 2,732 984 63,378 144 1,877 1,108 (8,022) 12,132 8,517 11,382 26,994 184 289 255 2,804 93,759 441 4,010 95,109 4,235 $ 3,614 1,637 2,765 (1,018) (735) 2,956 13,454 154 146 (2,331) (11,184) 9,931 (11,051) 734 (13,755) 105 186 1,206 1,350 57 328 (264) (2,393) (65) 10,174 834 6,192 (8) 10,502 570 3,799 9,826 (3,041) 21,648 73,461 4,985 920 9,913 (8,234) $ 4,775 (13) 28,103 3,593 $ 9,760 907 38,016 (4,641) $ 48 (3,041) (5,265) 6,615 $ 9,778 — 26,913 66,846 $ $ 21 Net interest income totaled $821.3 million in 2019, decreasing $2.5 million compared to $823.8 million in 2018. On a tax equivalent (T/E) basis, net interest income totaled $835.4 million, and decreased $4.6 million from 2018. This decrease included combined growth of $38.0 million in interest expense on deposits and borrowings, due to higher average rates paid and higher average balances. In addition, interest earned on investment securities decreased $5.2 million, mainly due to lower average balances, while loan interest income (T/E) grew $38.6 million due to higher rates earned and higher average balances. The net yield on earning assets (T/E) was 3.48% in 2019 compared with 3.53% in 2018. During 2019, loan interest income (T/E) grew $38.6 million over 2018 mainly due to higher rates earned coupled with increased average balances for business, business real estate and personal real estate loan categories. The average tax equivalent rate earned on the loan portfolio increased 18 basis points to 4.71% in 2019 compared to 4.53% in 2018. In addition, average loan balances increased 2.1%, or $298.6 million, this year. Increased interest of $17.5 million earned on business loans was the main driver of overall higher loan interest income, due to growth of $251.1 million in average business loan balances and a 16 basis point increase in the average rate. While higher rates also contributed to the increase in interest income, rates were impacted by actions taken by the Federal Reserve during the second half of 2019 to lower short-term interest rates, as many of these loans contain variable interest rate terms. Business real estate interest was higher by $10.1 million as a result of an increase in average balances of $121.2 million, along with an increase in the average rate of 17 basis points. Personal real estate loan interest income increased $5.2 million and resulted from growth in average balances of $84.9 million and a nine basis point increase in the average rate earned. Interest on consumer loans increased $3.3 million as the average rate grew 36 basis points, but was partly offset by a decline in average balances of $79.9 million, or 4.0%. Interest on consumer credit card loans grew $1.5 million over the prior year as the average rate earned increased 26 basis points, while average balances declined $4.0 million. Tax equivalent interest income on total investment securities decreased $5.2 million during 2019, as average balances declined $74.4 million and the average rate earned decreased three basis points. The average rate on the total investment portfolio was 2.81% in 2019 compared to 2.84% in 2018, while the average balance of the total investment securities portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $8.7 billion in 2019 compared to an average balance of $8.8 billion in 2018. The decrease in interest income was mainly due to lower interest and dividend income earned on equity and other securities, coupled with decreases in interest earned on state and municipal obligations, government-sponsored enterprise (GSE) obligations and U.S. government securities. Interest income on equity securities decreased $10.0 million, due to the receipt of $8.9 million in dividend income in the second quarter of 2018, which was related to a liquidated equity security that was carried at fair value. Interest on other securities decreased $3.9 million mainly due to receipts of non-recurring equity investment dividends in 2018, but was partly offset by higher average balances. Interest income on state and municipal obligations decreased $4.5 million, due to lower average balances of $189.7 million, partly offset by an increase of 10 basis points in the average rate earned. Interest income on GSE's decreased $1.5 million, due to a decline in average balances of $117.1 million, partly offset by an increase of 40 basis points in the average rate earned. Interest earned on U.S. government securities fell $752 thousand and was mainly impacted by a decline of $3.0 million in inflation income on treasury inflation-protected securities (TIPS). In addition, average balances declined $70.6 million, while the average rate earned increased 10 basis points. Partly offsetting these decreases in interest income was growth of $12.1 million and $3.3 million in interest earned on mortgage-backed and asset-backed securities, respectively. The growth in mortgage-backed interest resulted mainly from an increase of $391.0 million in average balances, coupled with a three basis point increase in the average rate earned. Asset-backed securities interest increased due to growth of 38 basis points in the average rate earned, partly offset by a decline of $83.1 million in average balances. During 2019, interest expense on deposits increased $27.3 million over 2018 and resulted mainly from a 20 basis point increase in the overall average rate paid on deposits. Interest expense on interest checking and money market accounts increased $11.9 million due to higher rates paid, which rose 11 basis points. The growth in interest expense on certificates of deposit was due to both higher rates paid on all certificates of deposit and higher average balances in certificates of deposit over $100,000, which grew $281.9 million, or 25.3%. The overall rate paid on total deposits increased from .34% in 2018 to .54% in the current year. Interest expense on borrowings increased $10.7 million due to both higher rates paid and higher average balances of federal funds purchased and customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .67% in 2019, compared to .44% in 2018. Net interest income totaled $823.8 million in 2018, increasing $90.1 million, or 12.3%, compared to $733.7 million in 2017. On a tax equivalent (T/E) basis, net interest income totaled $840.1 million, and increased $73.5 million over 2017. This increase included growth of $76.8 million in loan interest income (T/E), resulting from higher average balances and higher rates earned. In addition, interest earned on investment securities increased $13.2 million, mainly due to higher rates earned and the receipt of $8.9 million in dividend income during the second quarter of 2018, as mentioned above. Interest expense on deposits and borrowings combined was $65.4 million and increased $21.6 million, mostly due to higher rates paid. The net yield on earning assets (T/E) was 3.53% in 2018 compared with 3.19% in 2017. 22 During 2018, loan interest income (T/E) grew $76.8 million over 2017 mainly due to higher rates earned coupled with increased average balances for most loan categories. The average tax equivalent rate earned on the loan portfolio increased 46 basis points to 4.53% in 2018 compared to 4.07% in 2017. The higher rates earned on the loan portfolio in 2018 were partly related to short- term increases in interest rates, which enabled much of the Company's loan portfolio to re-price higher than 2017. In addition, average loan balances increased 2.3%, or $314.4 million, in 2018. Increased interest on business loans was the main driver of overall higher loan interest income, mostly due to higher rates, as many of these loans contain variable interest rate terms. Average business loan balances also grew $131.0 million in 2018. Increases in average balances and rates on construction and business real estate loans drove interest income growth a combined $27.6 million in 2018. Interest on personal real estate loans increased $5.1 million as average balances were higher by $74.1 million or 3.7%, and the average rate grew 11 basis points. Interest on consumer loans grew $8.0 million over 2017 as the average rate earned increased 45 basis points, but was partly offset by a decline in average balances of $25.6 million. Consumer credit card loan interest was higher by $3.9 million due to growth of $24.9 million in average balances, coupled with a 13 basis point increase in the average rate earned. Tax equivalent interest income on total investment securities increased $13.2 million during 2018, as the average rate earned increased 33 basis points, while average balances declined $661.6 million. The average rate on the total investment portfolio was 2.84% in 2018 compared to 2.51% in 2017, while the average balance of the total investment securities portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $8.8 billion in 2018 compared to an average balance of $9.5 billion in 2017. The increase in interest income was mainly due to higher interest earned on mortgage-backed securities, coupled with increased interest and dividend income on equity and other securities. These increases were partly offset lower interest earned on state and municipal securities. Interest income on mortgage-backed securities increased $22.1 million, due to an increase in average balances of $419.0 million and an increase of 29 basis points in the average rate earned. Interest income on equity securities increased due to dividend income of $8.9 million recorded in 2018 (mentioned previously), while interest on other securities increased $1.9 million due to an increase in receipts of non-recurring equity investment dividends during 2018. Interest earned on U.S. government securities grew $2.0 million, which included growth of $2.1 million in inflation-adjusted interest on TIPS. Partly offsetting these increases in interest income were declines of $19.2 million, $2.5 million and $1.2 million in interest earned on state and municipal, asset-backed and GSE securities, respectively. The decline in state and municipal interest resulted from a decline of $310.0 million in average balances coupled with a lower tax equivalent rate due to tax law changes in 2018. Asset-backed securities interest decreased mainly due to a decline of $627.9 million in average balances, partly offset by higher average rates. Interest earned on GSE's declined mainly due to lower average balances, partly offset by growth in the average rate. Interest earned on deposits with banks increased $4.0 million mainly due to an 88 basis point increase in average rates earned and an increase of $112.7 million in average balances. During 2018, interest expense on deposits increased $14.9 million over 2017 and resulted mainly from an 11 basis point increase in the overall average rate paid on deposits. Interest expense on interest checking and money market accounts increased $10.5 million due to higher rates paid, which rose nine basis points. The growth in interest expense on certificates of deposit was largely due to higher rates paid on certificates of deposit over $100,000, which increased 54 basis points, partly offset by lower total average certificate of deposit balances, which fell $363.3 million, or 17.5%. The overall rate paid on total deposits increased from .23% in 2017 to .34% in 2018. Interest expense on borrowings increased due to higher rates paid on customer repurchase agreements, partly offset by the elimination of all Federal Home Loan Bank (FHLB) borrowings in 2018. The overall average rate incurred on all interest bearing liabilities was .44% in 2018, compared to .29% in 2017. Provision for Loan Losses The provision for loan losses is recorded to bring the allowance for loan losses to a level deemed adequate by management based on the factors mentioned in the “Allowance for Loan Losses” section of this discussion. The provision for loan losses totaled $50.4 million in 2019, an increase of $7.7 million from the 2018 provision of $42.7 million. In 2018, the provision exceeded net loan charge-offs by $400 thousand, increasing the allowance for loan losses by the same amount, whereas the 2019 provision was $750 thousand greater than net loan charge-offs for the year. Net loan charge-offs for the year totaled $49.7 million and increased $7.4 million compared to $42.3 million in 2018. The increase in net loan charge-offs over the previous year was mainly the result of higher net charge-offs on credit card loans and business loans, which increased $4.8 million and $2.0 million, respectively. In addition, personal real estate loan net charge-offs increased $391 thousand, while construction loan and business real estate loan net recoveries decreased $518 thousand and $318 thousand, respectively. Partly offsetting these increases in net charge-offs were lower net charge-offs on consumer loans, which decreased $732 thousand from the prior year. The allowance for loan losses totaled $160.7 million at December 31, 2019, an increase of $750 thousand compared to the prior year, and represented 1.09% of outstanding loans at year end 2019, compared to 1.13% at December 31, 2018. 23 Non-Interest Income (Dollars in thousands) Bank card transaction fees Trust fees Deposit account charges and other fees Capital market fees Consumer brokerage services Loan fees and sales Other Total non-interest income Non-interest income as a % of total revenue* Total revenue per full-time equivalent employee $ $ $ 2019 167,879 155,628 95,983 8,146 15,804 15,767 65,496 524,703 39.0% 277.1 $ $ $ 2018 171,576 147,964 94,517 7,721 15,807 12,723 51,033 501,341 37.8% 276.4 $ $ $ 2017 155,100 135,159 90,060 7,996 14,630 13,948 44,370 461,263 38.6% 248.9 * Total revenue is calculated as net interest income plus non-interest income. % Change '19-'18 '18-'17 (2.2)% 5.2 1.6 5.5 — 23.9 28.3 4.7 % 10.6% 9.5 4.9 (3.4) 8.0 (8.8) 15.0 8.7% The table below is a summary of net bank card transaction fees for the years ended December 31, 2019, 2018 and 2017, respectively. (Dollars in thousands) Net debit card fees Net credit card fees Net merchant fees Net corporate card fees 2019 2018 2017 '19-'18 '18-'17 % Change $ 40,025 $ 39,738 $ 14,177 19,289 94,388 12,965 19,233 99,640 35,636 14,576 20,069 84,819 0.7 % 9.3 .3 (5.3) (2.2)% 11.5% (11.1) (4.2) 17.5 10.6% Total bank card transaction fees $ 167,879 $ 171,576 $ 155,100 Non-interest income totaled $524.7 million, an increase of $23.4 million, or 4.7%, compared to $501.3 million in 2018. Bank card fees decreased $3.7 million, or 2.2%, from the prior year, largely due to a decline in net corporate card fees of $5.3 million. This decline was partly offset by growth in net credit card fees of $1.2 million and net debit card fees of $287 thousand. The decline in net corporate card from the prior year was due to lower interchange income and higher network and rewards expense, while the growth in net credit and debit card fees was mainly due to higher interchange income. Net credit card revenue also grew due to lower rewards expense. Trust fee income increased $7.7 million, or 5.2%, as a result of continued growth in private client trust fees (up 6.5%), which comprised 76.4% of trust fee income in 2019. The market value of total customer trust assets totaled $56.7 billion at year end 2019, which was an increase of 13.3% over year end 2018 balances. Deposit account fees increased $1.5 million, or 1.6%, mainly due to growth of $3.0 million in corporate cash management fees. This increase was partly offset by declines of $872 thousand in overdraft and return item fees and $636 thousand in deposit account service charges. In 2019, corporate cash management fees comprised 43.2% of total deposit fees, while overdraft fees comprised 31.9% of total deposit fees. Capital market fees grew $425 thousand, or 5.5%, compared to the prior year, while loan fees and sales increased $3.0 million, or 23.9%, mainly due to growth in mortgage banking revenue. Total mortgage banking revenue totaled $10.8 million in 2019 compared to $8.2 million in 2018 and increased as a result of higher loan originations in 2019. Other non-interest income increased $14.5 million, or 28.3%, mainly due to a one-time gain of $11.5 million resulting from the sale of the Company's corporate trust business in the fourth quarter of 2019. In addition, cash sweep commissions increased $2.7 million and higher gains of $2.4 million were recorded on sales of leased assets to customers upon lease termination. These increases were partly offset by gains of $6.6 million recorded on the sales of branch properties in 2018. During 2018, non-interest income increased $40.1 million, or 8.7%, to $501.3 million compared to $461.3 million in 2017. Bank card fees increased $16.5 million over 2017. This growth included increases of $4.1 million in net debit card fees and $14.8 million in net corporate card fees, partly offset by a decline of $1.6 million, or 11.1%, in net credit card fees, and $836 thousand, or 4.2%, in net merchant fees. Trust fee income increased $12.8 million, or 9.5%, as a result of growth in both private client (up 11.1%) and institutional trust (up 6.4%) fees. The market value of total customer trust assets totaled $50.0 billion at year end 2018, which was an increase of 2.7% over year end 2017 balances. Deposit account fees increased $4.5 million, or 4.9%, due to growth of $2.4 million in corporate cash management fees, $1.1 million in deposit account service charges and $892 thousand in overdraft and return item fees. Capital market fees declined $275 thousand, or 3.4%, due to lower sales volumes, while consumer brokerage services revenue increased $1.2 million, or 8.0%, mainly due to growth in advisory and fixed annuity fees. Loan fees and sales decreased $1.2 million in 2018 compared to 2017, mainly due to declines in mortgage banking revenue as a result of lower originations of fixed-rate loans in 2018. Other non-interest income increased $6.7 million, or 15.0%, over 2017 mainly due to gains of $6.6 million recorded on the sales of branch properties in 2018. In addition, cash sweep commissions, interest rate 24 swap fees, and fees from sales of tax credits increased $1.6 million, $2.1 million, and $1.6 million, respectively, over 2017. These increases were partly offset by lower gains of $1.1 million on sales of leased assets to customers upon lease termination. Investment Securities Gains (Losses), Net (In thousands) 2019 2018 2017 Net losses on sales of available for sale debt securities $ (214) $ (9,653) $ Net gains on sales of equity securities Fair value adjustments on equity securities Adjustment for dividend income on a liquidated equity investment Donations of equity securities Net gains (losses) on sales and fair value adjustments of private equity investments Other 3,262 344 — — 367 (133) 1,759 2,542 (8,917) — 13,849 (68) Total investment securities gains (losses), net $ 3,626 $ (488) $ (9,695) 10,643 — — 31,074 (6,332) (639) 25,051 Net gains and losses on investment securities during 2019, 2018 and 2017 are shown in the table above. Included in these amounts are gains and losses arising from sales of securities from the Company’s available for sale debt portfolio, including credit- related losses on debt securities identified as other-than-temporarily impaired. Also shown are gains and losses relating to private equity investments, which are primarily held by the Parent’s majority-owned private equity subsidiaries. These include fair value adjustments, in addition to gains and losses realized upon disposition. The portions of private equity investment gains and losses that are attributable to minority interests are reported as non-controlling interest in the consolidated statements of income, and resulted in expense of $348 thousand in 2019, compared to expense of $2.8 million in 2018 and income of $575 thousand in 2017. Net securities gains of $3.6 million were recorded in 2019, which included $214 thousand in net losses realized on bond sales resulting from the Company's sale of approximately $400 million (book value) of bonds, mainly municipal securities, treasuries and asset-backed securities. Net securities gains also included $3.3 million in gains from sales of equity investments and a $1.1 million in gain from the sale of a private equity investment. These gains were offset by net losses totaling $727 thousand of fair value adjustments on private equity investments, in addition to net gains totaling $344 thousand of fair value adjustments on equity investments. Net securities losses of $488 thousand were recorded in 2018, which included $9.7 million in net losses realized on bond sales resulting from the Company's sale of approximately $680 million (book value) of bonds, mainly mortgage and asset-backed securities. Net securities losses also included $8.9 million in losses related to an adjustment for dividend income on a liquidated investment. These losses were offset by net gains totaling $13.8 million of fair value adjustments on private equity investments, in addition to fair value adjustments and net gains realized on sales of equity investments. Net securities gains of $25.1 million were recorded in 2017, which included $31.1 million in gains realized upon donation of appreciated stock and $10.6 million in net gains realized on sales of equity securities. These gains were offset by net losses of $9.7 million realized on sales of available for sale debt securities, resulting from the Company's sale of approximately $790 million of bonds, mainly mortgage and asset-backed securities. Additionally, net securities losses included $499 thousand in net losses realized on the sale of private equity investments and $5.8 million in losses related to fair value adjustments on private equity investments. 25 Non-Interest Expense (Dollars in thousands) Salaries Employee benefits Net occupancy Equipment Supplies and communication Data processing and software Marketing Deposit insurance Community service Other 2019 2018 2017 '19-'18 '18-'17 $ 416,869 $ 396,897 $ 380,945 5.0% 4.2 % % Change 76,058 47,157 19,061 20,394 92,899 21,914 6,676 2,446 63,924 71,297 46,044 18,125 20,637 85,978 20,548 11,546 2,445 64,304 67,376 45,612 18,568 22,790 80,998 16,325 13,986 34,377 63,366 6.7 2.4 5.2 (1.2) 8.0 6.6 (42.2) — (0.6) 5.8 .9 (2.4) (9.4) 6.1 25.9 (17.4) (92.9) 1.5 Total non-interest expense $ 767,398 $ 737,821 $ 744,343 4.0% (.9)% Efficiency ratio Salaries and benefits as a % of total non-interest expense Number of full-time equivalent employees 56.9% 64.2% 4,858 55.6% 63.5% 4,795 62.2% 60.2% 4,800 Non-interest expense was $767.4 million in 2019, an increase of $29.6 million, or 4.0%, over the previous year. Salaries and benefits expense increased $24.7 million, or 5.3%, mainly due to higher full-time salaries and medical expense. Full-time salaries expense increased due to growth in consumer, commercial, information technology and other support unit salaries expense. Full- time equivalent employees totaled 4,858 at December 31, 2019, reflecting a 1.3% increase over 2018. Occupancy expense increased $1.1 million, or 2.4%, mainly due to higher real estate taxes and building depreciation expense, partly offset by a decline in utilities expense. Equipment expense increased $936 thousand, or 5.2%, due to higher equipment depreciation expense. Data processing and software expense increased $6.9 million, or 8.0%, primarily due to higher costs for service providers and higher bank card processing expense. Marketing expense increased $1.4 million, or 6.6%, due to increased marketing efforts to support consumer and healthcare banking initiatives, partly offset by bank card marketing initiatives in the prior year. Deposit insurance expense declined $4.9 million, or 42.2%, from the prior year mainly due to reduced FDIC insurance rates. In 2018, non-interest expense was $737.8 million, a decrease of $6.5 million, or .9%, from 2017. Salaries and benefits expense increased $19.9 million, or 4.4%, mainly due to higher full-time salaries and medical expense. Growth in salaries expense was driven by increases in full-time salaries in information technology, consumer, wealth, commercial and other support units, while incentive compensation expense declined slightly from 2017. Full-time equivalent employees totaled 4,795 at December 31, 2018, reflecting a small decrease from 2017. Occupancy expense increased $432 thousand, or .9%, mainly due to higher rent, utilities and building services expense, while equipment expense decreased $443 thousand, or 2.4%, due to lower equipment depreciation. Supplies and communication expense decreased $2.2 million, or 9.4%, mainly due to lower voice and data network costs. Data processing and software expense increased $5.0 million, or 6.1%, primarily due to higher third party processing costs. Marketing expense increased $4.2 million, or 25.9%, due to new bank card initiatives and consumer marketing initiatives in 2018. Deposit insurance expense declined $2.4 million, or 17.4%, from the prior year mainly due to decreases in average assets, a lower assessment rate, and the elimination of the special FDIC surcharge in the fourth quarter of 2018. Community service costs decreased $31.9 million due to the contribution of appreciated securities to a related foundation during 2017, which did not recur in 2018. Other non-interest expense increased $938 thousand, or 1.5%, over the prior year mainly due to higher costs for professional fees (up $2.4 million) and directors fees (up $936 thousand). These increases were partly offset by lower bank card fraud losses (down $961 thousand). Income Taxes Income tax expense was $109.1 million in 2019, compared to $105.9 million in 2018 and $110.5 million in 2017. The effective tax rate, including the effect of non-controlling interest, was 20.6% in 2019 compared to 19.6% in 2018 and 25.7% in 2017. Due to the enactment of new federal tax reform legislation in December 2017, federal tax rates were lowered from 35% to 21%, which lowered the Company's effective tax rate for years 2018 and after. The Company's effective tax rate in the years noted above were lower than the federal statutory rates mainly due to tax-exempt interest on state and local municipal obligations. Additional information about income tax expense is provided in Note 9 to the consolidated financial statements. 26 Financial Condition Loan Portfolio Analysis Classifications of consolidated loans by major category at December 31 for each of the past five years are shown in the table below. This portfolio consists of loans which were acquired or originated with the intent of holding to their maturity. Loans held for sale are separately discussed in a following section. A schedule of average balances invested in each loan category below is disclosed within the Average Balance Sheets section of Management's Discussion and Analysis of Financial Condition and Results of Operations below. (In thousands) Commercial: Business Real estate — construction and land Real estate — business Personal banking: Real estate — personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans 2019 2018 2017 2016 2015 Balance at December 31 $ 5,565,449 $ 5,106,427 $ 4,958,554 $ 4,776,365 $ 4,397,893 899,377 2,833,554 2,354,760 1,964,145 349,251 764,977 6,304 869,659 2,875,788 2,127,083 1,955,572 376,399 814,134 15,236 968,820 2,697,452 2,062,787 2,104,487 400,587 783,864 7,123 791,236 2,643,374 2,010,397 1,990,801 413,634 776,465 10,464 624,070 2,355,544 1,915,953 1,924,365 432,981 779,744 6,142 $ 14,737,817 $ 14,140,298 $ 13,983,674 $ 13,412,736 $ 12,436,692 The contractual maturities of business and real estate loan categories at December 31, 2019, and a breakdown of those loans between fixed rate and floating rate loans are as follows. (In thousands) Business Real estate — construction and land Real estate — business Real estate — personal Principal Payments Due In One Year or Less After One Year Through Five Years After Five Years Total $ 2,716,246 $ 2,369,727 $ 479,476 $ 5,565,449 525,774 560,407 178,280 327,895 1,703,895 525,640 45,708 569,252 1,650,840 899,377 2,833,554 2,354,760 Total business and real estate loans $ 3,980,707 $ 4,927,157 $ 2,745,276 $ 11,653,140 Business and real estate loans: Loans with fixed rates Loans with floating rates Total business and real estate loans 21.3% 78.7% 100.0% 49.2% 50.8% 100.0% 57.2% 42.8% 100.0% 41.6% 58.4% 100.0% 27 The following table shows loan balances at December 31, 2019, segregated between those with fixed interest rates and those with variable rates that fluctuate with an index. (In thousands) Business Real estate — construction and land Real estate — business Real estate — personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans Fixed Rate Loans Variable Rate Loans Total % Variable Rate Loans $ 1,950,291 $ 3,615,158 $ 5,565,449 65.0% 38,414 1,258,254 1,598,280 1,342,175 5,572 51,622 6,304 860,963 1,575,300 756,480 621,970 343,679 713,355 — 899,377 2,833,554 2,354,760 1,964,145 349,251 764,977 6,304 95.7 55.6 32.1 31.7 98.4 93.3 — $ 6,250,912 $ 8,486,905 $ 14,737,817 57.6% Total loans at December 31, 2019 were $14.7 billion, an increase of $597.5 million, or 4.2%, over balances at December 31, 2018. The growth in loans during 2019 occurred in the business, construction, personal real estate and consumer loan categories, while business real estate, consumer credit card, revolving home equity and overdraft loan categories declined from the prior year. Business loans increased $459.0 million, or 9.0%, reflecting growth in lease lending and commercial and industrial loans, while commercial card and tax-advantaged lending declined. Construction loans increased $29.7 million, or 3.4% mainly due to growth in commercial construction lending. Business real estate loans decreased $42.2 million, or 1.5%, due mainly to decreases in multi- family real estate lending. Personal real estate loans increased $227.7 million, or 10.8%, due to increased loan originations. The Company sells certain long-term fixed rate mortgage loans to the secondary market, and loan sales in 2019 totaled $239.0 million, compared to $193.5 million in 2018. Consumer loans increased $8.6 million, or .4%, mainly due to an increase in health service financing loans, offset by a decline in fixed rate home equity loans and the continued run off of marine and recreational vehicle loan balances. Consumer credit card loans decreased $49.2 million, or 6.0% and revolving home equity loan balances declined $27.1 million, or 7.2%, compared to balances at year end 2018. The Company currently holds approximately 28% of its loan portfolio in the Kansas City market, 29% in the St. Louis market, and 43% in other regional markets. The portfolio is diversified from a business and retail standpoint, with 63% in loans to businesses and 37% in loans to consumers. The Company believes a diversified approach to loan portfolio management, strong underwriting criteria and an aversion toward credit concentrations, from an industry, geographic and product perspective, have contributed to low levels of problem loans and loan losses experienced over the last several years. The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. At December 31, 2019, the balance of SNC loans totaled approximately $1.1 billion, with an additional $1.4 billion in unfunded commitments, compared to a balance of $830.2 million, with an additional $1.3 billion in unfunded commitments, at year end 2018. Commercial Loans Business Total business loans amounted to $5.6 billion at December 31, 2019 and include loans used mainly to fund customer accounts receivable, inventories, and capital expenditures. The business loan portfolio includes tax-advantaged loans and leases which carry tax free interest rates. These loans totaled $858.1 million at December 31, 2019, a decline of $44.4 million, or 4.9%, from December 31, 2018 balances. The business loan portfolio also includes direct financing and sales type leases totaling $584.3 million, which are used by commercial customers to finance capital purchases ranging from computer equipment to office and transportation equipment. These leases increased $26.9 million, or 4.8%, over 2018. The Company has outstanding energy-related loans totaling $197.4 million at December 31, 2019, which are further discussed within the Energy Lending section of the Risk Elements of Loan Portfolio section located within Management's Discussion and Analysis of Financial Condition and Results of Operations. Also included in the business portfolio are corporate card loans, which totaled $293.7 million at December 31, 2019 and are made in conjunction with the Company’s corporate card business for corporate trade purchases. Corporate card loans are made to corporate, non-profit and government customers nationwide, but have very short-term maturities, which limits credit risk. 28 Business loans, excluding corporate card loans, are made primarily to customers in the regional trade area of the Company, generally the central Midwest, encompassing the states of Missouri, Kansas, Illinois, and nearby Midwestern markets, including Iowa, Oklahoma, Colorado, Texas and Ohio. This portfolio is diversified from an industry standpoint and includes businesses engaged in manufacturing, wholesaling, retailing, agribusiness, insurance, financial services, public utilities, health care, and other service businesses. Emphasis is upon middle-market and community businesses with known local management and financial stability. Consistent with management’s strategy and emphasis upon relationship banking, most borrowing customers also maintain deposit accounts and utilize other banking services. Net loan charge-offs in this category totaled $4.1 million in 2019 (mainly representing a charge-off related to the bankruptcy of a single leasing customer), compared to net loan charge-offs of $2.1 million recorded in 2018. Non-accrual business loans were $7.5 million (.1% of business loans) at December 31, 2019 compared to $9.0 million at December 31, 2018. Real Estate-Construction and Land The portfolio of loans in this category amounted to $899.4 million at December 31, 2019, which was an increase of $29.7 million, or 3.4%, from the prior year and comprised 6.1% of the Company’s total loan portfolio. Commercial construction and land development loans totaled $705.1 million, or 78.4% of total construction loans at December 31, 2019. These loans increased $40.6 million from 2018 year end balances, driving the growth in the total construction portfolio. Commercial construction loans are made during the construction phase for small and medium-sized office and medical buildings, manufacturing and warehouse facilities, apartment complexes, shopping centers, hotels and motels, and other commercial properties. Commercial land development loans relate to land owned or developed for use in conjunction with business properties. Residential construction and land development loans at December 31, 2019 totaled $194.3 million, or 21.6% of total construction loans. A stable construction market has contributed to low loss rates on these loans, with net loan recoveries of $117 thousand and $635 thousand recorded in 2019 and 2018, respectively. Real Estate-Business Total business real estate loans were $2.8 billion at December 31, 2019 and comprised 19.2% of the Company’s total loan portfolio. This category includes mortgage loans for small and medium-sized office and medical buildings, manufacturing and warehouse facilities, multi-family housing, farms, shopping centers, hotels and motels, churches, and other commercial properties. The business real estate borrowers and/or properties are generally located in local and regional markets where Commerce does business, and emphasis is placed on owner-occupied lending (37.0% of this portfolio), which presents lower risk levels. Additional information about business real estate loans by borrower is disclosed within the Real Estate - Business Loans section of the Risk Elements of Loan Portfolio section located within Management's Discussion and Analysis of Financial Condition and Results of Operations. At December 31, 2019, balances of non-accrual loans amounted to $1.0 million, or less than .1% of business real estate loans, down from $1.7 million at year end 2018. The Company experienced net loan recoveries of $60 thousand in 2019, compared to net loan recoveries of $378 thousand in 2018. Personal Banking Loans Real Estate-Personal At December 31, 2019, there were $2.4 billion in outstanding personal real estate loans, which comprised 16.0% of the Company’s total loan portfolio. The mortgage loans in this category are mainly for owner-occupied residential properties. The Company originates both adjustable and fixed rate mortgage loans, and at December 31, 2019, 32% of the portfolio was comprised of adjustable rate loans, while 68% was comprised of fixed rate loans. The Company does not purchase any loans from outside parties or brokers, and has never maintained no-document products. Levels of mortgage loan origination activity increased in 2019, with originations of $871.6 million in 2019 compared to $563.0 million in 2018. Net loans retained by the Company increased $227.7 million, driven by growth in new loan production due to the lower interest rate environment. Loans sold to the secondary market increased $45.5 million. The loan sales were made under an initiative to originate and sell certain long term fixed rate loans, resulting in sales of $239.0 million in 2019 compared to $193.5 million in 2018. The Company has experienced lower loan losses in this category than many others in the industry and believes this is partly because of its conservative underwriting culture, stable markets, and the fact that it does not purchase loans from brokers. Net loan charge-offs in 2019 totaled $56 thousand, a slight increase from net loan recoveries of $335 thousand in 2018. Balances of non-accrual loans in this category decreased to $1.7 million at December 31, 2019, compared to $1.8 million at year end 2018. Consumer Consumer loans consist of private banking, automobile, motorcycle, marine, tractor/trailer, recreational vehicle (RV), fixed rate home equity, patient health care financing and other types of consumer loans. These loans totaled $2.0 billion at year end 2019. Approximately 46% of the consumer portfolio consists of automobile loans, 21% in private banking loans, 4% in motorcycle loans, 14% in fixed rate home equity loans, 10% in healthcare financing loans and 2% in marine and RV loans. Total consumer 29 loans increased $8.6 million at year end 2019 compared to year end 2018. Growth of $28.9 million in patient healthcare financing and $21.3 million in private banking loans was partially offset by declines of $14.7 million in fixed rate home equity loans, $15.6 million in marine and RV loans, and $17.5 million in motorcycle loans. Net charge-offs on total consumer loans were $8.6 million in 2019, compared to $9.3 million in 2018, averaging .4% and .5% of consumer loans in 2019 and 2018, respectively. Consumer loan net charge-offs included marine and RV loan net charge-offs of $393 thousand, which were 1.0% of average marine and RV loans in 2019, compared to 1.2% in 2018. Revolving Home Equity Revolving home equity loans, of which 98% are adjustable rate loans, totaled $349.3 million at year end 2019. An additional $750.9 million was available in unused lines of credit, which can be drawn at the discretion of the borrower. Home equity loans are secured mainly by second mortgages (and less frequently, first mortgages) on residential property of the borrower. The underwriting terms for the home equity line product permit borrowing availability, in the aggregate, generally up to 80% or 90% of the appraised value of the collateral property at the time of origination. Net charge-offs totaled $209 thousand in 2019, compared to $55 thousand in 2018. Consumer Credit Card Total consumer credit card loans amounted to $765.0 million at December 31, 2019 and comprised 5.2% of the Company’s total loan portfolio. The credit card portfolio is concentrated within regional markets served by the Company. The Company offers a variety of credit card products, including affinity cards, rewards cards, and standard and premium credit cards, and emphasizes its credit card relationship product, Special Connections. Approximately 40% of the households that own a Commerce credit card product also maintain a deposit relationship with the subsidiary bank. At December 31, 2019, approximately 93% of the outstanding credit card loan balances had a floating interest rate, compared to 92% in the prior year. Net charge-offs amounted to $35.4 million in 2019, an increase of $4.8 million over $30.6 million in 2018. Loans Held for Sale At December 31, 2019, loans held for sale were comprised of certain long-term fixed rate personal real estate loans and loans extended to students while attending colleges and universities. The personal real estate loans are carried at fair value and totaled $9.2 million at December 31, 2019. The student loans, carried at the lower of cost or fair value, totaled $4.6 million at December 31, 2019. Both of these portfolios are further discussed in Note 2 to the consolidated financial statements. Allowance for Loan Losses The Company has an established process to determine the amount of the allowance for loan losses which assesses the risks and losses inherent in its portfolio. This process provides an allowance consisting of a specific allowance component based on certain individually evaluated loans and a general component based on estimates of reserves needed for pools of loans. Loans subject to individual evaluation generally consist of business, construction, business real estate and personal real estate loans on non-accrual status, and include troubled debt restructurings that are on non-accrual status. These non-accrual loans are evaluated individually for impairment based on factors such as payment history, borrower financial condition and collateral. For collateral dependent loans, appraisals of collateral (including exit costs) are normally obtained annually but discounted based on date last received and market conditions. From these evaluations of expected cash flows and collateral values, specific allowances are determined. Loans which are not individually evaluated are segregated by loan type and sub-type and are collectively evaluated. These loans consist of commercial loans (business, construction and business real estate) which have been graded pass, special mention, or substandard, and also include all personal banking loans except personal real estate loans on non-accrual status. Collectively- evaluated loans include certain troubled debt restructurings with similar risk characteristics. Allowances for both personal banking and commercial loans use methods which consider historical and current loss trends, loss emergence periods, delinquencies, industry concentrations and unique risks. Economic conditions throughout the Company's markets, as monitored by Company credit officers, are also considered in the allowance determination process. The Company’s estimate of the allowance for loan losses and the corresponding provision for loan losses rest upon various judgments and assumptions made by management. In addition to past loan loss experience, various qualitative factors are considered, such as current loan portfolio composition and characteristics, trends in delinquencies, portfolio risk ratings, levels of non-performing assets, credit concentrations, collateral values, and prevailing regional and national economic conditions. The Company has internal credit administration and loan review staff that continuously review loan quality and report the results of their reviews and examinations to the Company’s senior management and Board of Directors. Such reviews also assist management in establishing the level of the allowance. In using this process and the information available, management must consider various 30 assumptions and exercise considerable judgment to determine the overall level of the allowance for loan losses. Because of these subjective factors, actual outcomes of inherent losses can differ from original estimates. The Company’s subsidiary bank continues to be subject to examination by several regulatory agencies, and examinations are conducted throughout the year, targeting various segments of the loan portfolio for review. Refer to Note 1 to the consolidated financial statements for additional discussion on the allowance and charge-off policies. At December 31, 2019, the allowance for loan losses was $160.7 million, compared to $159.9 million at December 31, 2018. The percentage of allowance to loans decreased to 1.09% at December 31, 2019 compared to 1.13% at year end 2018. Total loans delinquent 90 days or more and still accruing were $19.9 million at December 31, 2019, an increase of $3.2 million compared to year end 2018, mainly driven by a $3.5 million increase in construction loan delinquencies on one larger loan and a $955 thousand increase in consumer credit card loans delinquent 90 days or more, partly offset by a decrease of $1.6 million in consumer loan delinquencies. Non-accrual loans at December 31, 2019 were $10.2 million, a decrease of $2.3 million over the prior year, mainly due to a decrease in business and business real-estate non-accrual loans of $1.5 million and $685 thousand, respectively. The 2019 year end balance of non-accrual loans was comprised of $7.5 million of business loans, $1.0 million of business real estate loans and $1.7 million of personal real estate loans. Net loan charge-offs totaled $49.7 million in 2019, representing a $7.4 million increase compared to net charge-offs of $42.3 million in 2018. The increase was largely due to higher credit card loan and business loan charge-offs of $4.8 million and $2.0 million, respectively. In addition, personal real estate loan net charge-offs increased $391 thousand, while construction loan and business real estate net recoveries decreased $518 thousand and $318 thousand, respectively. Partly offsetting these increases in net charge-offs were lower net loan charge-offs of $732 thousand on consumer loans. Consumer credit card net charge-offs were 4.63% of average consumer credit card loans in 2019 compared to 3.98% in 2018. Consumer credit card loan net charge-offs as a percentage of total net charge-offs decreased to 71.3% in 2019 compared to 72.3% in 2018. Consumer loan net charge-offs were .44% of average consumer loans in 2019, compared to .46% in 2018, and represented 17.2% of total net loan charge-offs in 2019. The ratio of net charge-offs to total average loans outstanding in 2019 was .35%, compared to .30% in 2018 and .31% in 2017. The provision for loan losses in 2019 was $50.4 million, compared to provisions of $42.7 million in 2018 and $45.2 million in 2017. The Company considers the allowance for loan losses of $160.7 million adequate to cover losses inherent in the loan portfolio at December 31, 2019. 31 The schedules which follow summarize the relationship between loan balances and activity in the allowance for loan losses: (Dollars in thousands) Loans outstanding at end of year(A) Average loans outstanding(A) Allowance for loan losses: Balance at beginning of year Additions to allowance through charges to expense Loans charged off: Business Real estate — construction and land Real estate — business Real estate — personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans charged off Recoveries of loans previously charged off: Business Real estate — construction and land Real estate — business Real estate — personal Consumer Revolving home equity Consumer credit card Overdrafts Total recoveries Net loans charged off Balance at end of year $ $ $ 2019 14,737,817 14,224,637 159,932 50,438 $ $ $ Years Ended December 31 2018 2017 2016 2015 14,140,298 13,926,079 $ $ 13,983,674 13,611,699 $ $ 13,412,736 12,927,778 $ $ 12,436,692 11,869,276 159,532 $ 155,932 $ 151,532 $ 42,694 45,244 36,318 156,532 28,727 4,622 7 82 294 12,048 487 42,254 2,086 61,880 520 124 142 238 3,494 278 6,833 563 12,192 49,688 3,144 — 20 176 12,897 357 36,931 2,296 55,821 1,042 635 398 511 3,611 302 6,353 675 13,527 42,294 2,410 1 127 417 13,415 488 36,114 2,207 55,179 1,032 1,192 330 722 3,436 303 5,861 659 13,535 41,644 2,549 515 194 556 12,711 860 31,616 1,977 50,978 1,933 4,227 1,475 562 3,664 375 6,186 638 19,060 31,918 2,295 499 1,263 1,037 11,708 722 31,326 2,200 51,050 2,683 1,761 1,396 596 3,430 320 6,287 850 17,323 33,727 $ 160,682 $ 159,932 $ 159,532 $ 155,932 $ 151,532 Ratio of allowance to loans at end of year Ratio of provision to average loans outstanding 1.09% .35% 1.13% .31% 1.14% .33% 1.16% .28% 1.22% .24% (A) Net of unearned income, before deducting allowance for loan losses, excluding loans held for sale. Ratio of net charge-offs (recoveries) to average loans outstanding, by loan category: Business Real estate — construction and land Real estate — business Real estate — personal Consumer Revolving home equity Consumer credit card Overdrafts Years Ended December 31 2019 2018 2017 2016 2015 .08% (.01) — — .44 .06 4.63 16.55 .04% .03% .01% (.01)% (.07) (.01) (.02) .46 .01 3.98 33.93 (.14) (.01) (.02) .49 .05 4.07 33.71 (.48) (.05) — .46 .12 3.39 28.42 (.26) (.01) .02 .45 .09 3.35 24.93 Ratio of total net charge-offs to total average loans outstanding .35% .30% .31% .25% .28 % 32 The following schedule provides a breakdown of the allowance for loan losses by loan category and the percentage of each loan category to total loans outstanding at year end. (Dollars in thousands) 2019 2018 2017 2016 2015 Loan Loss Allowance Allocation % of Loans to Total Loans Loan Loss Allowance Allocation % of Loans to Total Loans Loan Loss Allowance Allocation % of Loans to Total Loans Loan Loss Allowance Allocation % of Loans to Total Loans Loan Loss Allowance Allocation % of Loans to Total Loans Business $ 44,268 37.8% $ 42,890 36.1% $ 44,462 35.4% $ 43,910 35.6% $ 43,617 35.4% RE — construction and land RE — business RE — personal Consumer Revolving home equity Consumer credit card Overdrafts Total 21,589 25,903 3,125 15,932 638 47,997 1,230 $ 160,682 6.1 19.2 16.0 13.3 2.4 5.2 22,515 27,717 3,250 18,007 825 43,755 — 973 100.0% $ 159,932 6.2 20.3 15.0 13.8 2.7 5.8 .1 24,432 24,810 4,201 19,509 1,189 40,052 877 6.9 19.3 14.8 15.0 2.9 5.6 .1 21,841 25,610 4,110 18,935 1,164 39,530 832 5.9 19.7 15.0 14.8 3.1 5.8 .1 16,312 22,157 6,680 21,717 1,393 38,764 892 5.0 18.9 15.4 15.5 3.5 6.3 — 100.0% $ 159,532 100.0% $ 155,932 100.0% $ 151,532 100.0% Risk Elements of Loan Portfolio Management reviews the loan portfolio continuously for evidence of problem loans. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of loan agreements. Such loans are placed under close supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for loan loss, and (if appropriate) partial or full loan charge-off. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. After a loan is placed on non-accrual status, any interest previously accrued but not yet collected is reversed against current income. Interest is included in income only as received and only after all previous loan charge-offs have been recovered, so long as management is satisfied there is no impairment of collateral values. The loan is returned to accrual status only when the borrower has brought all past due principal and interest payments current, and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are comprised of those personal banking loans that are exempt under regulatory rules from being classified as non-accrual. Consumer installment loans and related accrued interest are normally charged down to the fair value of related collateral (or are charged off in full if no collateral) once the loans are more than 120 days delinquent. Credit card loans and the related accrued interest are charged off when the receivable is more than 180 days past due. The following schedule shows non-performing assets and loans past due 90 days and still accruing interest. (Dollars in thousands) Total non-accrual loans Real estate acquired in foreclosure Total non-performing assets Non-performing assets as a percentage of total loans Non-performing assets as a percentage of total assets Loans past due 90 days and still accruing interest 2019 $ 10,220 365 $ 10,585 2018 12,536 1,413 13,949 $ $ December 31 2017 11,983 681 12,664 $ $ $ $ 2016 14,283 366 14,649 2015 26,575 2,819 29,394 $ $ .07% .04% .10% .05% .09% .05% .11% .06% .24% .12% $ 19,859 $ 16,658 $ 18,127 $ 16,396 $ 16,467 The table below shows the effect on interest income in 2019 of loans on non-accrual status at year end. (In thousands) Gross amount of interest that would have been recorded at original rate Interest that was reflected in income Interest income not recognized $ $ 1,543 369 1,174 Non-accrual loans, which are also classified as impaired, totaled $10.2 million at year end 2019, a decrease of $2.3 million from the balance at year end 2018. The decrease from December 31, 2018 occurred mainly in business loans, which decreased $1.5 million, and business real estate loans, which decreased $685 thousand. At December 31, 2019, non-accrual loans were comprised primarily of business (73.3%), personal real estate (16.6%), and business real estate (10.1%) loans. Foreclosed real estate totaled $365 thousand at December 31, 2019, a decrease of $1.0 million when compared to December 31, 2018. Total non- performing assets remain low compared to the overall banking industry in 2019, with the non-performing assets to total loans ratio 33 at .07% at December 31, 2019. Total loans past due 90 days or more and still accruing interest were $19.9 million as of December 31, 2019, an increase of $3.2 million when compared to December 31, 2018. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section of Note 2 to the consolidated financial statements. In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company’s internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $164.8 million at December 31, 2019, compared with $145.7 million at December 31, 2018, resulting in an increase of $19.1 million or 13.1%. The increase in potential problem loans was largely driven by a $35.2 million increase in business real estate loans, which was partly offset by a $14.1 million decrease in business loans. (In thousands) Potential problem loans: Business Real estate – construction and land Real estate – business Real estate – personal Total potential problem loans December 31 2019 2018 $ $ $ 83,943 470 80,071 283 164,767 $ 98,009 1,211 44,854 1,586 145,660 At December 31, 2019, the Company had $79.5 million of loans whose terms have been modified or restructured, meeting the definition of 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 $55.9 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. Construction and land loans and business real estate loans are subject to higher risk because of the impact that volatile interest rates and a changing economy can have on real estate value, and because of the potential volatility of the real estate industry. Certain home equity loans have contractual features that could increase credit exposure in a market of declining real estate prices, when interest rates are steadily increasing, or when a geographic area experiences an economic downturn. For these home equity loans, higher risks could exist when 1) loan terms require a minimum monthly payment that covers only interest, or 2) loan-to-collateral value (LTV) ratios at origination are above 80%, with no private mortgage insurance. Information presented below for home equity loans is based on LTV ratios which were calculated with valuations at loan origination date. The Company does not attempt to obtain updated appraisals or valuations unless the loans become significantly delinquent or are in the process of being foreclosed upon. For credit monitoring purposes, the Company analyzes delinquency information, current FICO scores, and line utilization. This has remained an effective means of evaluating credit trends and identifying problem loans, partly because the Company offers standard, conservative lending products. 34 Real Estate - Construction and Land Loans The Company’s portfolio of construction and land loans, as shown in the table below, amounted to 6.1% of total loans outstanding at December 31, 2019. The largest component of construction and land loans was commercial construction, which increased $51.2 million during the year ended December 31, 2019. At December 31, 2019, multi-family residential construction loans totaled approximately $213.4 million, or 31.8%, of the commercial construction loan portfolio. (Dollars in thousands) December 31, 2019 % of Total % of Total Loans December 31, 2018 % of Total % of Total Loans Commercial construction Residential construction Residential land and land development Commercial land and land development Total real estate – construction and land loans Real Estate – Business Loans $ 670,590 128,575 65,687 34,525 74.6% 14.3 7.3 3.8 4.6% $ .9 .4 .2 619,370 123,369 81,740 45,180 71.2% 14.2 9.4 5.2 4.4% .9 .6 .3 $ 899,377 100.0% 6.1% $ 869,659 100.0% 6.2% Total business real estate loans were $2.8 billion at December 31, 2019 and comprised 19.2% 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. Approximately 37.0% of these loans were for owner-occupied real estate properties, which present lower risk profiles. (Dollars in thousands) Owner-occupied Retail Multi-family Office Hotels Farm Senior living Industrial Other December 31, 2019 % of Total % of Total Loans December 31, 2018 % of Total % of Total Loans $ 1,048,716 37.0% 7.1% $ 1,038,589 36.1% 7.3% 383,234 306,577 297,278 210,557 177,669 164,000 108,285 137,238 13.5 10.8 10.5 7.4 6.3 5.8 3.8 4.9 2.6 2.1 2.0 1.4 1.2 1.1 .7 1.0 307,915 408,151 356,733 209,693 160,935 117,635 109,391 166,746 10.7 14.2 12.4 7.3 5.6 4.1 3.8 5.8 2.2 2.9 2.5 1.5 1.1 .8 .8 1.2 Total real estate - business loans $ 2,833,554 100.0% 19.2% $ 2,875,788 100.0% 20.3% Revolving Home Equity Loans The Company has revolving home equity loans that are generally collateralized by residential real estate. Most of these loans (91.9%) are written with terms requiring interest-only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As shown in the following tables, the percentage of loans with LTV ratios greater than 80% has remained a small segment of this portfolio, and delinquencies have been low and stable. The weighted average FICO score for the total portfolio balance at December 31, 2019 was 792. At maturity, the accounts are re-underwritten and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or to convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. Over the next three years, approximately 12.5% of the Company's current outstanding balances are expected to mature. Of these balances, 92.9% have a FICO score above 700. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels. 35 (Dollars in thousands) Loans with interest-only payments Loans with LTV: Between 80% and 90% Over 90% Over 80% LTV Total loan portfolio from which above loans were identified Principal Outstanding at December 31, 2019 321,126 $ New Lines Originated * During 2019 91.9% $173,969 * 49.8% Unused Portion of Available Lines at December 31, 2019 $725,187 Balances Over 30 Days Past Due $1,422 * 207.6% 37,347 3,775 41,122 10.7 1.1 11.8 22,603 1,643 24,246 6.5 .4 6.9 43,313 4,969 48,282 12.4 1.4 13.8 213 23 236 349,251 184,085 751,283 * Percentage of total principal outstanding of $349.3 million at December 31, 2019. (Dollars in thousands) Loans with interest-only payments Loans with LTV: Between 80% and 90% Over 90% Over 80% LTV Total loan portfolio from which above loans were identified Principal Outstanding at December 31, 2018 345,302 $ New Lines Originated * During 2018 91.7% $198,875 * 52.8% Unused Portion of Available Lines at December 31, 2018 $692,293 Balances Over 30 Days Past Due $1,274 * 183.9% 40,327 4,785 45,112 10.7 1.3 12.0 19,608 675 20,283 5.2 .2 5.4 38,960 4,176 43,136 10.4 1.1 11.5 375 56 431 376,399 209,569 725,733 * Percentage of total principal outstanding of $376.4 million at December 31, 2018. Other Consumer Loans * .4% .1 — .1 * .3% .1 — .1 Within the consumer loan portfolio are several direct and indirect product lines comprised mainly of loans secured by automobiles, motorcycles, marine, and RVs. Outstanding balances for auto loans were $908.3 million and $910.5 million at December 31, 2019 and 2018, respectively. The balances over 30 days past due amounted to $13.2 million at December 31, 2019, compared to $17.8 million at the end of 2018, and comprised 1.5% of the outstanding balances of these loans at December 31, 2019 compared to 2.0% at December 31, 2018. For the year ended December 31, 2019, $414.9 million of new auto loans were originated, compared to $365.0 million during 2018. At December 31, 2019, the automobile loan portfolio had a weighted average FICO score of 756. Outstanding balances for motorcycle loans were $71.9 million at December 31, 2019, compared to $89.4 million at December 31, 2018. The balances over 30 days past due amounted to $1.3 million and $2.1 million at December 31, 2019 and 2018, respectively, and comprised 1.9% of the outstanding balances of these loans at December 31, 2019, compared to 2.4% at December 31, 2018. For the year ended December 31, 2019, $26.5 million of new motorcycle loans were originated, compared to $15.0 million during 2018. Marine and RV loan production has been significantly curtailed since 2008 with few new originations. While loss rates have remained low over the last five years, the loss ratios experienced for marine and RV loans in 2019 decreased over the prior year but have been higher than for other consumer loan products, at 1.0% and 1.2% in 2019 and 2018, respectively. Balances over 30 days past due for marine and RV loans decreased $1.1 million at year end 2019 compared to 2018. 36 The table below provides the total outstanding principal and other data for this group of direct and indirect lending products at December 31, 2019 and 2018. Principal Outstanding at December 31 2019 New Loans Originated Balances Over 30 Days Past Due Principal Outstanding at December 31 2018 New Loans Originated Balances Over 30 Days Past Due $ 908,260 $ 414,885 $ 13,233 $ 910,478 $ 364,955 $ 17,790 71,927 26,121 9,243 26,459 1,124 1,577 1,338 1,184 302 89,443 37,914 13,003 14,992 1,276 1,603 2,109 1,887 647 $ 1,015,551 $ 444,045 $ 16,057 $ 1,050,838 $ 382,826 $ 22,433 (In thousands) Automobiles Motorcycles RV Marine Total Consumer Credit Card Loans Additionally, the Company offers low introductory rates on selected consumer credit card products. Out of a portfolio at December 31, 2019 of $765.0 million in consumer credit card loans outstanding, approximately $144.8 million, or 18.9%, carried a low promotional rate. Within the next six months, $64.9 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card promotional feature, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters. Energy Lending The Company's energy lending portfolio was comprised of lending to the petroleum and natural gas sectors and totaled $197.4 million at December 31, 2019, an increase of $53.6 million from year end 2018, as shown in the table below. (In thousands) Extraction Downstream distribution and refining Mid-stream shipping and storage Support activities Total energy lending portfolio $ December 31, 2019 177,903 $ 7,168 4,763 7,598 197,432 $ December 31, 2018 114,152 17,300 3,483 8,892 143,827 $ Unfunded commitments at December 31, 2019 62,996 $ 19,271 54,761 27,667 164,695 $ Investment Securities Analysis Investment securities are comprised of securities that are classified as available for sale, equity, trading or other. The largest component, available for sale debt securities, decreased 1.9% during 2019 to $8.4 billion (excluding unrealized gains/losses in fair value) at year end 2019. During 2019, debt securities of $1.8 billion were purchased, which included $167.1 million in state and municipal securities, $1.4 billion in agency mortgage-backed securities, $55.7 million in non-agency mortgage-based securities, and $106.6 million in asset-backed securities. Total sales, maturities and pay downs were $1.9 billion during 2019. During 2020, maturities and pay downs of approximately $1.3 billion are expected to occur. The average tax equivalent yield earned on total investment securities was 2.81% in 2019 and 2.84% in 2018. At December 31, 2019, the fair value of available for sale securities was $8.6 billion, which included a net unrealized gain in fair value of $136.1 million, compared to a net unrealized loss of $64.6 million at December 31, 2018. The overall unrealized gain in fair value at December 31, 2019 included net gains of $42.4 million in state and municipal securities and net gains of $63.4 million in mortgage and asset-backed securities. The portfolio also included unrealized net gains of $23.9 million and $5.9 million on U.S. government and federal agency obligations and other debt securities, respectively. 37 Available for sale investment securities at year end for the past two years are shown below: (In thousands) Amortized Cost U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities Total available for sale debt securities Fair Value U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities Total available for sale debt securities December 31 2019 2018 $ 827,861 $ 138,734 1,225,532 3,893,247 796,451 1,228,151 325,555 914,486 199,470 1,322,785 3,253,433 1,053,854 1,518,976 339,595 $ $ 8,435,531 $ 8,602,599 851,776 $ 139,277 1,267,927 3,937,964 809,782 1,233,489 331,411 907,652 195,778 1,328,039 3,214,985 1,047,716 1,511,614 332,257 $ 8,571,626 $ 8,538,041 At December 31, 2019, the available for sale portfolio included $3.9 billion of agency mortgage-backed securities, which are collateralized bonds issued by agencies including FNMA, GNMA, FHLMC, FHLB, Federal Farm Credit Banks and FDIC. Non- agency mortgage-backed securities totaled $809.8 million and included $526.0 million collateralized by commercial mortgages and $283.8 million collateralized by residential mortgages at December 31, 2019. Certain non-agency mortgage-backed securities are other-than-temporarily impaired, and the processes for determining impairment and the related losses are discussed in Note 3 to the consolidated financial statements. At December 31, 2019, U.S. government obligations included TIPS of $461.8 million, at fair value. Other debt securities include corporate bonds, notes and commercial paper. The types of securities held in the available for sale security portfolio at year end 2019 are presented in the table below. Additional detail by maturity category is provided in Note 3 to the consolidated financial statements. Available for sale debt securities: U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities *Based on call provisions and estimated prepayment speeds. December 31, 2019 Percent of Total Debt Securities Weighted Average Yield Estimated Average Maturity* 9.9% 1.54% 4.2 years 1.6 14.9 45.9 9.4 14.4 3.9 2.26 2.49 2.87 2.98 2.61 2.66 6.0 5.0 4.8 2.3 3.0 3.0 Equity securities include common and preferred stock with readily determinable fair values that totaled $2.9 million at December 31, 2019, compared to $2.6 million at December 31, 2018. Other securities totaled $137.9 million at December 31, 2019 and $129.2 million at December 31, 2018. These include Federal Reserve Bank stock and Federal Home Loan Bank (Des Moines) stock held by the bank subsidiary in accordance with debt and 38 regulatory requirements. These are restricted securities and are carried at cost. Also included are private equity investments which are held by a subsidiary qualified as a Small Business Investment Company. These investments are carried at estimated fair value, but are not readily marketable. While the nature of these investments carries a higher degree of risk than the normal lending portfolio, this risk is mitigated by the overall size of the investments and oversight provided by management, and management believes the potential for long-term gains in these investments outweighs the potential risks. Other securities at year end for the past two years are shown below: (In thousands) Federal Reserve Bank stock Federal Home Loan Bank stock Private equity investments in debt securities Private equity investments in equity securities Total other securities December 31 2019 2018 33,770 $ 10,000 44,635 49,487 33,498 10,000 39,831 45,828 137,892 $ 129,157 $ $ In addition to its holdings in the investment securities portfolio, the Company invests in long-term securities purchased under agreements to resell, which totaled $850.0 million at December 31, 2019 and $700.0 million at December 31, 2018. These investments mature in 2020 through 2023 and have fixed rates or variable rates that fluctuate with published indices. The counterparties to these agreements are other financial institutions from whom the Company has accepted collateral of $886.3 million in marketable investment securities at December 31, 2019. The average rate earned on these agreements during 2019 was 1.99%. The Company also holds offsetting repurchase and resale agreements totaling $200.0 million at December 31, 2019 and $450.0 million at December 31, 2018, which are further discussed in Note 20 to the consolidated financial statements. These agreements involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase and resale agreements have been offset against each other in the balance sheet, as permitted under current accounting guidance. The agreements mature in 2020 and earned an average of 45 basis points during 2019. Deposits and Borrowings Deposits, including both individual and corporate customers, are the primary funding source for the Bank and are acquired from a broad base of local markets. Total period-end deposits were $20.5 billion at December 31, 2019, compared to $20.3 billion last year, reflecting an increase of $196.8 million, or 1.0%. Average deposits declined by $221.4 million, or 1.1%, in 2019 compared to 2018, resulting from declines in average demand deposits, which decreased $352.8 million, primarily driven by lower balances in business demand deposits. Additionally, average money market deposit account balances decreased $734.0 million in 2019. Partially offsetting these decreases in deposit balances was growth in average certificates of deposit balances, which increased $289.6 million, and in average interest checking balances, which increased $524.0 million in 2019. The following table shows year end deposit balances by type, as a percentage of total deposits. Non-interest bearing Savings, interest checking and money market Certificates of deposit of less than $100,000 Certificates of deposit of $100,000 and over Total deposits December 31 2019 2018 33.6% 56.6 3.1 6.7 100.0% 34.3% 57.5 2.9 5.3 100.0% Core deposits, which include non-interest bearing, interest checking, savings, and money market deposits, supported 75% and 77% of average earning assets in 2019 and 2018, respectively. Average balances by major deposit category for the last six years are disclosed in the Average Balance Sheets section of Management's Discussion and Analysis of Financial Condition and results of Operations below. A maturity schedule of certificates of deposits outstanding at December 31, 2019 is included in Note 7 on Deposits in the consolidated financial statements. 39 The Company’s primary sources of overnight borrowings are federal funds purchased and securities sold under agreements to repurchase (repurchase agreements). Balances in these accounts can fluctuate significantly on a day-to-day basis and generally have one day maturities. Total balances of federal funds purchased and repurchase agreements outstanding at December 31, 2019 were $1.9 billion, a $105.6 million decrease from the $2.0 billion balance outstanding at year end 2018. On an average basis, these borrowings increased $308.0 million, or 20.3%, during 2019, due to an increase of $143.0 million in repurchase agreements, and an increase of $165.0 million in federal funds purchased. The average rate paid on total federal funds purchased and repurchase agreements was 1.61% during 2019 and 1.30% during 2018. Historically, the majority of the Company’s long-term debt has been comprised of fixed rate advances from the FHLB. During 2019, the Company borrowed $250.0 million of short-term funds from the FHLB, and those borrowings were repaid by the Company in October 2019. The average rate paid on FHLB advances was 2.19% during 2019. No advances were taken in 2018. Liquidity and Capital Resources Liquidity Management Liquidity is managed within the Company in order to satisfy cash flow requirements of deposit and borrowing customers while at the same time meeting its own cash flow needs. The Company has taken numerous steps to address liquidity risk and has developed a variety of liquidity sources which it believes will provide the necessary funds for future growth. The Company manages its liquidity position through a variety of sources including: • A portfolio of liquid assets including marketable investment securities and overnight investments, • A large customer deposit base and limited exposure to large, volatile certificates of deposit, • Lower long-term borrowings that might place demands on Company cash flow, • Relatively low loan to deposit ratio promoting strong liquidity, • Excellent debt ratings from both Standard & Poor’s and Moody’s national rating services, and • Available borrowing capacity from outside sources. 40 The Company’s most liquid assets include available for sale debt securities, federal funds sold, balances at the Federal Reserve Bank, and securities purchased under agreements to resell. At December 31, 2019 and 2018, such assets were as follows: (In thousands) Available for sale debt securities Federal funds sold Long-term securities purchased under agreements to resell Balances at the Federal Reserve Bank Total 2019 2018 $ 8,571,626 $ 8,538,041 — 850,000 395,850 9,817,476 $ $ 3,320 700,000 689,876 9,931,237 There were no federal funds sold at December 31, 2019, which are funds lent to the Company’s correspondent bank customers with overnight maturities. At December 31, 2019, the Company had lent funds totaling $850.0 million under long-term resale agreements to other large financial institutions. The agreements mature in years 2020 through 2023. Under these agreements, the Company holds marketable securities, safekept by a third-party custodian, as collateral. This collateral totaled $886.3 million in fair value at December 31, 2019. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $395.9 million at December 31, 2019. The Company’s available for sale investment portfolio includes scheduled maturities and expected pay downs of approximately $1.3 billion during 2020, and these funds offer substantial resources to meet either new loan demand or help offset reductions in the Company’s deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, repurchase agreements, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. At December 31, 2019 and 2018, total investment securities pledged for these purposes were as follows: (In thousands) 2019 2018 Investment securities pledged for the purpose of securing: Federal Reserve Bank borrowings FHLB borrowings and letters of credit Repurchase agreements * Other deposits Total pledged securities Unpledged and available for pledging Ineligible for pledging $ 48,304 $ 7,637 2,083,716 2,149,575 4,289,232 3,029,268 1,253,126 67,675 9,974 2,469,432 1,784,020 4,331,101 2,872,562 1,334,378 Total available for sale debt securities, at fair value $ 8,571,626 $ 8,538,041 * Includes securities pledged for collateral swaps, as discussed in Note 20 to the consolidated financial statements The average loans to deposits ratio is a measure of a bank's liquidity, and the Company’s average loans to deposits ratio was 71.5% at December 31, 2019. Core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts, totaled $18.5 billion and represented 90.2% of the Company’s total deposits at December 31, 2019. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company promoting long lasting relationships and stable funding sources. Total core deposits decreased $153.1 million at year end 2019 compared to year end 2018, with declines in wealth management and commercial deposits of $104.7 million and $101.8 million, respectively. This decrease was partially offset by growth of $51.8 million in consumer deposits. While the Company considers core consumer and wealth management deposits less volatile, corporate deposits could decline if interest rates increase significantly or if corporate customers increase investing activities and reduce deposit balances. If these corporate deposits decline, the Company's funding needs can be met by liquidity supplied by investment security maturities and pay downs expected to total $1.3 billion over the next year, as noted above. In addition, as shown in the table of collateral available for future advances below, the Company has borrowing capacity of $3.6 billion through advances from the FHLB and the Federal Reserve. (In thousands) Core deposit base: Non-interest bearing Interest checking Savings and money market Total 2019 2018 $ 6,890,687 $ 6,980,298 2,130,591 9,491,125 2,090,936 9,594,303 $ 18,512,403 $ 18,665,537 41 Certificates of deposit of $100,000 or greater totaled $1.4 billion at December 31, 2019. These deposits are normally considered more volatile and higher costing, and comprised 6.7% of total deposits at December 31, 2019. 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) Borrowings: Federal funds purchased Securities sold under agreements to repurchase Other debt Total 2019 2018 $ $ 20,035 $ 1,830,737 2,418 13,170 1,943,219 8,702 1,853,190 $ 1,965,091 Federal funds purchased, which totaled $20.0 million at December 31, 2019, are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Retail repurchase agreements are offered to customers wishing to earn interest in highly liquid balances and are used by the Company as a funding source considered to be stable, but short-term in nature. Repurchase agreements are collateralized by securities in the Company’s investment portfolio. Total repurchase agreements at December 31, 2019 were comprised of non-insured customer funds totaling $1.8 billion, and securities pledged for these retail agreements totaled $1.9 billion. The Company pledges certain assets, including loans and investment securities to both the Federal Reserve Bank and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral. Additionally, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at December 31, 2019. (In thousands) Total collateral value pledged Letters of credit issued Available for future advances December 31, 2019 FHLB Federal Reserve Total $ $ 2,668,773 $ 1,280,434 $ 3,949,207 (396,608) — (396,608) 2,272,165 $ 1,280,434 $ 3,552,599 The Company receives outside ratings from both Standard & Poor’s and Moody’s on both the consolidated company and its subsidiary bank, Commerce Bank. These ratings are as follows: Commerce Bancshares, Inc. Issuer rating Preferred stock Rating outlook Commerce Bank Issuer rating Baseline credit assessment Short-term rating Rating outlook Standard & Poor’s Moody’s A- BBB- Stable A A-1 Stable Baa1 Stable A2 a1 P-1 Stable The Company considers these ratings to be indications of a sound capital base and strong liquidity and believes that these ratings would help ensure the ready marketability of its commercial paper, should the need arise. No commercial paper has been outstanding during the past ten years. The Company has no subordinated or hybrid debt instruments which would affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that, through its Capital Markets Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit, privately-placed corporate notes or other forms of debt. 42 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 $301.4 million in 2019, as reported in the consolidated statements of cash flows. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $512.8 million and has historically been a stable source of funds. Investing activities used cash of $730.2 million, mainly from an increase in the loan portfolio, partly offset by activity in the investment securities portfolio. Growth in the loan portfolio used cash of $647.9 million, purchases of long-term resale agreements used cash of $150.0 million, and net purchases of land, buildings and equipment used $40.5 million, while sales and maturities (net of purchases) of investment securities provided cash of $108.3 million. Investing activities are somewhat unique to financial institutions in that, while large sums of cash flow are normally used to fund growth in investment securities, loans, or other bank assets, they are normally dependent on the financing activities described below. During 2019, financing activities used cash of $84.1 million. The Company paid cash dividends of $122.5 million on common and preferred stock, and federal funds purchases and short-term securities sold under agreements to repurchase used cash in the amount of $105.6 million. Treasury stock purchases used cash of $284.9 million during 2019 and included a cash outflow of $150.0 million related to the Company's accelerated share repurchase agreement. Growth in deposits partially offset these cash outflows by providing cash of $435.3 million. Future short-term liquidity needs for daily operations are not expected to vary significantly, and the Company believes it maintains adequate liquidity to meet these cash flows. 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. Cash outflows resulting from the Company’s transactions in its common and preferred stock were as follows: (In millions) Purchases of treasury stock Accelerated share repurchase agreements Common cash dividends paid Preferred cash dividends paid Cash used 2019 2018 2017 134.9 $ 75.2 $ 150.0 113.5 9.0 — 100.2 9.0 17.8 — 91.6 9.0 407.4 $ 184.4 $ 118.4 $ $ The Parent faces unique liquidity constraints due to legal limitations on its ability to borrow funds from its bank subsidiary. The Parent obtains funding to meet its obligations from two main sources: dividends received from bank and non-bank subsidiaries (within regulatory limitations) and management fees charged to subsidiaries as reimbursement for services provided by the Parent, as presented below: (In millions) Dividends received from subsidiaries Management fees Total 2019 2018 2017 $ $ 500.0 $ 36.8 536.8 $ 200.0 $ 37.7 237.7 $ 160.0 30.4 190.4 These sources of funds are used mainly to pay cash dividends on outstanding stock, pay general operating expenses, and purchase treasury stock. At December 31, 2019, the Parent’s investment securities totaled $4.4 million at fair value, consisting mainly of preferred stock and non-agency mortgage-backed securities. To support its various funding commitments, the Parent maintains a $20.0 million line of credit with its subsidiary bank. There were no borrowings outstanding under the line during 2019 or 2018. Company senior management is responsible for measuring and monitoring the liquidity profile of the organization with oversight by the Company’s Asset/Liability Committee. This is done through a series of controls, including a written Contingency Funding Policy and risk monitoring procedures, which include daily, weekly and monthly reporting. In addition, the Company prepares forecasts to project changes in the balance sheet affecting liquidity and to allow the Company to better plan for forecasted changes. 43 Capital Management Under Basel III capital guidelines, at December 31, 2019 and 2018, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table. (Dollars in thousands) Risk-adjusted assets Tier I common risk-based capital Tier I risk-based capital Total risk-based capital 2019 2018 $ 19,713,813 $ 19,103,966 2,745,538 2,890,322 3,052,079 2,716,232 2,861,016 3,022,023 Minimum Ratios under Capital Adequacy Guidelines Minimum Ratios for Well- Capitalized Banks* Tier I common risk-based capital ratio 13.93% 14.22% 7.00% 6.50% Tier I risk-based capital ratio Total risk-based capital ratio Tier I leverage ratio Tangible common equity to tangible assets Dividend payout ratio *under Prompt Corrective Action requirements 14.66 15.48 11.38 10.99 27.52 14.98 15.82 11.52 10.45 23.61 8.50 10.50 4.00 8.00 10.00 5.00 The Company maintains a treasury stock buyback program under authorizations by its Board of Directors and periodically purchases stock in the open market. During 2018, the Company purchased 1.2 million shares through market purchases. During 2019, the Company purchased 4.7 million shares, including 2.4 million shares purchased under an accelerated share repurchase (ASR) agreement. The ASR agreement is further discussed in Note 14 to the consolidated financial statements. At December 31, 2019, 4.4 million shares remained available for purchase under the current Board authorization. The Company’s common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital levels and alternative investment options. Per share cash dividends paid by the Company increased 16.1% in 2019 compared with 2018, and the Company increased its first quarter 2020 cash dividend 8.9%, making 2020 the Company's 52nd consecutive year of regular cash dividend increases. The Company also distributed its 26th consecutive annual 5% stock dividend in December 2019. Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements In the normal course of business, various commitments and contingent liabilities arise that are not required to be recorded on the balance sheet. The most significant of these are loan commitments totaling $11.2 billion (including approximately $5.1 billion in unused, approved credit card lines) and the contractual amount of standby letters of credit totaling $377.3 million at December 31, 2019. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. Management does not anticipate any material losses arising from commitments or contingent liabilities and believes there are no material commitments to extend credit that represent risks of an unusual nature. A table summarizing contractual cash obligations of the Company at December 31, 2019 and the expected timing of these payments follows: (In thousands) Operating lease obligations* Purchase obligations Certificates of Deposit** Total Payments Due by Period In One Year or Less After One Year Through Three Years After Three Years Through Five Years 6,213 231,336 1,727,042 1,964,591 $ $ 10,605 349,100 256,692 616,397 $ 7,690 103,185 24,225 135,100 $ After Five Years 16,113 42,013 53 58,179 Total 40,621 725,634 2,008,012 2,774,267 $ * Includes operating leases signed but not yet commenced. ** Includes principal payments only. The Company funds a defined benefit pension plan for a portion of its employees. Under the funding policy for the plan, contributions are made as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. No contributions to the defined benefit plan were made in 2019 or 2018, and the Company is not required nor does it expect to make a contribution in 2020. 44 The Company has investments in low-income housing partnerships generally within the areas it serves. These partnerships supply funds for the construction and operation of apartment complexes that provide affordable housing to that segment of the population with lower family income. If these developments successfully attract a specified percentage of residents falling in that lower income range, federal (and sometimes state) income tax credits are made available to the partners. The tax credits are normally recognized over ten years, and they play an important part in the anticipated yield from these investments. In order to continue receiving the tax credits each year over the life of the partnership, the low-income residency targets must be maintained. Under the terms of the partnership agreements, the Company has a commitment to fund a specified amount that will be due in installments over the life of the agreements, which ranges from 8 to 17 years. At December 31, 2019, the investments totaled $37.3 million and are recorded as other assets in the Company’s consolidated balance sheet. Unfunded commitments, which are recorded as liabilities, amounted to $19.4 million at December 31, 2019. The Company regularly purchases various state tax credits arising from third-party property redevelopment. These credits are either resold to third parties or retained for use by the Company. During 2019, purchases and sales of tax credits amounted to $90.6 million and $84.9 million, respectively. Fees from the sales of tax credits were $3.5 million, $4.9 million and $3.3 million in 2019, 2018 and 2017, respectively. At December 31, 2019, the Company had outstanding purchase commitments totaling $160.9 million that it expects to fund in 2020. These commitments, along with the commitments for the next five years, are included in the table above. Interest Rate Sensitivity The Company’s Asset/Liability Management Committee (ALCO) measures and manages the Company’s interest rate risk on a monthly basis to identify trends and establish strategies to maintain stability in net interest income throughout various rate environments. Analytical modeling techniques provide management insight into the Company’s exposure to changing rates. These techniques include net interest income simulations and market value analysis. Management has set guidelines specifying acceptable limits within which net interest income and market value may change under various rate change scenarios. These measurement tools indicate that the Company is currently within acceptable risk guidelines as set by management. The Company’s main interest rate measurement tool, income simulation, projects net interest income under various rate change scenarios in order to quantify the magnitude and timing of potential rate-related changes. Income simulations are able to capture option risks within the balance sheet where expected cash flows may be altered under various rate environments. Modeled rate movements include “shocks, ramps and twists.” Shocks are intended to capture interest rate risk under extreme conditions by immediately shifting rates up and down, while ramps measure the impact of gradual changes and twists measure yield curve risk. The size of the balance sheet is assumed to remain constant so that results are not influenced by growth predictions. The Company also employs a sophisticated simulation technique known as a stochastic income simulation. This technique allows management to see a range of results from hundreds of income simulations. The stochastic simulation creates a vector of potential rate paths around the market’s best guess (forward rates) concerning the future path of interest rates and allows rates to randomly follow paths throughout the vector. This allows for the modeling of non-biased rate forecasts around the market consensus. Results give management insight into a likely range of rate-related risk as well as worst and best-case rate scenarios. Additionally, the Company uses market value analyses to help identify longer-term risks that may reside on the balance sheet. This is considered a secondary risk measurement tool by management. The Company measures the market value of equity as the net present value of all asset and liability cash flows discounted along the current swap curve plus appropriate market risk spreads. It is the change in the market value of equity under different rate environments, or effective duration, that gives insight into the magnitude of risk to future earnings due to rate changes. Market value analyses also help management understand the price sensitivity of non-marketable bank products under different rate environments. The tables below show the effects of gradual shifts in interest rates over a twelve month period on the Company’s net interest income versus the Company's net interest income in a flat rate scenario. Simulation A presents two rising rate scenarios and a falling rate scenario, and in each scenario, rates are assumed to change evenly over 12 months. In these scenarios, the balance sheet remains flat with the exception of deposit balances, which may fluctuate based on changes in rates. For instance, the Company may experience deposit disintermediation if the spread between market rates and bank deposit rates widens as rates rise. The sensitivity of deposit balances to changes in rates is particularly difficult to estimate in exceptionally low rate environments. Since the future effects of changes in rates on deposit balances cannot be known with certainty, the Company conservatively models alternate scenarios with greater deposit attrition as rates rise. Simulation B illustrates results from these higher attrition scenarios to provide added perspective on potential effects of higher rates. 45 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 December 31, 2019 September 30, 2019 (Dollars in millions) $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit Attrition $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit Attrition 200 basis points rising $ 100 basis points rising 7.8 1.1 .14 100 basis points falling (3.0) (0.36) .95% $ (281.9) $ 10.7 1.35% $ (262.4) (146.5) 154.8 7.3 1.1 .92 0.14 (138.2) 148.6 Simulation B December 31, 2019 September 30, 2019 (Dollars in millions) $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit Attrition $ Change in Net Interest Income % Change in Net Interest Income Assumed Deposit Attrition 200 basis points rising (6.0) (.74) 100 basis points rising (10.5) (1.29) (795.2) (664.8) (.1) (2.0) (.02) (.25) (662.2) (542.4) Under Simulation A, in the two rising rate scenarios, higher variable rate loan volumes and a slight decline in deposit sensitivity contributed to increases in income if rates rise relative to the previous period. However, this was more than offset by changes in rates earned on the Company’s long-term structured repurchase agreements. In the fourth quarter of 2019, lower market rates increased structured repurchase agreement rates and income in the Base scenario which are expected to decline again if rates rise, reducing the benefit of higher rates. In Simulation B, the assumed higher levels of deposit attrition were modeled to be replaced by wholesale borrowed funds with higher costs than in Simulation A and resulted in a reduction in net interest income under both rising rate scenarios. In the 100 basis point falling scenario shown in Simulation A, it is assumed that deposits would increase $154.8 million along with an increase in earning assets, but rates on loans would fall faster than deposit rates. Additionally, this scenario results in lower net interest income than in the base calculation. The 100 basis point falling scenario is presented only in Simulation A as the results would be the same under Simulation B. Projecting deposit activity in a historically low interest rate environment is difficult, and the Company cannot predict how deposits will react to shifting rates. The comparison provided above provides insight into potential effects of changes in rates and deposit levels on net interest income. The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of interest rate risk. Derivative Financial Instruments The Company maintains an overall interest rate risk management strategy that permits the use of derivative instruments to modify exposure to interest rate risk. Such instruments include interest rate swaps, interest rate floors, interest rate caps, credit risk participation agreements, foreign exchange contracts, mortgage loan commitments, forward sale contracts, and forward to- be-announced (TBA) contracts. The Company’s interest rate risk management strategy includes the ability to modify the re- pricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. Interest rate floors with a total notional amount of $1.5 billion have been entered into since the beginning of 2018 as part of this strategy to manage interest rate risk. All of these derivative instruments utilized by the Company are further discussed in Note 19 on Derivative Instruments. In all of these contracts, the Company is exposed to credit risk in the event of nonperformance by counterparties, who may be bank customers or other financial institutions. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures. Because the Company generally enters into transactions only with high quality counterparties, there have been no losses associated with counterparty nonperformance on derivative financial instruments. 46 The following table summarizes the notional amounts and estimated fair values of the Company’s derivative instruments at December 31, 2019 and 2018. Notional amount, along with the other terms of the derivative, is used to determine the amounts to be exchanged between the counterparties. Because the notional amount does not represent amounts exchanged by the parties, it is not a measure of loss exposure related to the use of derivatives nor of exposure to liquidity risk. 2019 2018 Notional Amount Positive Fair Value Negative Fair Value Notional Amount Positive Fair Value Negative Fair Value $ 2,606,181 $ 1,500,000 59,316 316,225 10,936 13,755 1,943 37,774 67,192 4 140 97 459 6 $ (9,916) $ 2,006,280 $ — (4) (230) (32) — (2) 1,000,000 62,163 143,460 6,206 14,544 5,768 11,537 29,031 24 47 20 536 15 $ (13,110) — (24) (93) (8) — (8) 17,500 $ 4,525,856 2 105,674 $ $ (35) (10,219) 16,500 $ 3,254,921 $ — 41,210 $ (178) (13,421) (In thousands) Interest rate swaps Interest rate floors Interest rate caps Credit risk participation agreements Foreign exchange contracts Mortgage loan commitments Mortgage loan forward sale contracts Forward TBA contracts Total at December 31 Operating Segments The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments. The results are determined based on the Company’s management accounting process, which assigns balance sheet and income statement items to each responsible segment. These segments are defined by customer base and product type. The management process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Each segment is managed by executives who, in conjunction with the Chief Executive Officer, make strategic business decisions regarding that segment. The three reportable operating segments are Consumer, Commercial, and Wealth. Additional information is presented in Note 13 on Segments in the consolidated financial statements. The Company uses a funds transfer pricing method to value funds used (e.g., loans, fixed assets, cash, etc.) and funds provided (deposits, borrowings, and equity) by the business segments and their components. This process assigns a specific value to each new source or use of funds with a maturity, based on current swap rates, thus determining an interest spread at the time of the transaction. Non-maturity assets and liabilities are valued using weighted average pools. The funds transfer pricing process attempts to remove interest rate risk from valuation, allowing management to compare profitability under various rate environments. The Company also assigns loan charge-offs and recoveries (labeled in the table below as “provision for loan losses”) directly to each operating segment instead of allocating an estimated loan loss provision. The operating segments also include a number of allocations of income and expense from various support and overhead centers within the Company. 47 The table below is a summary of segment pre-tax income results for the past three years. (Dollars in thousands) Consumer Commercial Wealth Segment Totals Other/ Elimination Consolidated Totals Year ended December 31, 2019: Net interest income Provision for loan losses Non-interest income Investment securities gains, net Non-interest expense Income before income taxes Year ended December 31, 2018: Net interest income Provision for loan losses Non-interest income Investment securities losses, net $ 315,782 $ 342,736 $ 48,058 $ 706,576 $ 114,717 $ 821,293 (44,987) 135,257 — (4,204) 203,952 — (174) 183,589 — (49,365) 522,798 — (297,581) (308,686) (124,123) (730,390) $ $ $ $ $ $ 108,471 294,798 (40,571) 126,253 — 233,798 344,972 (1,134) 202,527 — $ $ 107,350 46,946 32 173,026 — $ $ 449,619 686,716 (41,673) 501,806 — (1,073) 1,905 3,626 (37,008) 82,167 137,109 (1,021) (465) (488) (50,438) 524,703 3,626 (767,398) 531,786 823,825 (42,694) 501,341 (488) $ $ Non-interest expense (286,181) (297,847) (123,568) (707,596) (30,225) (737,821) Income before income taxes $ 94,299 $ 248,518 $ 96,436 $ 439,253 $ 104,910 $ 544,163 2019 vs 2018 Increase in income before income taxes: Amount $ 14,172 $ (14,720) $ 10,914 $ 10,366 $ (22,743) $ (12,377) Percent 15.0% (5.9)% 11.3% 2.4% (21.7)% (2.3)% Year ended December 31, 2017: Net interest income Provision for loan losses Non-interest income Investment securities gains, net $ 276,891 $ 329,087 $ 47,264 $ 653,242 $ 80,437 $ 733,679 (40,619) 121,362 — 205 184,577 — (41) 158,175 — (40,455) 464,114 — (4,789) (2,851) 25,051 (45,244) 461,263 25,051 Non-interest expense (274,225) (281,845) (120,461) (676,531) (67,812) (744,343) Income before income taxes $ 83,409 $ 232,024 $ 84,937 $ 400,370 $ 30,036 $ 430,406 2018 vs 2017 Increase in income before income taxes: Amount Percent Consumer $ 10,890 $ 16,494 $ 11,499 $ 38,883 $ 74,874 $ 113,757 13.1 % 7.1 % 13.5 % 9.7 % N.M. 26.4 % The Consumer segment includes consumer deposits, consumer finance, and consumer debit and credit cards. During 2019, income before income taxes for the Consumer segment increased $14.2 million, or 15.0%, compared to 2018. This increase was due to growth of $21.0 million, or 7.1%, in net interest income and an increase in non-interest income of $9.0 million, or 7.1%. Net interest income increased due to a $27.8 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and growth of $3.4 million in loan interest income, partly offset by an increase of $10.1 million in deposit interest expense. Non-interest income increased mainly due to growth in mortgage banking revenue and net credit card fees, (mainly higher interchange fees and lower rewards expense), partly offset by a decline in deposit fees (mainly overdraft and deposit account service fees). These increases to income were partly offset by growth of $11.4 million, or 4.0%, in non-interest expense. Non-interest expense increased over the prior year due to higher salaries expense, data processing and software expense and allocated servicing and support costs (mainly teller services, online banking, installment loan and management fees). The provision for loan losses totaled $45.0 million, a $4.4 million increase over the prior year, which was mainly due to higher net charge-offs on consumer credit card loans. Total average loans in this segment decreased $107.1 million, or 4.6%, in 2019 compared to 2018 mainly due to a decline in auto and other consumer loans. Average deposits increased $25.8 million over the prior year, resulting from growth in interest checking, savings, and certificate of deposit balances, partly offset by a decline in money market deposit accounts. 48 During 2018, income before income taxes for the Consumer segment increased $10.9 million, or 13.1%, compared to 2017. This increase was mainly due to growth of $17.9 million, or 6.5%, in net interest income and an increase in non-interest income of $4.9 million, or 4.0%. Net interest income increased due to a $14.2 million increase in net allocated funding credits and growth of $5.3 million in loan interest income, partly offset by an increase of $1.6 million in deposit interest expense. Non-interest income increased mainly due to growth in net debit card fees, (mainly lower network expense and higher interchange fees), deposit fees (mainly deposit account service fees and overdraft and return item fees) and mortgage banking revenue, partly offset by higher credit card rewards expense. These increases to income were partly offset by growth of $12.0 million, or 4.4%, in non-interest expense. Non-interest expense increased over 2017 due to an increase in full-time salaries expense and higher allocated servicing and support costs, mainly marketing, information technology and management fees. The provision for loan losses totaled $40.6 million, a slight decrease from 2017, which was mainly due to lower net charge-offs on home equity loans, partly offset by higher consumer credit card loan net charge-offs. Total average loans in this segment decreased $45.1 million, or 1.9%, in 2018 compared to 2017 mainly due to a decline in auto and other personal loans. Average deposits increased $19.9 million over 2017, resulting from growth in interest checking and savings accounts, partly offset by declines in demand, money market deposit accounts, and certificate of deposit balances. Commercial The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, international services, and business, government deposit, and related commercial cash management services, as well as merchant and commercial bank card products. The segment includes the Capital Markets Group, which sells fixed- income securities to correspondent banks, corporations, public institutions, municipalities, and individuals and also provides securities safekeeping and bond accounting services. Pre-tax income for 2019 decreased $14.7 million, or 5.9%, compared to 2018, mainly due to a decrease in net interest income and increases in non-interest expense and the provision for loan losses. Net interest income decreased $2.2 million, or .6%, due to a decline of $13.2 million in net allocated funding credits and higher interest expense of $18.4 million on deposits and customer repurchase agreements, partly offset by an increase of $29.3 million in loan interest income. The provision for loan losses increased $3.1 million over last year, due to higher lease loan net charge-offs (related to a charge-off on a single lease loan), partly offset by lower business loan net charge-offs. Non-interest income increased $1.4 million, or .7%, over 2018 due to higher deposit account fees (mainly corporate cash management), cash sweep commissions, and gains on sales of leased assets to customers upon lease termination. These increases were partly offset by lower net corporate card fees (driven by lower interchange income and higher network and rewards expense) and lower tax credit sales fees. Non- interest expense increased $10.8 million, or 3.6%, during 2019, mainly due to increases in salaries expense and allocated support costs (mainly information technology, marketing and commercial sales and product support). These increases were partly offset by lower deposit insurance expense and allocated servicing costs (mainly teller services and deposit operations). Average segment loans increased $310.9 million, or 3.5%, compared to 2018, with growth occurring in business and business real estate loans. Average deposits decreased $180.9 million, or 2.3%, due to declines in business demand and money market deposit accounts, partly offset by growth in certificate of deposit balances. Pre-tax income for 2018 increased $16.5 million, or 7.1%, compared to 2017, mainly due to increases in net interest income and non-interest income, partly offset by higher non-interest expense. Net interest income increased $15.9 million, or 4.8%, due to growth of $70.6 million in loan interest income, partly offset by a decline of $32.3 million in net allocated funding credits and higher interest expense of $22.5 million on deposits and customer repurchase agreements. The provision for loan losses increased $1.3 million over 2017, due to higher net charge-offs on business loans and lower recoveries on construction loans, partly offset by lower commercial card loan net charge-offs. Non-interest income increased $18.0 million, or 9.7%, over 2017 due to higher net corporate card fees (driven by higher fees), swap fees, tax credit sales fees and deposit account fees (mainly corporate cash management). These increases were partly offset by lower gains on sales of leased assets to customers upon lease termination. Non-interest expense increased $16.0 million, or 5.7%, during 2018, mainly due to increases in salaries expense and allocated support and service costs (mainly information technology and commercial sales and product support fees). Average segment loans increased $304.7 million, or 3.5%, compared to 2017, with growth occurring in commercial and industrial, construction, and healthcare loans. Average deposits decreased $271.8 million, or 3.3%, due to declines in business demand deposits, money market deposit accounts, and certificates of deposit, partly offset by growth in interest checking deposits. Wealth The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management services, brokerage services, and includes Private Banking accounts. At December 31, 2019, the Trust group managed investments with a market value of $34.4 billion and administered an additional $22.3 billion in non-managed assets. It also provides investment management services to The Commerce Funds, a series of mutual funds with $2.9 billion in total assets at December 31, 2019. In 2019, pre-tax income for the Wealth segment was $107.4 million, compared to $96.4 million in 2018, an increase of $10.9 million, or 11.3%. Net interest income increased $1.1 million, or 2.4%, due to a $4.3 million increase in loan interest income and a $1.7 million increase in net allocated funding credits, partly offset by higher interest expense of $4.9 million. Non-interest 49 income increased $10.6 million, or 6.1%, over the prior year largely due to higher private client fund trust fees and cash sweep commissions. Non-interest expense increased $555 thousand, or .4%, resulting from higher salaries and benefits expense and higher allocated costs for information technology. The provision for loan losses increased $206 thousand, mainly due to higher revolving home equity loan net charge-offs. Average assets increased $45.0 million, or 3.6%, during 2019 mainly due to growth in personal real estate and consumer loan balances. Average deposits decreased $39.2 million, or 2.1%, due to declines in interest checking account balances, partially offset by higher balances of demand deposits. During the fourth quarter of 2019, the Company sold its corporate trust business, which was included in the Wealth segment. In 2018, pre-tax income for the Wealth segment was $96.4 million, compared to $84.9 million in 2017, an increase of $11.5 million, or 13.5%. Net interest income decreased $318 thousand, or .7%, due to a $5.3 million decrease in net allocated funding credits, partly offset by a $5.5 million increase in loan interest income. Non-interest income increased $14.9 million, or 9.4%, over 2017 largely due to higher private client and institutional trust fees, brokerage fees and cash sweep commissions. These increases were partly offset by write downs on software costs. Non-interest expense increased $3.1 million, or 2.6%, resulting from higher salary and benefit costs, data processing expense and allocated support and corporate management fee costs, partly offset by lower trust losses. The provision for loan losses decreased $73 thousand, mainly due to personal real estate loan net recoveries. Average assets increased $25.2 million, or 2.1%, during 2018 mainly due to higher personal real estate and consumer loans. Average deposits decreased $219.0 million, or 10.5%, due to declines in money market deposit accounts and long-term certificates of deposit over $100,000. The segment activity, as shown above, includes both direct and allocated items. Amounts in the “Other/Elimination” column include activity not related to the segments, such as certain administrative functions, the investment securities portfolio, and the effect of certain expense allocations to the segments. Also included in this category is the difference between the Company’s provision for loan losses and net loan charge-offs, which are generally assigned directly to the segments. In 2019, the pre-tax income in this category was $82.2 million, compared to $104.9 million in 2018. This decrease was due to lower unallocated net interest income of $22.4 million and higher unallocated non-interest expense of $6.8 million. Unallocated securities gains were $3.6 million in 2019, compared to securities losses of $488 thousand in 2018. Also, the unallocated loan loss provision increased $52 thousand, as the provision was $1.1 million in excess of charge-offs in 2019, while the provision was $1.0 million in excess of charge offs in 2018. Additionally in 2019, a $11.5 million gain on the sale of Company's corporate trust business, mentioned above, was also recorded in the Other segment. Impact of Recently Issued Accounting Standards Leases In February 2016, the FASB issued ASU 2016-02, "Leases", in order to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU primarily affects lessee accounting, which requires the lessee to recognize a right-of-use (ROU) asset and a liability to make lease payments for those leases classified as operating leases under previous GAAP. The ASU provides guidance as to the definition of a lease, identification of lease components, and sale and leaseback transactions. The FASB issued elections and expedients within the original ASU and additional amendments, clarifying the lease guidance for certain implementation issues. The Company has adopted the package of expedients, the lease component expedient as well as the disclosure expedient. Additionally, for leases with a term of 12 months or less, an election was made not to recognize lease assets and lease liabilities. The Company adopted the new accounting standard as of January 1, 2019, and a lease liability of $28.1 million and a ROU asset of $27.5 million were recognized. The impact of the adoption and required disclosures are discussed in Note 6 to the consolidated financial statements. Premium Amortization The FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities", in March 2017. Under former guidance, many entities amortize the premium on purchased callable debt securities over the contractual life of the instrument. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium to the earliest call date, and more closely align the amortization period to expectations incorporated in market pricing of the instrument. The amendments were effective January 1, 2019 and did not have a significant effect on the Company's consolidated financial statements. Financial Instruments ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", known as the current expected credit loss (CECL) model, was issued in June 2016, and has been followed by additional clarifying guidance on specified implementation issues. This new standard is effective for fiscal years beginning after December 15, 2019 and was adopted by the Company on January 1, 2020 using the modified retrospective method. 50 This new measurement approach requires the calculation of expected lifetime credit losses and is applied to financial assets measured at amortized cost, including loans and held-to-maturity securities, as well as certain off-balance sheet credit exposures such as loan commitments. The standard also changes the impairment model of available for sale debt securities. The allowance for loan losses under the previously required incurred loss model that is reported on the Company's consolidated balance sheets is different under the requirements of the CECL model. Upon adoption in the first quarter of 2020, a cumulative- effect adjustment for the change in the allowance for credit losses will be recognized in retained earnings. The cumulative-effect adjustment to retained earnings, net of taxes, will be comprised of the impact to the allowance for credit losses on outstanding loans and leases and the impact to the liability for off-balance sheet commitments. There is no implementation impact on held- to-maturity debt securities as the Company does not hold any debt securities within the scope of CECL. The new accounting standard does not require the use of a specific loss estimation method for purposes of determining the allowance for credit losses. The Company selected a methodology that uses historical net charge-off rates, adjusted by the impacts of a reasonable and supportable forecast and the impacts of other qualitative factors to determine the expected credit losses. Key assumptions include the application of historical loss rates, prepayment speeds, forecast results of a reasonable and supportable period, the period to revert to historical loss rates, and qualitative factors. The forecast is determined using projections of certain macroeconomic variables, such as, unemployment rate, prime rate, BBB corporate yield, and housing price index. The model design and methodology requires management judgment. The allowance for credit losses on the commercial portfolio is expected to decrease due to the relatively short contractual lives of the commercial loan portfolios coupled with an economic forecast predicting stable macroeconomic factors similar to the current environment. The allowance for credit losses on the personal banking loan portfolio is expected to increase due to the relatively longer contractual lives of certain portfolios, primarily those collateralized with personal real estate. Because the commercial loan portfolio represents 63% of total loans at December 31, 2019, the change in its allowance for credit losses will have a more significant impact on the total allowance for credit losses, resulting in a potential net reduction in the allowance for credit losses. Based on preliminary results, the Company expects its allowance for loan losses to total loans ratio to decline from 1.09% at December 31, 2019, to within a range of approximately 0.85% to 1.05% upon adoption. Offsetting the overall reduction in the allowance for credit losses for outstanding loans and leases is an expected increase in the liability for off-balance sheet loan commitments. The liability will increase as the loss estimation is required to expand over the contractual commitment period. Preliminary results indicate the adoption adjustment will result in an immaterial impact to retained earnings. The Company is currently performing quality reviews on preliminary results and is planning to finalize the impact in the 1st quarter of 2020. The adoption adjustment is subject to the completion of the Company’s governance and quality review processes that are in process. Moving beyond the impact of the adoption of CECL, volatility in the allowance for credit losses, and therefore earnings, will likely be experienced due to changes in the relevant forward-looking information including forecasts of macroeconomic conditions utilized in the CECL model and other key assumptions that are applied to the remaining life of the loan and lease portfolios. Intangible Assets The FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", in January 2017. Under current guidance, a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill by following procedures that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the new amendments, the goodwill impairment test compares the fair value of a reporting unit with its carrying amount and an impairment charge is measured as the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments were effective for impairment tests beginning January 1, 2020 and did not have a significant effect on the Company's consolidated financial statements. Financial Instruments The FASB issued ASU 2018-13, "Changes to the Disclosure Requirements of Fair Value Measurement", in August 2018. The amendments in the ASU eliminate or modify certain disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. In addition, the amendments in the ASU also require the addition of new disclosure requirements on fair value measurement, including the disclosure of changes in unrealized gains and losses for the period included in AOCI for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance was effective January 1, 2020 and did not have a significant effect on the Company's consolidated financial statements. Retirement Benefits The FASB issued ASU 2018-14, "Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)", in August 2018. The amendments in the ASU eliminate disclosures that are no longer considered cost beneficial and clarify specific requirements of disclosures. In addition, the amendments in the ASU also add new disclosures, including the explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments were effective January 1, 2020 and did not have a significant effect on the Company's consolidated financial statements. 51 Intangible Assets The FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", in August 2018. Under current guidance the accounting for implementation costs of a hosting arrangement that is a service contract is not specifically addressed. Under the new amendments, the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract are aligned with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software or hosting arrangements that include internal-use software license. The guidance was effective January 1, 2020 and did not have a significant effect on the Company's consolidated financial statements. Income Taxes The FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes", in December 2019. The amendments in the ASU eliminate certain exceptions under current guidance for investments, intraperiod allocations, and the methodology for calculating interim income tax. In addition, the amendments also add new guidance to simplify accounting for income taxes. The amendments are effective January 1, 2021, but early adoption is permitted. The Company is still assessing the impact on the Company's consolidated financial statements. Corporate Governance The Company has adopted a number of corporate governance measures. These include corporate governance guidelines, a code of ethics that applies to its senior financial officers and the charters for its audit and risk committee, its committee on compensation and human resources, and its committee on governance/directors. This information is available on the Company’s Web site www.commercebank.com under Social Responsibility. 52 SUMMARY OF QUARTERLY STATEMENTS OF INCOME Year ended December 31, 2019 (In thousands, except per share data) Interest income Interest expense Net interest income Non-interest income Investment securities gains (losses), net Salaries and employee benefits Other expense Provision for loan losses Income before income taxes Income taxes Non-controlling interest 12/31/2019 9/30/2019 6/30/2019 3/31/2019 For the Quarter Ended $ 226,665 $ (24,006) 202,659 143,461 (248) (126,901) (68,273) (15,206) 135,492 (28,214) (398) 231,743 $ (28,231) 203,512 132,743 4,909 (123,836) (67,184) (10,963) 139,181 (29,101) (838) 238,412 $ (26,778) 211,634 127,259 (110) (120,062) (69,717) (11,806) 137,198 (28,899) (328) Net income attributable to Commerce Bancshares, Inc. Net income per common share — basic* Net income per common share — diluted* Weighted average shares — basic* Weighted average shares — diluted* $ $ $ 106,880 $ 109,242 $ 107,971 $ .94 $ .93 $ 111,730 112,011 .93 $ .93 $ 112,982 113,249 .91 $ .91 $ 114,961 115,240 Year ended December 31, 2018 (In thousands, except per share data) 12/31/2018 9/30/2018 6/30/2018 3/31/2018 For the Quarter Ended $ 232,832 $ 224,751 $ 225,623 $ Interest income Interest expense Net interest income Non-interest income Investment securities gains (losses), net Salaries and employee benefits Other expense Provision for loan losses Income before income taxes Income taxes Non-controlling interest Net income attributable to Commerce Bancshares, Inc. Net income per common share — basic* Net income per common share — diluted* Weighted average shares — basic* Weighted average shares — diluted* Year ended December 31, 2017 (In thousands, except per share data) Interest income Interest expense Net interest income Non-interest income Investment securities gains (losses), net Salaries and employee benefits Other expense Provision for loan losses Income before income taxes Income taxes Non-controlling interest Net income attributable to Commerce Bancshares, Inc. Net income per common share — basic* Net income per common share — diluted* Weighted average shares — basic* Weighted average shares — diluted* * Restated for the 5% stock dividend distributed in 2019. (20,612) 212,220 133,087 (7,129) (120,517) (68,108) (12,256) 137,297 (26,537) (1,108) (16,997) 207,754 123,714 4,306 (116,194) (68,865) (9,999) 140,716 (26,647) (1,493) (14,664) 210,959 124,850 (3,075) (115,589) (66,271) (10,043) 140,831 (29,507) (994) 109,652 $ 112,576 $ 110,330 $ .92 $ .91 $ 116,000 116,309 .93 $ .94 $ 116,434 116,823 .92 $ .91 $ 116,519 116,897 12/31/2017 9/30/2017 6/30/2017 3/31/2017 For the Quarter Ended 201,572 $ (11,564) 190,008 119,383 27,209 (115,741) (93,118) (12,654) 115,087 (20,104) (628) 194,244 $ (11,653) 182,591 116,887 (3,037) (111,382) (67,835) (10,704) 106,520 (32,294) 338 193,594 $ (10,787) 182,807 115,380 1,651 187,997 (9,724) 178,273 109,613 (772) (108,829) (112,369) (68,061) (10,758) 112,190 (33,201) (29) 94,355 $ 74,564 $ 78,960 $ .78 $ .78 $ 116,445 116,839 .61 $ .61 $ 116,455 116,844 .65 $ .65 $ 116,405 116,803 $ $ $ $ $ $ $ 53 227,865 (24,377) 203,488 121,240 (925) (122,128) (69,297) (12,463) 119,915 (22,860) 83 97,138 .81 .81 115,511 115,816 205,995 (13,103) 192,892 119,690 5,410 (115,894) (66,383) (10,396) 125,319 (23,258) (1,077) 100,984 .84 .84 116,462 116,827 (67,008) (11,128) 96,609 (24,907) (198) 71,504 .59 .58 116,191 116,650 AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS (Dollars in thousands) ASSETS Loans:(A) Business(B) Real estate – construction and land Real estate – business Real estate – personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans Loans held for sale Investment securities: U.S. government & federal agency obligations Government-sponsored enterprise obligations State & municipal obligations(B) Mortgage-backed securities Asset-backed securities Other debt securities Trading debt securities(B) Equity securities(B) Other securities(B) Total investment securities Federal funds sold and short-term securities purchased under agreements to resell Long-term securities purchased under agreements to resell Interest earning deposits with banks Total interest earning assets Allowance for loan losses Unrealized gain (loss) on debt securities Cash and due from banks Land, buildings and equipment - net Other assets Total assets LIABILITIES AND EQUITY Interest bearing deposits: Savings Interest checking and money market Certificates of deposit of less than $100,000 Certificates of deposit of $100,000 and over Total interest bearing deposits Borrowings: Federal funds purchased and securities sold under agreements to repurchase Other borrowings Total borrowings Total interest bearing liabilities Non-interest bearing deposits Other liabilities Equity Total liabilities and equity Net interest margin (T/E) Net yield on interest earning assets Percentage increase (decrease) in net interest margin (T/E) compared to the prior year 2019 Interest Income/ Expense Average Balance Average Rates Earned/Paid Average Balance 2018 Interest Income/ Expense Average Rates Earned/Paid Average Balance 2017 Interest Income/ Expense Average Rates Earned/Paid Years Ended December 31 $ 5,214,158 $ 909,367 2,859,008 2,178,716 1,930,883 358,474 764,828 9,203 14,224,637 18,577 202,308 49,702 127,635 85,604 92,414 18,204 93,754 — 669,621 1,209 3.88 % $ 5.47 4.46 3.93 4.79 5.08 12.26 — 4.71 6.51 4,963,029 $ 967,320 2,737,820 2,093,802 2,010,826 379,715 768,789 4,778 13,926,079 19,493 184,837 49,440 117,516 80,365 89,074 17,513 92,269 — 631,014 1,298 3.72% $ 5.11 4.29 3.84 4.43 4.61 12.00 — 4.53 6.66 4,832,045 $ 881,879 2,694,620 2,019,674 2,036,393 398,611 743,885 4,592 13,611,699 17,452 154,681 37,315 102,009 75,267 81,065 15,516 88,329 — 554,182 1,000 3.20 % 4.23 3.79 3.73 3.98 3.89 11.87 — 4.07 5.73 851,124 20,968 2.46 921,759 21,720 2.36 914,961 19,697 2.15 191,406 1,220,958 4,594,576 1,372,574 333,105 29,450 4,547 134,255 8,731,995 4,557 38,362 123,806 37,478 9,017 886 1,792 8,466 245,332 2,034 55 15,898 6,698 938,813 1,021 38,691 6,368 26,945 73,025 29,415 952 30,367 103,392 741,089 316,299 24,034,631 (160,212) 74,605 370,709 380,350 513,442 $ 25,213,525 $ 918,896 10,607,224 610,807 1,396,760 13,533,687 1,822,098 43,919 1,866,017 15,399,704 6,376,204 360,587 3,077,030 $ 25,213,525 2.38 3.14 2.69 2.73 2.71 3.01 39.41 6.31 2.81 2.70 2.15 2.12 3.91 308,520 1,410,700 4,203,625 1,455,690 340,458 24,731 26,459 114,438 8,806,380 6,098 42,867 111,686 34,223 8,912 759 11,816 12,412 250,493 27,026 519 15,881 6,233 905,438 973 26,830 3,215 14,658 45,676 19,655 45 19,700 65,376 696,438 319,948 23,795,364 (158,791) (113,068) 360,732 343,636 438,362 $ 24,666,235 .11 .36 1.04 1.93 .54 $ 867,150 10,817,169 603,137 1,114,825 13,402,281 1.61 2.17 1.63 .67 % 1,514,144 1,747 1,515,891 14,918,172 6,728,971 247,520 2,771,572 $ 24,666,235 1.98 3.04 2.66 2.35 2.62 3.07 44.66 10.85 2.84 1.92 2.28 1.95 3.81 452,422 1,720,723 3,784,602 2,083,611 330,365 21,929 60,772 98,564 9,467,949 7,321 62,073 89,623 36,757 8,410 583 2,283 10,507 237,254 18,518 230 15,440 2,223 810,329 981 16,328 2,645 10,859 30,813 9,829 3,086 12,915 43,728 688,147 207,269 24,011,034 (156,572) 45,760 361,414 345,639 424,333 $ 25,031,608 .11 .25 .53 1.31 .34 $ 819,558 10,517,741 676,272 1,404,960 13,418,531 1.30 2.58 1.30 .44% 1,462,387 87,696 1,550,083 14,968,614 7,176,255 250,510 2,636,229 $ 25,031,608 $ 835,421 $ 840,062 $ 766,601 3.48 % (.55)% 3.53% 9.58% 1.62 3.61 2.37 1.76 2.55 2.66 3.76 10.66 2.51 1.24 2.24 1.07 3.37 .12 .16 .39 .77 .23 .67 3.52 .83 .29 % 3.19 % 7.75 % (A) Loans on non-accrual status are included in the computation of average balances. Included in interest income above are loan fees and late charges, net of amortization of deferred loan origination fees and costs, which are immaterial. Credit card income from merchant discounts and net interchange fees are not included in loan income. AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS 54 2016 Interest Income/ Expense Average Balance Average Rates Earned/Paid Average Balance 2015 Interest Income/ Expense Average Rates Earned/Paid Average Balance 2014 Interest Income/ Expense Average Rates Earned/Paid Average Balance Five Year Compound Growth Rate Years Ended December 31 $ 4,652,526 $ 778,822 2,440,955 1,936,420 1,947,240 417,514 749,589 4,712 12,927,778 25,710 134,438 27,452 89,305 72,417 75,076 14,797 86,008 — 499,493 1,317 735,081 15,628 13,173 63,261 82,888 35,346 8,382 489 2,208 7,656 229,031 78 13,544 973 744,436 923 13,443 2,809 8,545 25,720 3,315 3,968 7,283 33,003 591,785 1,753,727 3,460,821 2,418,118 331,289 19,722 47,763 112,888 9,471,194 12,660 791,392 188,581 23,417,315 (152,628) 143,842 381,822 350,443 415,677 $ 24,556,471 $ 775,121 10,285,288 749,261 1,471,610 13,281,280 1,266,093 171,255 1,437,348 14,718,628 7,049,633 292,145 2,496,065 $ 24,556,471 2.89% 3.52 3.66 3.74 3.86 3.54 11.47 — 3.86 5.12 $ 4,186,101 $ 477,320 2,293,839 1,899,234 1,829,830 431,033 746,503 5,416 11,869,276 4,115 116,455 17,075 85,751 71,666 72,625 15,262 86,162 — 464,996 191 2.78% 3.58 3.74 3.77 3.97 3.54 11.54 — 3.92 4.64 $ 3,919,421 $ 418,702 2,300,855 1,818,125 1,617,039 426,720 754,482 4,889 11,260,233 — 110,791 15,826 88,206 69,054 68,434 16,188 86,298 — 454,797 — 2.13 2.23 3.61 2.40 1.46 2.53 2.48 4.62 6.78 2.42 .62 1.71 .52 3.18 .12 .13 .37 .58 .19 .26 2.32 .51 .22% 466,135 5,180 938,589 1,786,235 3,164,447 2,773,069 255,558 20,517 45,200 108,061 9,557,811 17,319 63,054 80,936 29,558 6,191 562 1,805 8,582 213,187 16,184 60 13,172 528 692,134 876 12,498 3,236 6,051 22,661 1,861 3,574 5,435 28,096 1,002,053 206,115 22,655,554 (152,690) 112,352 378,803 359,773 383,810 $ 23,737,602 $ 729,311 9,752,794 832,343 1,224,402 12,538,850 1,654,860 103,884 1,758,744 14,297,594 6,786,741 280,231 2,373,036 $ 23,737,602 1.11 1.85 3.53 2.56 1.07 2.42 2.74 3.99 7.94 2.23 .37 1.31 .26 3.06 .12 .13 .39 .49 .18 .11 3.44 .31 .20% 497,271 13,750 13,211 61,593 80,229 24,976 3,287 411 1,448 9,885 208,790 101 12,473 555 676,716 855 12,667 4,137 5,926 23,585 1,019 3,484 4,503 28,088 794,752 1,715,493 2,981,225 2,834,013 141,266 18,423 48,847 100,399 9,131,689 31,817 985,205 220,876 21,629,820 (160,828) 90,392 382,207 354,899 376,433 $ 22,672,923 $ 670,650 9,477,947 935,387 1,372,509 12,456,493 1,257,660 104,896 1,362,556 13,819,049 6,339,183 225,554 2,289,137 $ 22,672,923 $ 711,433 $ 664,038 $ 648,628 3.04% 7.14% 2.93% 2.38% 2.83% 3.78 3.83 3.80 4.23 3.79 11.44 — 4.04 — 2.77 1.66 3.59 2.69 .88 2.33 2.23 2.96 9.85 2.29 .32 1.27 .25 3.13 .13 .13 .44 .43 .19 .08 3.32 .33 .20% 3.00% .42% 5.87% 16.78 4.44 3.68 3.61 (3.43) .27 13.49 4.78 — 11.35 (24.78) (6.58) 9.04 (13.50) 18.72 9.84 (37.80) 5.98 (.89) (42.30) (5.54) 7.45 2.13 (.08) (3.77) (.61) 1.39 6.40 2.15 6.50 2.28 (8.17) .35 1.67 7.70 (15.98) 6.49 2.19 .12 9.84 6.09 2.15% (B) Interest income and yields are presented on a fully-taxable equivalent basis using a federal income tax rate of 21% in 2019 and 2018, and 35% in prior periods. Loan interest income includes tax free loan income (categorized as business loan income) which includes tax equivalent adjustments of $6,282,000 in 2019, $5,931,000 in 2018, $10,357,000 in 2017, $9,537,000 in 2016, $8,332,000 in 2015 and $7,640,000 in 2014. Investment securities interest income includes tax equivalent adjustments of $7,845,000 in 2019, $10,306,000 in 2018, $22,565,000 in 2017, $21,847,000 in 2016, $21,386,000 in 2015 and $20,784,000 in 2014. These adjustments relate to state and municipal obligations, trading securities, equity securities, and other securities. 55 QUARTERLY AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS (Dollars in millions) ASSETS Loans: Business(A) Real estate – construction and land $ Real estate – business Real estate – personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans Loans held for sale Investment securities: U.S. government & federal agency obligations Government-sponsored enterprise obligations State & municipal obligations(A) Mortgage-backed securities Asset-backed securities Other debt securities Trading debt securities(A) Equity securities(A) Other securities(A) Total investment securities Federal funds sold and short-term securities purchased under agreements to resell Long-term securities purchased under agreements to resell Interest earning deposits with banks Total interest earning assets Allowance for loan losses Unrealized gain (loss) on debt securities Cash and due from banks Land, buildings and equipment – net Other assets Total assets LIABILITIES AND EQUITY Interest bearing deposits: Savings Interest checking and money market Certificates of deposit under $100,000 Certificates of deposit $100,000 & over Total interest bearing deposits Borrowings: Federal funds purchased and securities sold under agreements to repurchase Other borrowings Total borrowings Total interest bearing liabilities Non-interest bearing deposits Other liabilities Equity Total liabilities and equity Net interest margin (T/E) Net yield on interest earning assets (A) Includes tax equivalent calculations. $ $ $ $ Fourth Quarter Third Quarter Second Quarter First Quarter Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Year ended December 31, 2019 5,362 901 2,820 2,284 1,962 348 749 18 14,444 15 826 185 1,208 4,686 1,258 331 33 4 142 8,673 1 850 390 24,373 (160) 150 379 387 549 25,678 924 10,619 627 1,434 13,604 1,837 94 1,931 15,535 6,553 459 3,131 25,678 206 3.59% $ 5.05 4.22 3.85 4.76 4.76 12.11 — 4.47 5.32 2.16 2.17 3.05 2.72 2.62 2.82 2.81 49.40 6.58 2.78 2.22 2.26 1.61 3.75 .11 .35 1.16 1.79 .52 1.20 2.05 1.25 .61% $ $ $ $ 5,265 920 2,883 2,175 1,924 354 763 9 14,293 20 824 182 1,172 4,713 1,298 334 30 5 135 8,693 1 713 227 23,947 (160) 153 367 380 545 25,232 925 10,409 620 1,504 13,458 1,885 77 1,962 15,420 6,290 391 3,131 25,232 207 3.85% $ 5.46 4.42 3.91 4.88 5.17 12.42 — 4.71 6.15 2.36 2.69 3.14 2.61 2.80 2.63 2.91 35.67 6.19 2.76 2.57 2.01 2.17 3.90 .11 .38 1.11 1.99 .58 1.74 2.33 1.76 .73% $ $ $ $ 5,142 909 2,869 2,135 1,908 362 766 5 14,096 21 844 200 1,222 4,615 1,412 331 30 5 130 8,789 2 700 332 23,940 (161) 42 369 378 504 25,072 930 10,643 605 1,378 13,556 1,794 2 1,796 15,352 6,336 307 3,077 25,072 215 4.02% $ 5.63 4.60 3.97 4.77 5.20 12.33 — 4.82 6.98 4.66 2.32 3.18 2.70 2.79 2.68 3.14 35.97 6.69 3.04 2.76 2.11 2.40 4.05 .11 .38 1.01 2.02 .55 1.80 1.52 1.80 .70% $ $ $ $ 5,086 907 2,864 2,119 1,929 371 781 4 14,061 18 910 199 1,283 4,360 1,526 336 25 5 130 8,774 5 700 317 23,875 (159) (49) 367 376 454 24,864 896 10,763 590 1,268 13,517 1,772 1 1,773 15,290 6,325 283 2,966 24,864 207 4.07% 5.73 4.61 4.00 4.73 5.17 12.18 — 4.85 7.38 .78 2.35 3.19 2.76 2.70 2.69 3.24 37.55 5.73 2.66 2.79 2.18 2.42 3.93 .11 .35 .87 1.92 .51 1.72 1.62 1.72 .65% 3.36% 3.43% 3.61% 3.52% 56 QUARTERLY AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS (Dollars in millions) ASSETS Loans: Business(A) Real estate – construction and land $ Real estate – business Real estate – personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans Loans held for sale Investment securities: U.S. government & federal agency obligations Government-sponsored enterprise obligations State & municipal obligations(A) Mortgage-backed securities Asset-backed securities Other debt securities Trading debt securities(A) Equity securities(A) Other securities(A) Total investment securities Federal funds sold and short-term securities purchased under agreements to resell Long-term securities purchased under agreements to resell Interest earning deposits with banks Total interest earning assets Allowance for loan losses Unrealized loss on debt securities Cash and due from banks Land, buildings and equipment – net Other assets Total assets LIABILITIES AND EQUITY Interest bearing deposits: Savings Interest checking and money market Certificates of deposit under $100,000 Certificates of deposit $100,000 & over Total interest bearing deposits Borrowings: Federal funds purchased and securities sold under agreements to repurchase Other borrowings Total borrowings Total interest bearing liabilities Non-interest bearing deposits Other liabilities Equity Total liabilities and equity Net interest margin (T/E) Net yield on interest earning assets (A) Includes tax equivalent calculations. $ $ $ $ Fourth Quarter Third Quarter Second Quarter First Quarter Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Average Balance Average Rates Earned/Paid Year ended December 31, 2018 5,030 953 2,758 2,122 1,962 374 788 5 13,992 18 923 215 1,361 4,380 1,519 340 26 4 128 8,896 14 700 353 23,973 (159) (166) 365 343 452 24,808 871 10,839 585 1,091 13,386 1,656 1 1,657 15,043 6,667 265 2,833 24,808 216 3.93% $ 5.47 4.53 3.87 4.62 4.98 11.91 — 4.72 6.59 1.90 2.24 3.06 2.75 2.55 2.60 3.21 39.92 15.51 2.86 2.56 2.31 2.28 3.92 .11 .30 .70 1.61 .41 1.60 2.67 1.60 .54% $ $ $ $ 4,925 992 2,733 2,111 1,985 374 775 5 13,900 18 925 262 1,376 4,434 1,427 340 24 4 120 8,912 13 686 299 23,828 (159) (119) 357 344 445 24,696 877 10,840 594 1,100 13,411 1,500 2 1,502 14,913 6,678 296 2,809 24,696 211 3.80% $ 5.21 4.35 3.83 4.46 4.72 11.99 — 4.59 6.87 2.23 2.10 2.98 2.65 2.42 2.59 3.13 32.69 13.00 2.76 2.10 2.26 1.96 3.80 .11 .26 .56 1.41 .35 1.33 2.60 1.33 .45% $ $ $ $ 4,962 972 2,727 2,079 2,026 378 754 4 13,902 22 924 354 1,395 4,067 1,407 340 26 47 109 8,669 37 700 354 23,684 (159) (122) 357 343 419 24,522 881 10,850 609 1,135 13,475 1,339 3 1,342 14,817 6,749 228 2,728 24,522 216 3.69% $ 5.06 4.22 3.84 4.39 4.51 12.05 — 4.49 6.72 3.18 1.88 3.06 2.60 2.32 2.63 3.15 89.68 6.68 3.19 1.93 2.17 1.80 3.90 .11 .23 .46 1.23 .32 1.18 2.52 1.19 .40% $ $ $ $ 4,934 952 2,734 2,062 2,072 393 758 5 13,910 19 916 406 1,513 3,926 1,469 342 22 51 101 8,746 44 700 274 23,693 (159) (43) 364 345 437 24,637 839 10,738 625 1,134 13,336 1,560 2 1,562 14,898 6,825 199 2,715 24,637 197 3.48% 4.69 4.06 3.80 4.25 4.25 12.06 — 4.33 6.45 2.12 1.84 3.06 2.62 2.11 2.65 2.73 3.64 6.73 2.58 1.65 2.38 1.69 3.59 .12 .20 .43 1.02 .28 1.04 2.54 1.04 .36% 3.58% 3.52% 3.65% 3.37% 57 Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is disclosed within the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Commerce Bancshares, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Commerce Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Assessment of the allowance for loan losses related to loans collectively evaluated for impairment As discussed in Notes 1 and 2 to the consolidated financial statements, the Company’s allowance for loan losses related to loans collectively evaluated for impairment (ASC 450 ALL) was $157.9 million of a total allowance for loan losses of $160.7 million as December 31, 2019, or 1.07% of total loans. The Company estimated the ASC 450 ALL using a historical loss methodology utilizing a loss emergence period, which is applied to loans based on loan risk ratings. Such amounts are adjusted for certain qualitative factors which include an evaluation of the performance and status of loans, current loan portfolio composition and characteristics, trends in delinquencies, portfolio risk ratings, levels of non- performing assets, and prevailing regional and national economic and business conditions. 58 We identified the assessment of the ASC 450 ALL as a critical audit matter because it involved significant measurement uncertainty requiring complex auditor judgment, and knowledge and experience in the industry. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. This assessment encompassed the evaluation of the process used to estimate the ASC 450 ALL, including the following key factors and assumptions (1) historical losses in the Company’s portfolio over time, (2) an estimate of the length of time between a specific loss event and when the first loss is identified (known as the estimated loss emergence period), and (3) loan risk ratings; and the development and evaluation of qualitative adjustments. The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls related to the Company’s ASC 450 ALL process, including controls related to the (1) development and approval of the ASC 450 ALL methodology, (2) determination of the key factors and assumptions used to estimate the ASC 450 ALL, (3) determination of qualitative adjustments, and (4) analysis of the ASC 450 ALL results, trends, and ratios. We evaluated the Company’s process to develop the ASC 450 ALL estimate by testing certain sources of data, factors, and assumptions, and considered the relevance and reliability of such data, factors, and assumptions. We evaluated that the historical losses in the Company’s portfolio are representative of the credit characteristics of the current portfolio. We tested the estimated loss emergence period based on historical loss data, including the relevance of the parameters used in the estimate. We involved credit risk professionals with specialized industry knowledge and experience, who assisted in: • evaluating the Company’s ASC 450 ALL methodology for compliance with U.S. generally accepted accounting principles, • assessing the structured process for the determination of the magnitude of the qualitative adjustments, • evaluating the qualitative factors and the effect of those factors on the ASC 450 ALL compared with relevant credit factors and consistency with credit trends, and • testing individual loan grades for a selection of commercial loans by evaluating the financial performance of the borrower and the underlying collateral. We evaluated the collective results of the procedures performed to assess the sufficiency of the audit evidence obtained related to the Company’s ASC 450 ALL. We have served as the Company’s auditor since 1971. Kansas City, Missouri February 25, 2020 59 Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS ASSETS Loans Allowance for loan losses Net loans Loans held for sale (including $9,181,000 and $13,529,000 of residential mortgage loans carried at fair value at December 31, 2019 and 2018, respectively) Investment securities: Available for sale debt ($204,942,000 and $463,325,000 pledged at December 31, 2019 and 2018, respectively, to secure swap and repurchase agreements) Trading debt Equity Other Total investment securities Federal funds sold and short-term securities purchased under agreements to resell Long-term securities purchased under agreements to resell Interest earning deposits with banks Cash and due from banks Premises and equipment – net Goodwill Other intangible assets – net Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits: Non-interest bearing Savings, interest checking and money market Certificates of deposit of less than $100,000 Certificates of deposit of $100,000 and over Total deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowings Other liabilities Total liabilities Commerce Bancshares, Inc. stockholders’ equity: Preferred stock, $1 par value Authorized 2,000,000 shares; issued 6,000 shares at December 31, 2019 and 2018 Common stock, $5 par value Authorized 140,000,000 shares at December 31, 2019 and 120,000,000 shares at December 31, 2018; issued 112,795,605 shares at December 31, 2019 and 111,886,450 shares at December 31, 2018 Capital surplus Retained earnings Treasury stock of 445,952 shares at December 31, 2019 and 555,100 shares at December 31, 2018, at cost Accumulated other comprehensive income (loss) Total Commerce Bancshares, Inc. stockholders’ equity Non-controlling interest Total equity Total liabilities and equity See accompanying notes to consolidated financial statements. December 31 2019 2018 (In thousands) $ 14,737,817 $ (160,682) 14,577,135 14,140,298 (159,932) 13,980,366 13,809 20,694 8,571,626 28,161 4,209 137,892 8,741,888 — 850,000 395,850 491,615 370,637 138,921 9,534 476,400 26,065,789 $ 6,890,687 $ 11,621,716 626,157 1,381,855 20,520,415 1,850,772 2,418 553,712 22,927,317 8,538,041 27,059 4,409 129,157 8,698,666 3,320 700,000 689,876 507,892 333,119 138,921 8,794 382,194 25,463,842 6,980,298 11,685,239 586,091 1,072,031 20,323,659 1,956,389 8,702 237,943 22,526,693 144,784 144,784 563,978 2,151,464 201,562 (37,548) 110,444 3,134,684 3,788 3,138,472 26,065,789 $ 559,432 2,084,824 241,163 (34,236) (64,669) 2,931,298 5,851 2,937,149 25,463,842 $ $ $ 60 Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) INTEREST INCOME Interest and fees on loans Interest on loans held for sale Interest on investment securities Interest on federal funds sold and short-term securities purchased under agreements to resell Interest on long-term securities purchased under agreements to resell Interest on deposits with banks Total interest income INTEREST EXPENSE Interest on deposits: Savings, interest checking and money market Certificates of deposit of less than $100,000 Certificates of deposit of $100,000 and over Interest on federal funds purchased and securities sold under agreements to repurchase Interest on other borrowings Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses NON-INTEREST INCOME Bank card transaction fees Trust fees Deposit account charges and other fees Capital market fees Consumer brokerage services Loan fees and sales Other Total non-interest income INVESTMENT SECURITIES GAINS (LOSSES), NET NON-INTEREST EXPENSE Salaries and employee benefits Net occupancy Equipment Supplies and communication Data processing and software Marketing Deposit insurance Community service Other Total non-interest expense Income before income taxes Less income taxes Net income Less non-controlling interest expense Net income attributable to Commerce Bancshares, Inc. Less preferred stock dividends Net income available to common shareholders Net income per common share - basic Net income per common share - diluted See accompanying notes to consolidated financial statements. $ $ $ 61 For the Years Ended December 31 2018 2017 2019 $ 663,338 $ 1,209 237,487 625,083 $ 1,298 240,187 55 15,898 6,698 924,685 39,712 6,368 26,945 29,415 952 103,392 821,293 50,438 770,855 167,879 155,628 95,983 8,146 15,804 15,767 65,496 524,703 3,626 492,927 47,157 19,061 20,394 92,899 21,914 6,676 2,446 63,924 767,398 531,786 109,074 422,712 1,481 421,231 9,000 412,231 $ 3.59 $ 3.58 $ 519 15,881 6,233 889,201 27,803 3,215 14,658 19,655 45 65,376 823,825 42,694 781,131 171,576 147,964 94,517 7,721 15,807 12,723 51,033 501,341 (488) 468,194 46,044 18,125 20,637 85,978 20,548 11,546 2,445 64,304 737,821 544,163 105,949 438,214 4,672 433,542 9,000 424,542 $ 3.61 $ 3.60 $ 543,825 1,000 214,689 230 15,440 2,223 777,407 17,309 2,645 10,859 9,829 3,086 43,728 733,679 45,244 688,435 155,100 135,159 90,060 7,996 14,630 13,948 44,370 461,263 25,051 448,321 45,612 18,568 22,790 80,998 16,325 13,986 34,377 63,366 744,343 430,406 110,506 319,900 517 319,383 9,000 310,383 2.63 2.62 Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Net income Other comprehensive income (loss): Net unrealized gains (losses) on securities for which a portion of an other-than-temporary impairment has been recorded in earnings Net unrealized gains (losses) on other securities Change in pension loss Unrealized gains on cash flow hedge derivatives Other comprehensive income (loss) Comprehensive income Less non-controlling interest expense For the Years Ended December 31 2019 2018 2017 $ 422,712 $ 438,214 $ 319,900 (632) 151,122 1,167 23,456 175,113 597,825 1,481 (277) (55,631) 664 6,855 (48,389) 389,825 4,672 412 3,022 (301) — 3,133 323,033 517 322,516 Comprehensive income attributable to Commerce Bancshares, Inc. $ 596,344 $ 385,153 $ See accompanying notes to consolidated financial statements. 62 Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Provision for depreciation and amortization Amortization of investment security premiums, net Deferred income tax expense Investment securities (gains) losses, net (A) Net gains on sales of loans held for sale Proceeds from sales of loans held for sale Originations of loans held for sale Net (increase) decrease in trading securities, excluding unsettled transactions Stock-based compensation (Increase) decrease in interest receivable Increase in interest payable Increase (decrease) in income taxes payable Donation of securities Gain on sale of Corporate Trust business Other changes, net Net cash provided by operating activities INVESTING ACTIVITIES Proceeds from sales of investment securities (A) Proceeds from maturities/pay downs of investment securities (A) Purchases of investment securities (A) Net increase in loans Long-term securities purchased under agreements to resell Repayments of long-term securities purchased under agreements to resell Purchases of land, buildings and equipment Sales of land, buildings and equipment Net cash provided by (used in) investing activities FINANCING ACTIVITIES Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits Net increase (decrease) in certificates of deposit Net increase (decrease) in federal funds purchased and short-term securities sold under agreements to repurchase Net increase (decrease) in other borrowings Purchases of treasury stock Accelerated share repurchase agreement Issuance of stock under equity compensation plans Cash dividends paid on common stock Cash dividends paid on preferred stock Net cash provided by (used in) financing activities Increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash at beginning of year Cash, cash equivalents and restricted cash at end of year Income tax payments, net Interest paid on deposits and borrowings Loans transferred to foreclosed real estate (A) Available for sale debt securities, equity securities, and other securities. See accompanying notes to consolidated financial statements. 63 For the Years Ended December 31 2019 2018 2017 $ 422,712 $ 438,214 $ 319,900 50,438 41,145 27,631 14,195 (3,626) (10,127) 259,153 (244,976) 3,863 13,854 3,316 5,586 14,465 — (11,472) (73,363) 512,794 42,694 38,679 26,224 5,336 488 (6,370) 208,431 (203,775) (14,277) 12,841 (4,258) 2,137 12,288 — — (5,992) 552,660 45,244 39,732 35,423 13,617 (25,051) (8,008) 215,373 (216,064) 7,585 12,105 (4,459) 38 (27,685) 32,036 — (13,259) 426,527 413,203 1,558,244 708,864 1,510,985 792,380 1,899,640 (1,863,180) (2,090,333) (1,853,817) (647,890) (150,000) — (42,575) 2,033 (730,165) 85,438 349,890 (105,617) (6,394) (134,904) (150,000) (8) (113,466) (9,000) (84,061) (301,432) 1,209,240 (200,673) (100,000) 100,000 (33,294) 13,427 (91,024) 60,278 (108,742) 449,251 6,944 (75,231) — (10) (100,238) (9,000) 223,252 684,888 524,352 $ $ 907,808 $ 76,168 $ 97,806 581 1,209,240 $ 84,172 $ 63,239 1,551 (614,849) (75,000) 100,000 (30,824) 3,190 220,720 (15,036) (474,044) (216,767) (100,291) (17,771) — (8) (91,619) (9,000) (924,536) (277,289) 801,641 524,352 120,744 43,690 2,063 Commerce Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In thousands, except per share data) Balance, December 31, 2016 Adoption of ASU 2016-09 Net income Other comprehensive income Distributions to non-controlling interest Sale of non-controlling interest of subsidiary Purchases of treasury stock Cash dividends paid on common stock ($.777 per share) Cash dividends paid on preferred stock ($1.500 per depositary share) Stock-based compensation Issuance under stock purchase and equity compensation plans 5% stock dividend, net Balance, December 31, 2017 Adoption of ASU 2018-02 Adoption of ASU 2016-01 Net income Other comprehensive loss Distributions to non-controlling interest Purchases of treasury stock Cash dividends paid on common stock ($.853 per share) Cash dividends paid on preferred stock ($1.500 per depositary share) Stock-based compensation Issuance under stock purchase and equity compensation plans 5% stock dividend, net Balance, December 31, 2018 Net income Other comprehensive income Distributions to non-controlling interest Purchases of treasury stock Accelerated share repurchase agreement Cash dividends paid on common stock ($.990 per share) Cash dividends paid on preferred stock ($1.500 per depositary share) Stock-based compensation Issuance under stock purchase and equity compensation plans 5% stock dividend, net Balance, December 31, 2019 Commerce Bancshares, Inc. Shareholders Preferred Stock Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Non- Controlling Interest Total $ 144,784 $ 510,015 $ 1,552,454 $ 292,849 $ (15,294) $ 10,975 $ 5,349 $ 2,501,132 3,441 (2,144) 319,383 1,297 517 319,900 2,950 12,105 (17,734) (91,619) (9,000) 25,392 262,144 (288,095) 144,784 535,407 1,815,360 221,374 (2,932) 33,320 433,542 (100,238) (9,000) 12,841 (21,632) 24,025 278,255 (334,903) 144,784 559,432 2,084,824 241,163 421,231 (113,466) (9,000) 13,854 (19,293) (17,771) 18,592 (14,473) (75,231) 23,424 32,044 (34,236) (134,904) (150,000) 20,644 4,546 72,079 (338,366) 260,948 3,133 (1,293) (2,949) 3,133 (1,293) 1 (17,771) (91,619) (9,000) 12,105 858 (559) 14,108 2,932 (33,320) (48,389) 1,624 2,718,184 — — 4,672 438,214 (445) (48,389) (445) (75,231) (100,238) (9,000) 12,841 1,792 (579) (64,669) 175,113 5,851 1,481 2,937,149 422,712 175,113 (3,544) (3,544) (134,904) (150,000) (113,466) (9,000) 13,854 1,351 (793) $ 144,784 $ 563,978 $ 2,151,464 $ 201,562 $ (37,548) $ 110,444 $ 3,788 $ 3,138,472 See accompanying notes to consolidated financial statements. 64 Commerce Bancshares, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Nature of Operations Commerce Bancshares, Inc. and its subsidiaries (the Company) conducts its principal activities from approximately 316 branch and ATM locations throughout Missouri, Kansas, Illinois, Oklahoma and Colorado. Principal activities include retail and commercial banking, investment management, securities brokerage, mortgage banking, trust, and private banking services. The Company also maintains commercial banking offices in Dallas, Houston, Cincinnati, Nashville, Des Moines, Indianapolis, and Grand Rapids. Basis of Presentation The Company follows accounting principles generally accepted in the United States of America (GAAP) and reporting practices applicable to the banking industry. The preparation of financial statements under GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. These estimates are based on information available to management at the time the estimates are made. While the consolidated financial statements reflect management’s best estimates and judgments, actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries (after elimination of all material intercompany balances and transactions). Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no effect on net income or total assets. Management has evaluated subsequent events for potential recognition or disclosure through the date these consolidated financial statements were issued. The Company, in the normal course of business, engages in a variety of activities that involve variable interest entities (VIEs). A VIE is a legal entity that lacks equity investors or whose equity investors do not have a controlling financial interest in the entity through their equity investments. However, an enterprise is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. An enterprise that is the primary beneficiary must consolidate the VIE. The Company’s interests in VIEs are evaluated to determine if the Company is the primary beneficiary both at inception and when there is a change in circumstances that requires a reconsideration. The Company is considered to be the primary beneficiary in a rabbi trust related to a deferred compensation plan offered to certain employees. The assets and liabilities of this trust, which are included in the accompanying consolidated balance sheets, are not significant. The Company also has variable interests in certain entities in which it is not the primary beneficiary. These entities are not consolidated. These interests include affordable housing limited partnership interests, holdings in its investment portfolio of various asset and mortgage-backed bonds that are issued by securitization trusts, and managed discretionary trust assets that are not included in the accompanying consolidated balance sheets. Cash, Cash Equivalents and Restricted Cash In the accompanying consolidated statements of cash flows, cash and cash equivalents include “Cash and due from banks”, “Federal funds sold and short-term securities purchased under agreements to resell”, and “Interest earning deposits with banks” as segregated in the accompanying consolidated balance sheets. Restricted cash is comprised of cash collateral on deposit with another financial institution to secure interest rate swap transactions. Restricted cash is included in other assets in the consolidated balance sheets and totaled $20.3 million and $8.2 million at December 31, 2019 and 2018, respectively. Regulations of the Federal Reserve System require cash balances to be maintained at the Federal Reserve Bank, based on certain deposit levels. The minimum reserve requirement for the Bank at December 31, 2019 totaled $160.7 million. Other interest earning cash balances held at the Federal Reserve Bank totaled $395.9 million. Loans and Related Earnings Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balances, net of undisbursed loan proceeds, the allowance for loan losses, and any deferred fees and costs on originated loans. Origination fee income received on loans and amounts representing the estimated direct costs of origination are deferred and amortized to interest income over the life of the loan using the interest method. 65 Interest on loans is accrued based upon the principal amount outstanding. Interest income is recognized primarily on the level yield method. Loan and commitment fees, net of costs, are deferred and recognized in income over the term of the loan or commitment as an adjustment of yield. Annual fees charged on credit card loans are capitalized to principal and amortized over 12 months to loan fees and sales. Other credit card fees, such as cash advance fees and late payment fees, are recognized in income as an adjustment of yield when charged to the cardholder’s account. Non-Accrual Loans Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Business, construction real estate, business real estate, and personal real estate loans that are contractually 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection. Consumer, revolving home equity and credit card loans are exempt under regulatory rules from being classified as non-accrual. When a loan is placed on non-accrual status, any interest previously accrued but not collected is reversed against current income, and the loan is charged off to the extent uncollectible. Principal and interest payments received on non-accrual loans are generally applied to principal. Interest is included in income only after all previous loan charge- offs have been recovered and is recorded only as received. The loan is returned to accrual status only when the borrower has brought all past due principal and interest payments current, and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. A six month history of sustained payment performance is generally required before reinstatement of accrual status. Troubled Debt Restructurings A loan is accounted for as a troubled debt restructuring if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. A troubled debt restructuring typically involves (1) modification of terms such as a reduction of the stated interest rate, loan principal, or accrued interest, (2) a loan renewal at a stated interest rate lower than the current market rate for a new loan with similar risk, or (3) debt that was not reaffirmed in bankruptcy. Business, business real estate, construction real estate and personal real estate troubled debt restructurings with impairment charges are placed on non-accrual status. The Company measures the impairment loss of a troubled debt restructuring in the same manner as described below. Troubled debt restructurings which are performing under their contractual terms continue to accrue interest which is recognized in current earnings. Impaired Loans Loans are evaluated regularly by management for impairment. Included in impaired loans are all non-accrual loans, as well as loans that have been classified as troubled debt restructurings. Once a loan has been identified as impaired, impairment is measured based on either the present value of the expected future cash flows at the loan’s initial effective interest rate or the fair value of the collateral if collateral dependent. Factors considered in determining impairment include delinquency status, cash flow analysis, credit analysis, and collateral value and availability. Loans Held For Sale Loans held for sale include student loans and certain fixed rate residential mortgage loans. These loans are typically classified as held for sale upon origination based upon management's intent to sell the production of these loans. The student loans are carried at the lower of aggregate cost or fair value, and their fair value is determined based on sale contract prices. The mortgage loans are carried at fair value under the elected fair value option. Their fair value is based on secondary market prices for loans with similar characteristics, including an adjustment for embedded servicing value. Changes in fair value and gains and losses on sales are included in loan fees and sales. Deferred fees and costs related to these loans are not amortized but are recognized as part of the cost basis of the loan at the time it is sold. Interest income related to loans held for sale is accrued based on the principal amount outstanding and the loan's contractual interest rate. Occasionally, other types of loans may be classified as held for sale in order to manage credit concentration. These loans are carried at the lower of cost or fair value with gains and losses on sales recognized in loan fees and sales. Allowance/Provision for Loan Losses The allowance for loan losses is maintained at a level believed to be appropriate by management to provide for probable loan losses inherent in the portfolio as of the balance sheet date, including losses on known or anticipated problem loans as well as for loans which are not currently known to require specific allowances. Management has established a process to determine the amount of the allowance for loan losses which assesses the risks and losses inherent in its portfolio. Business, construction real estate and business real estate loans are normally larger and more complex, and their collection rates are harder to predict. These loans are more likely to be collateral dependent and are allocated a larger reserve, due to their potential volatility. Personal real 66 estate, credit card, consumer and revolving home equity loans are individually smaller and perform in a more homogenous manner, making loss estimates more predictable. Management’s process provides an allowance consisting of a specific allowance component based on certain individually evaluated loans and a general component based on estimates of reserves needed for pools of loans. Loans subject to individual evaluation generally consist of business, construction real estate, business real estate and personal real estate loans on non-accrual status. These impaired loans are evaluated individually for the impairment of repayment potential and collateral adequacy. Other impaired loans identified as performing troubled debt restructurings are collectively evaluated because they have similar risk characteristics. Loans which have not been identified as impaired are segregated by loan type and sub-type and are collectively evaluated. Reserves calculated for these loan pools are estimated using a consistent methodology that considers historical loan loss experience by loan type, loss emergence periods, delinquencies, current economic factors, loan risk ratings and industry concentrations. The Company’s estimate of the allowance for loan losses and the corresponding provision for loan losses is based on various judgments and assumptions made by management. The amount of the allowance for loan losses is influenced by several qualitative factors which include collateral valuation, evaluation of performance and status, current loan portfolio composition and characteristics, trends in delinquencies, portfolio risk ratings, levels of non-performing assets, and prevailing regional and national economic and business conditions. The estimates, appraisals, evaluations, and cash flows utilized by management may be subject to frequent adjustments due to changing economic prospects of borrowers or properties. These estimates are reviewed periodically and adjustments, if necessary, are recorded in the provision for loan losses in the periods in which they become known. Loans, or portions of loans, are charged off to the extent deemed uncollectible. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. Business, business real estate, construction real estate and personal real estate loans are generally charged down to estimated collectible balances when they are placed on non-accrual status. Consumer loans and related accrued interest are normally charged down to the fair value of related collateral (or are charged off in full if no collateral) once the loans are more than 120 days delinquent. Credit card loans are charged off against the allowance for loan losses when the receivable is more than 180 days past due. The interest and fee income previously capitalized but not collected on credit card charge-offs is reversed against interest income. Direct Financing and Sales Type Leases The net investment in direct financing and sales type leases is included in loans on the Company’s consolidated balance sheets and consists of the present values of the sum of the future minimum lease payments and estimated residual value of the leased asset. Revenue consists of interest earned on the net investment and is recognized over the lease term as a constant percentage return thereon. Investments in Debt and Equity Securities The majority of the Company's investment portfolio is comprised of debt securities that are classified as available for sale. From time to time, the Company sells securities and utilizes the proceeds to reduce borrowings, fund loan growth, or modify its interest rate profile. Securities classified as available for sale are carried at fair value. Changes in fair value, excluding certain losses associated with other-than-temporary impairment (OTTI), are reported in other comprehensive income (loss), a component of stockholders’ equity. Securities are periodically evaluated for OTTI in accordance with guidance provided in ASC 320-10-35. For securities with OTTI, the entire loss in fair value is required to be recognized in current earnings if the Company intends to sell the securities or believes it likely that it will be required to sell the security before the anticipated recovery. If neither condition is met, but the Company does not expect to recover the amortized cost basis, the Company determines whether a credit loss has occurred, and the loss is then recognized in current earnings. The noncredit-related portion of the overall loss is reported in other comprehensive income (loss). Gains and losses realized upon sales of securities are calculated using the specific identification method and are included in investment securities gains (losses), net, in the consolidated statements of income. Purchase premiums and discounts are amortized to interest income using a level yield method over the estimated lives of the securities. For certain callable debt securities purchased at a premium, the amortization is instead recorded to the earliest call date. For mortgage and asset-backed securities, prepayment experience is evaluated quarterly to determine if a change in a bond's estimated remaining life is necessary. A corresponding adjustment is then made in the related amortization of premium or discount accretion. Equity securities include common and preferred stock with readily determinable fair values. These are also carried at fair value. Prior to January 1, 2018, changes in fair value were recorded in other comprehensive income. The Company's adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities", effective January 1, 2018, required that all subsequent changes in fair value be recorded in current earnings. The adoption also required a reclassification of the 67 unrealized gain in fair value on equity securities (recorded in accumulated other comprehensive income at December 31, 2017) to retained earnings. The amount of this reclassification was $33.3 million, net of tax. Certain equity securities do not have readily determinable fair values. The Company has elected under ASU 2016-01 to measure these at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. The Company has not recorded any impairment or other adjustments to the carrying amount of these investments. Other securities include Federal Reserve Bank stock and Federal Home Loan Bank stock, which are held for debt and regulatory purposes. They are carried at cost and periodically evaluated for other-than-temporary impairment. Also included are investments in portfolio concerns held by the Company’s private equity subsidiaries, which consist of both debt and equity instruments. Private equity investments are carried at fair value in accordance with ASC 946-10-15, with changes in fair value reported in current earnings. In the absence of readily ascertainable market values, fair value is estimated using internally developed methods. Changes in fair value which are recognized in current earnings and gains and losses from sales are included in investment securities gains (losses), net in the consolidated statements of income. Trading account securities, which are debt securities bought and held principally for the purpose of resale in the near term, are carried at fair value. Gains and losses, both realized and unrealized, are recorded in non-interest income. Purchases and sales of securities are recognized on a trade date basis. A receivable or payable is recognized for pending transaction settlements. Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions, not as purchases and sales of the underlying securities. The agreements are recorded at the amount of cash advanced or received. The Company periodically enters into securities purchased under agreements to resell with large financial institutions. Securities pledged by the counterparties to secure these agreements are delivered to a third party custodian. Securities sold under agreements to repurchase are a source of funding to the Company and are offered to cash management customers as an automated, collateralized investment account. From time to time, securities sold may also be used by the Bank to obtain additional borrowed funds at favorable rates. These borrowings are secured by a portion of the Company's investment security portfolio and delivered either to the dealer custody account at the FRB or to the applicable counterparty. The fair value of collateral either received from or provided to a counterparty is monitored daily, and additional collateral is obtained, returned, or provided by the Company in order to maintain full collateralization for these transactions. As permitted by current accounting guidance, the Company offsets certain securities purchased under agreements to resell against securities sold under agreements to repurchase in its balance sheet presentation. These agreements are further discussed in Note 20, Resale and Repurchase Agreements. Premises and Equipment Land is stated at cost, and buildings and equipment are stated at cost, including capitalized interest when appropriate, less accumulated depreciation. Depreciation is computed using a straight-line method, utilizing estimated useful lives; generally 30 years for buildings, 10 years for building improvements, and 3 to 10 years for equipment. Leasehold improvements are amortized over the shorter of 10 years or the remaining lease term. Maintenance and repairs are charged to non-interest expense as incurred. Premises and equipment also includes the Company's right-of-use leased assets, which is mainly comprised of operating leases for branches, office space, ATM locations, and certain equipment. Foreclosed Assets Foreclosed assets consist of property that has been repossessed and is comprised of commercial and residential real estate and other non-real estate property, including auto and recreational and marine vehicles. The assets are initially recorded at fair value less estimated selling costs, establishing a new cost basis. Initial valuation adjustments are charged to the allowance for loan losses. Fair values are estimated primarily based on appraisals, third-party price opinions, or internally developed pricing models. After initial recognition, fair value estimates are updated periodically. Declines in fair value below cost are recognized through 68 valuation allowances which may be reversed when supported by future increases in fair value. These valuation adjustments, in addition to gains and losses realized on sales and net operating expenses, are recorded in other non-interest expense. Goodwill and Intangible Assets Goodwill is not amortized but is assessed for impairment on an annual basis or more frequently in certain circumstances. When testing for goodwill impairment, the Company may initially perform a qualitative assessment. Based on the results of this qualitative assessment, if the Company concludes it is more likely than not that a reporting unit's fair value is less than its carrying amount, a quantitative analysis is performed. Quantitative valuation methodologies include a combination of formulas using current market multiples, based on recent sales of financial institutions within the Company's geographic marketplace. If the fair value of a reporting unit is less than the carrying amount, additional analysis is required to measure the amount of impairment. The Company has not recorded impairment resulting from goodwill impairment tests. However, adverse changes in the economic environment, operations of the reporting unit, or other factors could result in a decline in fair value. Intangible assets that have finite useful lives, such as core deposit intangibles and mortgage servicing rights, are amortized over their estimated useful lives. Core deposit intangibles are amortized over periods of 8 to 14 years, representing their estimated lives, using accelerated methods. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, considering appropriate prepayment assumptions. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate their carrying amount may not be recoverable. Impairment is indicated if the sum of the undiscounted estimated future net cash flows is less than the carrying value of the intangible asset. Mortgage servicing rights, while initially recorded at fair value, are subsequently amortized and carried at the lower of the initial capitalized amount (net of accumulated amortization), or estimated fair value. The Company evaluates its mortgage servicing rights for impairment on a quarterly basis, using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans. A valuation allowance has been established, through a charge to earnings, to the extent the amortized cost exceeds the estimated fair value. However, the Company has not recorded other-than-temporary impairment losses on either of these types of intangible assets. Income Taxes Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income taxes are provided for temporary differences between the financial reporting bases and income tax bases of the Company’s assets and liabilities, net operating losses, and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income when such assets and liabilities are anticipated to be settled or realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as tax expense or benefit in the period that includes the enactment date of the change. In determining the amount of deferred tax assets to recognize in the financial statements, the Company evaluates the likelihood of realizing such benefits in future periods. A valuation allowance is established if it is more likely than not that all or some portion of the deferred tax asset will not be realized. The Company recognizes interest and penalties related to income taxes within income tax expense in the consolidated statements of income. The Company and its eligible subsidiaries file a consolidated federal income tax return. State and local income tax returns are filed on a combined, consolidated or separate return basis based upon each jurisdiction’s laws and regulations. In December 2017, tax reform legislation was enacted that changed the maximum corporate tax rate for years 2018 and beyond. As such, deferred tax assets and liabilities were revalued in 2017 to account for the change in future tax rates. Additional information about current and deferred income taxes is provided in Note 9, Income Taxes. Non-Interest Income Non-interest income is mainly comprised of revenue from contracts with customers. For that revenue (excluding certain revenue associated with financial instruments, derivative and hedging instruments, guarantees, lease contracts, transferring and servicing of financial assets, and other specific revenue transactions), the Company applies the following five-step approach when recognizing revenue: (i) identify the contract with the customer, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) the performance obligation is satisfied. The Company’s contracts with customers are generally short term in nature, with a duration of one year or less, and most contracts are cancellable by either the Company or its customer without penalty. Performance obligations for customer contracts are generally satisfied at a single point in time, typically when the transaction is complete and the customer has received the goods or service, or over time. For performance obligations satisfied over time, the Company recognizes the value of the goods or services transferred to the customer when the performance obligations have been transferred 69 and received by the customer. Payments for satisfied performance obligations are typically due when or as the goods or services are completed, or shortly thereafter, which usually occurs within a single financial reporting period. In situations where payment is made before the performance obligation is satisfied, the fees are deferred until the performance obligations pertaining to those goods or services are completed. In cases where payment has not been received despite satisfaction of its performance obligations, the Company accrues an estimate of the amount due in the period that the performance obligations have been satisfied. For contracts with variable components, the Company only recognizes revenue to the extent that it is probable that the cumulative amount recognized will not be subject to a significant reversal in future periods. Generally, the Company’s contracts do not include terms that require significant judgment to determine whether a variable component is included within the transaction price. The Company generally acts in a principal capacity, on its own behalf, in most of its contracts with customers. For these transactions, revenue and the related costs to provide the goods or services are presented on a gross basis in the financial statements. In some cases, the Company acts in an agent capacity, deriving revenue through assisting third parties in transactions with the Company’s customers. In such transactions, revenue and the related costs to provide services is presented on a net basis in the financial statements. These transactions primarily relate to fees earned from bank card and related network and rewards costs and the sales of annuities and certain limited insurance products. Derivatives Most of the Company's derivative contracts are accounted for as free-standing instruments. These instruments are carried at fair value, and changes in fair value are recognized in current earnings. They include interest rate swaps and caps, which are offered to customers to assist in managing their risks of adverse changes in interest rates. Each contract between the Company and a customer is offset by a contract between the Company and an institutional counterparty, thus minimizing the Company's exposure to rate changes. The Company also enters into certain contracts, known as credit risk participation agreements, to buy or sell credit protection on specific interest rate swaps. It also purchases and sells forward foreign exchange contracts, either in connection with customer transactions, or for its own trading purposes. In 2015, the Company began an origination and sales program of certain personal real estate mortgages. Derivative instruments under this program include mortgage loan commitments, forward loan sale contracts, and forward contracts to sell certain to-be-announced (TBA) securities. The Company's interest rate risk management policy permits the use of hedge accounting for derivatives, and the Company has entered into interest rate floor contracts as protection from the potential for declining interest rates in the commercial loan portfolio. These floors were designated and qualified as cash flow hedges. In a cash flow hedge, the changes in fair value are recorded in accumulated other comprehensive income and recognized in the income statement when the hedged cash flows affect earnings. Both at hedge inception and on an ongoing basis, the Company assesses whether the interest rate floors used in the hedging relationships are highly effective in offsetting changes in the cash flows of the hedged items. The Company has master netting arrangements with various counterparties but does not offset derivative assets and liabilities under these arrangements in its consolidated balance sheets. However, interest rate swaps that are executed under central clearing requirements are presented net of variation margin as mandated by the statutory terms of the Company's contract with its clearing counterparty. Additional information about derivatives held by the Company and valuation methods employed is provided in Note 17, Fair Value Measurements and Note 19, Derivative Instruments. Pension Plan The Company’s pension plan is described in Note 10, Employee Benefit Plans. Historically, the Company has reported all components of net periodic pension cost in salaries and employee benefits in its consolidated statements of income. Upon the adoption of ASU 2017-07 "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost", in 2018, only the service cost component of net periodic pension cost is reported in salaries and employee benefits in the accompanying consolidated statements of income, while the other components are reported in other non-interest expense. The funded status of the plan is recognized as an asset or liability in the consolidated balance sheets, and changes in that funded status are recognized in the year in which the changes occur through other comprehensive income. Plan assets and benefit obligations are measured as of the fiscal year end of the plan. The measurement of the projected benefit obligation and pension expense involve actuarial valuation methods and the use of various actuarial and economic assumptions. The Company monitors the assumptions and updates them periodically. Due to the long-term nature of the pension plan obligation, actual results may differ significantly from estimations. Such differences are adjusted over time as the assumptions are replaced by facts and values are recalculated. 70 Stock-Based Compensation The Company’s stock-based employee compensation plan is described in Note 11, Stock-Based Compensation and Directors Stock Purchase Plan. In accordance with the requirements of ASC 718-10-30-3 and 35-2, the Company measures the cost of stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite service period, which is generally the vesting period. The fair value of an option award is estimated using the Black-Scholes option-pricing model while the fair value of a nonvested stock award is the common stock (CBSH) market price. The expense recognized for stock- based compensation is included in salaries and benefits in the accompanying consolidated statements of income. The Company recognizes forfeitures as a reduction to expense only when they have occurred. Treasury Stock Purchases of the Company’s common stock are recorded at cost. Upon re-issuance for acquisitions, exercises of stock-based awards or other corporate purposes, treasury stock is reduced based upon the average cost basis of shares held. Income per Share Basic income per share is computed using the weighted average number of common shares outstanding during each year. Diluted income per share includes the effect of all dilutive potential common shares (primarily stock appreciation rights) outstanding during each year. The Company applies the two-class method of computing income per share. The two-class method is an earnings allocation formula that determines income per share for common stock and for participating securities, according to dividends declared and participation rights in undistributed earnings. The Company’s nonvested stock awards are considered to be a class of participating security. All per share data has been restated to reflect the 5% stock dividend distributed in December 2019. 71 2. Loans and Allowance for Loan Losses Major classifications within the Company’s held for investment loan portfolio at December 31, 2019 and 2018 are as follows: (In thousands) Commercial: Business Real estate — construction and land Real estate — business Personal Banking: Real estate — personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans 2019 2018 $ 5,565,449 $ 5,106,427 899,377 869,659 2,833,554 2,875,788 2,354,760 1,964,145 349,251 764,977 6,304 2,127,083 1,955,572 376,399 814,134 15,236 $ 14,737,817 $ 14,140,298 Loans to directors and executive officers of the Parent and the Bank, and to their affiliates, are summarized as follows: (In thousands) Balance at January 1, 2019 Additions Amounts collected Amounts written off Balance, December 31, 2019 $ $ 46,728 133,607 (123,956) — 56,379 Management believes all loans to directors and executive officers have been made in the ordinary course of business with normal credit terms, including interest rate and collateral considerations, and do not represent more than a normal risk of collection. The activity in the table above includes draws and repayments on several lines of credit with business entities. There were no outstanding loans at December 31, 2019 to principal holders (over 10% ownership) of the Company’s common stock. The Company’s lending activity is generally centered in Missouri, Kansas, Illinois and other nearby states including Oklahoma, Colorado, Iowa, Ohio, Texas, and others. The Company maintains a diversified portfolio with limited industry concentrations of credit risk. Loans and loan commitments are extended under the Company’s normal credit standards, controls, and monitoring features. Most loan commitments are short or intermediate term in nature. Commercial loan maturities generally range from one to seven years. Collateral is commonly required and would include such assets as marketable securities and cash equivalent assets, accounts receivable and inventory, equipment, other forms of personal property, and real estate. At December 31, 2019, unfunded loan commitments totaled $11.2 billion (which included $5.1 billion in unused approved lines of credit related to credit card loan agreements) which could be drawn by customers subject to certain review and terms of agreement. At December 31, 2019, loans totaling $4.0 billion were pledged at the FHLB as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.6 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings. The Company has a net investment in direct financing and sales type leases to commercial and industrial and tax-exempt entities of $795.8 million and $752.2 million at December 31, 2019 and 2018, respectively, which is included in business loans on the Company’s consolidated balance sheets. This investment includes deferred income of $71.8 million and $62.6 million at December 31, 2019 and 2018, respectively. The net investment in operating leases amounted to $14.7 million and $16.1 million at December 31, 2019 and 2018, respectively, and is included in other assets on the Company’s consolidated balance sheets. 72 Allowance for loan losses A summary of the activity in the allowance for losses during the previous three years follows: (In thousands) Balance at December 31, 2016 Provision for loan losses Deductions: Loans charged off Less recoveries Net loans charged off (recoveries) Balance at December 31, 2017 Provision for loan losses Deductions: Loans charged off Less recoveries Net loans charged off Balance at December 31, 2018 Provision for loan losses Deductions: Loans charged off Less recoveries Net loans charged off Commercial Personal Banking Total $ 91,361 $ 64,571 $ 155,932 2,327 42,917 45,244 2,538 2,554 (16) 93,704 254 3,164 2,075 1,089 92,869 2,816 4,711 786 3,925 52,641 10,981 41,660 65,828 42,440 52,657 11,452 41,205 67,063 47,622 57,169 11,406 45,763 55,179 13,535 41,644 159,532 42,694 55,821 13,527 42,294 159,932 50,438 61,880 12,192 49,688 Balance at December 31, 2019 $ 91,760 $ 68,922 $ 160,682 The following table shows the balance in the allowance for loan losses and the related loan balance at December 31, 2019 and 2018, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status which are individually evaluated for impairment and other impaired loans deemed to have similar risk characteristics, which are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20. (In thousands) December 31, 2019 Commercial Personal Banking Total December 31, 2018 Commercial Personal Banking Total Impaired Loans All Other Loans Allowance for Loan Losses Loans Outstanding Allowance for Loan Losses Loans Outstanding 1,629 $ 1,117 2,746 $ 1,780 $ 916 2,696 $ 64,500 17,232 81,732 61,496 17,120 78,616 $ $ $ $ 90,131 $ 9,233,880 67,805 5,422,205 157,936 $ 14,656,085 91,089 $ 8,790,378 66,147 5,271,304 157,236 $ 14,061,682 $ $ $ $ 73 Impaired loans The table below shows the Company’s investment in impaired loans at December 31, 2019 and 2018. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings. These restructured 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. They are discussed further in the "Troubled debt restructurings" section below. (In thousands) Non-accrual loans Restructured loans (accruing) Total impaired loans 2019 2018 $ $ 10,220 $ 71,512 81,732 $ 12,536 66,080 78,616 The following table provides additional information about impaired loans held by the Company at December 31, 2019 and 2018, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided. (In thousands) December 31, 2019 With no related allowance recorded: Business With an allowance recorded: Business Real estate – construction and land Real estate – business Real estate – personal Consumer Revolving home equity Consumer credit card Total December 31, 2018 With no related allowance recorded: Business With an allowance recorded: Business Real estate – construction and land Real estate – business Real estate – personal Consumer Revolving home equity Consumer credit card Total Recorded Investment Unpaid Principal Balance Related Allowance $ $ $ $ $ $ $ $ $ $ 7,054 $ 7,054 $ 13,738 $ 13,738 $ 30,437 $ 30,487 $ 46 26,963 4,729 4,421 35 8,047 51 27,643 5,968 4,421 35 8,047 74,678 $ 81,732 $ 76,652 $ 90,390 $ 8,725 $ 8,725 $ 14,477 $ 14,477 $ — — 837 1 791 258 35 1 823 2,746 2,746 — — 40,286 $ 40,582 $ 1,223 416 12,069 4,461 5,510 40 7,109 421 12,699 6,236 5,510 40 7,109 69,891 $ 78,616 $ 72,597 $ 87,074 $ 11 546 266 38 1 611 2,696 2,696 74 Total average impaired loans during 2019 and 2018 are shown in the table below. (In thousands) Commercial 2019 Personal Banking Total Commercial 2018 Personal Banking Total Average impaired loans: Non-accrual loans Restructured loans (accruing) Total $ $ 9,892 $ 2,031 $ 49,544 15,667 59,436 $ 17,698 $ 11,923 65,211 77,134 $ $ 7,619 $ 2,122 $ 73,261 16,526 80,880 $ 18,648 $ 9,741 89,787 99,528 The table below shows interest income recognized during the years ended December 31, 2019, 2018 and 2017 for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section below. (In thousands) Interest income recognized on impaired loans: Business Real estate – construction and land Real estate – business Real estate – personal Consumer Revolving home equity Consumer credit card Total Years Ended December 31 2019 2018 2017 $ 1,329 $ 2,219 $ 3,135 2 1,456 136 286 3 828 25 558 139 305 3 746 41 514 402 307 10 673 $ 4,040 $ 3,995 $ 5,082 75 Delinquent and non-accrual loans The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at December 31, 2019 and 2018. (In thousands) December 31, 2019 Commercial: Business Real estate – construction and land Real estate – business Personal Banking: Real estate – personal Consumer Revolving home equity Consumer credit card Overdrafts Total December 31, 2018 Commercial: Business Real estate – construction and land Real estate – business Personal Banking: Real estate – personal Consumer Revolving home equity Consumer credit card Overdrafts Total Credit quality Current or Less Than 30 Days Past Due 30 – 89 Days Past Due 90 Days Past Due and Still Accruing Non-accrual Total $ 5,545,104 $ 12,064 $ 792 $ 7,489 $ 5,565,449 882,826 2,830,494 2,345,243 1,928,082 347,258 742,659 5,972 13,046 2,030 6,129 34,053 1,743 10,703 332 3,503 — 1,689 2,010 250 11,615 — 2 899,377 1,030 2,833,554 1,699 — — — — 2,354,760 1,964,145 349,251 764,977 6,304 $ 14,627,638 $ 80,100 $ 19,859 $ 10,220 $ 14,737,817 $ 5,086,912 $ 10,057 $ 473 $ 8,985 $ 5,106,427 867,692 2,867,347 2,118,045 1,916,320 374,830 792,334 14,937 1,963 6,704 6,041 35,608 875 11,140 299 — 22 1,165 3,644 694 10,660 — 4 869,659 1,715 2,875,788 1,832 — — — — 2,127,083 1,955,572 376,399 814,134 15,236 $ 14,038,417 $ 72,687 $ 16,658 $ 12,536 $ 14,140,298 The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. 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 material 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. 76 (In thousands) December 31, 2019 Pass Special mention Substandard Non-accrual Total December 31, 2018 Pass Special mention Substandard Non-accrual Total Commercial Loans Business Real Estate - Construction Real Estate - Business Total $ 5,393,928 $ 856,364 $ 2,659,827 $ 8,910,119 $ $ 80,089 83,943 7,489 42,541 470 2 5,565,449 $ 899,377 $ 92,626 80,071 1,030 2,833,554 $ 215,256 164,484 8,521 9,298,380 4,915,042 $ 866,527 $ 2,777,374 $ 8,558,943 84,391 98,009 8,985 1,917 1,211 4 51,845 44,854 1,715 138,153 144,074 10,704 $ 5,106,427 $ 869,659 $ 2,875,788 $ 8,851,874 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 "Delinquent and non-accrual loans". 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. The bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain personal real estate loans for which FICO scores are not obtained because the loans generally pertain to commercial customer activities and are often underwritten with other collateral considerations. These loans totaled $198.2 million at December 31, 2019 and $201.7 million at December 31, 2018. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $199.2 million at December 31, 2019 and $170.3 million at December 31, 2018. 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 8% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at December 31, 2019 and 2018 by FICO score. December 31, 2019 FICO score: Under 600 600 – 659 660 – 719 720 – 779 780 and over Total December 31, 2018 FICO score: Under 600 600 – 659 660 – 719 720 – 779 780 and over Total Personal Banking Loans % of Loan Category Real Estate - Personal Consumer Revolving Home Equity Consumer Credit Card 1.0% 3.0% 1.7% 5.6% 1.9 9.2 25.7 62.2 5.2 15.4 27.0 49.4 1.9 9.0 21.5 65.9 14.3 32.2 26.6 21.3 100.0% 100.0% 100.0% 100.0% 1.1 % 3.1 % 0.8 % 4.4 % 1.8 9.4 24.7 63.0 4.8 16.1 25.7 50.3 1.7 9.1 24.0 64.4 14.0 34.8 26.4 20.4 100.0 % 100.0 % 100.0 % 100.0 % 77 Troubled debt restructurings As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings, as shown in the table below. 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) Accruing loans: Commercial Assistance programs Consumer bankruptcy Other consumer Non-accrual loans Total troubled debt restructurings December 31 2019 2018 $ $ 55,934 $ 50,904 8,365 3,592 3,621 7,938 7,410 4,103 3,663 9,759 79,450 $ 75,839 The table below shows the balance of troubled debt restructurings by loan classification at December 31, 2019, 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) Commercial: Business Real estate – construction and land Real estate – business Personal Banking: Real estate – personal Consumer Revolving home equity Consumer credit card Balance 90 days past due at any time during previous 12 months December 31, 2019 $ 37,055 $ 44 25,933 3,915 4,421 35 8,047 — — — 347 83 — 987 1,417 Total troubled debt restructurings $ 79,450 $ 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. No financial impact resulted from those performing loans where the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. However, the effects of modifications to loans under various debt management and assistance programs were estimated to decrease interest income by approximately $1.2 million 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. 78 The allowance for loan 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 loan 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 loan losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begin. The Company had commitments of $4.7 million at December 31, 2019 to lend additional funds to borrowers with restructured loans, compared to $1.8 million at December 31, 2018. Loans held for sale The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 19. The loans are primarily sold to FNMA, FHLMC, and GNMA. At December 31, 2019, the fair value of these loans was $9.2 million, and the unpaid principal balance was $8.9 million. The Company also designates certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which totaled $4.6 million at December 31, 2019. At December 31, 2019, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing. Foreclosed real estate/repossessed assets The Company’s holdings of foreclosed real estate totaled $365 thousand and $1.4 million at December 31, 2019 and 2018, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles (RV), totaled $5.5 million and $2.0 million at December 31, 2019 and 2018, respectively. The December 31, 2019 balance of repossessed assets also included trailers with an asset value of $3.4 million, which were acquired due to the bankruptcy of a single leasing customer. 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. 79 3. Investment Securities Investment securities, at fair value, consisted of the following at December 31, 2019 and 2018: (In thousands) Available for sale debt securities Trading debt securities Equity securities: Readily determinable fair value No readily determinable fair value Other: Federal Reserve Bank stock Federal Home Loan Bank stock Private equity investments Total investment securities 2019 2018 $ 8,571,626 $ 8,538,041 27,059 28,161 2,929 1,280 2,585 1,824 33,770 10,000 94,122 33,498 10,000 85,659 $ 8,741,888 $ 8,698,666 The Company has elected to measure equity securities with no readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. This portfolio includes the Company's holdings of Visa Class B shares, which have a carrying value of zero, as there have not been observable price changes in orderly transactions for identical or similar investments of the same issuer. During the year-ended December 31, 2019, 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, and investments in portfolio concerns held by the Company's private equity subsidiaries. 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 level of borrowings from the FHLB. These holdings are carried at cost. The private equity investments, in the absence of readily ascertainable market values, 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 accumulated other comprehensive income (AOCI). A summary of the available for sale debt securities by maturity groupings as of December 31, 2019 is shown in the following table. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security at December 31, 2019. Yields on tax exempt securities have not been adjusted for tax exempt status. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by residential and commercial mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. 80 (Dollars in thousands) U.S. government and federal agency obligations: Within 1 year After 1 but within 5 years After 5 but within 10 years Total U.S. government and federal agency obligations Government-sponsored enterprise obligations: Within 1 year After 10 years Total government-sponsored enterprise obligations State and municipal obligations: Within 1 year After 1 but within 5 years After 5 but within 10 years After 10 years Total state and municipal obligations Mortgage and asset-backed securities: Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Total mortgage and asset-backed securities Other debt securities: Within 1 year After 1 but within 5 years After 5 but within 10 years Total other debt securities Amortized Cost Fair Value Weighted Average Yield (.01)*% 2.17* .59* 1.54* 1.99 2.65 2.26 2.55 2.42 2.56 2.92 2.49 2.87 2.98 2.61 2.83 $ 57,234 $ 518,035 252,592 827,861 81,616 57,118 138,734 51,230 740,283 377,009 57,010 57,192 533,805 260,779 851,776 81,830 57,447 139,277 51,540 763,396 395,014 57,977 1,225,532 1,267,927 3,893,247 3,937,964 796,451 1,228,151 5,917,849 51,998 218,950 54,607 325,555 809,782 1,233,489 5,981,235 52,180 222,770 56,461 331,411 Total available for sale debt securities $ 8,435,531 $ 8,571,626 * Rate does not reflect inflation adjustment on inflation-protected securities Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $461.8 million, at fair value, at December 31, 2019. 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. Included in state and municipal obligations are $9.9 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Interest on these bonds is currently being paid at the maximum failed auction rates. 81 For debt securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in AOCI, by security type. (In thousands) December 31, 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. government and federal agency obligations $ 827,861 $ 23,957 $ Government-sponsored enterprise obligations State and municipal obligations Mortgage and asset-backed securities: Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Total mortgage and asset-backed securities Other debt securities Total December 31, 2018 U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Mortgage and asset-backed securities: Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Total mortgage and asset-backed securities Other debt securities Total 138,734 1,225,532 3,893,247 796,451 1,228,151 5,917,849 325,555 730 42,427 50,890 14,036 11,056 75,982 5,863 (42) $ (187) (32) (6,173) (705) (5,718) (12,596) (7) 851,776 139,277 1,267,927 3,937,964 809,782 1,233,489 5,981,235 331,411 $ $ 8,435,531 $ 148,959 $ (12,864) $ 8,571,626 914,486 $ 4,545 $ (11,379) $ 199,470 1,322,785 3,253,433 1,053,854 1,518,976 5,826,263 339,595 55 10,284 9,820 6,641 3,849 20,310 72 (3,747) (5,030) (48,268) (12,779) (11,211) (72,258) (7,410) 907,652 195,778 1,328,039 3,214,985 1,047,716 1,511,614 5,774,315 332,257 $ 8,602,599 $ 35,266 $ (99,824) $ 8,538,041 The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. 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 for an extended period of time, or those which 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. Inputs to these models include 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 (including current delinquencies). Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At December 31, 2019, the fair value of securities on this watch list was $51.6 million compared to $57.7 million at December 31, 2018. As of December 31, 2019, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities with a current par value of $17.5 million. These securities, which are part of the watch list mentioned above, had an aggregate fair value of $13.1 million at December 31, 2019. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $13.3 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost. The credit-related portion of the loss on these securities was based on the 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. Significant inputs to the cash flow models used to calculate the credit losses on these securities at December 31, 2019 included the following: Significant Inputs Prepayment CPR Projected cumulative default Credit support Loss severity 82 Range 0% - 25% 9% - 52% 0% - 20% 8% - 63% The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities. (In thousands) Cumulative OTTI credit losses at January 1 Credit losses on debt securities for which impairment was not previously recognized Credit losses on debt securities for which impairment was previously recognized Increase in expected cash flows that are recognized over remaining life of security Cumulative OTTI credit losses at December 31 2019 2018 2017 14,092 $ 14,199 $ 14,080 48 85 (950) 58 10 (175) 111 274 (266) 13,275 $ 14,092 $ 14,199 $ $ Debt securities with unrealized losses recorded in AOCI are shown in the table below, along with the length of the impairment period. (In thousands) December 31, 2019 Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. government and federal agency obligations $ 31,787 $ 21 $ 25,405 $ Government-sponsored enterprise obligations State and municipal obligations Mortgage and asset-backed securities: Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Total mortgage and asset-backed securities Other debt securities Total December 31, 2018 6,155 6,700 652,352 102,931 330,876 1,086,159 5,496 $ 1,136,297 U.S. government and federal agency obligations $ 317,699 Government-sponsored enterprise obligations State and municipal obligations Mortgage and asset-backed securities: Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Total mortgage and asset-backed securities Other debt securities Total 187 31 5,306 254 3,610 9,170 4 — 1,554 147,653 189,747 152,461 489,861 997 21 — 1 867 451 2,108 3,426 3 $ 57,192 $ 6,155 8,254 800,005 292,678 483,337 42 187 32 6,173 705 5,718 1,576,020 12,596 6,493 $ $ 9,413 $ 517,817 $ 3,451 $ 1,654,114 6,515 $ 116,728 $ — 704 1,502 1,085 728 3,315 564 188,846 257,051 1,927,268 657,685 813,427 3,398,380 260,682 4,864 3,747 4,326 $ 434,427 188,846 414,889 46,766 11,694 10,483 68,943 6,846 2,258,201 865,191 961,424 4,084,816 312,518 — 157,838 330,933 207,506 147,997 686,436 51,836 $ $ 7 12,864 11,379 3,747 5,030 48,268 12,779 11,211 72,258 7,410 $ 1,213,809 $ 11,098 $ 4,221,687 $ 88,726 $ 5,435,496 $ 99,824 The available for sale debt portfolio included $1.7 billion of securities that were in a loss position at December 31, 2019, compared to $5.4 billion at December 31, 2018. The total amount of unrealized loss on these securities was $12.9 million at December 31, 2019, a decrease of $87.0 million compared to the unrealized loss at December 31, 2018. This decrease in losses was mainly due to a declining interest rate environment. 83 The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings. (In thousands) Proceeds from sales of securities: Available for sale debt securities Equity securities Other Total proceeds Investment securities gains (losses), net: Available for sale debt securities: Losses realized on called bonds Gains realized on sales Losses realized on sales Other-than-temporary impairment recognized on debt securities Equity securities: Gains realized on donations of securities Gains realized on sales Losses realized on sales Fair value adjustments, net Other: Gains realized on sales Losses realized on sales Fair value adjustments, net Total investment securities gains (losses), net For the Year Ended December 31 2019 2018 2017 $ 402,103 $ 667,227 $ 779,793 10,953 1,634 $ 413,203 $ 708,864 $ 792,380 41,637 — 3,856 7,244 $ — $ — $ 2,354 (2,568) (133) 448 (10,101) (68) — 3,262 — 344 — 1,759 (8,917) 2,542 1,094 — (727) 3,626 $ — — 13,849 (488) $ $ (254) 592 (10,287) (385) 31,074 10,653 (10) — 381 (880) (5,833) 25,051 Investment securities with a fair value of $4.3 billion were pledged at both December 31, 2019 and 2018 to secure public deposits, securities sold under repurchase agreements, trust funds, and borrowings at the Federal Reserve Bank. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $204.9 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 exceeds 10% of stockholders’ equity. 4. Premises and Equipment Premises and equipment consist of the following at December 31, 2019 and 2018: (In thousands) Land Buildings and improvements Equipment Right of use leased assets Total Less accumulated depreciation Net premises and equipment 2019 2018 $ 91,678 $ 566,177 237,047 28,195 923,097 552,460 $ 370,637 $ 91,603 545,510 226,666 — 863,779 530,660 333,119 Depreciation expense of $30.8 million in 2019, $28.6 million in 2018 and $29.1 million in 2017, was included in occupancy expense and equipment expense in the consolidated statements of income. Repairs and maintenance expense of $17.0 million, $16.9 million and $16.4 million for 2019, 2018 and 2017, respectively, was included in occupancy expense and equipment expense. There has been no interest expense capitalized on construction projects in the past three years. Right of use leased assets are comprised mainly of operating leases for branches, office space, ATM locations, and certain equipment, as described in Note 6. 84 5. Goodwill and Other Intangible Assets The following table presents information about the Company's intangible assets which have estimable useful lives. (In thousands) Amortizable intangible assets: Core deposit premium Mortgage servicing rights Total December 31, 2019 December 31, 2018 Gross Carrying Amount Accumulated Amortization Valuation Allowance Net Amount Gross Carrying Amount Accumulated Amortization Valuation Allowance Net Amount $ 31,270 12,942 $ 44,212 $ $ (29,485) (4,866) (34,351) $ $ — $ 1,785 7,749 $ 9,534 (327) (327) $ 31,270 10,339 $ 41,609 $ $ (28,954) (3,861) (32,815) $ $ — $ 2,316 — 6,478 — $ 8,794 The carrying amount of goodwill and its allocation among segments at December 31, 2019 and 2018 is shown in the table below. As a result of ongoing assessments, no impairment of goodwill was recorded in 2019, 2018 or 2017. Further, the annual assessment of qualitative factors on January 1, 2020 revealed no likelihood of impairment as of that date. (In thousands) Consumer segment Commercial segment Wealth segment Total goodwill December 31, 2019 December 31, 2018 $ $ 70,721 $ 67,454 746 138,921 $ 70,721 67,454 746 138,921 Changes in the net carrying amount of goodwill and other net intangible assets for the years ended December 31, 2019 and 2018 are shown in the following table. (In thousands) Balance at December 31, 2017 Originations Amortization Impairment reversal Balance at December 31, 2018 Originations Amortization Impairment Goodwill Core Deposit Premium Mortgage Servicing Rights $ 138,921 $ 2,965 $ — — — 138,921 — — — — (649) — 2,316 — (531) — 4,653 2,433 (617) 9 6,478 2,603 (1,005) (327) 7,749 Balance at December 31, 2019 $ 138,921 $ 1,785 $ Mortgage servicing rights (MSRs) are initially recorded at fair value and subsequently amortized over the period of estimated servicing income. They are periodically reviewed for impairment at a tranche level, and if impairment is indicated, recorded at fair value. Temporary impairment, including impairment recovery, is effected through a change in a valuation allowance. At December 31, 2019, temporary impairment of $327 thousand had been recognized. The fair value of the MSRs is based on the present value of expected future cash flows, as further discussed in Note 17 on Fair Value Measurements. Aggregate amortization expense on intangible assets for the years ended December 31, 2019, 2018 and 2017 was $1.5 million, $1.3 million and $1.3 million, respectively. The following table shows the estimated future amortization expense based on existing asset balances and the interest rate environment as of December 31, 2019. 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) 2020 2021 2022 2023 2024 $ 1,507 1,286 1,099 919 770 85 6. Leases The Company adopted ASU 2016-02, "Leases", and its related amendments on January 1, 2019 using a modified retrospective approach. The Company's leasing activities include leasing certain real estate and equipment, providing lease financing to commercial customers, and leasing office space to third parties. The Company adopted the package of practical expedients permitted within the new standard, along with the lease component expedient for all lease classes and the disclosure expedient. The Company uses the FHLB fixed-advance rate at lease commencement or at any subsequent remeasurement event date based on the remaining lease term to calculate the liability for each lease. Lessee The Company primarily has operating leases for branches, office space, ATM locations, and certain equipment. As of December 31, 2019, the right-of-use asset for operating leases, reported within premises and equipment, net, and lease liability, reported within other liabilities, recognized on the Company's consolidated balance sheets totaled $26.3 million and $27.0 million, respectively. Total lease cost for the year ended December 31, 2019 was $7.3 million. For leases with a term of 12 months or less, an election was made not to recognize lease assets and lease liabilities for all asset classes, and to recognize lease expense for these leases on a straight-line basis over the lease term. The Company's leases have remaining terms of 1 month to 34 years, most of which contain renewal options. However, the renewal options are generally not included in the leased asset or liability because the option exercises are uncertain. The maturities of operating leases are included in the table below. (in thousands) 2020 2021 2022 2023 2024 After 2024 Total lease payments Less: Interest(2) Present value of lease liabilities Operating Leases(1) 5,913 5,001 4,304 3,802 2,530 12,600 34,150 7,126 27,024 $ $ $ (1) Excludes $6.5 million of legally binding minimum lease payments for operating leases signed but not yet commenced. (2) Calculated using the interest rate for each lease. The following table presents the average lease term and discount rate of operating leases. Weighted-average remaining lease term Weighted-average discount rate December 31, 2019 11.7 years 3.67% Supplemental cash flow information related to operating leases is included in the table below. (in thousands) Operating cash paid toward lease liabilities Leased assets obtained in exchange for new lease liabilities For the Year Ended December 31 2019 $ $ 5,989 3,958 86 The Company adopted the new lease standard using the effective date as the date of initial application as noted above, and as required, the table below provides the disclosure for periods prior to adoption. Under ASC Topic 840, Leases, rent expense amounted to $7.7 million and $7.3 million in 2018 and 2017, respectively. Future minimum lease payments as of December 31, 2018 are shown below, which include leases that have not yet commenced. (in thousands) Year Ended December 31 2019 2020 2021 2022 2023 After Total minimum lease payments Total 5,763 4,817 4,055 3,598 3,273 15,161 36,667 $ $ Lessor The Company has net investments in direct financing and sales-type leases to commercial, industrial, and tax-exempt entities. These leases are included within business loans on the Company's consolidated balance sheets. The Company primarily leases various types of equipment, trucks and trailers, and office furniture and fixtures. Lease agreements may include options for the lessee to renew or purchase the leased equipment at the end of the lease term. The Company has elected to adopt the lease component expedient in which the lease and nonlease components are combined into the total lease receivable. The Company also leases office space to third parties, and these leases are classified as operating leases. The leases may include options to renew or to expand the leased space, and currently the leases have remaining terms of 1 month to 8 years. The following table provides the components of lease income. (in thousands) Direct financing and sales-type leases Operating leases(1) Total lease income For the Year Ended December 31 2019 24,062 7,951 32,013 $ (1) Includes rent of $75 thousand from Tower Properties Company, a related party. The following table presents the components of the net investments in direct financing and sales-type leases. (in thousands) Lease payment receivable Unguaranteed residual assets Total net investments in direct financing and sales-type leases Deferred origination cost Total net investment included within business loans The maturities of lease receivables are included in the table below. December 31, 2019 $ $ $ 738,809 53,408 792,217 3,609 795,826 (in thousands) 2020 2021 2022 2023 2024 After 2024 Total lease receipts Less: Net present value adjustment Present value of lease receipts Direct Financing and Sale-Type Leases Operating Leases $ $ 224,297 $ 177,143 136,787 92,813 58,773 114,188 804,001 $ 65,192 738,809 7,564 $ 7,511 13,816 5,536 4,811 8,643 47,881 $ Total 231,861 184,654 150,603 98,349 63,584 122,831 851,882 87 7. Deposits At December 31, 2019, the scheduled maturities of certificates of deposit were as follows: (In thousands) Due in 2020 Due in 2021 Due in 2022 Due in 2023 Due in 2024 Thereafter Total $ 1,727,042 229,487 27,205 14,387 9,838 53 $ 2,008,012 The following table shows a detailed breakdown of the maturities of certificates of deposit, by size category, at December 31, 2019. (In thousands) Due in 3 months or less Due in over 3 through 6 months Due in over 6 through 12 months Due in over 12 months Total Certificates of Deposit under $100,000 Certificates of Deposit over $100,000 117,635 $ 632,064 $ 144,309 223,756 140,457 286,240 323,038 140,513 Total 749,699 430,549 546,794 280,970 626,157 $ 1,381,855 $ 2,008,012 $ $ The aggregate amount of certificates of deposit that exceeded the $250,000 FDIC insurance limit totaled $1.1 billion at December 31, 2019. 8. Borrowings At December 31, 2019, the Company's borrowings primarily consisted of federal funds purchased and securities sold under agreements to repurchase (repurchase agreements). The following table sets forth selected information for federal funds purchased and repurchase agreements. (Dollars in thousands) Federal funds purchased and repurchase agreements: 2019 2018 2017 Year End Weighted Rate Average Weighted Rate Average Balance Outstanding Maximum Outstanding at any Month End Balance at December 31 .8% 1.6% $ 1,822,098 $ 2,394,294 $ 1,850,772 .9 .8 1.3 .7 1,514,144 1,462,387 1,981,761 1,984,071 1,956,389 1,507,138 Federal funds purchased and repurchase agreements comprised the majority of the Company's short-term borrowings (borrowings with an original maturity of less than one year) at December 31, 2019, and $1.8 billion of these borrowings were repurchase agreements, which generally have one day maturities and are mainly comprised of non-insured customer funds secured by a portion of the Company's investment portfolio. Additional information about the securities pledged for repurchase agreements is provided in Note 20 on Resale and Repurchase Agreements. The Bank is a member of the Des Moines FHLB and has access to term financing from the FHLB. These borrowings are secured under a blanket collateral agreement including primarily residential mortgages as well as all unencumbered assets and stock of the borrowing bank. At December 31, 2019, the Bank had no outstanding advances from the FHLB. The FHLB also issues letters of credit to secure the Bank's obligations to certain depositors of public funds, which totaled $396.6 million at December 31, 2019. 88 9. Income Taxes The components of income tax expense from operations for the years ended December 31, 2019, 2018 and 2017 were as follows: (In thousands) Year ended December 31, 2019: U.S. federal State and local Total Year ended December 31, 2018: U.S. federal State and local Total Year ended December 31, 2017: U.S. federal State and local Total Current Deferred Total $ $ $ $ $ $ 82,556 $ 12,323 94,879 $ 90,390 $ 10,223 100,613 $ 89,154 $ 7,735 96,889 $ 11,388 $ 2,807 14,195 $ 3,220 $ 2,116 5,336 $ 12,190 $ 1,427 13,617 $ 93,944 15,130 109,074 93,610 12,339 105,949 101,344 9,162 110,506 The components of income tax (benefit) expense recorded directly to stockholders’ equity for the years ended December 31, 2019, 2018 and 2017 were as follows: (In thousands) Unrealized gain (loss) on available for sale debt securities Change in fair value on cash flow hedges Accumulated pension (benefit) loss Income tax (benefit) expense allocated to stockholders’ equity 2019 2018 2017 $ $ 50,163 $ 7,818 389 58,370 $ (18,634) $ 2,286 222 (16,126) $ 2,104 — (184) 1,920 Significant components of the Company’s deferred tax assets and liabilities at December 31, 2019 and 2018 were as follows: (In thousands) Deferred tax assets: Loans, principally due to allowance for loan losses Unrealized loss on available for sale debt securities Equity-based compensation Deferred compensation Unearned fee income Accrued expenses Other Total deferred tax assets Deferred tax liabilities: Equipment lease financing Unrealized gain on available for sale debt securities Land, buildings and equipment Cash flow hedges Intangibles Other Total deferred tax liabilities Net deferred tax liabilities 2019 2018 $ $ 39,130 $ — 7,554 6,662 5,053 4,270 4,057 66,726 68,814 34,024 17,202 9,015 6,491 7,331 142,877 (76,151) $ 39,169 16,140 7,609 5,911 4,125 2,152 4,640 79,746 55,738 — 14,207 2,104 5,973 5,309 83,331 (3,585) Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the total deferred tax assets. 89 A reconciliation between the expected federal income tax expense using the federal statutory tax rate and the Company's actual income tax expense is provided below. The federal statutory tax rate was 21% in 2019 and 2018, and 35% in 2017. The effective tax rate is calculated by dividing income taxes by income before income taxes less the non-controlling interest expense. (In thousands) Computed “expected” tax expense Increase (decrease) in income taxes resulting from: Tax-exempt interest, net of cost to carry Contribution of appreciated securities State and local income taxes, net of federal tax benefit Tax reform enactment Share-based award payments Other Total income tax expense 2019 2018 2017 $ 111,364 $ 113,293 $ 150,461 (10,973) (11,502) — 11,953 — (3,337) 67 — 9,748 — (3,928) (1,662) (20,295) (10,864) 5,955 (6,753) (6,613) (1,385) $ 109,074 $ 105,949 $ 110,506 The gross amount of unrecognized tax benefits was $1.4 million and $1.3 million at December 31, 2019 and 2018, respectively, and the total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was $1.1 million and $993 thousand, respectively. The activity in the accrued liability for unrecognized tax benefits for the years ended December 31, 2019 and 2018 was as follows: (In thousands) Unrecognized tax benefits at beginning of year Gross increases – tax positions in prior period Gross decreases – tax positions in prior period Gross increases – current-period tax positions Lapse of statute of limitations Unrecognized tax benefits at end of year 2019 2018 1,257 $ 1,208 18 (4) 361 (260) 1,372 $ 31 — 322 (304) 1,257 $ $ The Company and its subsidiaries are subject to income tax by federal, state and local government taxing authorities. Tax years 2016 through 2019 remain open to examination for U.S. federal income tax and for major state taxing jurisdictions. 10. Employee Benefit Plans Employee benefits charged to operating expenses are summarized in the table below. Substantially all of the Company’s employees are covered by a defined contribution (401(k)) plan, under which the Company makes matching contributions. (In thousands) Payroll taxes Medical plans 401(k) plan Pension plans Other Total employee benefits 2019 2018 2017 26,959 $ 29,635 15,810 605 3,049 76,058 $ 25,712 $ 27,030 14,986 651 2,918 71,297 $ 24,402 25,143 14,244 704 2,883 67,376 $ $ A portion of the Company’s employees are covered by a noncontributory defined benefit pension plan, however, participation in the pension plan is not available to employees hired after June 30, 2003. All participants are fully vested in their benefit payable upon normal retirement date, which is based on years of participation and compensation. Since January 2011, all benefits accrued under the pension plan have been frozen. However, the accounts continue to accrue interest at a stated annual rate. Certain key executives also participate in a supplemental executive retirement plan (the CERP) that the Company funds only as retirement benefits are disbursed. The CERP carries no segregated assets. The CERP continues to provide credits based on hypothetical contributions in excess of those permitted under the 401(k) plan. In the tables presented below, the pension plan and the CERP are presented on a combined basis. Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to satisfy the statutory minimum required contribution as defined by the Pension Protection Act, which is intended to provide for current service accruals and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these 90 requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. No contributions to the defined benefit plan were made in 2019 or 2018. The Company made a discretionary contribution of $5.5 million to its defined benefit pension plan in 2017 in order to reduce pension guarantee premiums. The minimum required contribution for 2020 is expected to be zero. The Company does not expect to make any further contributions in 2020 other than the necessary funding contributions to the CERP. Contributions to the CERP were $25 thousand, $24 thousand and $439 thousand during 2019, 2018 and 2017, respectively. The following items are components of the net pension cost for the years ended December 31, 2019, 2018 and 2017. (In thousands) Service cost-benefits earned during the year Interest cost on projected benefit obligation Expected return on plan assets Amortization of prior service cost Amortization of unrecognized net loss Net periodic pension cost 2019 2018 2017 $ $ 607 $ 651 $ 4,198 (4,842) (271) 2,288 3,756 (5,255) (271) 2,267 1,980 $ 1,148 $ 621 3,826 (5,785) (271) 2,313 704 The following table sets forth the pension plans’ funded status, using valuation dates of December 31, 2019 and 2018. (In thousands) Change in projected benefit obligation Projected benefit obligation at prior valuation date Service cost Interest cost Benefits paid Actuarial (gain) loss Projected benefit obligation at valuation date Change in plan assets Fair value of plan assets at prior valuation date Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets at valuation date 2019 2018 $ 112,063 $ 120,667 607 4,198 (7,016) 10,750 120,602 99,418 15,129 25 (7,016) 107,556 651 3,756 (6,622) (6,389) 112,063 108,260 (2,244) 24 (6,622) 99,418 (12,645) Funded status and net amount recognized at valuation date $ (13,046) $ The accumulated benefit obligation, which represents the liability of a plan using only benefits as of the measurement date, was $120.6 million and $112.1 million for the combined plans on December 31, 2019 and 2018, respectively. 91 Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) at December 31, 2019 and 2018 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis. (In thousands) Prior service cost Accumulated loss Accumulated other comprehensive loss Cumulative employer contributions in excess of net periodic benefit cost Net amount recognized as an accrued benefit liability on the December 31 balance sheet Net loss arising during period Amortization of net loss Amortization of prior service cost Total recognized in other comprehensive income Total expense recognized in net periodic pension cost and other comprehensive income 2019 2018 $ $ $ $ 1,265 $ (30,516) (29,251) 16,205 (13,046) $ (461) 2,288 (271) 1,556 $ (424) $ 1,535 (32,342) (30,807) 18,162 (12,645) (1,110) 2,267 (271) 886 (262) The estimated net loss and prior service cost to be amortized from accumulated other comprehensive income into net periodic pension cost in 2020 is $1.9 million. The following assumptions, on a weighted average basis, were used in accounting for the plans. Determination of benefit obligation at year end: Effective discount rate for benefit obligations Assumed credit on cash balance accounts Determination of net periodic benefit cost for year ended: Effective discount rate for benefit obligations Effective rate for interest on benefit obligations Long-term rate of return on assets Assumed credit on cash balance accounts 2019 2018 2017 3.07% 5.00% 4.13% 3.81% 5.00% 5.00% 4.14% 5.00% 3.57% 3.28% 5.00% 5.00% 3.57% 5.00% 3.95% 3.28% 6.00% 5.00% 92 The following table shows the fair values of the Company’s pension plan assets by asset category at December 31, 2019 and 2018. Information about the valuation techniques and inputs used to measure fair value are provided in Note 17 on Fair Value Measurements. (In thousands) December 31, 2019 Assets: U.S. government obligations Government-sponsored enterprise obligations (a) State and municipal obligations Agency mortgage-backed securities (b) Non-agency mortgage-backed securities Asset-backed securities Corporate bonds (c) Equity securities and mutual funds: (d) Mutual funds Common stocks International developed markets funds Emerging markets funds Total December 31, 2018 Assets: U.S. government obligations Government-sponsored enterprise obligations (a) State and municipal obligations Agency mortgage-backed securities (b) Non-agency mortgage-backed securities Asset-backed securities Corporate bonds (c) Equity securities and mutual funds: (d) Mutual funds Common stocks International developed markets funds Emerging markets funds Total Fair Value Measurements Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value $ 4,746 $ 4,746 $ — $ 1,302 8,612 8,892 3,919 5,093 39,663 6,315 22,552 4,674 1,788 107,556 $ — — — — — — 6,315 22,552 4,674 1,788 40,075 $ 1,302 8,612 8,892 3,919 5,093 39,663 — — — — 67,481 $ 2,994 $ 2,994 $ — $ $ $ 1,200 8,299 8,209 4,398 3,520 37,207 8,645 18,173 5,046 1,727 99,418 $ $ — — — — — — 8,645 18,173 5,046 1,727 36,585 $ 1,200 8,299 8,209 4,398 3,520 37,207 — — — — 62,833 $ — — — — — — — — — — — — — — — — — — — — — — — — (a) This category represents bonds (excluding mortgage-backed securities) issued by agencies such as the Federal Home Loan Bank, the Federal Home Loan Mortgage Corp and the Federal National Mortgage Association. (b) This category represents mortgage-backed securities issued by the agencies mentioned in (a). (c) This category represents investment grade bonds issued in the U.S., primarily by domestic issuers, representing diverse industries. (d) This category represents investments in individual common stocks and equity funds. These holdings are diversified, largely across the financial services, technology services, healthcare, electronic technology, and producer manufacturing industries. The investment policy of the pension plan is designed for growth in principal, within limits designed to safeguard against significant losses within the portfolio. The policy sets guidelines, which may change from time to time, regarding the types and percentages of investments held. Currently, the policy includes guidelines such as holding bonds rated investment grade or better and prohibiting investment in Company stock. The plan does not utilize derivatives. Management believes there are no significant concentrations of risk within the plan asset portfolio at December 31, 2019. Under the current policy, the long-term investment target mix for the plan is 35% equity securities and 65% fixed income securities. The Company regularly reviews its policies on investment mix and may make changes depending on economic conditions and perceived investment risk. 93 The assumed overall expected long-term rate of return on pension plan assets used in calculating 2019 pension plan expense was 5.0%. Determination of the plan’s expected rate of return is based upon historical and anticipated returns of the asset classes invested in by the pension plan and the allocation strategy currently in place among those classes. The rate used in plan calculations may be adjusted by management for current trends in the economic environment. The 10-year annualized return for the Company’s pension plan was 7.3%. During 2019, the plan’s assets gained 14.8% of their value, compared to a loss of 1.7% in 2018. Returns for any plan year may be affected by changes in the stock market and interest rates. The Company expects to incur pension expense of $402 thousand in 2020, compared to $2.0 million in 2019. The Company utilizes mortality tables published by the Society of Actuaries to incorporate mortality assumptions into the measurement of the pension benefit obligation. At December 31, 2019, the Company utilized an updated mortality table and projection scale, which decreased the pension benefit obligation on that date by approximately $1.1 million. The following future benefit payments are expected to be paid: (In thousands) 2020 2021 2022 2023 2024 2025 - 2029 $ 7,281 7,430 7,409 7,467 7,371 35,721 11. Stock-Based Compensation and Directors Stock Purchase Plan* The Company’s stock-based compensation is provided under a stockholder-approved plan that allows for issuance of various types of awards, including stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards and stock-based awards. During the past three years, stock-based compensation has been issued in the form of nonvested stock awards and stock appreciation rights. At December 31, 2019, 2,249,326 shares remained available for issuance under the plan. The stock-based compensation expense that was charged against income was $13.9 million, $12.8 million and $12.1 million for the years ended December 31, 2019, 2018 and 2017, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $3.0 million, $3.2 million and $4.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. Nonvested Restricted Stock Awards Nonvested stock is awarded to key employees by action of the Company's Compensation and Human Resources Committee and Board of Directors. These awards generally vest after 4 to 7 years of continued employment, but vesting terms may vary according to the specifics of the individual grant agreement. There are restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant of restricted stock awards. A summary of the status of the Company’s nonvested share awards as of December 31, 2019 and changes during the year then ended is presented below. Nonvested at January 1, 2019 Granted Vested Forfeited Shares 1,239,970 217,182 (339,618) (13,323) Nonvested at December 31, 2019 1,104,211 $ Weighted Average Grant Date Fair Value 41.18 $ 58.82 31.33 47.41 47.57 The total fair value (at vest date) of shares vested during 2019, 2018 and 2017 was $19.9 million, $21.5 million and $23.8 million, respectively. 94 Stock Appreciation Rights Stock appreciation rights (SARs) are granted with exercise prices equal to the market price of the Company’s stock at the date of grant. SARs generally vest ratably over 4 years of continuous service and have 10-year contractual terms. All SARs must be settled in stock under provisions of the plan. A summary of SAR activity during 2019 is presented below. (Dollars in thousands, except per share data) Outstanding at January 1, 2019 Granted Forfeited Expired Exercised Outstanding at December 31, 2019 Exercisable at December 31, 2019 Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value 38.30 58.82 49.67 37.00 32.30 43.55 36.16 6.6 years $ 25,601 5.3 years $ 17,728 Shares 1,119,405 $ 196,129 (5,935) (1,917) (257,866) 1,049,816 $ 557,763 $ In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of SARs on date of grant. The Black-Scholes model is a closed-end model that uses various assumptions as shown in the following table. Expected volatility is based on historical volatility of the Company’s stock. The Company uses historical exercise behavior and other factors to estimate the expected term of the SARs, which represents the period of time that the SARs granted are expected to be outstanding. The risk-free rate for the expected term is based on the U.S. Treasury zero coupon spot rates in effect at the time of grant. The per share average fair value and the model assumptions for SARs granted during the past three years are shown in the table below. Weighted per share average fair value at grant date Assumptions: Dividend yield Volatility Risk-free interest rate Expected term 2019 $11.35 2018 2017 $11.28 $10.83 1.7% 19.8% 2.6% 1.6% 20.6% 2.7% 1.6% 21.1% 2.4% 6.0 years 6.6 years 7.0 years Additional information about stock options and SARs exercised is presented below. (In thousands) Intrinsic value of options and SARs exercised Tax benefit realized from options and SARs exercised 2019 2018 2017 $ $ 7,109 $ 1,385 $ 9,632 1,928 $ $ 9,310 2,698 As of December 31, 2019, there was $27.7 million of unrecognized compensation cost related to unvested SARs and stock awards. This cost is expected to be recognized over a weighted average period of approximately 3.0 years. Directors Stock Purchase Plan The Company has a directors stock purchase plan whereby outside directors of the Company and its subsidiaries may elect to use their directors’ fees to purchase Company stock at market value each month end. Remaining shares available for issuance under this plan were 33,914 at December 31, 2019. In 2019, 21,904 shares were purchased at an average price of $61.14, and in 2018, 32,454 shares were purchased at an average price of $54.92. * All share and per share amounts in this note have been restated for the 5% common stock dividend distributed in 2019. 95 12. Accumulated Other Comprehensive Income (Loss) The table below shows the activity and accumulated balances for components of other comprehensive income (loss). The largest component is the unrealized holding gains and losses on available for sale debt securities. Unrealized gains and losses on debt securities for which an other-than-temporary impairment (OTTI) has been recorded in current earnings are shown separately below. Another component is the amortization from other comprehensive income of losses associated with pension benefits, which occurs as the losses are included in current net periodic pension cost. The remaining component is gains in fair value on certain interest rate floors that have been designated as cash flow hedging instruments. (In thousands) Balance January 1, 2019 Unrealized Gains (Losses) on Securities (1) OTTI Other Pension Loss Unrealized Gains on Cash Flow Hedge Derivatives (2) Total Accumulated Other Comprehensive Income (Loss) $ 3,861 $ (52,278) $ (23,107) $ 6,855 $ (64,669) Other comprehensive income (loss) before reclassifications (975) 201,280 (461) 27,481 227,325 Amounts reclassified from accumulated other comprehensive income Current period other comprehensive income (loss), before tax Income tax (expense) benefit Current period other comprehensive income (loss), net of tax Transfer of unrealized gain on securities for which impairment was not previously recognized Balance December 31, 2019 Balance January 1, 2018 ASU 2018-02 Reclassification of tax rate change ASU 2016-01 Reclassification of unrealized gain on equity securities Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income Current period other comprehensive income (loss), before tax Income tax (expense) benefit Current period other comprehensive income (loss), net of tax Transfer of unrealized gain on securities for which impairment was not previously recognized 133 (842) 210 (632) 215 201,495 (50,373) 151,122 2,017 1,556 (389) 1,167 3,793 31,274 (7,818) 23,456 6,158 233,483 (58,370) 175,113 $ $ 35 3,264 3,411 715 $ $ (35) — — — 98,809 $ (21,940) $ 30,311 $ 110,444 30,326 $ (19,629) $ — $ 14,108 6,359 (4,142) — — — (438) (33,320) (73,725) — (1,110) 8,381 68 (447) 1,996 (370) (74,172) 93 18,541 (277) (55,631) 886 (222) 664 760 9,141 (2,286) 6,855 2,932 (33,320) (66,892) 2,377 (64,515) 16,126 (48,389) 12 (12) — — — Balance December 31, 2018 $ 3,861 $ (52,278) $ (23,107) $ 6,855 $ (64,669) (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. The requirement to revalue deferred tax assets and liabilities in the period of enactment stranded the effects of the tax rate change, mandated by the Tax Cuts and Jobs Act, in accumulated other comprehensive income. In response, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income", which the Company adopted on January 1, 2018. This ASU allowed the reclassification of the stranded tax effects from accumulated other comprehensive income (loss) (as shown in the table above) to retained earnings. New accounting guidance, which was effective January 1, 2018, required the reclassification of unrealized gains on equity securities from accumulated other comprehensive income (loss) to retained earnings (also shown above). 96 13. Segments The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial, and Wealth. The Consumer segment includes the consumer portion of the retail branch network (loans, deposits and other personal banking services), indirect and other consumer financing, and consumer 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. The Commercial segment provides corporate lending (including the Small Business Banking product line within the branch network), leasing, international services, and business, government deposit, and related commercial cash management services, as well as merchant and commercial bank card products. The Commercial segment also includes the Capital Markets Group, which sells fixed income securities and provides securities safekeeping and bond accounting services. The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management, and brokerage services. This segment also provides various loan and deposit related services to its private banking customers. The Company’s business line reporting system derives segment information from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting procedures and methods, which have been developed to reflect the underlying economics of the businesses. These methodologies are applied in connection with funds transfer pricing and assignment of overhead costs among segments. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost (credit) for funds used for (provided by) assets and liabilities based on their maturity, prepayment and/or repricing characteristics. Income and expense that directly relate to segment operations are recorded in the segment when incurred. Expenses that indirectly support the segments are allocated based on the most appropriate method available. The Company uses a funds transfer pricing method to value funds used (e.g., loans, fixed assets, and cash) and funds provided (e.g., deposits, borrowings, and equity) by the business segments and their components. This process assigns a specific value to each new source or use of funds with a maturity, based on current swap rates, thus determining an interest spread at the time of the transaction. Non-maturity assets and liabilities are valued using weighted average pools. The funds transfer pricing process attempts to remove interest rate risk from valuation, allowing management to compare profitability under various rate environments. The following tables present selected financial information by segment and reconciliations of combined segment totals to consolidated totals. There were no material intersegment revenues between the three segments. Management periodically makes changes to methods of assigning costs and income to its business segments to better reflect operating results. If appropriate, these changes are reflected in prior year information presented below. Segment Income Statement Data (In thousands) Year ended December 31, 2019: Net interest income Provision for loan losses Non-interest income Investment securities gains, net Non-interest expense Income before income taxes Year ended December 31, 2018: Net interest income Provision for loan losses Non-interest income Investment securities losses, net Non-interest expense Income before income taxes Year ended December 31, 2017: Net interest income Provision for loan losses Non-interest income Investment securities gains, net Non-interest expense Income before income taxes Consumer Commercial Wealth Segment Totals Other/ Elimination Consolidated Totals $ $ $ $ $ 315,782 $ (44,987) 135,257 — (297,581) 108,471 $ 294,798 $ (40,571) 126,253 — (286,181) 94,299 $ 276,891 $ (40,619) 121,362 — (274,225) $ 83,409 $ 342,736 $ (4,204) 203,952 — (308,686) 233,798 $ 344,972 $ (1,134) 202,527 — (297,847) 248,518 $ 329,087 $ 205 184,577 — (281,845) 232,024 $ 97 48,058 $ (174) 183,589 — (124,123) 107,350 $ 46,946 $ 32 173,026 — (123,568) 96,436 $ 47,264 $ (41) 158,175 — (120,461) 84,937 $ 706,576 $ (49,365) 522,798 — (730,390) 449,619 $ 686,716 $ (41,673) 501,806 — (707,596) 439,253 $ 653,242 $ (40,455) 464,114 — (676,531) 400,370 $ 114,717 $ (1,073) 1,905 3,626 (37,008) 82,167 $ 137,109 $ (1,021) (465) (488) (30,225) 104,910 $ 80,437 $ (4,789) (2,851) 25,051 (67,812) 30,036 $ 821,293 (50,438) 524,703 3,626 (767,398) 531,786 823,825 (42,694) 501,341 (488) (737,821) 544,163 733,679 (45,244) 461,263 25,051 (744,343) 430,406 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 loan losses in this category contains the difference between net loan charge-offs assigned directly to the segments and the recorded provision for loan loss expense. Included in this category’s net interest income are earnings of the investment portfolio, which are not allocated to a segment. Segment Balance Sheet Data (In thousands) Average balances for 2019: Assets Loans, including held for sale Goodwill and other intangible assets Deposits Average balances for 2018: Assets Loans, including held for sale Goodwill and other intangible assets Deposits $ $ Consumer Commercial Wealth Segment Totals Other/ Elimination Consolidated Totals 2,375,326 $ 2,239,100 79,055 10,236,257 9,486,074 $ 9,250,645 68,109 7,848,367 1,288,806 $ 1,276,839 746 1,832,418 13,150,206 $ 12,766,584 147,910 19,917,042 12,063,319 $ 1,476,630 — (7,151) 25,213,525 14,243,214 147,910 19,909,891 2,481,060 $ 2,346,166 78,062 10,210,502 9,115,738 $ 8,939,696 68,300 8,029,248 1,243,806 $ 1,233,780 746 1,871,596 12,840,604 $ 12,519,642 147,108 20,111,346 11,825,631 $ 1,425,930 — 19,906 24,666,235 13,945,572 147,108 20,131,252 The above segment balances include only those items directly associated with the segment. The “Other/Elimination” column includes unallocated bank balances not associated with a segment (such as investment securities and federal funds sold), balances relating to certain other administrative and corporate functions, and eliminations between segment and non-segment balances. This column also includes the resulting effect of allocating such items as float, deposit reserve and capital for the purpose of computing the cost or credit for funds used/provided. The Company’s reportable segments are strategic lines of business that offer different products and services. They are managed separately because each line services a specific customer need, requiring different performance measurement analyses and marketing strategies. The performance measurement of the segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments’ financial condition and results of operations if they were independent entities. 14. Common and Preferred Stock* On December 18, 2019, the Company distributed a 5% stock dividend on its $5 par common stock for the 26th consecutive year. All per common share data in this report has been restated to reflect the stock dividend. The Company applies the two-class method of computing income per share, as nonvested share-based awards that pay nonforfeitable common stock dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the following table. Nonvested share-based awards are further discussed in Note 11 on Stock-Based Compensation. Basic income per share is based on the weighted average number of common shares outstanding during the year. Diluted income per share gives effect to all dilutive potential common shares that were outstanding during the year. Presented below is a summary of the components used to calculate basic and diluted income per common share, which have been restated for all stock dividends. 98 (In thousands, except per share data) Basic income per common share: Net income attributable to Commerce Bancshares, Inc. Less preferred stock dividends Net income available to common shareholders Less income allocated to nonvested restricted stock Net income allocated to common stock Weighted average common shares outstanding Basic income per common share Diluted income per common share: Net income available to common shareholders Less income allocated to nonvested restricted stock Net income allocated to common stock Weighted average common shares outstanding 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 Weighted average diluted common shares outstanding Diluted income per common share 2019 2018 2017 $ $ $ $ $ $ 421,231 $ 9,000 412,231 4,019 408,212 $ 113,784 3.59 $ 412,231 $ 4,012 408,219 $ 113,784 433,542 $ 9,000 424,542 4,558 419,984 $ 116,352 3.61 $ 424,542 $ 4,547 419,995 $ 116,352 282 114,066 361 116,713 3.58 $ 3.60 $ 319,383 9,000 310,383 3,848 306,535 116,375 2.63 310,383 3,838 306,545 116,375 410 116,785 2.62 Unexercised stock appreciation rights of 356 thousand, 235 thousand and 167 thousand were excluded from the computation of diluted income per share for the years ended December 31, 2019, 2018 and 2017, respectively, because their inclusion would have been anti-dilutive. On August 7, 2019, the Company entered into an accelerated share repurchase ("ASR") agreement with Morgan Stanley & Co. LLC (Morgan Stanley). Under this ASR agreement, the Company paid $150.0 million to Morgan Stanley and received from Morgan Stanley 1,994,327 shares of the Company’s common stock, representing approximately 75% of the estimated total number of shares to be delivered by Morgan Stanley at the conclusion of the program. Final settlement occurred on December 30, 2019 at which time the remaining shares, totaling 438,009, were received by the Company. The specific number of shares that the Company ultimately repurchased was based on the volume-weighted-average price per share of the Company’s common stock during the repurchase period. In the Annual Meeting of the Shareholders, held on April 17, 2019, a proposal to increase the shares of Company common stock authorized for issuance under its articles of incorporation was approved. The approval increased the authorized shares from 120,000,000 to 140,000,000. The Company has 6,000,000 depositary shares outstanding, representing 6,000 shares of 6.00% Series B Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share, having an aggregate liquidation preference of $150.0 million (“Series B Preferred Stock”). Each depositary share has a liquidation preference of $25 per share. Dividends on the Series B Preferred Stock, if declared, accrue and are payable quarterly, in arrears, at a rate of 6.00%. The Series B Preferred Stock qualifies as Tier 1 capital for the purposes of the regulatory capital calculations. In the event that the Company does not declare and pay dividends on the Series B Preferred Stock for the most recent dividend period, the ability of the Company to declare or pay dividends on, purchase, redeem or otherwise acquire shares of its common stock or any securities of the Company that rank junior to the Series B Preferred Stock is subject to certain restrictions under the terms of the Series B Preferred Stock. The Company maintains a treasury stock buyback program authorized by its Board of Directors. The most recent authorization in November 2019 approved future purchases of 5,000,000 shares of the Company's common stock. At December 31, 2019, 4,430,958 shares of common stock remained available for purchase under the current authorization. 99 The table below shows activity in the outstanding shares of the Company’s common stock during the past three years. Shares in the table below are presented on an historical basis and have not been restated for the annual 5% stock dividends. (In thousands) Shares outstanding at January 1 Issuance of stock: Awards and sales under employee and director plans 5% stock dividend Other purchases of treasury stock Other Shares outstanding at December 31 Years Ended December 31 2019 2018 2017 111,129 106,615 101,461 329 5,359 (4,670) (15) 112,132 416 5,305 (1,194) (13) 111,129 403 5,078 (315) (12) 106,615 * Except as noted in the above table, all share and per share amounts in this note have been restated for the 5% common stock dividend distributed in 2019. 100 15. Regulatory Capital Requirements The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and additional discretionary actions by regulators that could have a direct material effect on the Company’s financial statements. The regulations require the Company to meet specific capital adequacy guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The following tables show the capital amounts and ratios for the Company (on a consolidated basis) and the Bank, together with the minimum capital adequacy and well-capitalized capital requirements, at the last two year ends. (Dollars in thousands) December 31, 2019 Total Capital (to risk-weighted assets): Actual Minimum Capital Adequacy Requirement Well-Capitalized Capital Requirement Amount Ratio Amount Ratio Amount Ratio Commerce Bancshares, Inc. (consolidated) $ 3,052,079 15.48% $ 1,577,105 8.00% N.A. N.A. Commerce Bank 2,583,676 13.19 1,566,866 8.00 $ 1,958,583 10.00% Tier I Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 2,890,322 14.66% $ 1,182,829 6.00% N.A. Commerce Bank 2,421,919 12.37 1,175,150 6.00 $ 1,566,866 Tier I Common Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 2,745,538 13.93% $ 887,122 4.50% N.A. Commerce Bank 2,421,919 12.37 881,362 4.50 $ 1,273,079 Tier I Capital (to adjusted quarterly average assets): (Leverage Ratio) Commerce Bancshares, Inc. (consolidated) $ 2,890,322 11.38% $ 1,015,771 4.00% N.A. Commerce Bank December 31, 2018 Total Capital (to risk-weighted assets): 2,421,919 9.57 1,012,232 4.00 $ 1,265,290 N.A. 8.00% N.A. 6.50% N.A. 5.00% Commerce Bancshares, Inc. (consolidated) $ 3,022,023 15.82% $ 1,528,317 8.00% N.A. N.A. Commerce Bank 2,655,591 13.98 1,519,169 8.00 $ 1,898,962 10.00% Tier I Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 2,861,016 14.98% $ 1,146,238 6.00% N.A. Commerce Bank 2,494,584 13.14 1,139,377 6.00 $ 1,519,169 Tier I Common Capital (to risk-weighted assets): Commerce Bancshares, Inc. (consolidated) $ 2,716,232 14.22% $ 859,678 4.50% N.A. Commerce Bank 2,494,584 13.14 854,533 4.50 $ 1,234,325 Tier I Capital (to adjusted quarterly average assets): (Leverage Ratio) Commerce Bancshares, Inc. (consolidated) $ 2,861,016 11.52% $ 993,564 4.00% N.A. Commerce Bank 2,494,584 10.07 991,185 4.00 $ 1,238,981 N.A. 8.00% N.A. 6.50% N.A. 5.00% The minimum required ratios for well-capitalized banks (under prompt corrective action provisions) are 6.5% for Tier I common capital, 8.0% for Tier I capital, 10.0% for Total capital and 5.0% for the leverage ratio. At December 31, 2019 and 2018, the Company met all capital requirements to which it is subject, and the Bank’s capital position exceeded the regulatory definition of well-capitalized. 101 16. Revenue from Contracts with Customers The Company adopted ASU 2014-09, "Revenue from Contracts with Customers," and its related amendments on January 1, 2018. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For the year ended December 31, 2019, approximately 61% of the Company’s total revenue was comprised of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services. The adoption of ASU 2014-09 did not require any significant change to the Company's revenue recognition processes. However, application of the new guidance resulted in a reclassification of certain bank card related network and rewards costs, previously classified as non-interest expense, to a reduction to non-interest income in the Company’s consolidated statements of income. The reclassification had no effect on prior period net income or net income per share. The Company adopted ASU 2014-09 on a full retrospective basis, in which each prior reporting period has been presented in accordance with the new guidance. The table below shows the effect of this reclassification on bank card fee income and non-interest expense for the year ended December 31, 2017. (In thousands) Non-interest income: Bank card transaction fees Total non-interest income Non-interest expense: Data processing and software Other Total non-interest expense For the year ended December 31, 2017 As Previously Reported Adoption of ASU 2014-09 As Adjusted $ $ 180,441 $ (25,341) $ 486,604 (25,341) 92,246 $ (11,248) $ 77,459 769,684 (14,093) (25,341) 155,100 461,263 80,998 63,366 744,343 The following table disaggregates non-interest income subject to ASU 2014-09 by major product line. (In thousands) Bank card transaction fees Trust fees Deposit account charges and other fees Consumer brokerage services Other non-interest income Total non-interest income from contracts with customers Other non-interest income (1) Total non-interest income For the Year Ended December 31 2019 2018 2017 $ 167,879 $ 171,576 $ 155,628 95,983 15,804 48,597 483,891 40,812 147,964 94,517 15,807 37,440 467,304 34,037 $ 524,703 $ 501,341 $ 155,100 135,159 90,060 14,630 30,128 425,077 36,186 461,263 (1) This revenue is not within the scope of ASU 2014-09, and includes fees relating to capital market activities, loan fees and sales, derivative instruments, standby letters of credit and various other transactions. The following table presents the opening and closing receivable balances for the years ended December 31, 2019 and 2018 for the Company’s significant revenue categories subject to ASU 2014-09. (In thousands) Bank card transaction fees Trust fees Deposit account charges and other fees Consumer brokerage services December 31, 2019 December 31, 2018 December 31, 2017 $ 13,915 $ 13,035 $ 13,315 2,093 6,523 596 2,721 6,107 559 2,802 5,597 380 For these revenue categories, none of the transaction price has been allocated to performance obligations that are unsatisfied as of the end of a reporting period. A description of these revenue categories follows. 102 Bank Card Transaction Fees The following table presents the components of bank card fee income. (In thousands) Debit card: Fee income Expense for network charges Net debit card fees Credit card: Fee income Expense for network charges and rewards Net credit card fees Corporate card: Fee income Expense for network charges and rewards Net corporate card fees Merchant: Fee income Fees to cardholder banks Expense for network charges Net merchant fees For the Years Ended December 31 2019 2018 2017 $ 42,106 $ 41,522 $ (2,081) 40,025 27,416 (13,239) 14,177 196,984 (102,596) 94,388 31,517 (8,779) (3,449) 19,289 (1,784) 39,738 26,799 (13,834) 12,965 199,651 (100,011) 99,640 30,241 (7,831) (3,177) 19,233 40,134 (4,498) 35,636 25,275 (10,699) 14,576 179,642 (94,823) 84,819 31,863 (8,228) (3,566) 20,069 155,100 Total bank card transaction fees $ 167,879 $ 171,576 $ The majority of debit and credit card fees are reported in the Consumer segment, while corporate card and merchant fees are reported in the Commercial segment. Debit and Credit Card Fees The Company issues debit and credit cards to its retail and commercial banking customers who use the cards to purchase goods and services from merchants through an electronic payment system. As a card issuer, the Company earns fees, including interchange income, for processing the cardholder’s purchase transaction with a merchant through a settlement network. Purchases are charged directly to a customer’s checking account (in the case of a debit card), or are posted to a customer’s credit card account. The fees earned are established by the settlement network and are dependent on the type of transaction processed but are typically based on a per unit charge. Interchange income, the largest component of debit and credit card fees, is settled daily through the networks. The services provided to the cardholders include issuing and maintaining cards, settling purchases with merchants, and maintaining memberships in various card networks to facilitate processing. These services are considered one performance obligation, as one of the services would not be performed without the others. The performance obligation is satisfied as services are rendered for each purchase transaction, and income is immediately recognized. In order to participate in the settlement network process, the Company must pay various transaction-related costs, established by the networks, including membership fees and a per unit charge for each transaction. These expenses are recorded net of the card fees earned. Consumer credit card products offer cardholders rewards that can be later redeemed for cash or goods or services to encourage card usage. Reward programs must meet network requirements based on the type of card issued. The expense associated with the rewards granted are recorded net of the credit card fees earned. Commercial card products offer cash rewards to corporate cardholders to encourage card usage in facilitating corporate payments. The Company pays cash rewards based on contractually agreed upon amounts, normally as a percent of each sales transaction. The expense associated with the cash rewards program is recorded net of the corporate card fees earned. 103 Merchant Fees The Company offers merchant processing services to its business customers to enable them to accept credit and debit card payments. Merchant processing activities include gathering merchant sales information, authorizing sales transactions and collecting the funds from card issuers using the networks. The merchant is charged a merchant discount fee for the services based on agreed upon pricing between the merchant and the Company. Merchant fees are recorded net of outgoing interchange costs paid to the card issuing banks and net of other network costs as shown in the table above. Merchant services provided are considered one performance obligation, as one of the services would not be performed without the others. The performance obligation is satisfied as services are rendered for each settlement transaction and income is immediately recognized. Income earned from merchant fees settles with the customer according to terms negotiated in individual customer contracts. The majority of customers settle with the Company at least monthly. Trust Fees The following table shows the components of revenue within trust fees, which are reported within the Wealth segment. (In thousands) Private client Institutional Other Total trust fees For the Years Ended December 31 2019 2018 2017 $ $ 118,832 $ 111,533 $ 29,468 7,328 29,241 7,190 155,628 $ 147,964 $ 100,358 27,477 7,324 135,159 The Company provides trust and asset management services to both private client and institutional trust customers including asset custody, investment advice, and reporting and administrative services. Other specialized services such as tax preparation, financial planning, representation and other related services are provided as needed. Trust fees are generally earned monthly and billed based on a rate multiplied by the fair value of the customer's trust assets. The majority of customer trust accounts are billed monthly. However, some accounts are billed quarterly, and a small number of accounts are billed semi-annually or annually, in accordance with agreements in place with the customer. The Company accrues trust fees monthly based on an estimate of fees due and either directly charges the customer’s account the following month or invoices the customer for fees due according to the billing schedule. The Company maintains written product pricing information which is used to bill each trust customer based on the services provided. Providing trust services is considered to be a single performance obligation that is satisfied on a monthly basis, involving the monthly custody of customer assets, statement rendering, periodic investment advice where applicable, and other specialized services as needed. As such, performance obligations are considered to be satisfied at the conclusion of each month while trust fee income is also recorded monthly. Deposit Account Charges and Other Fees The following table shows the components of revenue within deposit account charges and other fees. (In thousands) Corporate cash management fees Overdraft and return item fees Other service charges on deposit accounts Total deposit account charges and other fees $ $ For the Years Ended December 31 2019 2018 2017 41,442 $ 30,596 38,468 $ 31,468 23,945 24,581 95,983 $ 94,517 $ 36,044 30,576 23,440 90,060 Approximately half of this revenue is reported in the Consumer segment, while the remainder is reported in the Commercial segment. The Company provides corporate cash management services to its business and non-profit customers to meet their various transaction processing needs. Such services include deposit and check processing, lockbox, remote deposit, reconciliation, on- line banking and other similar transaction processing services. The Company maintains unit prices for each type of service, and the customer is billed based on transaction volumes processed monthly. The customer is usually billed either monthly or quarterly, however, some customers may be billed semi-annually or annually. The customer may pay for the cash management services 104 provided either by paying in cash or using the value of deposit balances (formula provided to the customer) held at the Company. The Company’s performance obligation for corporate cash management services is the processing of items over a monthly term, and the obligations are satisfied at the conclusion of each month. Overdraft fees are charged to customers when daily checks and other withdrawals to customers’ accounts exceed balances on hand. Fees are based on a unit price multiplied by the number of items processed whose total amounts exceed the available account balance. The daily overdraft charge is calculated and the fee is posted to the customer’s account each day. The Company’s performance obligations for overdraft transactions is based on the daily transaction processed and the obligation is satisfied as each day’s transaction processing is concluded. Other deposit fees include numerous smaller fees such as monthly statement fees, foreign ATM processing fees, identification restoration fees, and stop payment fees. Such fees are mostly billed to customers directly on their monthly deposit account statements, or in the case of foreign ATM processing fees, the fee is charged to the customer on the day that transactions are processed. Performance obligations for all of these various services are satisfied at the time that the service is rendered. Consumer Brokerage Services The following shows the components of revenue within consumer brokerage services, and nearly all of this revenue is reported in the Company's Wealth segment. (In thousands) Commission income Managed account services Total consumer brokerage services For the Years Ended December 31 2019 2018 2017 $ $ 9,071 $ 6,733 15,804 $ 8,956 $ 6,851 15,807 $ 8,400 6,230 14,630 Consumer brokerage services revenue is comprised of commissions received upon the execution of purchases and sales of mutual fund shares and equity securities, in addition to sales of annuities and certain limited insurance products in an agency capacity. Also, fees are earned on professionally managed advisory programs through arrangements with sub-advisors. Payment from the customer is due upon settlement date for purchases and sales of securities, at the purchase date for annuities and insurance products, and upon inception of the service period for advisory programs. Most of the contracts (except advisory contracts) encompass two types of performance obligations. The first is an obligation to provide account maintenance, record keeping and custodial services throughout the contract term. The second is the obligation to provide trade execution services for the customers' purchases and sales of products mentioned above. The first obligation is satisfied over time as the service period elapses, while the second type of obligation is satisfied upon the execution of each purchase/ sale transaction. Contracts for advisory services contain a single performance obligation comprised of providing the management services and related reporting/administrative services over the contract term. The transaction price of the contracts (except advisory contracts) is a commission charged at the time of trade execution. The commission varies across different security types, insurance products and mutual funds. It is generally determined by standardized price lists published by the Company and its mutual fund and insurance vendors. Because the transaction price relates specifically to the trade execution, it has been allocated to that performance obligation and is recorded at the time of execution. The fee for advisory services is charged to the customer in advance of the quarterly service period, based on the account balance at the beginning of the period. Revenue is recognized ratably over the service period. Other Non-Interest Income from Contracts with Customers Other non-interest income from contracts with customers consists mainly of various customer deposit related fees such as ATM fees and gains on sales of tax credits, foreclosed assets, and bank premises and equipment. Performance obligations for these services consist mainly of the execution of transactions for sales of various properties or providing specific deposit related transactions. Fees from these revenue sources are recognized when the performance obligation is completed, at which time cash is received by the Company. 105 17. Fair Value Measurements The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available for sale debt securities, equity securities, trading debt securities, certain investments relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record 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. When determining the fair value measurements for assets and liabilities required or permitted to be recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets, and the Company must use alternative valuation techniques to derive an estimated fair value measurement. 106  Instruments Measured at Fair Value on a Recurring Basis The table below presents the carrying values of assets and liabilities measured at fair value on a recurring basis at December 31, 2019 and 2018. There were no transfers among levels during these years. (In thousands) December 31, 2019 Assets: Residential mortgage loans held for sale Available for sale debt securities: U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities Trading debt securities Equity securities Private equity investments Derivatives * Assets held in trust for deferred compensation plan Total assets Liabilities: Derivatives * Liabilities held in trust for deferred compensation plan Total liabilities December 31, 2018 Assets: Residential mortgage loans held for sale Available for sale debt securities: U.S. government and federal agency obligations Government-sponsored enterprise obligations State and municipal obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities Trading debt securities Equity securities Private equity investments Derivatives * Assets held in trust for deferred compensation plan Total assets Liabilities: Derivatives * Liabilities held in trust for deferred compensation plan Total liabilities * The fair value of each class of derivative is shown in Note 19. . Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value $ 9,181 $ — $ 9,181 $ — 851,776 139,277 1,267,927 3,937,964 809,782 1,233,489 331,411 28,161 2,929 94,122 105,674 16,518 8,828,211 851,776 — — — — — — — 2,929 — — 16,518 871,223 — 139,277 1,258,074 3,937,964 809,782 1,233,489 331,411 28,161 — — 105,075 — 7,852,414 10,219 16,518 26,737 $ — 16,518 16,518 $ 9,989 — 9,989 $ — — 9,853 — — — — — — 94,122 599 — 104,574 230 — 230 13,529 $ — $ 13,529 $ — 907,652 195,778 1,328,039 3,214,985 1,047,716 1,511,614 332,257 27,059 2,585 85,659 41,210 12,968 8,721,051 907,652 — — — — — — — 2,585 — — 12,968 923,205 — 195,778 1,313,881 3,214,985 1,047,716 1,511,614 332,257 27,059 — — 40,627 — 7,697,446 13,421 12,968 26,389 $ — 12,968 12,968 $ 13,328 — 13,328 $ — — 14,158 — — — — — — 85,659 583 — 100,400 93 — 93 $ $ $ 107 Valuation methods for instruments measured at fair value on a recurring basis Following is a description of the Company’s valuation methodologies used for instruments measured at fair value on a recurring basis: Residential mortgage loans held for sale The Company originates fixed rate, first lien residential mortgage loans that are intended for sale in the secondary market. Fair value is based on quoted secondary market prices for loans with similar characteristics, which are adjusted to include the embedded servicing value in the loans. This adjustment represents an unobservable input to the valuation but is not considered significant given the relative insensitivity of the valuation to changes in this input. Accordingly, these loan measurements are classified as Level 2. Available for sale debt securities For available for sale securities, changes in fair value, including that portion of other-than-temporary impairment unrelated to credit loss, are recorded in other comprehensive income. As mentioned in Note 3 on Investment Securities, the Company records the credit-related portion of other-than-temporary impairment in current earnings. This portfolio comprises the majority of the assets which the Company records at fair value. Most of the portfolio, which includes government-sponsored enterprise, mortgage- backed and asset-backed securities, are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. These measurements are classified as Level 2 in the fair value hierarchy. Where quoted prices are available in an active market, the measurements are classified as Level 1. Most of the Level 1 measurements apply to U.S. Treasury obligations. The fair values of Level 1 and 2 securities in the available for sale portfolio are prices provided by a third-party pricing service. The prices provided by the third-party pricing service are based on observable market inputs, as described in the sections below. On a quarterly basis, the Company compares a sample of these prices to other independent sources for the same and similar securities. Variances are analyzed, and, if appropriate, additional research is conducted with the third-party pricing service. Based on this research, the pricing service may affirm or revise its quoted price. No significant adjustments have been made to the prices provided by the pricing service. The pricing service also provides documentation on an ongoing basis that includes reference data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy is appropriate. Valuation methods and inputs, by class of security: • U.S. government and federal agency obligations U.S. treasury bills, bonds and notes, including inflation-protected securities, are valued using live data from active market makers and inter-dealer brokers. Valuations for stripped coupon and principal issues are derived from yield curves generated from various dealer contacts and live data sources. • Government-sponsored enterprise obligations Government-sponsored enterprise obligations are evaluated using cash flow valuation models. Inputs used are live market data, cash settlements, Treasury market yields, and floating rate indices such as LIBOR, CMT, and Prime. • State and municipal obligations, excluding auction rate securities A yield curve is generated and applied to bond sectors, and individual bond valuations are extrapolated. Inputs used to generate the yield curve are bellwether issue levels, established trading spreads between similar issuers or credits, historical trading spreads over widely accepted market benchmarks, new issue scales, and verified bid information. Bid information is verified by corroborating the data against external sources such as broker-dealers, trustees/paying agents, issuers, or non-affiliated bondholders. • Mortgage and asset-backed securities Collateralized mortgage obligations and other asset-backed securities are valued at the tranche level. For each tranche valuation, the process generates predicted cash flows for the tranche, applies a market based (or benchmark) yield/spread for each tranche, and incorporates deal collateral performance and tranche level attributes to determine tranche-specific spreads to adjust the benchmark yield. Tranche cash flows are generated from new deal files and prepayment/default assumptions. Tranche spreads are based on tranche characteristics such as average life, type, volatility, ratings, underlying 108 collateral and performance, and prevailing market conditions. The appropriate tranche spread is applied to the corresponding benchmark, and the resulting value is used to discount the cash flows to generate an evaluated price. Valuation of agency pass-through securities, typically issued under GNMA, FNMA, FHLMC, and SBA programs, are primarily derived from information from the to-be-announced (TBA) market. This market consists of generic mortgage pools which have not been received for settlement. Snapshots of the TBA market, using live data feeds distributed by multiple electronic platforms, are used in conjunction with other indices to compute a price based on discounted cash flow models. • Other debt securities Other debt securities are valued using active markets and inter-dealer brokers as well as bullet spread scales and option adjusted spreads. The spreads and models use yield curves, terms and conditions of the bonds, and any special features (e.g., call or put options and redemption features). The available for sale portfolio includes certain auction rate securities. Due to the illiquidity in the auction rate securities market in recent years, the fair value of these securities cannot be based on observable market prices. The fair values of these securities are estimated using a discounted cash flows analysis which is discussed more fully in the Level 3 Inputs section of this note. Because many of the inputs significant to the measurement are not observable, these measurements are classified as Level 3 measurements. Equity securities with readily determinable fair values Equity securities are priced using the market prices for each security from the major stock exchanges or other electronic quotation systems. These are generally classified as Level 1 measurements. Stocks which trade infrequently are classified as Level 2. Trading debt securities The securities in the Company’s trading portfolio are priced by averaging several broker quotes for similar instruments and are classified as Level 2 measurements. Private equity investments These securities are held by the Company’s private equity subsidiaries and are included in other investment securities in the consolidated balance sheets. Due to the absence of quoted market prices, valuation of these nonpublic investments requires significant management judgment. These fair value measurements, which are discussed in the Level 3 Inputs section of this note, are classified as Level 3. Derivatives The Company’s derivative instruments include interest rate swaps and floors, foreign exchange forward contracts, and certain credit risk guarantee agreements. When appropriate, the impact of credit standing as well as any potential credit enhancements, such as collateral, has been considered in the fair value measurement. • Valuations for interest rate swaps are derived from a proprietary model whose significant inputs are readily observable market parameters, primarily yield curves used to calculate current exposure. Counterparty credit risk is incorporated into the model and calculated by applying a net credit spread over LIBOR to the swap's total expected exposure over time. The net credit spread is comprised of spreads for both the Company and its counterparty, derived from probability of default and other loss estimate information obtained from a third party credit data provider or from the Company's Credit Department when not otherwise available. The credit risk component is not significant compared to the overall fair value of the swaps. The results of the model are constantly validated through comparison to active trading in the marketplace. Parties to swaps requiring central clearing are required to post collateral (generally in the form of cash or marketable securities) to an authorized clearing agency that holds and monitors the collateral. In January 2017, the Company's clearing counterparty made rule changes to characterize a component of this collateral as a legal settlement of the derivative contract exposure. As a result, this component, known as variation margin, is no longer accounted for separately from the derivative as collateral, but is considered in determining the fair value of the derivative. Valuations for interest rate floors are also derived from a proprietary model whose significant inputs are readily observable market parameters, primarily yield curves and volatility surfaces. The model uses market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below the strike rates of the floors. The model also incorporates credit valuation adjustments of both the Company's and the counterparties' non- 109 performance risk. The credit valuation adjustment component is not significant compared to the overall fair value of the floors. The fair value measurements of interest rate swaps and floors are classified as Level 2 due to the observable nature of the significant inputs utilized. • Fair value measurements for foreign exchange contracts are derived from a model whose primary inputs are quotations from global market makers and are classified as Level 2. • The Company’s contracts related to credit risk guarantees are valued under a proprietary model which uses unobservable inputs and assumptions about the creditworthiness of the counterparty (generally a Bank customer). Customer credit spreads, which are based on probability of default and other loss estimates, are calculated internally by the Company's Credit Department, as mentioned above, and are based on the Company's internal risk rating for each customer. Because these inputs are significant to the measurements, they are classified as Level 3. • Derivatives relating to residential mortgage loan sale activity include commitments to originate mortgage loans held for sale, forward loan sale contracts, and forward commitments to sell TBA securities. The fair values of loan commitments and sale contracts are estimated using quoted market prices for loans similar to the underlying loans in these instruments. The valuations of loan commitments are further adjusted to include embedded servicing value and the probability of funding. These assumptions are considered Level 3 inputs and are significant to the loan commitment valuation; accordingly, the measurement of loan commitments is classified as Level 3. The fair value measurement of TBA contracts is based on security prices published on trading platforms and is classified as Level 2. Assets held in trust Assets held in an outside trust for the Company’s deferred compensation plan consist of investments in mutual funds. The fair value measurements are based on quoted prices in active markets and classified as Level 1. The Company has recorded an asset representing the total investment amount. The Company has also recorded a corresponding liability, representing the Company’s liability to the plan participants. 110 The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows: (In thousands) Year ended December 31, 2019: Balance at January 1, 2019 Total gains or losses (realized/unrealized): Included in earnings Included in other comprehensive income Investment securities called Discount accretion Purchases of private equity securities Sale / pay down of private equity securities Capitalized interest/dividends Purchase of risk participation agreement Sale of risk participation agreement Balance at December 31, 2019 Total gains or losses for the year included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2019 Year ended December 31, 2018: Balance at January 1, 2018 Total gains or losses (realized/unrealized): Included in earnings Included in other comprehensive income Investment securities called Discount accretion Purchases of private equity securities Sale / pay down of private equity securities Capitalized interest/dividends Purchase of risk participation agreement Sale of risk participation agreement Balance at December 31, 2018 Total gains or losses for the year included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2018 $ $ Fair Value Measurements Using Significant Unobservable Inputs (Level 3) State and Municipal Obligations Private Equity Investments Derivatives Total $ 14,158 $ 85,659 $ 490 $ 100,307 — 246 (4,635) 84 — — — — — (727) (93) — — — 15,706 (6,548) 32 — — — — — — — — 439 (467) (820) 246 (4,635) 84 15,706 (6,548) 32 439 (467) $ $ $ 9,853 $ 94,122 $ 369 $ 104,344 — $ (2,177) $ 457 $ (1,720) 17,016 $ 55,752 $ 503 $ 73,271 13,849 105 — (274) (2,616) 32 — — — — — 14,158 $ — — — 16,395 (371) 34 — — 85,659 $ — — — — — — 61 13,954 (274) (2,616) 32 16,395 (371) 34 61 (179) 490 $ (179) 100,307 — $ 13,849 $ 663 $ 14,512 Gains and losses on the Level 3 assets and liabilities in the table above are reported in the following income categories: (In thousands) Year ended December 31, 2019: Loan Fees and Sales Other Non- Interest Income Investment Securities Gains (Losses), Net Total Total gains or losses included in earnings Change in unrealized gains or losses relating to assets still held at December 31, 2019 Year ended December 31, 2018: Total gains or losses included in earnings Change in unrealized gains or losses relating to assets still held at December 31, 2018 $ $ $ $ (77) $ 458 $ (45) $ 535 $ (16) $ (727) $ (820) (1) $ (2,177) $ (1,720) 150 $ 13,849 $ 13,954 128 $ 13,849 $ 14,512 111 Level 3 Inputs As shown above, the Company's significant Level 3 measurements which employ unobservable inputs that are readily quantifiable pertain to auction rate securities (ARS) held by the Bank, investments in portfolio concerns held by the Company's private equity subsidiaries, and held for sale residential mortgage loan commitments. ARS are included in state and municipal securities and totaled $9.9 million at December 31, 2019, while private equity investments, included in other securities, totaled $94.1 million. Information about these inputs is presented in the table and discussions below. Auction rate securities Private equity investments Mortgage loan commitments Quantitative Information about Level 3 Fair Value Measurements Valuation Technique Discounted cash flow Unobservable Input Estimated market recovery period Estimated market rate Market comparable companies EBITDA multiple Discounted cash flow Probability of funding Embedded servicing value Range Weighted Average 3.4% - - 4.0 5 years 3.7% 6.0 47.8% - 100.0% 83.7% 1.2% 2.3% —% - The fair values of ARS are estimated using a discounted cash flows analysis in which estimated cash flows are based on mandatory interest rates paid under failing auctions and projected over an estimated market recovery period. Under normal conditions, ARS traded in weekly auctions and were considered liquid investments. The Company's estimate of when these auctions might resume is highly judgmental and subject to variation depending on current and projected market conditions. Few auctions of these securities have been successful in recent years, and most secondary transactions have been privately arranged. Estimated cash flows during the period over which the Company expects to hold the securities are discounted at an estimated market rate. These securities are comprised of bonds issued by various states and municipalities for healthcare and student lending purposes, and market rates are derived for each type. Market rates are calculated at each valuation date using a LIBOR or Treasury based rate plus spreads representing adjustments for liquidity premium and nonperformance risk. The spreads are developed internally by employees in the Company's bond department. An increase in the holding period alone would result in a higher fair value measurement, while an increase in the estimated market rate (the discount rate) alone would result in a lower fair value measurement. The valuation of the ARS portfolio is reviewed on a quarterly basis by the Company's chief investment officers. The fair values of the Company's private equity investments are based on a determination of fair value of the investee company less preference payments assuming the sale of the investee company. Investee companies are normally non-public entities. The fair value of the investee company is determined by reference to the investee's total earnings before interest, depreciation/ amortization, and income taxes (EBITDA) multiplied by an EBITDA factor. EBITDA is normally determined based on a trailing prior period adjusted for specific factors including current economic outlook, investee management, and specific unique circumstances such as sales order information, major customer status, regulatory changes, etc. The EBITDA multiple is based on management's review of published trading multiples for recent private equity transactions and other judgments and is derived for each individual investee. The fair value of the Company's investment is then calculated based on its ownership percentage in the investee company. On a quarterly basis, these fair value analyses are reviewed by a valuation committee consisting of investment managers and senior Company management. The significant unobservable inputs used in the fair value measurement of the Company’s derivative commitments to originate residential mortgage loans are the percentage of commitments that are actually funded and the mortgage servicing value that is inherent in the underlying loan value. A significant increase in the rate of loans that fund would result in a larger derivative asset or liability. A significant increase in the inherent mortgage servicing value would result in an increase in the derivative asset or a reduction in the derivative liability. The probability of funding and the inherent mortgage servicing values are directly impacted by changes in market rates and will generally move in the same direction as interest rates. 112 Instruments Measured at Fair Value on a Nonrecurring Basis For assets measured at fair value on a nonrecurring basis during 2019 and 2018, and still held as of December 31, 2019 and 2018, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation assumptions used to determine each adjustment, and the carrying value of the related individual assets or portfolios at December 31, 2019 and 2018. (In thousands) Fair Value Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Balance at December 31, 2019 Collateral dependent impaired loans Mortgage servicing rights Long-lived assets Balance at December 31, 2018 Collateral dependent impaired loans Mortgage servicing rights Long-lived assets $ $ 422 $ — $ — $ 422 $ 7,749 1,098 294 $ 6,478 914 — — — $ — — — — — $ — — 7,749 1,098 294 $ 6,478 914 (263) (327) (362) (269) 9 (552) Valuation methods for instruments measured at fair value on a nonrecurring basis Following is a description of the Company’s valuation methodologies used for other financial and nonfinancial instruments measured at fair value on a nonrecurring basis. Collateral dependent impaired loans While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. The Company maintains a staff of qualified appraisers who also review third party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by credit administration. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. These measurements are classified as Level 3. Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company at December 31, 2019 and 2018 are shown in the table above. Mortgage servicing rights The Company initially measures its mortgage servicing rights at fair value and amortizes them over the period of estimated net servicing income. They are periodically assessed for impairment based on fair value at the reporting date. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the fair value is estimated based on a valuation model which calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The fair value measurements are classified as Level 3. Long-lived assets When investments in branch facilities and various office buildings are determined to be impaired, their carrying values are written down to estimated fair value, or estimated fair value less cost to sell if the property is held for sale. Fair value is estimated in a process which considers current local commercial real estate market conditions and the judgment of the sales agent and often involves obtaining third party appraisals from certified real estate appraisers. The carrying amounts of these real estate holdings are regularly monitored by real estate professionals employed by the Company. These fair value measurements are classified as Level 3. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. 113 18. Fair Value of Financial Instruments The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for many of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as follows at December 31, 2019 and 2018: Estimated Fair Value at December 31, 2019 Level 1 Level 2 Level 3 Total $ — $ — — — — — — — — — 854,705 — 395,850 491,615 — 16,518 — $ 5,526,303 $ 5,526,303 898,152 898,152 — 2,849,213 2,849,213 — 2,333,002 2,333,002 — 1,938,505 1,938,505 — 344,424 344,424 — 708,209 708,209 — 4,478 4,478 — 14,602,286 — 14,602,286 13,809 — 8,741,888 149,025 869,592 869,592 395,850 — 491,615 — 105,674 599 16,518 — $ 1,758,688 $ 7,857,042 $ 15,621,502 $ 25,237,232 13,809 7,738,158 — — — 105,075 — $ 6,890,687 $ 11,621,716 — 20,035 — — — 16,518 $ 18,548,956 $ — $ — — — — 988 9,989 — — $ 6,890,687 — 11,621,716 2,022,629 20,035 1,831,518 988 10,219 16,518 10,977 $ 3,854,377 $ 22,414,310 2,022,629 — 1,831,518 — 230 — (In thousands) Financial Assets Loans: Business Real estate - construction and land Real estate - business Real estate - personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans Loans held for sale Investment securities Securities purchased under agreements to resell Interest earning deposits with banks Cash and due from banks Derivative instruments Assets held in trust for deferred compensation plan Total Financial Liabilities Non-interest bearing deposits Savings, interest checking and money market deposits Certificates of deposit Federal funds purchased Securities sold under agreements to repurchase Other borrowings Derivative instruments Liabilities held in trust for deferred compensation plan Total Carrying Amount $ 5,565,449 899,377 2,833,554 2,354,760 1,964,145 349,251 764,977 6,304 14,737,817 13,809 8,741,888 850,000 395,850 491,615 105,674 16,518 $ 25,353,171 $ 6,890,687 11,621,716 2,008,012 20,035 1,830,737 988 10,219 16,518 $ 22,398,912 114 (In thousands) Financial Assets Loans: Business Real estate - construction and land Real estate - business Real estate - personal Consumer Revolving home equity Consumer credit card Overdrafts Total loans Loans held for sale Investment securities Federal funds sold Securities purchased under agreements to resell Interest earning deposits with banks Cash and due from banks Derivative instruments Assets held in trust for deferred compensation plan Total Financial Liabilities Non-interest bearing deposits Savings, interest checking and money market deposits Certificates of deposit Federal funds purchased Securities sold under agreements to repurchase Other borrowings Derivative instruments Liabilities held in trust for deferred compensation plan Total Carrying Amount $ 5,106,427 869,659 2,875,788 2,127,083 1,955,572 376,399 814,134 15,236 14,140,298 20,694 8,698,666 3,320 700,000 689,876 507,892 41,210 12,968 $ 24,814,924 $ 6,980,298 11,685,239 1,658,122 13,170 1,943,219 8,702 13,421 12,968 $ 22,315,139 Estimated Fair Value at December 31, 2018 Level 1 Level 2 Level 3 Total $ — $ — — — — — — — — — 910,237 3,320 — 689,876 507,892 — 12,968 — $ 5,017,694 $ 5,017,694 868,274 868,274 — 2,846,095 2,846,095 — 2,084,370 2,084,370 — 1,916,627 1,916,627 — 365,069 365,069 — 756,651 756,651 — 11,223 — 11,223 13,866,003 — 13,866,003 20,694 — 8,698,666 145,139 3,320 — 693,228 693,228 689,876 — 507,892 — 41,210 583 12,968 — $ 2,124,293 $ 7,704,611 $ 14,704,953 $ 24,533,857 20,694 7,643,290 — — — — 40,627 — $ 6,980,298 $ 11,685,239 — 13,170 — — — 12,968 $ 18,691,675 $ — $ — — — — 7,751 13,328 — — $ 6,980,298 — 11,685,239 1,663,748 13,170 1,944,458 8,702 13,421 12,968 21,079 $ 3,609,250 $ 22,322,004 1,663,748 — 1,944,458 951 93 — 19. Derivative Instruments The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. With the exception of the interest rate floors (discussed below), the Company's derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings. (In thousands) Interest rate swaps Interest rate floors Interest rate caps Credit risk participation agreements Foreign exchange contracts Mortgage loan commitments Mortgage loan forward sale contracts Forward TBA contracts Total notional amount December 31 2019 2018 $ 2,606,181 $ 2,006,280 1,500,000 59,316 316,225 10,936 13,755 1,943 17,500 1,000,000 62,163 143,460 6,206 14,544 5,768 16,500 $ 4,525,856 $ 3,254,921 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 115 product distribution, education, and retirement communities. These customer swaps are offset by matching contracts purchased by the Company from other financial dealer institutions. 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. As of December 31, 2019, the Company has entered into three interest rate floors with a combined notional value of $1.5 billion, to hedge the risk of declining interest rates on certain floating rate commercial loans indexed to one month LIBOR. The first interest rate floor has a purchased strike rate of 2.25% and became effective on January 1, 2020 and matures on January 1, 2026. The second interest rate floor has a purchased strike rate of 2.50% and is effective on June 1, 2020 and matures on June 1, 2026. The third interest rate floor has a purchased strike rate of 2.00% and is effective December 15, 2020 and matures on December 15, 2026. The premiums paid for these floors totaled $31.3 million. As of December 31, 2019, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is approximately 7.0 years. The interest rate floors qualified and were designated as cash flow hedges and were assessed for effectiveness using regression analysis. The change in the fair value of the interest rate floors are recorded in AOCI, net of the amortization of the premium paid, which is recorded against interest and fees on loans in the consolidated statements of income. As of December 31, 2019, net deferred gains on the interest rate floors totaled $40.4 million (pre-tax) and were recorded in AOCI in the consolidated balance sheet. As of December 31, 2019, it is expected that $4.1 million (pre-tax) of interest rate floor premium amortization will be reclassified from AOCI into earnings over the next twelve months. The Company also contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps through risk participation agreements. The Company’s risks and responsibilities as guarantor are further discussed in Note 21 on Commitments, Contingencies and Guarantees. In addition, the Company enters into foreign exchange contracts, which are mainly comprised of contracts 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. 116 The fair values of the Company’s derivative instruments, whose notional amounts are listed above, are shown in the table below. Information about the valuation methods used to determine fair value is provided in Note 17 on Fair Value Measurements. The Company'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 offset against the fair values of cleared swaps, such that at December 31, 2019 in the table below, the positive fair values of cleared swaps were reduced by $617 thousand and the negative fair values of cleared swaps were reduced by $28.5 million. At December 31, 2018, the positive fair values of cleared swaps were reduced by $8.1 million and the negative fair values of cleared swaps were reduced by $6.5 million. (In thousands) Derivatives designated as hedging instruments: Interest rate floors Total derivatives designated as hedging instruments Derivatives not designated as hedging instruments: Interest rate swaps Interest rate caps Credit risk participation agreements Foreign exchange contracts Mortgage loan commitments Mortgage loan forward sale contracts Forward TBA contracts Total derivatives not designated as hedging instruments Total Asset Derivatives December 31 Liability Derivatives December 31 2019 2018 2019 2018 Fair Value Fair Value $ $ $ $ $ $ 67,192 67,192 37,774 4 140 97 459 6 2 29,031 29,031 11,537 24 47 20 536 15 — $ $ $ — $ — $ — — (9,916) (4) $ (13,110) (24) (230) (32) — (2) (35) (93) (8) — (8) (178) $ $ 38,482 105,674 $ $ 12,179 41,210 $ $ (10,219) (10,219) $ $ (13,421) (13,421) 117 The pre-tax effects of derivative instruments on the consolidated statements of income are shown in the tables below. Amount of Gain or (Loss) Recognized in OCI Included Component Excluded Component Location of Gain (Loss) Reclassified from AOCI into Income (In thousands) Amount of Gain (Loss) Reclassified from AOCI into Income Included Component Excluded Component Total Total Interest rate floors* (In thousands) For the Year Ended December 31, 2019 Derivatives in cash flow hedging relationships: $ $ Total For the Year Ended December 31, 2018 Derivatives in cash flow hedging relationships: $ $ 27,481 $ 27,481 $ 8,381 $ 8,381 $ Interest rate floors* Total 50,327 $ 50,327 $ — $ — $ * No hedging relationship existed during 2017. (In thousands) Derivative instruments: Interest rate swaps Interest rate caps Credit risk participation agreements Foreign exchange contracts: Mortgage loan commitments Mortgage loan forward sale contracts Forward TBA contracts Total (22,846) (22,846) Interest and fees on loans Total 8,381 8,381 Interest and fees on loans Total $ $ $ $ (3,793) $ (3,793) $ — $ — $ (3,793) (3,793) (760) $ (760) $ — $ — $ (760) (760) Location of Gain or (Loss) Recognized in Income on Derivative Amount of Gain or (Loss) Recognized in Income on Derivative For the Years Ended December 31 2019 2018 2017 Other non-interest income $ 4,732 $ 3,914 $ 1,978 Other non-interest income Other non-interest income Other non-interest income Loan fees and sales Loan fees and sales Loan fees and sales — (16) 53 (77) (3) (837) 11 150 31 (45) 5 414 — 35 (80) 231 64 (648) $ 3,852 $ 4,480 $ 1,580 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 arrangements on its consolidated balance sheet. Collateral exchanged between the Company and dealer bank counterparties is generally subject to thresholds and transfer minimums, and usually consist of marketable securities. By contract, 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. 118 (In thousands) December 31, 2019 Assets: Derivatives subject to master netting agreements Derivatives not subject to master netting agreements Total derivatives Liabilities: Derivatives subject to master netting agreements Derivatives not subject to master netting agreements Total derivatives December 31, 2018 Assets: Derivatives subject to master netting agreements Derivatives not subject to master netting agreements Total derivatives Liabilities: Derivatives subject to master netting agreements Derivatives not subject to master netting agreements Total derivatives Gross Amount Recognized Gross Amounts Offset in the Balance Sheet Net Amounts Presented in the Balance Sheet Gross Amounts Not Offset in the Balance Sheet Financial Instruments Available for Offset Collateral Received/ Pledged Net Amount $ 105,147 $ — $ 105,147 $ (8,104) $ (59,525) $ 37,518 527 105,674 10,083 136 10,219 — — — — — 527 105,674 10,083 (8,104) (437) 1,542 136 10,219 $ 40,613 $ — $ 40,613 $ (2,992) $ (26,174) $ 11,447 597 41,210 13,333 88 13,421 — — — — — 597 41,210 13,333 (2,992) (261) 10,080 88 13,421 119 20. Resale and Repurchase Agreements The following table shows the extent to which assets and liabilities relating to securities purchased under agreements to resell (resale agreements) and securities sold under agreements to repurchase (repurchase agreements) have been offset in 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 netting is applied); thus amounts of excess collateral are not shown. The agreements in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default. 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 collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral accepted or pledged in resale and repurchase agreements with other financial institutions also 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 customers. The Company is party to agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase and resale agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the consolidated balance sheets, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $200.0 million at December 31, 2019 and $450.0 million at December 31, 2018. At December 31, 2019, the Company had posted collateral of $204.3 million in marketable securities, consisting of agency mortgage-backed bonds, and had accepted $209.6 million in agency mortgage-backed bonds. (In thousands) December 31, 2019 Total resale agreements, subject to master netting arrangements Total repurchase agreements, subject to master netting arrangements December 31, 2018 Total resale agreements, subject to master netting arrangements Total repurchase agreements, subject to master netting arrangements Gross Amount Recognized Gross Amounts Offset in the Balance Sheet Net Amounts Presented in the Balance Sheet Gross Amounts Not Offset in the Balance Sheet Financial Instruments Available for Offset Securities Collateral Received/ Pledged Net Amount $ 1,050,000 $ (200,000) $ 850,000 $ — $ (850,000) $ 2,030,737 (200,000) 1,830,737 — (1,830,737) $ 1,150,000 $ (450,000) $ 700,000 $ — $ (700,000) $ 2,393,219 (450,000) 1,943,219 — (1,943,219) — — — — 120 The table below shows the remaining contractual maturities of repurchase agreements outstanding at December 31, 2019 and 2018, in addition to the various types of marketable securities that have been pledged by the Company as collateral for these borrowings. (In thousands) December 31, 2019 Repurchase agreements, secured by: U.S. government and federal agency obligations Government-sponsored enterprise obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities Total repurchase agreements, gross amount recognized December 31, 2018 Repurchase agreements, secured by: U.S. government and federal agency obligations Government-sponsored enterprise obligations Agency mortgage-backed securities Non-agency mortgage-backed securities Asset-backed securities Other debt securities Total repurchase agreements, gross amount recognized Remaining Contractual Maturity of the Agreements Overnight and continuous Up to 90 days Greater than 90 days Total $ $ $ $ 526,283 $ 32,575 973,774 71,399 60,012 50,375 1,714,418 $ 387,541 $ 18,466 882,744 187,740 322,680 98,522 1,897,693 $ — $ — 48,517 — 40,000 — 88,517 $ — $ — 227,802 — — — 227,802 $ 150,000 $ 100,000 $ — 31,774 — — — — 213,752 — — — 181,774 $ 313,752 $ 526,283 32,575 1,250,093 71,399 100,012 50,375 2,030,737 637,541 18,466 1,128,270 187,740 322,680 98,522 2,393,219 21. Commitments, Contingencies and Guarantees The Company engages in various transactions and commitments with off-balance sheet risk in the normal course of business to meet customer financing needs. The Company uses the same credit policies in making the commitments and conditional obligations described below as it does for on-balance sheet instruments. The following table summarizes these commitments at December 31: (In thousands) Commitments to extend credit: Credit card Other Standby letters of credit, net of participations Commercial letters of credit 2019 2018 $ 5,063,166 $ 5,328,502 6,123,264 5,840,967 377,338 7,050 353,905 13,774 Commitments to extend credit are legally binding agreements to lend to a borrower providing there are no violations of any conditions established in the contract. As many of the commitments are expected to expire without being drawn upon, the total commitment does not necessarily represent future cash requirements. Refer to Note 2 on Loans and Allowance for Loan Losses for further discussion. Commercial letters of credit act as a means of ensuring payment to a seller upon shipment of goods to a buyer. The majority of commercial letters of credit issued are used to settle payments in international trade. Typically, letters of credit require presentation of documents which describe the commercial transaction, evidence shipment, and transfer title. The Company, 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 the customer, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. 121 At December 31, 2019, the Company had recorded a liability in the amount of $2.6 million, representing the carrying value of the guarantee obligations associated with the standby letters of credit. This amount will be accreted into income over the remaining life of the respective commitments. Commitments outstanding under these letters of credit, which represent the maximum potential future payments guaranteed by the Company, were $377.3 million at December 31, 2019. The Company regularly purchases various state tax credits arising from third-party property redevelopment. These credits are either resold to third parties or retained for use by the Company. During 2019, purchases and sales of tax credits amounted to $90.6 million and $84.9 million, respectively. At December 31, 2019, the Company had outstanding purchase commitments totaling $160.9 million that it expects to fund in 2020. The Company periodically enters into risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral, and at December 31, 2019, 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 3 to 11 years. At December 31, 2019, the fair value of the Company's guarantee liability RPAs was $230 thousand, and the notional amount of the underlying swaps was $208.9 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated and is dependent upon the fair value of the interest rate swaps at the time of default. The Company has various legal proceedings pending at December 31, 2019, arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. The Company records a loss accrual for all legal and regulatory matters for which it deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet progressed to the point where a loss amount can be determined to be probable and estimable. 22. Related Parties The Company’s Chief Executive Officer, its Executive Chairman, and its former Vice Chairman are directors of Tower Properties Company (Tower) and, together with members of their immediate families, beneficially own approximately 67% of the outstanding stock of Tower. At December 31, 2019, Tower owned 211,996 shares of Company stock. Tower is primarily engaged in the business of owning, developing, leasing and managing real property. Payments from the Company and its affiliates to Tower are summarized below. These payments, with the exception of dividend payments, relate to property management services, including construction oversight, on three Company-owned office buildings and related parking garages in downtown Kansas City. (In thousands) Leasing agent fees Operation of parking garages Building management fees Property construction management fees Dividends paid on Company stock held by Tower Total 2019 2018 2017 154 $ 133 $ 118 2,001 250 210 95 1,935 136 181 2,733 $ 2,480 $ 32 82 1,954 146 232 2,446 $ $ Tower has a $13.5 million line of credit with the Bank which is subject to normal credit terms and has a variable interest rate. The line of credit is collateralized by Company stock and based on collateral value had a maximum borrowing amount of approximately $11.5 million at December 31, 2019. There were no borrowings under this line during 2019, and no balance outstanding at December 31, 2019. There were no borrowings during 2018, and the maximum borrowings during 2017 were $5.2 million. There was no balance outstanding at December 31, 2018 or 2017. Interest paid on borrowings during the last three years was not significant. Letters of credit may be collateralized under this line of credit; however, there were no letters of credit outstanding during 2019, 2018 or 2017, and thus, no fees were received during these periods. From time to time, the Bank extends additional credit to Tower for construction and development projects. No construction loans were outstanding during 2019, 2018 and 2017. 122 Tower leases office space in the Kansas City bank headquarters building owned by the Company. Rent paid to the Company totaled $75 thousand in 2019, $74 thousand in 2018, and $74 thousand in 2017, at $17.00, $16.69 and $15.75 per square foot, respectively. Directors of the Company and their beneficial interests have deposit accounts with the Bank and may be provided with cash management and other banking services, including loans, in the ordinary course of business. Such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unrelated persons and did not involve more than the normal risk of collectability. As discussed in Note 21 on Commitments, Contingencies and Guarantees, the Company regularly purchases various state tax credits arising from third-party property redevelopment and resells the credits to third parties. During 2019, the Company sold state tax credits to its Executive Chairman, its former Vice Chairman, its Chief Executive Officer, and its Chief Credit Officer in the amount of $865 thousand, $663 thousand, $166 thousand, and $83 thousand, respectively, for personal tax planning. During 2018, the Company sold state tax credits to its Executive Chairman, its former Vice Chairman, and its Chief Executive Officer in the amount of $831 thousand, $759 thousand, and $119 thousand, respectively. During 2017, the Company sold state tax credits to its Executive Chairman, its former Vice Chairman, and its Chief Executive Officer in the amount of $694 thousand, $598 thousand, and $67 thousand, respectively. The terms of the sales and the amounts paid were the same as the terms and amounts paid for similar tax credits by persons not related to the Company. 123 23. Parent Company Condensed Financial Statements Following are the condensed financial statements of Commerce Bancshares, Inc. (Parent only) for the periods indicated: Condensed Balance Sheets (In thousands) Assets Investment in consolidated subsidiaries: Bank Non-banks Cash Investment securities: Available for sale debt Equity Note receivable due from bank subsidiary Advances to subsidiaries, net of borrowings Income tax benefits Other assets Total assets Liabilities and stockholders’ equity Pension obligation Other liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity Condensed Statements of Income (In thousands) Income Dividends received from consolidated bank subsidiary Earnings of consolidated subsidiaries, net of dividends Interest and dividends on investment securities Management fees charged to subsidiaries Investment securities gains (losses) Net interest income on advances and note to subsidiaries Other Total income Expense Salaries and employee benefits Professional fees Data processing fees paid to affiliates Community service Other Total expense Income tax benefit Net income December 31 2019 2018 $ 2,687,692 $ 2,587,489 71,290 301,913 67,538 207,462 1,399 2,969 50,000 26,097 9,973 23,528 2,576 3,191 50,000 19,867 8,590 23,734 3,174,861 $ 2,970,447 $ $ 13,028 $ 27,149 40,177 3,134,684 $ 3,174,861 $ 12,645 26,504 39,149 2,931,298 2,970,447 For the Years Ended December 31 2019 2018 2017 $ 500,000 $ 200,000 $ (79,641) 233,785 1,698 36,776 3,572 1,208 4,700 10,698 37,688 (4,581) 1,299 2,390 160,002 147,678 2,099 30,431 41,717 514 3,346 468,313 481,279 385,787 32,882 2,050 3,142 87 13,019 51,180 (4,098) 33,588 2,383 3,341 152 10,729 50,193 (2,456) $ 421,231 $ 433,542 $ 33,714 2,036 3,512 32,093 10,671 82,026 (15,622) 319,383 124 Condensed Statements of Cash Flows (In thousands) Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Earnings of consolidated subsidiaries, net of dividends Other adjustments, net Net cash provided by operating activities Investing Activities Decrease in securities purchased under agreements to resell (Increase) decrease in investment in subsidiaries, net Proceeds from sales of investment securities Proceeds from maturities/pay downs of investment securities Purchases of investment securities Note receivable due from bank subsidiary Increase in advances to subsidiaries, net Net purchases of building improvements and equipment Net cash provided by (used in) investing activities Financing Activities Purchases of treasury stock Accelerated share repurchase agreements Issuance of stock under equity compensation plans Cash dividends paid on common stock Cash dividends paid on preferred stock Net cash used in financing activities Increase in cash Cash at beginning of year Cash at end of year Income tax receipts, net For the Years Ended December 31 2019 2018 2017 $ 421,231 $ 433,542 $ 319,383 79,641 2,491 503,363 — (12) 3,856 1,150 (63) — (6,230) (235) (1,534) (134,904) (150,000) (8) (233,785) (147,678) 2,505 202,262 — — 41,638 1,988 (125) — (5,296) (133) 38,072 (11,268) 160,437 155,775 11 11,006 2,295 — (50,000) (9,518) (52) 109,517 (75,231) (17,771) — (10) — (8) (91,619) (9,000) (118,398) 151,556 51 (113,466) (100,238) (9,000) (9,000) (407,378) (184,479) 94,451 207,462 55,855 151,607 $ $ 301,913 $ 207,462 $ 151,607 (2,337) $ (1,965) $ (8,991) Dividends paid by the Parent to its shareholders were substantially provided from Bank dividends. The Bank may distribute common dividends without prior regulatory approval, provided that the dividends do not exceed the sum of net income for the current year and retained net income for the preceding two years, subject to maintenance of minimum capital requirements. The Parent charges fees to its subsidiaries for management services provided, which are allocated to the subsidiaries based primarily on total average assets. The Parent makes cash advances to its private equity subsidiaries for general short-term cash flow purposes. Advances may be made to the Parent by its subsidiary bank holding company for temporary investment of idle funds. Interest on such advances is based on market rates. In 2017, the Bank borrowed $50.0 million from the Parent as part of its strategy to manage FDIC insurance premiums. The note has a rolling 13 month maturity, and the interest rate is a variable rate equal to the one year treasury rate. For the past several years, the Parent has maintained a $20.0 million line of credit for general corporate purposes with the Bank. The Parent has not borrowed under this line during the past three years. At December 31, 2019, the fair value of the investment securities held by the Parent consisted of investments of $2.8 million in preferred stock with readily determinable fair values, $188 thousand in equity securities that do not have readily determinable fair values, and $1.4 million in non-agency mortgage-backed securities. 125 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure. Item 9a. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2019. The Company’s internal control over financial reporting as of December 31, 2019 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which follows. Changes in Internal Control Over Financial Reporting No change in the Company’s internal control over financial reporting occurred that has materially affected, or is reasonably likely to materially affect, such controls during the last quarter of the period covered by this report. 126 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Commerce Bancshares, Inc.: Opinion on Internal Control Over Financial Reporting We have audited Commerce Bancshares, Inc.'s and subsidiaries (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2020 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Kansas City, Missouri February 25, 2020 127 Item 9b. OTHER INFORMATION None PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Items 401, 405 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K regarding executive officers, directors, and corporate governance is included at the end of Part I of this Form 10-K under the caption “Information about the Company's Executive Officers” and under the captions “Proposal One - Election of the 2023 Class of Directors”, “Delinquent Section 16(a) Reports”, “Audit and Risk Committee Report”, “Committees of the Board" and "Shareholder Proposals and Nominations" in the definitive proxy statement, which is incorporated herein by reference. The Company’s senior financial officer code of ethics for the chief executive officer and senior financial officers of the Company, including the chief financial officer, principal accounting officer or controller, or persons performing similar functions, is available at www.commercebank.com. Amendments to, and waivers of, the code of ethics are posted on this Web site. Item 11. EXECUTIVE COMPENSATION The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K regarding executive compensation is included under the captions “Compensation Discussion and Analysis”, “Executive Compensation”, “Director Compensation”, “Compensation and Human Resources Committee Report”, and “Compensation and Human Resources Committee Interlocks and Insider Participation” in the definitive proxy statement, which is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Items 201(d) and 403 of Regulation S-K is included under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the definitive proxy statement, which is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Items 404 and 407(a) of Regulation S-K is covered under the captions “Proposal One - Election of the 2023 Class of Directors” and “Corporate Governance” in the definitive proxy statement, which is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 9(e) of Schedule 14A is included under the captions “Pre-approval of Services by the External Auditor” and “Fees Paid to KPMG LLP” in the definitive proxy statement, which is incorporated herein by reference. 128 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV (a) The following documents are filed as a part of this report: (1) (2) Financial Statements: Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of Quarterly Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statement Schedules: All schedules are omitted as such information is inapplicable or is included in the financial statements. Page 60 61 62 63 64 65 53 (b) The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed below. 3 —Articles of Incorporation and By-Laws: (1) Restated Articles of Incorporation, as amended, were filed in quarterly report on Form 10-Q (Commission file number 1-36502) dated May 7, 2019, and the same are hereby incorporated by reference. (2) By-Laws, as amended, were filed in annual report on Form 10-K (Commission file number 1-36502) dated February 25, 2020, and the same are hereby incorporated by reference. 4 — Instruments defining the rights of security holders, including indentures: (1) Pursuant to paragraph (b)(4)(iii) of Item 601 Regulation S-K, Registrant will furnish to the Commission upon request copies of long-term debt instruments. (2) Description of Commerce Bancshares, Inc. registered securities. 10 — Material Contracts (Each of the following is a management contract or compensatory plan arrangement): (1) Commerce Bancshares, Inc. Executive Incentive Compensation Plan amended and restated as of January 1, 2019, was filed in annual report on Form 10-K (Commission file number 1-36502) dated February 21, 2019, and the same is hereby incorporated by reference. (2) Commerce Bancshares, Inc. Stock Purchase Plan for Non-Employee Directors amended and restated as of April 17, 2013 was filed in current report on Form 8-K (Commission file number 0-2989) dated April 23, 2013, and the same is hereby incorporated by reference. (3) Commerce Executive Retirement Plan amended and restated as of January 28, 2011 was filed in annual report on Form 10-K (Commission file number 0-2989) dated February 25, 2011, and the same is hereby incorporated by reference. (4) 2009 Form of Severance Agreement between Commerce Bancshares, Inc. and the persons listed at the end of such agreement was filed in annual report on Form 10-K (Commission file number 1-36502) dated February 24, 2015, and the same is hereby incorporated by reference. (5) 2015 Form of Severance Agreement between Commerce Bancshares, Inc. and the persons listed at the end of such agreement was filed in annual report on Form 10-K (Commission file number 1-36502) dated February 24, 2015, and the same is hereby incorporated by reference. (6) 2009 Form of Severance Agreement between Commerce Bancshares, Inc. and the persons listed at the end of such agreement was filed in annual report on Form 10-K (Commission file number 1-36502) dated February 21, 2019, and the same is hereby incorporated by reference. 129 (7) Trust Agreement for the Commerce Bancshares, Inc. Executive Incentive Compensation Plan amended and restated as of January 1, 2001 was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 8, 2001, and the same is hereby incorporated by reference. (8) Commerce Bancshares, Inc. 2020 Compensatory Arrangements with CEO and Named Executive Officers were filed in amended current report on Form 8-K (Commission file number 1-36502) dated February 7, 2020, and the same is hereby incorporated by reference. (9) Commerce Bancshares, Inc. Amended and Restated 2005 Equity Incentive Plan, amended and restated as of April 17, 2013 (incorporated by reference to Exhibit 10(j) to Commerce Bancshares, Inc.'s Form 8-K dated April 23, 2013). (9)(1) Amendment No. 1 dated November 12, 2018 to Commerce Bancshares, Inc. Amended and Restated 2005 Equity Incentive Plan, amended and restated as of April 17, 2013, was filed in annual report on Form 10-K (Commission file number 1-36502) dated February 21, 2019. (10) Commerce Bancshares, Inc. Stock Appreciation Rights Agreement and Commerce Bancshares, Inc. Restricted Stock Award Agreement, pursuant to the 2005 Equity Incentive Plan, were filed in current report on Form 8-K (Commission file number 0-2989) dated February 23, 2006, and the same are hereby incorporated by reference. (11) Commerce Bancshares, Inc. Stock Appreciation Rights Agreement, Commerce Bancshares, Inc. Restricted Stock Award Agreements for Executive Officers, and Commerce Bancshares, Inc. Restricted Stock Award Agreements for Employees other than Executive Officers, pursuant to the 2005 Equity Incentive Plan, were filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 6, 2013, and the same are hereby incorporated by reference. (12) Form of Notice of Grant of Award and Award Agreement for Restricted Stock for Executive Officers, pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan, was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 7, 2014, and the same is hereby incorporated by reference. (13) Form of Notice of Grant of Award and Award Agreement for Restricted Stock for Employees other than Executive Officers, pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan, was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 7, 2014, and the same is hereby incorporated by reference. (14) Form of Notice of Grant of Award and Award Agreement for Stock Appreciation Rights, pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan, was filed in quarterly report on Form 10-Q (Commission file number 0-2989) dated May 7, 2014, and the same is hereby incorporated by reference. (15) Form of Notice of Grant of Award and Award Agreement for Restricted Stock, pursuant to the Commerce Bancshares, Inc. 2005 Equity Incentive Plan, was filed in annual report on Form 10-K (Commission file number 1-36502) dated February 21, 2019, and the same is hereby incorporated by reference. 21 — Subsidiaries of the Registrant 23 — Consent of Independent Registered Public Accounting Firm 24 — Power of Attorney 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 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) Item 16. FORM 10-K SUMMARY None. 130 Pursuant to the requirements of Section 13 or 15(d) 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 this 25th day of February 2020. SIGNATURES COMMERCE BANCSHARES, INC. By: /s/ THOMAS J. NOACK Thomas J. Noack Senior Vice President & Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 25th day of February 2020. By: By: By: /s/ JOHN W. KEMPER John W. Kemper Chief Executive Officer /s/ CHARLES G. KIM Charles G. Kim Chief Financial Officer /s/ PAUL A. STEINER Paul A. Steiner Controller (Chief Accounting Officer) All the Directors on the Board of Directors* David W. Kemper Terry D. Bassham John R. Capps Earl H. Devanny, III W. Thomas Grant, II Karen L. Daniel John W. Kemper Jonathan M. Kemper Benjamin F. Rassieur, III Todd R. Schnuck Andrew C. Taylor Kimberly G. Walker ____________ * The Directors of Registrant listed executed a power of attorney authorizing Thomas J. Noack, their attorney-in-fact, to sign this report on their behalf. By: 131 /s/ THOMAS J. NOACK Thomas J. Noack Attorney-in-Fact The consolidated subsidiaries of the Registrant at February 1, 2020 were as follows: Exhibit 21 Name CBI-Kansas, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Kansas Location State or Other Jurisdiction of Incorporation Clayton Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO Clayton Realty Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO Commerce Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri Commerce Brokerage Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO Missouri Clayton Holdings, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri Missouri Missouri Delaware Illinois Financial, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peoria, IL Delaware Illinois Realty, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peoria, IL Commerce Insurance Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fenton, MO Missouri Commerce Investment Advisors, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri CBI Equipment Finance, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri Tower Redevelopment Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri CBI Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Arizona CFB Partners, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO Delaware CFB Venture Fund I, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri Delaware Capital for Business, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas City, MO Missouri CFB Venture Fund, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clayton, MO Consent of Independent Registered Public Accounting Firm Exhibit 23 The Board of Directors Commerce Bancshares, Inc.: We consent to the incorporation by reference in the Registration Statements No. 33-28294, No. 33-82692, No. 33-8075, No. 33-78344, No. 333-14651, No. 333-186867, No. 333-188374, and No. 333-214495 on Form S-8 and No. 333-140221 and No. 333-196689 on Form S-3ASR of Commerce Bancshares, Inc. of our reports dated February 25, 2020, with respect to the consolidated balance sheets of Commerce Bancshares, Inc. as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and the effectiveness of internal control over financial reporting as of December 31, 2019, which reports appear in the December 31, 2019 annual report on Form 10-K of Commerce Bancshares, Inc. KPMG LLP Kansas City, Missouri February 25, 2020 POWER OF ATTORNEY Exhibit 24 KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby appoint Thomas J. Noack and Paul A. Steiner, or either of them, attorney for the undersigned to sign the Annual Report on Form 10-K of Commerce Bancshares, Inc., for the fiscal year ended December 31, 2019, together with any and all amendments which might be required from time to time with respect thereto, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, with respect to Commerce Bancshares, Inc., with full power and authority in either of said attorneys to do and perform in the name of and on behalf of the undersigned every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person. IN WITNESS WHEREOF, the undersigned have executed these presents as of this 7th day of February, 2020. /s/ TERRY D. BASSHAM /s/ JOHN R. CAPPS /s/ EARL H. DEVANNY, III /s/ W. THOMAS GRANT, II /s/ KAREN L. DANIEL /s/ DAVID W. KEMPER /s/ JOHN W. KEMPER /s/ JONATHAN M. KEMPER /s/ BENJAMIN F. RASSIEUR, III /s/ TODD R. SCHNUCK /s/ ANDREW C. TAYLOR /s/ KIMBERLY G. WALKER CERTIFICATION Exhibit 31.1 I, John W. Kemper, certify that: 1. I have reviewed this annual report on Form 10-K of Commerce Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. February 25, 2020 /s/ JOHN W. KEMPER John W. Kemper President and Chief Executive Officer Exhibit 31.2 I, Charles G. Kim, certify that: 1. I have reviewed this annual report on Form 10-K of Commerce Bancshares, Inc.; CERTIFICATION 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. February 25, 2020 /s/ CHARLES G. KIM Charles G. Kim Executive Vice President and Chief Financial Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32 In connection with the Annual Report of Commerce Bancshares, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, John W. Kemper and Charles G. Kim, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JOHN W. KEMPER John W. Kemper Chief Executive Officer /s/ CHARLES G. KIM Charles G. Kim Chief Financial Officer February 25, 2020 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. CORPOR ATE HEADQUARTERS INVESTOR INQUIRIES 1000 Walnut P.O. Box 419248 Kansas City, MO 64141-6248 816.234.2000 www.commercebank.com INDEPENDENT ACCOUNTANTS KPMG LLP Kansas City, MO TR ANSFER AGENT, REGISTR AR AND DIVIDEND DISBURSING AGENT Shareholder correspondence should be mailed to: Computershare Trust Company, N.A. P.O. Box 505000 Louisville, KY 40233 Overnight correspondence should be sent to: Computershare 462 South 4th Street, Suite 1600 Louisville, KY 40202 Within USA Telephone: 800.317.4445 Outside USA Telephone: 781.575.2723 Shareholders, analysts and investors seeking information about the company should direct their inquiries to: Matthew Burkemper Senior Vice President, Commerce Bank Corporate Development and Investor Relations 8000 Forsyth Boulevard St. Louis, MO 63105 314.746.7485 Matthew.Burkemper@commercebank.com SHAREHOLDERS MAY RECEIVE FUTURE ANNUAL REPORTS AND PROX Y MATERIALS ONLINE To receive materials electronically, rather than by mail, individuals who hold stock in their name may enroll for electronic delivery at Computershare’s investor website: www.computershare.com/investor • If you have already created a login ID and password at the above site, log in and follow the prompts to “Enroll in Electronic Delivery.” • If you have not created a login ID and password on the above site, choose “Create Login.” You will need the Social Security number or tax ID number associated with your Commerce stock account to create the login. After you have created your login, follow the prompts to “Enroll in Electronic Delivery.” Hearing Impaired/TDD: 800.952.9245 Website: www.computershare.com/investor Please note: • Your consent is entirely revocable. Shareholder online inquiries: https://www.us.computershare.com/investor/Contact • You can always vote your proxy on the internet whether or not you elect to receive your materials electronically. Shareholders who hold their Commerce stock through a bank, broker or other holder of record should refer to the information provided by that entity for instructions on how to elect to view future annual reports and proxy statements over the internet. Employee PIP (401(k)) shareholders who have a company email address and online access will automatically be enrolled to receive the Annual Report, Proxy Statement, and proxy card over the internet unless they choose to opt out by emailing the Corporate Secretary at Thomas.Noack@commercebank.com. STOCK EXCHANGE LISTING Nasdaq Symbol-Common Stock: CBSH Symbol-Preferred Stock: CBSHP COMMON STOCK INFORMATION The table below sets forth the high and low prices of actual transactions for the company’s common stock, adjusted for the December 2019 5% stock dividend, which is publicly traded on the Nasdaq Stock Market. FISCAL 2019 HIGH LOW First Quarter $60.97 $52.97 Second Quarter Third Quarter Fourth Quarter ANNUAL MEETING 59.01 58.90 68.65 53.93 52.05 54.56 The annual meeting of shareholders will be held Wednesday, April 15, 2020 at 9:30 a.m. on the 10th floor of the Commerce Bank building located at 8000 Forsyth Boulevard, St. Louis, MO 63105. C O M M E R C E B A N C S H A R E S , I N C . 1000 WALNUT P.O. BOX 419248 KANSAS CITY, MO 64141-6248 Phone: (816) 234-2000 (800) 892-7100 Email: CBSHInvestorRelations@commercebank.com Website: www.commercebank.com An Equal Opportunity Employer Copyright © 2020 Commerce Bancshares, Inc. All rights reserved. 

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