COMMERCE BANCSHARES INC /MO/ 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2020 Annual Report on Form 10-K. Results of operations for the three and nine month periods ended September 30, 2021 are not necessarily indicative of results to be attained for any other period. Forward-Looking Information This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, the effects of the COVID-19 pandemic, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2020 Annual Report on Form 10-K and in Part II Item 1A of this Quarterly Report on Form 10-Q. Except as set forth in Part II, Item 1A, during the quarter ended September 30, 2021, there were no material changes to the Risk Factors disclosed in the Company's 2020 Annual Report on Form 10-K. Critical Accounting Policies The Company has identified certain policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses and the valuation of certain investment securities. A discussion of these policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2020 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2020. 44 Table of Contents Selected Financial Data Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Per Share Data Net income per common share — basic $ 1.05 $ 1.06 * $ 3.55 $ 1.80 * Net income per common share — diluted 1.05 1.06 * 3.54 1.80 * Cash dividends on common stock .263 .257 * .788 .771 * Book value per common share 30.01 28.23 * Market price 69.68 53.61 * Selected Ratios (Based on average balance sheets) Loans to deposits (1) 54.44 % 66.23 % 57.91 % 69.12 % Non-interest bearing deposits to total deposits 40.90 39.61 40.15 36.96 Equity to loans (1) 23.17 20.54 21.68 20.96 Equity to deposits 12.62 13.60 12.56 14.49 Equity to total assets 10.22 10.90 10.22 11.42 Return on total assets 1.40 1.71 1.65 1.04 Return on common equity 13.74 15.21 16.14 8.93 (Based on end-of-period data) Non-interest income to revenue (2) 39.11 37.50 39.66 37.42 Efficiency ratio (3) 59.95 55.00 57.76 57.37 Tier I common risk-based capital ratio 14.02 13.45 Tier I risk-based capital ratio 14.02 13.45 Total risk-based capital ratio 14.83 14.62 Tangible common equity to tangible assets ratio (4) 9.71 10.11 Tier I leverage ratio 9.31 9.39 * Restated for the 5% stock dividend distributed in December 2020. (1) Includes loans held for sale. (2) Revenue includes net interest income and non-interest income. (3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue. (4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization. It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP. The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets. September 30 (Dollars in thousands) 2021 2020 Total equity $ 3,491,221 $ 3,306,264 Less non-controlling interest 10,551 601 Less goodwill 138,921 138,921 Less core deposit premium 4,684 1,452 Total tangible common equity (a) $ 3,337,065 $ 3,165,290 Total assets $ 34,497,543 $ 31,453,817 Less goodwill 138,921 138,921 Less core deposit premium 4,684 1,452 Total tangible assets (b) $ 34,353,938 $ 31,313,444 Tangible common equity to tangible assets ratio (a)/(b) 9.71 % 10.11 % 45 Table of Contents Results of Operations Summary Three Months Ended September 30 Nine Months Ended September 30 (Dollars in thousands) 2021 2020 % change 2021 2020 % change Net interest income $ 214,037 $ 215,962 (.9 %) $ 627,767 $ 620,084 1.2 % Provision for credit losses 7,385 (3,101) (338.1) 59,272 (141,593) (141.9) Non-interest income 137,506 129,572 6.1 412,694 370,750 11.3 Investment securities gains (losses), net 13,108 16,155 (18.9) 39,765 (1,275) N.M. Non-interest expense (211,620) (190,858) 10.9 (602,319) (572,068) 5.3 Income taxes (34,662) (34,375) .8 (111,947) (54,209) 106.5 Non-controlling interest income (expense) (3,193) (907) N.M. (9,373) 2,479 N.M. Net income attributable to Commerce Bancshares, Inc. 122,561 132,448 (7.5) 415,859 224,168 85.5 Preferred stock dividends — (7,466) (100.0) — (11,966) (100.0) Net income available to common shareholders $ 122,561 $ 124,982 (1.9 %) $ 415,859 $ 212,202 96.0 % N.M. - Not meaningful For the quarter ended September 30, 2021, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $122.6 million, a decrease of $9.9 million, or 7.5%, compared to the third quarter of the previous year. For the current quarter, the annualized return on average assets was 1.40%, the annualized return on average equity was 13.74%, and the efficiency ratio was 59.95%. Diluted earnings per common share was $1.05, a decrease of .9% compared to $1.06 per share in the third quarter of 2020, and decreased 23.9% compared to $1.38 per share in the previous quarter. Compared to the third quarter of last year, net interest income decreased $1.9 million, or .9%, mainly due to decreases in loan interest and interest on securities purchased under agreements to resell of $7.9 million and $2.2 million, respectively. These decreases were partly offset by a decline of $4.2 million in interest expense on deposits and borrowings, coupled with an increase of $3.4 million in interest income on investment securities. The provision for credit losses declined $10.5 million due to a decrease in the estimate of the allowance for credit losses on loans and unfunded commitments and lower net loan charge-offs. Non-interest income increased $7.9 million, or 6.1%, compared to the third quarter of 2020, mainly due to growth in trust fees, net bank card fees and deposit account fees, partly offset by lower loan fees and sales. Investment securities net gains totaled $13.1 million in the current quarter compared to net gains of $16.2 million in the same quarter last year. Net securities gains in the current quarter primarily resulted from unrealized fair value gains of $13.0 million in the Company's private equity portfolio. Non-interest expense increased $20.8 million, or 10.9%, over the third quarter of 2020 mainly due to non-recurring litigation settlement expense, higher salaries and benefits expense and data processing and software expense. Net income for the first nine months of 2021 was $415.9 million, an increase of $191.7 million, or 85.5%, over the same period last year. Diluted earnings per common shares was $3.54, an increase of 96.7% compared to $1.80 per share in the same period last year. For the first nine months of 2021, the annualized return on average assets was 1.65%, the annualized return on average equity was 16.14%, and the efficiency ratio was 57.76%. Net interest income increased $7.7 million, or 1.2%, over the same period last year. This growth was due to a decrease of $27.8 million in deposits and borrowings interest expense and growth of $6.2 million in interest income on investment securities, partly offset by a $27.5 million decrease in interest income on loans. The provision for credit losses was a benefit of $59.3 million for the first nine months of 2021, compared to provision expense of $141.6 million in the same period last year, resulting in a decrease of $200.9 million. Non-interest income increased $41.9 million, or 11.3%, over the first nine months of last year mainly due to higher trust fees, net bank card fees and loan fees and sales. Non-interest expense increased $30.3 million, or 5.3%, over the first nine months of last year due to increases in salaries and benefits and data processing and software expense, as well as lower deferred loan origination costs. 46 Table of Contents Net Interest Income The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate. Analysis of Changes in Net Interest Income Three Months Ended September 30, 2021 vs. 2020 Nine Months Ended September 30, 2021 vs. 2020 Change due to Change due to (In thousands) Average Volume Average Rate Total Average Volume Average Rate Total Interest income, fully taxable equivalent basis: Loans: Business $ (9,486) $ 6,838 $ (2,648) $ (6,101) $ 5,238 $ (863) Real estate - construction and land 1,831 (672) 1,159 5,745 (5,159) 586 Real estate - business (61) (459) (520) 2,026 (6,914) (4,888) Real estate - personal 479 (1,959) (1,480) 6,517 (7,631) (1,114) Consumer 517 (2,436) (1,919) 1,193 (9,471) (8,278) Revolving home equity (395) 129 (266) (1,470) (846) (2,316) Consumer credit card (2,292) (109) (2,401) (8,454) (2,969) (11,423) Overdrafts — — — — — — Total interest on loans (9,407) 1,332 (8,075) (544) (27,752) (28,296) Loans held for sale (74) (3) (77) 287 (139) 148 Investment securities: U.S. government and federal agency securities (400) 3,736 3,336 (918) 13,653 12,735 Government-sponsored enterprise obligations (284) 19 (265) (1,672) (401) (2,073) State and municipal obligations 1,737 (915) 822 11,888 (6,296) 5,592 Mortgage-backed securities 4,205 (7,351) (3,146) 24,116 (41,209) (17,093) Asset-backed securities 7,218 (6,263) 955 20,737 (19,639) 1,098 Other securities 2,197 (700) 1,497 5,354 457 5,811 Total interest on investment securities 14,673 (11,474) 3,199 59,505 (53,435) 6,070 Federal funds sold 1 — 1 4 (3) 1 Securities purchased under agreements to resell 10,384 (12,624) (2,240) 10,149 (9,043) 1,106 Interest earning deposits with banks 398 336 734 2,059 (1,947) 112 Total interest income 15,975 (22,433) (6,458) 71,460 (92,319) (20,859) Interest expense: Deposits: Savings 66 (46) 20 258 (195) 63 Interest checking and money market 428 (1,837) (1,409) 2,550 (12,341) (9,791) Certificates of deposit of less than $100,000 (210) (612) (822) (813) (2,377) (3,190) Certificates of deposit of $100,000 and over (236) (1,826) (2,062) (1,158) (8,026) (9,184) Total interest on deposits 48 (4,321) (4,273) 837 (22,939) (22,102) Federal funds purchased and securities sold under agreements to repurchase 117 (43) 74 486 (5,135) (4,649) Other borrowings — 1 1 (1,030) 3 (1,027) Total interest expense 165 (4,363) (4,198) 293 (28,071) (27,778) Net interest income, tax equivalent basis $ 15,810 $ (18,070) $ (2,260) $ 71,167 $ (64,248) $ 6,919 Net interest income in the third quarter of 2021 was $214.0 million, a decrease of $1.9 million from the third quarter of 2020. On a tax equivalent (T/E) basis, net interest income totaled $216.9 million in the third quarter of 2021, down $2.3 million from the same period last year and up $5.8 million over the previous quarter. The decrease in net interest income 47 Table of Contents compared to the third quarter of 2020 was mainly due to lower interest income earned on loans (T/E) of $8.1 million and securities purchased under agreements to resell of $2.2 million, partly offset by higher interest income earned on investment securities (T/E) of $3.2 million and lower interest expense on interest bearing deposits of $4.3 million. The decrease in total interest earned on loans (T/E) was mainly the result of a decline in average balances, partly offset by growth in the average rate earned. The increase in interest earned on investment securities (T/E) was mainly due to higher average balances, partly offset by lower rates earned, while the decrease in expense on interest bearing deposits was a result of a decline in the average rate paid. The Company's net yield on earning assets (T/E) was 2.58% in the current quarter compared to 2.97% in the third quarter of 2020. Total interest income (T/E) decreased $6.5 million from the third quarter of 2020. Interest income on loans (T/E) was $143.9 million during the third quarter of 2021, a decrease of $8.1 million, or 5.3%, from the same quarter last year. The decrease in interest income from the same quarter last year was primarily due to a decline of $1.1 billion, or 6.8%, in average loan balances, partly offset by an increase of five basis points in the average rate earned. Most of the decrease in interest income occurred in the business, consumer credit card, consumer, and personal real estate loan categories. These decreases were partly offset by an increase in interest income in the construction and land loan category. Business loan interest income decreased $2.6 million due to a decline of $1.3 billion in average balances, partly offset by an increase of 48 basis points in the average rate earned. The decline in business loan average balances was mainly due to a decrease of $930.8 million in Paycheck Protection Program (PPP) loans, while the increase in the yield was partly due to an increase in the PPP loan yield, which was 7.73% in the third quarter of 2021. Consumer credit card loan interest decreased $2.4 million mainly due to a decline of $79.8 million in average balances. Consumer loan interest declined $1.9 million due to a decrease of 48 basis points in the average rate earned, partly offset by a $48.9 million, or 2.5%, increase in average balances. Personal real estate loan interest income fell $1.5 million due to a 29 basis point decrease in the average rate earned, partly offset by higher average balances of $53.3 million, or 2.0%. These decreases to interest income (T/E) were partly offset by an increase of $1.2 million in interest earned on construction and land loans, mostly due to growth of $194.2 million, or 19.9%, in average loan balances, partly offset by a decline of 23 basis points in the average rate earned. Interest income on investment securities (T/E) was $65.7 million during the third quarter of 2021, which was an increase of $3.2 million over the same quarter last year. The increase in interest income occurred mainly in interest earned on U.S. government and federal agency obligations, which grew $3.3 million mainly due to an increase in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS). Interest income related to TIPS, which is tied to the Consumer Price Index, increased $3.4 million over the same quarter last year. Interest earned on other securities grew $1.5 million mainly due to distributions from investments in the Company's private equity portfolio. Interest on asset-backed securities rose $955 thousand as a result of a $1.5 billion increase in the average balance, partly offset by an 82 basis point decline in the average rate earned. In addition, interest earned on state and municipal obligations grew $822 thousand as a result of growth in the average balance of $272.4 million, or 15.4%, partly offset by an 18 basis point decline in the average rate earned. These increases to interest income on investment securities (T/E) were partly offset by a decline in interest earned on mortgage-backed securities, which fell $3.1 million due to a 42 basis point decline in the average rate earned, partly offset by an increase of $855.5 million, or 13.7%, in the average balance. At September 30, 2021, the Company recorded a $5.0 million adjustment to premium amortization, which increased interest income this quarter to reflect moderately slower prepayment speed estimates on mortgage-backed securities. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $13.8 billion in the third quarter of 2021, compared to $11.1 billion in the third quarter of 2020. Interest income on securities purchased under agreements to resell decreased $2.2 million from the same quarter last year, due to a decrease of 307 basis points in the average rate earned, partly offset by growth of $783.2 million in the average balance. In the third quarter of 2021, $250.0 million of securities purchased under agreements to resell (resell agreements), which had been earning interest at an average rate of 4.7%, matured and were replaced with $700.0 million of resell agreements earning approximately .28%. Interest income on balances at the Federal Reserve grew $734 thousand due to an increase of $1.6 billion in the average balance invested and an increase of five basis points in the average rate earned. The average tax equivalent yield on total interest earning assets was 2.62% in the third quarter of 2021, down from 3.07% in the third quarter of 2020. Total interest expense decreased $4.2 million compared to the third quarter of 2020 due to a $4.3 million decrease in interest expense on interest bearing deposits, slightly offset by a $75 thousand increase in interest expense on borrowings. The decrease in deposit interest expense resulted mainly from a 12 basis point decline in the overall average rate paid. Interest expense on certificates of deposit (CD's) declined $2.9 million due to a 55 basis point decrease in the average rate paid, coupled with a decrease of $267.1 million in the average balance. Interest expense on interest checking and money market accounts declined $1.4 million, due to a five basis point decrease in the average rate paid, partly offset by higher average balances of $1.6 billion. 48 Table of Contents Interest expense on borrowings increased slightly due to higher average balances of customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .06% and .17% in the third quarters of 2021 and 2020, respectively. Net interest income (T/E) for the first nine months of 2021 was $636.7 million compared to $629.8 million for the same period in 2020. For the first nine months of 2021, the net interest margin was 2.63% compared to 3.07% for the same period in 2020. Total interest income (T/E) for the first nine months of 2021 decreased $20.9 million from the same period last year mainly due to lower interest income on loans (T/E), partly offset by higher interest earned on investment securities (T/E). Loan interest income (T/E) declined $28.3 million, or 6.1%, due to a 27 basis point decline in the average rate earned. The decrease in loan interest occurred mainly in consumer credit card loans due to lower average loan balances, coupled with lower average rates. In addition, business real estate, consumer and personal real estate loan interest declined due to lower average rates, partly offset by higher average balances, while interest on home equity loans declined due to lower average balances and rates. Interest income on investment securities (T/E) grew $6.1 million, mainly due to an increase of $3.4 billion in the average balance, partly offset by a decrease of 55 basis points in the average rate earned. Interest earned on U.S. government and federal agency obligations grew $12.7 million, mainly due to higher TIPS interest income. Interest earned on state and municipal obligations increased $5.6 million due to higher average balances, partly offset by lower average rates earned. Interest earned on other securities increased partly due to the receipt of distributions from investments in the Company's private equity portfolio. Interest earned on asset-backed securities also increased over the prior year as a result of higher average balances, partly offset by lower rates earned. Partly offsetting these increases was a decrease in interest earned on mortgage-backed securities, which declined $17.1 million as a result of lower average rates earned, partly offset by higher average balances. Interest earned on government sponsored enterprise obligations also decreased due to declines in both the average balance and the average rate earned. Interest income on securities purchased under agreements to resell increased $1.1 million due to higher average balances, partly offset by lower average rates. Interest earned on balances at the Federal Reserve increased slightly due to a $1.1 billion increase in the average balance invested, partly offset by a 12 basis point decline in the average rate earned. Total interest expense for the first nine months of 2021 decreased $27.8 million compared to the same period last year. Interest expense on interest bearing deposits decreased $22.1 million, mainly due to a 22 basis point decrease in the overall rate paid. Interest expense on interest checking and money market account balances decreased $9.8 million mainly due to a 12 basis point decrease in rates paid, partly offset by higher average balances. Interest expense on CD's declined $12.4 million due to an 81 basis point decline in rates paid, coupled with lower average balances. Interest expense on borrowings decreased $5.7 million, mainly due to lower rates paid on customer repurchase agreements. The overall cost of total interest bearing liabilities decreased to .07% compared to .31% in the same period last year. Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion. 49 Table of Contents Non-Interest Income Three Months Ended September 30 Nine Months Ended September 30 (Dollars in thousands) 2021 2020 % change 2021 2020 % change Bank card transaction fees $ 42,815 $ 37,873 13.0 % $ 123,118 $ 111,818 10.1 % Trust fees 48,950 40,769 20.1 139,334 118,676 17.4 Deposit account charges and other fees 25,161 23,107 8.9 71,724 69,063 3.9 Capital market fees 3,794 3,194 18.8 12,102 10,756 12.5 Consumer brokerage services 4,900 4,011 22.2 13,484 11,099 21.5 Loan fees and sales 6,842 9,769 (30.0) 24,472 17,653 38.6 Other 5,044 10,849 (53.5) 28,460 31,685 (10.2) Total non-interest income $ 137,506 $ 129,572 6.1 % $ 412,694 $ 370,750 11.3 % Non-interest income as a % of total revenue* 39.1 % 37.5 % 39.7 % 37.4 % * Total revenue includes net interest income and non-interest income. The table below is a summary of net bank card transaction fees for the three and nine month periods ended September 30, 2021 and 2020. Three Months Ended September 30 Nine Months Ended September 30 (Dollars in thousands) 2021 2020 % change 2021 2020 % change Net debit card fees $ 10,402 $ 9,721 7.0 % $ 30,274 $ 27,863 8.7 % Net credit card fees 3,863 3,359 15.0 11,389 9,749 16.8 Net merchant fees 5,202 4,551 14.3 14,711 13,165 11.7 Net corporate card fees 23,348 20,242 15.3 66,744 61,041 9.3 Total bank card transaction fees $ 42,815 $ 37,873 13.0 % $ 123,118 $ 111,818 10.1 % For the third quarter of 2021, total non-interest income amounted to $137.5 million compared to $129.6 million in the same quarter last year, which was an increase of $7.9 million, or 6.1%. The increase was mainly due to higher trust fees and net bank card fees. Additionally, deposit account fees, consumer brokerage fees and capital market fees grew compared to the same quarter last year, but were partly offset by lower loan fees and sales and other non-interest income. Bank card transaction fees for the current quarter grew $4.9 million, or 13.0%, over the same period last year, due to growth of $3.1 million in net corporate card fees, $681 thousand in net debit card fees, $651 thousand in net merchant fees, and $504 thousand in net credit card fees. The growth in net corporate card fees and net credit card fees was mainly due to higher interchange income, partly offset by higher rewards expense. The growth in net debit card fees was mainly due to higher interchange income, while the growth in net merchant fees was mostly due to higher merchant fees, partly offset by higher network expense. Trust fees for the quarter increased $8.2 million, or 20.1%, over the same quarter last year, resulting from higher private client and institutional trust fees, which were up 22.9% and 11.2%, respectively. Compared to the same period last year, deposit account fees increased $2.1 million, or 8.9%, mainly due to higher overdraft and return item fees and corporate cash management fees. Capital market fees increased $600 thousand, or 18.8%, while consumer brokerage service fees increased $889 thousand, or 22.2%, due to growth in annuity and advisory fees. Loan fees and sales decreased $2.9 million, or 30.0%, compared to the same quarter last year, mainly due to a decline in mortgage banking revenue. Other non-interest income decreased $5.8 million, or 53.5%, mainly due to lower cash sweep commissions and tax credit sales fees of $1.6 million and $1.1 million, respectively. Additionally a $2.0 million loss on an equity method investment was recorded this quarter. Non-interest income for the first nine months of 2021 was $412.7 million compared to $370.8 million in 2020, resulting in an increase of $41.9 million, or 11.3%. Bank card fees increased $11.3 million, or 10.1%, due to growth of $5.7 million in net corporate card fees, $2.4 million in net debit card fees, $1.6 million in net credit card fees, and $1.5 million in net merchant fees. Trust fee income increased $20.7 million, or 17.4%, as a result of growth in private client and institutional trust fee income. Deposit account fees increased $2.7 million due to higher corporate cash management fees and overdraft and return item fees, partly offset by lower personal account deposit fees. For the nine months ended September 30, 2021, corporate cash management fees comprised 51.9% of total deposit fees, while overdraft fees comprised 23.9% of total deposit fees. Capital market fees increased $1.3 million, while consumer brokerage service fees grew $2.4 million, or 21.5%, as a result of higher annuity and advisory fees. Loan fees and sales increased $6.8 million, or 38.6%, mainly due to growth in mortgage banking revenue. Other income decreased $3.2 million, mainly due to lower cash sweep commissions, tax credit sales fees and a $2.6 million loss on an equity method investment. These decreases were partly offset by gains recorded on branch sales and higher interest rate swap fees, check sales and wire fees and international fees. 50 Table of Contents Investment Securities Gains (Losses), Net Three Months Ended September 30 Nine Months Ended September 30 (In thousands) 2021 2020 2021 2020 Net gains on sales of available for sale debt securities $ — $ 13,674 $ — $ 16,965 Net gains on sales of equity securities — — — 2 Net gains (losses) on sales and fair value adjustments of private equity investments 12,971 2,389 39,613 (18,116) Fair value adjustments on equity securities, net 137 92 152 (126) Total investment securities gains (losses), net $ 13,108 $ 16,155 $ 39,765 $ (1,275) Net gains and losses on investment securities, which were recognized in earnings during the three months ended September 30, 2021 and 2020, are shown in the table above. Net securities gains of $13.1 million were reported in the third quarter of 2021, compared to net gains of $16.2 million in the same period last year. The net gains in the third quarter of 2021 were primarily comprised of $13.0 million of net gains in fair value on the Company’s private equity investments. The net gains on investment securities for the same quarter last year were mainly comprised of net gains of $13.7 million realized on sales of available for sale debt securities and $2.4 million of net gains in fair value on the Company’s private equity investments. Net gains on investment securities of $39.8 million were recognized in earnings for the nine months ended September 30, 2021, compared to net losses of $1.3 million for the same period in 2020. Net gains in the first nine months of 2021 were mainly comprised of a gain of $1.6 million realized on the sale of a private equity investment and $38.0 million of net gains in fair value on private equity investments. Net losses in the first nine months of 2020 were mainly comprised of fair value adjustments on private equity investments, which were largely offset by net gains realized on sales of available for sale debt securities. The portion of private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in expense of $7.7 million during the first nine months of 2021 and income of $3.2 million during the first nine months of 2020. Non-Interest Expense Three Months Ended September 30 Nine Months Ended September 30 (Dollars in thousands) 2021 2020 % change 2021 2020 % change Salaries and employee benefits $ 132,824 $ 127,308 4.3 % $ 392,608 $ 383,004 2.5 % Net occupancy 12,329 12,058 2.2 35,877 35,075 2.3 Equipment 4,440 4,737 (6.3) 13,398 14,313 (6.4) Supplies and communication 4,530 4,141 9.4 12,688 13,226 (4.1) Data processing and software 25,598 23,610 8.4 76,015 71,002 7.1 Marketing 5,623 4,926 14.1 16,461 14,706 11.9 Other 26,276 14,078 86.6 55,272 40,742 35.7 Total non-interest expense $ 211,620 $ 190,858 10.9 % $ 602,319 $ 572,068 5.3 % Non-interest expense for the third quarter of 2021 amounted to $211.6 million, an increase of $20.8 million, or 10.9%, compared to expense of $190.9 million in the third quarter of last year. The increase in expense was mainly due to non-recurring litigation settlement expense and higher salaries and benefits expense and data processing and software expense. Salaries and employee benefits expense increased $5.5 million, or 4.3%, mostly due to higher incentive compensation. Full-time equivalent employees totaled 4,582 at September 30, 2021, compared to 4,825 at September 30, 2020. Occupancy and supplies and communication expense grew $271 thousand and $389 thousand, respectively, while equipment expense declined $297 thousand. Data processing and software expense increased $2.0 million, or 8.4%, due to higher bank card processing fees and increased cost for service providers, while marketing expense grew $696 thousand, or 14.1%. Other non-interest expense increased $12.2 million, mainly due to $8.2 million in non-recurring litigation settlement costs. Additionally, legal and professional fees and travel and entertainment expense increased $1.3 million and $1.1 million, respectively. Non-interest expense amounted to $602.3 million for the first nine months of 2021, an increase of $30.3 million, or 5.3%, over the first nine months of 2020. Salaries and benefits expense increased $9.6 million, or 2.5%, mainly due to higher costs for incentive compensation and healthcare expense, partly offset by lower full and part-time salaries expense. Occupancy expense increased $802 thousand, while supplies and communication expense decreased $538 thousand. Equipment expense decreased $915 thousand mainly due to lower depreciation and service contract expense. Data processing expense increased $5.0 million, or 7.1%, mostly due to higher costs for service providers, while marketing expense grew $1.8 million, or 11.9%. 51 Table of Contents Other non-interest expense increased $14.5 million, mainly due to the non-recurring litigation settlement mentioned above, lower deferred loan origination costs and higher FDIC insurance and legal fees expense. These increases to expense were partly offset by lower travel and entertainment expense and a reduction in impairment expense on the Company's mortgage servicing rights. 52 Table of Contents Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments Three Months Ended Nine Months Ended September 30 Sept. 30, 2021 June 30, 2021 Sept. 30, 2020 2021 2020 ALLOWANCE FOR CREDIT LOSSES ON LOANS Balance at end of prior period $ 172,395 $ 200,527 $ 240,744 $ 220,834 $ 160,682 Adoption of ASU 2016-13 — — — — (21,039) Balance at beginning of period $ 172,395 $ 200,527 $ 240,744 $ 220,834 $ 139,643 Provision for credit losses on loans (5,961) (27,433) 3,200 $ (43,749) $ 123,559 Net loan charge-offs (recoveries): Commercial: Business 65 (4,909) 208 (4,848) 3,084 Real estate-construction and land — — (1) 1 (1) Real estate-business (5) (85) (13) (70) (40) Commercial net loan charge-offs (recoveries) 60 (4,994) 194 (4,917) 3,043 Personal Banking: Real estate-personal (26) (16) (198) (27) (273) Consumer 496 378 211 1,637 3,284 Revolving home equity (22) 28 (86) 29 (158) Consumer credit card 2,908 5,155 7,263 17,044 20,004 Overdrafts 243 148 200 544 942 Personal banking net loan charge-offs 3,599 5,693 7,390 19,227 23,799 Total net loan charge-offs 3,659 699 7,584 14,310 26,842 Balance at end of period $ 162,775 $ 172,395 $ 236,360 $ 162,775 $ 236,360 LIABILITY FOR UNFUNDED LENDING COMMITMENTS Balance at end of prior period $ 24,208 $ 42,430 $ 35,299 $ 38,307 $ 1,075 Adoption of ASU 2016-13 — — — — 16,090 Balance at beginning of period 24,208 42,430 35,299 38,307 17,165 Provision for credit losses on unfunded lending commitments (1,424) (18,222) (99) (15,523) 18,035 Balance at end of period 22,784 24,208 35,200 22,784 35,200 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 185,559 $ 196,603 $ 271,560 $ 185,559 $ 271,560 53 Table of Contents Three Months Ended Nine Months Ended September 30 Sept. 30, 2021 June 30, 2021 Sept. 30, 2020 2021 2020 Annualized net loan charge-offs (recoveries)*: Commercial: Business — % (.32 %) .01 % (.11 %) .07 % Real estate-construction and land — — — — — Real estate-business — (.01) — — — Commercial net loan charge-offs (recoveries) — (.19) .01 (.06) .04 Personal Banking: Real estate-personal — — (.03) — (.01) Consumer .10 .08 .04 .11 .22 Revolving home equity (.03) .04 (.10) .01 (.06) Consumer credit card 2.04 3.59 4.47 3.91 3.93 Overdrafts 18.87 15.89 29.59 17.59 39.16 Personal banking net loan charge-offs .25 .40 .52 .45 .57 Total annualized net loan charge-offs .10 % .02 % .18 % .12 % .23 % * as a percentage of average loans (excluding loans held for sale) The Company has an established process to determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, which assesses the risks and losses expected in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded lending commitments, as well as a second, smaller component based on certain individually evaluated loans and unfunded lending commitments. The Company's policies and processes for determining the allowance for credit losses on loans and the liability for unfunded lending commitments are discussed in Note 1 to the consolidated financial statements and in the " Allowance for Credit Losses" discussion within Critical Accounting Policies in Item 7 of the 2020 Annual Report on Form 10-K. Net loan charge-offs in the third quarter of 2021 amounted to $3.7 million, compared to $699 thousand in the prior quarter and $7.6 million in the third quarter of last year. During the third quarter of 2021, the Company recorded net charge-offs on commercial loans of $60 thousand, compared to net recoveries of $5.0 million in the prior quarter. Commercial loan net recoveries in the prior quarter resulted from recoveries on two business loans. Consumer credit card loan net charge-offs decreased $2.2 million in the third quarter of 2021, compared to the prior quarte r. Comp ared to the same period last year, net loan charge-offs in the third quarter of 2021 decreased $3.9 million. The decrease in net charge-offs during the third quarter of 2021 compared to the same quarter last year was driven by a $4.4 million decrease in net charge-offs on consumer credit card loans. For the three months ended September 30, 2021, annualized net charge-offs on average consumer credit card loans totaled 2.04%, compared to 3.59% in the previous quarter and 4.47% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .10%, compared to .08% in the prior quarter and .04% in the same period last year. In the third quarter of 2021, total annualized net loan charge-offs were .10%, compared to .02% in the previous quarter and .18% in the same period last year. The continued recovery of the provision for credit losses on loans is the result of an improved forecast coupled with lower than projected net charge-offs. The allowance for credit losses significantly increased during the first half of 2020 due to the pandemic-induced recession. The economic forecast utilized in the first half of 2020 captured extreme uncertainty with high unemployment rates, but through various governmental stimulus programs, improvements in the public health crisis due to the development and increasing availability of a COVID-19 vaccine, the projected net charge-offs were not realized and the economic forecast improved, thus allowing the release of the allowance for credit losses during 2021. As a result, the provision for credit losses, which includes the provision for loans and unfunded lending commitments, was a benefit of $7.4 million for the third quarter of 2021, compared to a benefit of $45.7 million in the second quarter of 2021 and expense of $3.1 million in the third quarter of 2020. In the current quarter, the provision for credit losses on loans was a benefit of $6.0 million, which was a $21.5 million decrease from the $27.4 million benefit recorded in the prior quarter. The provision for credit losses on loans in the current quarter decreased $9.2 million compared to the provision expense in the third quarter of 2020 . For the nine months ended September 30, 2021, net loan charge-offs totaled $14.3 million, compared to $26.8 million in the same period last year. During the first nine months of 2021, the Company recorded net recoveries of $4.9 million on commercial loans, compared to net loan charge-offs of $3.0 million in the first nine months of 2020. In addition, consumer 54 Table of Contents loan net charge-offs declined $1.6 million and consumer credit card loan net charge-offs declined $3.0 million in the first nine months of 2021, compared to the same period last year. The provision for credit losses on loans for the first nine months of 2021 was a benefit of $43.8 million, reducing the allowance for credit losses on loans. The allowance for credit losses on loans as of September 30, 2020 was $236.4 million, and the provision expense for the nine months ended September 30, 2020 was $123.6 million. In the current quarter, the provision for credit losses on unfunded lending commitments was a benefit of $1.4 million, reflecting a $16.8 million increase over the provision in the prior quarter (which was a benefit of $18.2 million), and decreased $1.3 million compared to the third quarter of 2020. At September 30, 2021, the liability for unfunded lending commitments was $22.8 million, compared to $24.2 million at June 30, 2021 and $35.2 million at September 30, 2020. The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans. See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses. For the quarter ended September 30, 2021, the allowance for credit losses on loans decreased $9.6 million, compared to the allowance for credit losses on loans as of June 30, 2021. The decrease was primarily due to the improved economic forecast. The allowance for credit losses on commercial loans increased slightly by $126 thousand, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, decreased $9.7 million. While the forecast continued to improve, the allowance considered the uncertainty of future potential COVID-19 disruptions on both the consumer and commercial portfolios. At September 30, 2021, the allowance for credit losses on loans amounted to $162.8 million, compared to $172.4 million and $200.5 million at June 30, 2021 and March 31, 2021, respectively, and was 1.07%, 1.10% and 1.22% of total loans at September 30, 2021, June 30, 2021 and March 31, 2021, respectively. The Company considers the allowance for credit losses on loans and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at September 30, 2021. The allowance for credit losses on loans and the liability for unfunded lending commitments are estimates that require significant judgment including projections of the macro-economic environment. The Company utilizes a third-party macro-economic forecast that continuously changes due to economic conditions and events. These changes in the forecast cause fluctuations in the allowance for credit losses on loans and the liability for unfunded lending commitments. The Company used its best judgment to assess the macro-economic forecast and internal loss data in estimating the allowance for credit losses on loans and the liability for unfunded lending commitments. These estimates are subject to periodic refinement based on changes in the underlying external and internal data. Risk Elements of Loan Portfolio The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual. During 2020, Section 4013 of the CARES Act was signed into law and provided financial institutions the option to suspend the requirement to categorize modifications related to the COVID-19 pandemic as troubled debt restructurings. The 2021 Consolidated Appropriations Act signed on December 27, 2020 extends this temporary suspension through January 1, 2022. The Company follows the guidance under the CARES Act when determining if a customer's modification is subject to troubled debt restructuring classification. Refer to Note 2 for additional information. (Dollars in thousands) September 30, 2021 December 31, 2020 Non-accrual loans $ 10,421 $ 26,540 Foreclosed real estate 115 93 Total non-performing assets $ 10,536 $ 26,633 Non-performing assets as a percentage of total loans .07 % .16 % Non-performing assets as a percentage of total assets .03 % .08 % Total loans past due 90 days and still accruing interest $ 10,496 $ 22,190 Non-accrual loans totaled $10.4 million at September 30, 2021, a decrease of $16.1 million from the balance at December 31, 2020. The decrease occurred mainly in business loans which decreased $14.2 million. At September 30, 2021, 55 Table of Contents non-accrual loans were comprised of business (79.6%), personal real estate (14.9%), and business real estate (5.5%) loans. Foreclosed real estate totaled $115 thousand at September 30, 2021, an increase of $22 thousand when compared to December 31, 2020. Total loans past due 90 days or more and still accruing interest were $10.5 million as of September 30, 2021, a decrease of $11.7 million from December 31, 2020. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements. In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $335.7 million at September 30, 2021 compared with $361.8 million at December 31, 2020, resulting in a decrease of $26.1 million, or 7.2%. (In thousands) September 30, 2021 December 31, 2020 Potential problem loans: Business $ 45,710 $ 133,039 Real estate – construction and land 40,553 29,378 Real estate – business 249,017 198,666 Real estate – personal 414 670 Total potential problem loans $ 335,694 $ 361,753 At September 30, 2021, the Company had $129.9 million of loans whose terms have been modified or restructured under a troubled debt restructuring. These loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession, as defined by accounting guidance, and are further discussed in the "Troubled debt restructurings" section in Note 2 to the consolidated financial statements. This balance includes certain commercial loans totaling $110.6 million which are classified as substandard and included in the table above because of this classification. Loans with Special Risk Characteristics Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon. Real Estate – Construction and Land Loans The Company's portfolio of construction and land loans, as shown in the table below, amounted to 8.3% of total loans outstanding at September 30, 2021. The largest component of construction and land loans was commercial construction, which increased $231.6 million during the nine months ended September 30, 2021. At September 30, 2021, multi-family residential construction loans totaled approximately $294.4 million, or 27.7%, of the commercial construction loan portfolio, compared to $238.0 million, or 28.8%, at December 31, 2020. (Dollars in thousands) September 30, 2021 % of Total % of Total Loans December 31, 2020 % of Total % of Total Loans Commercial construction $ 1,059,113 84.2 % 7.0 % $ 827,546 81.0 % 5.1 % Residential construction 103,825 8.3 .7 94,729 9.3 .6 Commercial land and land development 48,754 3.9 .3 40,021 3.9 .2 Residential land and land development 46,144 3.6 .3 59,299 5.8 .4 Total real estate - construction and land loans $ 1,257,836 100.0 % 8.3 % $ 1,021,595 100.0 % 6.3 % 56 Table of Contents Real Estate – Business Loans Total business real estate loans were $2.9 billion at September 30, 2021 and comprised 19.4% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At September 30, 2021, 38.0% of business real estate loans were for owner-occupied real estate properties, which have historically resulted in lower net charge-off rates than non-owner-occupied commercial real estate loans. (Dollars in thousands) September 30, 2021 % of Total % of Total Loans December 31, 2020 % of Total % of Total Loans Owner-occupied $ 1,115,184 38.0 % 7.4 % $ 1,145,862 37.9 % 7.0 % Office 362,440 12.3 2.4 385,392 12.7 2.4 Retail 321,768 11.0 2.1 349,461 11.5 2.1 Multi-family 301,734 10.3 2.0 301,161 10.0 1.8 Hotels 265,247 9.0 1.8 271,189 9.0 1.7 Senior living 185,116 6.3 1.2 195,800 6.5 1.2 Farm 162,660 5.5 1.1 169,692 5.6 1.0 Industrial 98,369 3.3 .6 78,341 2.6 .5 Other 125,334 4.3 .8 129,219 4.2 .8 Total real estate - business loans $ 2,937,852 100.0 % 19.4 % $ 3,026,117 100.0 % 18.5 % Revolving Home Equity Loans The Company had $281.4 million in revolving home equity loans at September 30, 2021 that were generally collateralized by residential real estate. Most of these loans (93.1%) are written with terms requiring interest-only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of September 30, 2021, the outstanding principal of loans with an original LTV higher than 80% was $31.3 million, or 11.1% of the portfolio, compared to $32.1 million as of December 31, 2020. Total revolving home equity loan balances over 30 days past due were $2.0 million at September 30, 2021 and December 31, 2020, and there were no revolving home equity loans on non-accrual status at September 30, 2021 or December 31, 2020. The weighted average FICO score for the total current portfolio balance is 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 convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of 2021 through 2023, approximately 15% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 93% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels. Consumer Loans Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs. Auto loans comprised 43% of the consumer loan portfolio at September 30, 2021, and outstanding balances for auto loans were $874.2 million and $879.9 million at September 30, 2021 and December 31, 2020, respectively. The balances over 30 days past due amounted to $6.9 million at September 30, 2021 compared to $9.2 million at December 31, 2020, and comprised .8% and 1.0% of the outstanding balances of these loans at September 30, 2021 and December 31, 2020, respectively. For the nine months ended September 30, 2021, $324.5 million of new auto loans were originated, compared to $321.1 million during the first nine months of 2020. At September 30, 2021, the automobile loan portfolio had a weighted average FICO score of 758, and net charge-offs on auto loans were .1% of average auto loans at September 30, 2021. The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 11% of the consumer loan portfolio at September 30, 2021. Losses on these loans have historically been low, and the Company saw a net charge-off of $24 thousand in 2021. Private banking loans comprised 28% of the consumer loan portfolio at September 30, 2021. The Company's private banking loans are generally well-collateralized and at September 30, 2021 were secured primarily by assets held by the Company's trust department. The remaining portion of the Company's consumer loan portfolio is comprised of health services financing, motorcycles, marine and RV loans. Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $958 thousand in the first nine months of 2021 and were .1% of the average balances of these loans at September 30, 2021. 57 Table of Contents Consumer Credit Card Loans The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at September 30, 2021 of $570.0 million in consumer credit card loans outstanding, approximately $92.9 million, or 16.3%, carried a low promotional rate. Within the next six months, $39.9 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 product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters. Oil and Gas Energy Lending The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $230.4 million, or 1.5% of total loans at September 30, 2021, an increase of $51.6 million from year end 2020, as shown in the table below. (In thousands) September 30, 2021 December 31, 2020 Unfunded commitments at September 30, 2021 Extraction $ 165,883 $ 133,866 $ 147,581 Mid-stream shipping and storage 38,355 15,634 69,398 Downstream distribution and refining 13,488 18,365 25,710 Support activities 12,638 10,864 16,099 Total energy lending portfolio $ 230,364 $ 178,729 $ 258,788 Information about the credit quality of the Company's energy lending portfolio as of September 30, 2021 and December 31, 2020 is provided in the table below. (Dollars in thousands) September 30, 2021 % of Energy Lending December 31, 2020 % of Energy Lending Pass $ 216,674 94.0 % $ 126,380 70.7 % Special mention 1,999 .9 17,978 10.1 Substandard 9,172 4.0 31,676 17.7 Non-accrual 2,519 1.1 2,695 1.5 Total $ 230,364 100.0 % $ 178,729 100.0 % Energy lending balances classified as substandard and non-accrual represented 4.0% and 1.1% respectively, of total energy lending loan balances at September 30, 2021. The Company saw a small recovery on energy loans during the nine months ended September 30, 2021. The Company recorded $15 thousand of net loan charge-offs on energy loans for the year ended December 31, 2020. Small Business Lending During April 2020, in response to the COVID-19 crisis, the federal government created the PPP, sponsored by the Small Business Administration ("SBA"), under the CARES Act. As a participating lender under the program, the Company funded loans of $1.5 billion during 2020 (round 1) and $402.1 million during 2021 (round 2). The balance of PPP loans at September 30, 2021 was $307.9 million, a decrease of $546.4 million compared to balances at June 30, 2021. The change in PPP loan balances reflected a decline of $407.6 million in loan balances from June 30, 2021 (round 1), along with a decline of $138.8 million in loan balances from June 30, 2021 (round 2). Since the start of the PPP, the Company has recognized $51.4 million of a total of $60.4 million of PPP fees as of September 30, 2021, including $10.9 million during the third quarter of 2021. The Company understands that the PPP loans are fully guaranteed by the SBA. Therefore, there was no increase in the allowance for credit losses on loans related to these loans as there is no expectation of credit loss. The maximum term of the loans is five years, however, the Company believes that almost all of the loan balances are expected to be forgiven by the SBA. As of September 30, 2021, 97% of round 1 and 35% of round 2 PPP loan balances have been forgiven. The process of loan forgiveness began during the third quarter of 2020, and the Company believes most of the remaining PPP loan balances will be forgiven in the fourth quarter of 2021. 58 Table of Contents Shared National Credits The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled $1.0 billion at September 30, 2021 and December 31, 2020. Additional unfunded commitments at September 30, 2021 totaled $1.6 billion. Income Taxes Income tax expense was $34.7 million in the third quarter of 2021, compared to $45.2 million in the second quarter of 2021 and $34.4 million in the third quarter of 2020. The Company's effective tax rate, including the effect of non-controlling interest, was 22.1% in the third quarter of 2021, compared to 21.8% in the second quarter of 2021 and 20.6% in the third quarter of 2020. For the nine months ended September 30, 2021, income tax expense was $111.9 million, compared to $54.2 million for the same period during the previous year, resulting in effective tax rates of 21.2% and 19.5%, respectively. Financial Condition Balance Sheet Total assets of the Company were $34.5 billion at September 30, 2021 and $32.9 billion at December 31, 2020. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $33.1 billion at September 30, 2021 and $31.3 billion at December 31, 2020, and consisted of 46% in loans and 43% in investment securities at September 30, 2021. At September 30, 2021, total loans decreased $1.2 billion, or 7.4%, compared to balances at December 31, 2020. Business loans decreased $1.3 billion, primarily due to a decline in Paycheck Protection Plan (PPP) loan balances. As of September 30, 2021, 97% of round 1 and 35% of round 2 PPP loan balances have been forgiven. Business real estate, consumer credit card and personal real estate loans also decreased $88.2 million, $85.1 million and $50.7 million, respectively. These decreases were partly offset by growth in construction and consumer banking loans of $236.2 million and $99.1 million, respectively. Consumer loans, which include automobile, marine and RV, fixed rate home equity, and other consumer loans, increased mainly due to growth in private banking loans. Available for sale investment securities, excluding fair value adjustments, increased $1.9 billion at September 30, 2021 compared to December 31, 2020. Purchases of securities during this period totaled $4.5 billion, partly offset by maturities and pay downs of $2.6 billion. The largest growth in outstanding balances occurred in asset-backed securities and non-agency mortgage back securities, which grew $1.5 billion and $870.4 million, respectively. These increases were partially offset by a decline in agency mortgage-backed securities of $613.3 million at September 30, 2021 compared to December 31, 2020. At September 30, 2021, the duration of the investment portfolio was 3.5 years, and maturities and pay downs of approximately $2.8 billion are expected to occur during the next 12 months. Total deposits at September 30, 2021 amounted to $28.1 billion, an increase of $1.2 billion compared to December 31, 2020. The increase in deposits largely resulted from growth in demand deposits, mainly in business demand deposits (increase of $903.5 million) and personal demand deposits (increase of $149.4 million). Additionally, savings and money market deposits increased $238.1 million and $264.9 million, respectively. These increases were partially offset by decreases of $228.9 million in certificate of deposit balances and $199.9 million in interest checking deposit balances at September 30, 2021 compared to balances at December 31, 2020. The Company's borrowings totaled $2.3 billion at September 30, 2021, an increase of $158.6 million over balances at December 31, 2020, mainly due to an increase in customer repurchase agreements. 59 Table of Contents Liquidity and Capital Resources Liquidity Management The Company’s most liquid assets are comprised of available for sale debt securities, federal funds sold, securities purchased under agreements to resell (resale agreements), and balances at the Federal Reserve Bank, as follows: (In thousands) September 30, 2021 June 30, 2021 December 31, 2020 Liquid assets: Available for sale debt securities $ 14,165,656 $ 13,291,506 $ 12,449,264 Federal funds sold — 5,945 — Securities purchased under agreements to resell 1,750,000 1,300,000 850,000 Balances at the Federal Reserve Bank 1,888,545 2,161,644 1,747,363 Total $ 17,804,201 $ 16,759,095 $ 15,046,627 There were no federal funds sold at September 30, 2021, which are funds lent to the Company's correspondent bank customers with overnight maturities. Resale agreements, maturing through 2023, totaled $1.8 billion at September 30, 2021. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled $1.8 billion in fair value at September 30, 2021. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $1.9 billion at September 30, 2021. The fair value of the available for sale debt portfolio was $14.2 billion at September 30, 2021 and included an unrealized net gain of $138.4 million. The total net unrealized gain included net gains of $44.5 million on mortgage-backed and asset-backed securities, $52.1 million on U.S. government and federal agency obligations, and $36.5 million on state and municipal obligations. Approximately $2.8 billion of the available for sale debt portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet new loan demand or help offset potential reductions in the Company's deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows: (In thousands) September 30, 2021 June 30, 2021 December 31, 2020 Investment securities pledged for the purpose of securing: Federal Reserve Bank borrowings $ 18,566 $ 25,179 $ 40,792 FHLB borrowings and letters of credit 3,736 4,296 5,376 Securities sold under agreements to repurchase * 2,511,891 2,573,314 2,322,941 Other deposits and swaps 3,210,326 2,982,225 2,438,628 Total pledged securities 5,744,519 5,585,014 4,807,737 Unpledged and available for pledging 7,123,799 6,369,604 6,310,907 Ineligible for pledging 1,297,338 1,336,888 1,330,620 Total available for sale debt securities, at fair value $ 14,165,656 $ 13,291,506 $ 12,449,264 * Includes securities pledged for collateral swaps, as discussed in Note 12 to the consolidated financial statements. Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At September 30, 2021, such deposits totaled $26.5 billion and represented 94.3% of total deposits. These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources. Certificates of deposit of $100,000 and over totaled $1.2 billion at September 30, 2021. These accounts are normally considered more volatile and higher costing and comprised 4.1% of total deposits at September 30, 2021. (In thousands) September 30, 2021 June 30, 2021 December 31, 2020 Core deposit base: Non-interest bearing $ 11,622,855 $ 11,085,286 $ 10,497,598 Interest checking 2,202,422 2,192,932 2,402,272 Savings and money market 12,705,232 12,461,764 12,202,184 Total $ 26,530,509 $ 25,739,982 $ 25,102,054 60 Table of Contents 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) September 30, 2021 June 30, 2021 December 31, 2020 Borrowings: Federal funds purchased $ 11,345 $ 12,335 $ 42,270 Securities sold under agreements to repurchase 2,242,408 2,305,893 2,056,113 Other debt 4,006 2,194 802 Total $ 2,257,759 $ 2,320,422 $ 2,099,185 Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Repurchase agreements are collateralized by securities in the Company's investment portfolio and are comprised of non-insured customer funds totaling $2.3 billion, which generally mature overnight. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were no advances outstanding from the FHLB at September 30, 2021. The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral. Also, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged and permits borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at September 30, 2021. September 30, 2021 (In thousands) FHLB Federal Reserve Total Collateral value pledged $ 2,120,480 $ 1,039,017 $ 3,159,497 Letters of credit issued (184,710) — (184,710) Available for future advances $ 1,935,770 $ 1,039,017 $ 2,974,787 In addition to those mentioned above, several other sources of liquidity are available. No commercial paper has been issued or outstanding during the past ten years. The Company has no subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that through its Capital Markets Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit or privately placed corporate notes or other forms of debt. The Company receives strong outside rankings from both Standard & Poor's and Moody's on both the consolidated company level and its subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise. These ratings are as follows: Standard & Poor’s Moody’s Commerce Bancshares, Inc. Issuer rating A- Rating outlook Stable Commerce Bank Issuer rating A A2 Baseline credit assessment a1 Short-term rating A-1 P-1 Rating outlook Stable Stable The cash flows from the operating, investing and financing activities of the Company resulted in a net increase in cash, cash equivalents and restricted cash of $43.2 million during the first nine months of 2021, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $486.1 million and has historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, used cash of $1.6 billion. Activity in the investment securities portfolio used cash of 61 Table of Contents $1.9 billion from purchases (net of sales, maturities and pay downs), and securities purchased under agreements to resell used cash of $900 million. These investing cash outflows were partially offset by pay downs in the loan portfolio, which provided cash of $1.2 billion. Financing activities provided cash of $1.2 billion, largely resulting from an increase in deposits of $1.2 billion paired with an increase of $155.4 million in federal funds purchased and securities sold under agreements to repurchase, partially offset by dividend payments of $92.2 million on common stock and treasury stock purchases of $80.1 million. Capital Management The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at September 30, 2021 and December 31, 2020, as shown in the following table. (Dollars in thousands) September 30, 2021 December 31, 2020 Minimum Ratios under Capital Adequacy Guidelines Minimum Ratios for Well-Capitalized Banks * Risk-adjusted assets $ 22,738,255 $ 21,516,461 Tier I common risk-based capital 3,189,015 2,950,926 Tier I risk-based capital 3,189,015 2,950,926 Total risk-based capital 3,372,335 3,189,432 Tier I common risk-based capital ratio 14.02 % 13.71 % 7.00 % 6.50 % Tier I risk-based capital ratio 14.02 13.71 8.50 8.00 Total risk-based capital ratio 14.83 14.82 10.50 10.00 Tier I leverage ratio 9.31 9.45 4.00 5.00 *Under Prompt Corrective Action requirements The Company is subject to a 2.5% capital conservation buffer, which is an amount above the minimum ratios under capital adequacy guidelines, and is required under Basel III. The capital conservation buffer is intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, share repurchases, and executive compensation. In the first quarter of 2020, the interim final rule of the Federal Reserve Bank and other U.S. banking agencies became effective, providing banks that adopt CECL (ASU 2016-13) during the 2020 calendar year the option to delay recognizing the estimated impact on regulatory capital until after a two year deferral period, followed by a three year transition period. In connection with the adoption of CECL on January 1, 2020, the Company elected to utilize this option. As a result, the two year deferral period for the Company extends through December 31, 2021. Beginning on January 1, 2022, the Company will be required to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and normally purchases stock in the open market. During the nine months ended September 30, 2021, the Company purchased 1,110,890 shares at an average price of $72.06 in open market purchases and through stock-based compensation transactions. At September 30, 2021, 2,433,689 shares remained available for purchase under the Board authorization. The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.263 per share cash dividend on its common stock in the third quarter of 2021, which was a 2.3% increase compared to its 2020 quarterly dividend. On September 1, 2020, the Company redeemed all 6,000 outstanding shares of its 6.00% Series B Non-Cumulative Perpetual Preferred Stock and the corresponding depositary shares representing fractional interests in the Series B Preferred Stock at a redemption price of $25 per depositary share (equivalent to $1,000 per share of preferred stock). Commitments, Off-Balance Sheet Arrangements and Contingencies In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at September 30, 2021 totaled $13.3 billion (including $5.0 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $423.6 million and $2.5 million, respectively, at September 30, 2021. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying 62 Table of Contents value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to $3.1 million at September 30, 2021. The allowance for these commitments is recorded in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheet. At September 30, 2021, the liability for unfunded commitments totaled $22.8 million. See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements. During the third quarter of 2020, the Company signed a $106.6 million agreement with U.S. Capital Development to develop a 280,000 square foot commercial office building in a two building complex in Clayton, Missouri, which is expected to be completed near the end of 2022. As of September 30, 2021, the Company has made payments totaling $43.7 million. While the Company intends to occupy a portion of the office building for executive offices, a 15 year lease agreement has been signed by an anchor tenant to lease approximately 40% of the office building. The Company regularly purchases various state tax credits arising from third party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first nine months of 2021, purchases and sales of tax credits amounted to $77.2 million and $70.8 million, respectively. Fees from sales of tax credits were $3.2 million for the nine months ended September 30, 2021, compared to $3.7 million in the same period last year. At September 30, 2021, the Company expected to fund outstanding purchase commitments of $42.3 million during the remainder of 2021. Segment Results The table below is a summary of segment pre-tax income results for the first nine months of 2021 and 2020. (Dollars in thousands) Consumer Commercial Wealth Segment Totals Other/ Elimination Consolidated Totals Nine Months Ended September 30, 2021 Net interest income $ 239,159 $ 340,345 $ 53,186 $ 632,690 $ (4,923) $ 627,767 Provision for credit losses (19,122) 4,856 10 (14,256) 73,528 59,272 Non-interest income 110,911 155,079 158,731 424,721 (12,027) 412,694 Investment securities gains, net — — — — 39,765 39,765 Non-interest expense (220,276) (246,502) (101,377) (568,155) (34,164) (602,319) Income before income taxes $ 110,672 $ 253,778 $ 110,550 $ 475,000 $ 62,179 $ 537,179 Nine Months Ended September 30, 2020 Net interest income $ 241,195 $ 300,301 $ 41,686 $ 583,182 $ 36,902 $ 620,084 Provision for credit losses (23,885) (3,122) 10 (26,997) (114,596) (141,593) Non-interest income 107,489 143,746 139,700 390,935 (20,185) 370,750 Investment securities losses, net — — — — (1,275) (1,275) Non-interest expense (225,791) (237,327) (92,915) (556,033) (16,035) (572,068) Income before income taxes $ 99,008 $ 203,598 $ 88,481 $ 391,087 $ (115,189) $ 275,898 Increase in income before income taxes: Amount $ 11,664 $ 50,180 $ 22,069 $ 83,913 $ 177,368 $ 261,281 Percent 11.8 % 24.6 % 24.9 % 21.5 % 154.0 % 94.7 % Consumer For the nine months ended September 30, 2021, income before income taxes for the Consumer segment increased $11.7 million, or 11.8%, compared to the first nine months of 2020. This increase in income before income taxes was mainly due to growth in non-interest income of $3.4 million, or 3.2%, lower non-interest expense of $5.5 million, or 2.4%, and a decrease in the provision for credit losses of $4.8 million. These increases to income were partly offset by lower net interest income of $2.0 million, or .8%. Net interest income decreased due to a $17.4 million decline in loan interest income, partly offset by a $5.5 million decrease in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios, and a $9.9 million decrease in deposit interest expense. Non-interest income increased mainly due to growth in net credit and debit card fees (mainly higher interchange fees, partly offset by higher rewards expense) and check sales and wire fees. These increases were partly offset by a decrease in mortgage banking revenue. Non-interest expense decreased from the same period in the previous year mainly due to lower salaries and benefits expense, occupancy expense, allocated servicing costs for mortgage operations and a reduction in impairment expense on mortgage servicing rights. These decreases were partly offset by higher marketing expense and allocated support and servicing costs for information technology. The provision for credit 63 Table of Contents losses totaled $19.1 million, a $4.8 million decrease from the first nine months of 2020, mainly due to lower credit card and personal loan net charge-offs. Commercial For the nine months ended September 30, 2021, income before income taxes for the Commercial segment increased $50.2 million, or 24.6%, compared to the same period in the previous year. This increase was mainly due to higher net interest income and non-interest income and a decrease in the provision for credit losses, partly offset by higher non-interest expense. Net interest income increased $40.0 million, or 13.3%, due to a $48.2 million increase in net allocated funding credits and a decrease in deposit and borrowings interest expense of $12.6 million. These increases to income were partly offset by a $20.7 million decrease in loan interest income. Non-interest income increased $11.3 million, or 7.9%, over the previous year mainly due to growth in net bank card fees (mainly corporate card and merchant fees), deposit account fees (mainly corporate cash management fees), capital market fees and interest rate swap fees. These increases were partly offset by a decline in cash sweep commissions. Non-interest expense increased $9.2 million, or 3.9%, mainly due to higher salaries and benefits expense (mainly incentive compensation), data processing and software expense, allocated support costs for information technology and commercial banking, and lower deferred origination costs. These increases to income were partly offset by lower allocated service costs (mainly lockbox). The provision for credit losses decreased $8.0 million from the same period last year, mainly due to net recoveries recorded on business loans. Wealth Wealth segment pre-tax profitability for the nine months ended September 30, 2021 increased $22.1 million, or 24.9%, over the same period in the previous year. Net interest income increased $11.5 million, or 27.6%, mainly due to a $9.8 million increase in net allocated funding credits and lower deposit interest expense of $3.5 million, partly offset by a $1.8 million decrease in loan interest income. Non-interest income increased $19.0 million, or 13.6%, over the prior year largely due to higher trust fees (mainly private client trust fees and institutional trust fees), brokerage fees and mortgage banking revenue, partly offset by lower cash sweep commissions. Non-interest expense increased $8.5 million, or 9.1%, mainly due to higher salaries expense (mainly incentive compensation) and allocated support costs for information technology. There was no change in the provision for credit losses compared to the same period last year. The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was higher than in the same period last year by $177.4 million. This increase was partly due to higher non-interest income of $8.2 million, partly offset by lower net interest income of $41.8 million and an increase in non-interest expense of $18.1 million. Unallocated securities gains were $39.8 million in the first nine months of 2021 compared to losses of $1.3 million in 2020. Also, the unallocated provision for credit losses decreased $188.1 million, as the provision was $58.1 million less than net charge-offs in the first nine months of 2021, while the provision was $96.7 million in excess of net charge-offs during the first nine months of 2020. For management reporting purposes, net charge-offs are allocated to the segments when incurred. Additionally, the Company's provision for credit losses on unfunded lending commitments, which is not allocated to the segments for management reporting, was a benefit of $15.5 million for the nine months ended September 30, 2021. Impact of Recently Issued Accounting Standards 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 were effective January 1, 2021, and the Company adopted them on that date. The adoption did not have a significant effect on the Company's consolidated financial statements. Investment Securities The FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs", in October 2020. The amendments in the ASU clarify that for each reporting period an entity should evaluate whether a callable debt security that has multiple call dates may consider estimates of future principal prepayments when applying the interest method. The guidance was effective January 1, 2021, and the Company adopted it on that date. The adoption did not have a significant effect on the Company's consolidated financial statements. Reference Rate Reform The FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting", in March 2020, and has been followed by additional clarifying guidance related to derivatives that are modified as a result of reference rate reform. The new guidance provides optional expedients and 64 Table of Contents exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if they reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Further, the guidance applies to derivative instruments that are affected by the discounting transition. The expedients and exceptions provided by the new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022. The guidance is effective as of March 12, 2020 through December 31, 2022, and the Company is in the process of evaluating and applying, as applicable, the optional expedients and exceptions for eligible contracts and transaction available through December 31, 2022. 65 Table of Contents AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS Three Months Ended September 30, 2021 and 2020 Third Quarter 2021 Third Quarter 2020 (Dollars in thousands) Average Balance Interest Income/Expense Avg. Rates Earned/Paid Average Balance Interest Income/Expense Avg. Rates Earned/Paid ASSETS: Loans: Business (A) $ 5,437,498 $ 47,032 3.43 % $ 6,709,200 $ 49,680 2.95 % Real estate — construction and land 1,168,566 10,326 3.51 974,346 9,167 3.74 Real estate — business 2,982,847 26,027 3.46 2,989,652 26,547 3.53 Real estate — personal 2,775,638 22,854 3.27 2,722,300 24,334 3.56 Consumer 2,041,263 19,085 3.71 1,992,314 21,004 4.19 Revolving home equity 281,689 2,456 3.46 329,361 2,722 3.29 Consumer credit card 566,406 16,112 11.29 646,185 18,513 11.40 Overdrafts 5,110 — — 2,689 — — Total loans 15,259,017 143,892 3.74 16,366,047 151,967 3.69 Loans held for sale 16,021 187 4.63 24,728 264 4.25 Investment securities: U.S. government and federal agency obligations 727,566 10,525 5.74 770,361 7,189 3.71 Government-sponsored enterprise obligations 50,785 295 2.30 102,749 560 2.17 State and municipal obligations (A) 2,039,942 12,062 2.35 1,767,526 11,240 2.53 Mortgage-backed securities 7,115,419 27,461 1.53 6,259,926 30,607 1.95 Asset-backed securities 3,028,076 8,205 1.08 1,520,988 7,250 1.90 Other debt securities 608,642 3,125 2.04 514,166 3,036 2.35 Trading debt securities (A) 32,238 82 1.01 27,267 114 1.66 Equity securities (A) 8,756 528 23.92 4,193 497 47.15 Other securities (A) 183,397 3,447 7.46 120,253 2,038 6.74 Total investment securities 13,794,821 65,730 1.89 11,087,429 62,531 2.24 Federal funds sold 792 1 .50 337 — — Securities purchased under agreements to resell 1,633,205 9,007 2.19 849,994 11,247 5.26 Interest earning deposits with banks 2,602,896 995 .15 1,024,435 261 .10 Total interest earning assets 33,306,752 219,812 2.62 29,352,970 226,270 3.07 Allowance for credit losses on loans (172,112) (240,286) Unrealized gain on debt securities 230,058 368,154 Cash and due from banks 329,129 326,030 Premises and equipment, net 408,966 404,144 Other assets 523,182 659,509 Total assets $ 34,625,975 $ 30,870,521 LIABILITIES AND EQUITY: Interest bearing deposits: Savings $ 1,484,923 289 .08 $ 1,193,079 269 .09 Interest checking and money market 13,343,180 1,528 .05 11,731,494 2,937 .10 Certificates of deposit of less than $100,000 464,367 206 .18 573,207 1,028 .71 Certificates of deposit of $100,000 and over 1,289,665 450 .14 1,447,968 2,512 .69 Total interest bearing deposits 16,582,135 2,473 .06 14,945,748 6,746 .18 Borrowings: Federal funds purchased and securities sold under agreements to repurchase 2,360,876 480 .08 1,855,971 406 .09 Other borrowings 347 1 1.14 1,225 — — Total borrowings 2,361,223 481 .08 1,857,196 406 .09 Total interest bearing liabilities 18,943,358 2,954 .06 % 16,802,944 7,152 .17 % Non-interest bearing deposits 11,475,113 9,801,562 Other liabilities 667,786 899,890 Equity 3,539,718 3,366,125 Total liabilities and equity $ 34,625,975 $ 30,870,521 Net interest margin (T/E) $ 216,858 $ 219,118 Net yield on interest earning assets 2.58 % 2.97 % (A) Stated on a tax equivalent basis using a federal income tax rate of 21%. 66 Table of Contents AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS Nine Months Ended September 30, 2021 and 2020 Nine Months 2021 Nine Months 2020 (Dollars in thousands) Average Balance Interest Income/Expense Avg. Rates Earned/Paid Average Balance Interest Income/Expense Avg. Rates Earned/Paid ASSETS: Loans: Business (A) $ 6,056,664 $ 145,574 3.21 % $ 6,322,644 $ 146,437 3.09 % Real estate — construction and land 1,116,603 29,538 3.54 931,517 28,952 4.15 Real estate — business 3,006,780 78,494 3.49 2,935,319 83,382 3.79 Real estate — personal 2,801,861 69,715 3.33 2,565,740 70,829 3.69 Consumer 1,998,081 57,567 3.85 1,962,466 65,845 4.48 Revolving home equity 289,299 7,406 3.42 340,900 9,722 3.81 Consumer credit card 583,471 48,679 11.15 679,101 60,102 11.82 Overdrafts 4,136 — — 3,213 — — Total loans 15,856,895 436,973 3.68 15,740,900 465,269 3.95 Loans held for sale 25,002 736 3.94 14,692 588 5.35 Investment securities: U.S. government and federal agency obligations 724,269 24,979 4.61 783,006 12,244 2.09 Government-sponsored enterprise obligations 50,793 885 2.33 117,135 2,958 3.37 State and municipal obligations (A) 1,988,715 35,779 2.41 1,426,432 30,187 2.83 Mortgage-backed securities 6,933,544 69,924 1.35 5,426,861 87,017 2.14 Asset-backed securities 2,592,618 23,594 1.22 1,349,316 22,496 2.23 Other debt securities 594,984 9,263 2.08 414,553 7,907 2.55 Trading debt securities (A) 33,171 272 1.10 31,087 560 2.41 Equity securities (A) 6,013 1,584 35.22 4,201 1,492 47.44 Other securities (A) 164,911 10,101 8.19 134,481 5,450 5.41 Total investment securities 13,089,018 176,381 1.80 9,687,072 170,311 2.35 Federal funds sold 715 3 .56 252 2 1.06 Securities purchased under agreements to resell 1,143,061 30,551 3.57 849,998 29,445 4.63 Interest earning deposits with banks 2,273,448 2,108 .12 1,126,600 1,996 .24 Total interest earning assets 32,388,139 646,752 2.67 27,419,514 667,611 3.25 Allowance for credit losses on loans (197,631) (184,001) Unrealized gain on debt securities 236,702 280,616 Cash and due from banks 337,595 351,435 Premises and equipment, net 404,697 397,093 Other assets 533,660 657,969 Total assets $ 33,703,162 $ 28,922,626 LIABILITIES AND EQUITY: Interest bearing deposits: Savings $ 1,431,386 843 .08 $ 1,086,120 780 .10 Interest checking and money market 13,200,461 4,921 .05 11,318,376 14,712 .17 Certificates of deposit of less than $100,000 490,655 1,006 .27 600,295 4,196 .93 Certificates of deposit of $100,000 and over 1,291,693 2,173 .22 1,364,798 11,357 1.11 Total interest bearing deposits 16,414,195 8,943 .07 14,369,589 31,045 .29 Borrowings: Federal funds purchased and securities sold under agreements to repurchase 2,231,595 1,112 .07 1,945,669 5,761 .40 Other borrowings 717 5 .93 168,748 1,032 .82 Total borrowings 2,232,312 1,117 .07 2,114,417 6,793 .43 Total interest bearing liabilities 18,646,507 10,060 .07 % 16,484,006 37,838 .31 % Non-interest bearing deposits 11,011,446 8,425,068 Other liabilities 601,352 710,824 Equity 3,443,857 3,302,728 Total liabilities and equity $ 33,703,162 $ 28,922,626 Net interest margin (T/E) $ 636,692 $ 629,773 Net yield on interest earning assets 2.63 % 3.07 % (A) Stated on a tax equivalent basis using a federal income tax rate of 21%. 67 Table of Contents