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 2021 Annual Report on Form 10-K. Results of operations for the nine month periods ended September 30, 2022 are not necessarily indicative of results to be attained for any other period. Forward-Looking Information This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, the effects of the COVID-19 pandemic, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2021 Annual Report on Form 10-K. During the quarter ended September 30, 2022, there were no material changes to the Risk Factors disclosed in the Company's 2021 Annual Report on Form 10-K. Critical Accounting Estimates and Related Policies The Company has identified certain policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates and related policies are the Company's allowance for credit losses and fair value measurement policies. A discussion of these estimates and related policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2021 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, 2021. 45 Table of Contents Selected Financial Data Three Months Ended September 30 Nine Months Ended September 30 2022 2021 2022 2021 Per Share Data Net income per common share — basic $ 1.03 $ 1.00 * $ 2.96 $ 3.38 * Net income per common share — diluted 1.02 .99 * 2.95 3.37 * Cash dividends on common stock .265 .250 * .795 .750 * Book value per common share 19.86 28.58 * Market price 66.16 66.36 * Selected Ratios (Based on average balance sheets) Loans to deposits (1) 56.40 % 54.44 % 54.05 % 57.91 % Non-interest bearing deposits to total deposits 38.76 40.90 39.04 40.15 Equity to loans (1) 17.45 23.17 19.19 21.68 Equity to deposits 9.84 12.62 10.37 12.56 Equity to total assets 8.31 10.22 8.66 10.22 Return on total assets 1.48 1.40 1.39 1.65 Return on equity 17.84 13.74 16.08 16.14 (Based on end-of-period data) Non-interest income to revenue (2) 35.99 39.11 37.34 39.66 Efficiency ratio (3) 55.19 59.95 57.48 57.76 Tier I common risk-based capital ratio 13.97 14.02 Tier I risk-based capital ratio 13.97 14.02 Total risk-based capital ratio 14.69 14.83 Tangible common equity to tangible assets ratio (4) 6.80 9.71 Tier I leverage ratio 9.87 9.31 * Restated for the 5% stock dividend distributed in December 2021. (1) Includes loans held for sale. (2) Revenue includes net interest income and non-interest income. (3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue. (4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization. It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP. The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets. September 30 (Dollars in thousands) 2022 2021 Total equity $ 2,371,107 $ 3,491,221 Less non-controlling interest 19,513 10,551 Less goodwill 138,921 138,921 Less intangible assets* 4,371 4,684 Total tangible common equity (a) $ 2,208,302 $ 3,337,065 Total assets $ 32,602,596 $ 34,497,543 Less goodwill 138,921 138,921 Less intangible assets* 4,371 4,684 Total tangible assets (b) $ 32,459,304 $ 34,353,938 Tangible common equity to tangible assets ratio (a)/(b) 6.80 % 9.71 % * Intangible assets other than mortgage servicing rights. 46 Table of Contents Results of Operations Summary Three Months Ended September 30 Nine Months Ended September 30 (Dollars in thousands) 2022 2021 % change 2022 2021 % change Net interest income $ 246,373 $ 214,037 15.1 % $ 687,544 $ 627,767 9.5 % Provision for credit losses (15,290) 7,385 307.0 (12,594) 59,272 121.2 Non-interest income 138,514 137,506 .7 409,710 412,694 (.7) Investment securities gains, net 3,410 13,108 (74.0) 11,602 39,765 (70.8) Non-interest expense (212,884) (211,620) .6 (632,037) (602,319) 4.9 Income taxes (33,936) (34,662) (2.1) (97,859) (111,947) (12.6) Non-controlling interest expense (3,364) (3,193) 5.4 (9,595) (9,373) 2.4 Net income attributable to Commerce Bancshares, Inc. $ 122,823 $ 122,561 .2 % $ 356,771 $ 415,859 (14.2 %) For the quarter ended September 30, 2022, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $122.8 million, an increase of $262 thousand, or .2%, compared to the third quarter of the previous year. For the current quarter, the annualized return on average assets was 1.48%, the annualized return on average equity was 17.84%, and the efficiency ratio was 55.19%. Diluted earnings per common share was $1.02, an increase of 3.0% compared to $0.99 per share in the third quarter of 2021, and increased 6.3% compared to $.96 per share in the previous quarter. Compared to the third quarter of last year, net interest income increased $32.3 million, or 15.1%, mainly due to increases of $28.4 million in interest income on loans and $15.7 million in interest income on investment securities, partly offset by an increase in deposits and borrowings interest expense of $13.3 million. The provision for credit losses increased $22.7 million due to an increase in the estimate of the allowance for credit losses on loans and unfunded lending commitments and higher net loan charge-offs, coupled with the release of allowances associated with certain pandemic-related estimates in the third quarter of 2021. Non-interest income increased $1.0 million, or .7%, compared to the third quarter of 2021, mainly due to increases in net bank card fees and cash sweep commissions, partly offset by lower loan fees and sales and trust fees. Net gains on investment securities totaled $3.4 million in the current quarter compared to net gains of $13.1 million in the same quarter of last year. Net securities gains in the current quarter primarily resulted from net fair value gains of $14.1 million in the Company's private equity investment portfolio, partly offset by a loss of $10.7 million on the sale of an available for sale security. Non-interest expense increased $1.3 million, or .6%, over the third quarter of 2021 mainly due to higher salaries expense, data processing and software expense and travel and entertainment expense, partly offset by $8.2 million in litigation settlement costs recorded in 2021. Net income for the first nine months of 2022 was $356.8 million, a decrease of $59.1 million, or 14.2%, from the same period last year. Diluted earnings per common share was $2.95, a decrease of 12.5% compared to $3.37 per share in the same period last year. For the first nine months of 2022, the annualized return on average assets was 1.39%, the annualized return on average equity was 16.08%, and the efficiency ratio was 57.48%. Net interest income increased $59.8 million, or 9.5%, over the same period last year. This growth was due to increases of $70.7 million in interest income on investment securities, $11.8 million in interest income on loans and $7.0 million in interest earned on balances with the Federal Reserve, partly offset by a decrease in interest income on securities purchased under agreements to resell of $14.9 million and an increase in deposits and borrowings interest expense of $15.0 million. The provision for credit losses was expense of $12.6 million for the first nine months of 2022, compared to a recovery of $59.3 million in the same period last year, resulting in an increase in provision expense of $71.9 million. Non-interest income decreased $3.0 million, or .7%, from the first nine months of last year mainly due to lower loan fees and sales, partly offset by higher net bank card fees. Non-interest expense increased $29.7 million, or 4.9%, over the first nine months of last year mainly due to increases in salaries and benefits expense and data processing and software expense. 47 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, 2022 vs. 2021 Nine Months Ended September 30, 2022 vs. 2021 Change due to Change due to (In thousands) Average Volume Average Rate Total Average Volume Average Rate Total Interest income, fully taxable equivalent basis: Loans: Business $ (851) $ 6,632 $ 5,781 $ (17,148) $ 5,205 $ (11,943) Real estate - construction and land 1,063 5,744 6,807 2,655 7,955 10,610 Real estate - business 2,401 7,693 10,094 4,334 8,267 12,601 Real estate - personal 567 644 1,211 612 (523) 89 Consumer 564 2,461 3,025 2,100 (776) 1,324 Revolving home equity (7) 964 957 (348) 1,209 861 Consumer credit card (465) 1,064 599 (3,384) 1,716 (1,668) Overdrafts — — — — — — Total interest on loans 3,272 25,202 28,474 (11,179) 23,053 11,874 Loans held for sale (70) 42 (28) (413) 147 (266) Investment securities: U.S. government and federal agency securities 5,583 (3,444) 2,139 13,376 (2,604) 10,772 Government-sponsored enterprise obligations 29 8 37 64 13 77 State and municipal obligations 77 (381) (304) 1,742 (1,866) (124) Mortgage-backed securities (1,032) 6,894 5,862 1,740 33,031 34,771 Asset-backed securities 2,294 5,283 7,577 12,360 4,424 16,784 Other securities 379 (130) 249 3,374 4,489 7,863 Total interest on investment securities 7,330 8,230 15,560 32,656 37,487 70,143 Federal funds sold 18 75 93 23 88 111 Securities purchased under agreements to resell (1,401) (1,622) (3,023) 12,316 (27,198) (14,882) Interest earning deposits with banks (613) 5,189 4,576 (599) 7,641 7,042 Total interest income 8,536 37,116 45,652 32,804 41,218 74,022 Interest expense: Deposits: Savings 22 (134) (112) 95 (426) (331) Interest checking and money market 183 5,657 5,840 720 5,430 6,150 Certificates of deposit of less than $100,000 (30) 235 205 (163) (88) (251) Certificates of deposit of $100,000 and over (156) 577 421 (269) (136) (405) Total interest on deposits 19 6,335 6,354 383 4,780 5,163 Federal funds purchased 10 302 312 17 518 535 Securities sold under agreements to repurchase (30) 7,129 7,099 95 9,764 9,859 Other borrowings 5 3 8 9 8 17 Total interest expense 4 13,769 13,773 504 15,070 15,574 Net interest income, tax equivalent basis $ 8,532 $ 23,347 $ 31,879 $ 32,300 $ 26,148 $ 58,448 Net interest income in the third quarter of 2022 was $246.4 million, an increase of $32.3 million over the third quarter of 2021. On a fully taxable-equivalent (FTE) basis, net interest income totaled $248.7 million in the third quarter of 2022, up $31.9 million over the same period last year and up $13.7 million over the previous quarter. The increase in net interest income 48 Table of Contents compared to the third quarter of 2021 was mainly due to higher interest income earned on loans (FTE) of $28.5 million and investment securities (FTE) of $15.6 million, partly offset by higher interest expense on deposits and borrowings of $13.8 million. The increase in total interest earned on loans (FTE) was the result of higher loan yields on all loan products, especially commercial loans, many of which have variable rates, coupled with higher average balances. The increase in interest on investment securities (FTE) was the result of higher average rates earned and average balances, while the increase in interest expense was due to higher rates paid on deposits and borrowings. The Company's net yield on earning assets (FTE) was 3.01% in the current quarter compared to 2.58% in the third quarter of 2021. Total interest income (FTE) increased $45.7 million over the third quarter of 2021. Interest income on loans (FTE) was $172.4 million during the third quarter of 2022, an increase of $28.5 million, or 19.8%, over the same quarter last year. The increase in interest income over the same quarter last year was primarily due to an increase of 63 basis points in the average rate earned and growth of $386.9 million, or 2.5%, in average loan balances. Most of the increase in interest income occurred in the business, business real estate, construction and consumer loan categories. The largest increase to interest income occurred in business real estate loan interest, which grew $10.1 million due to a 94 basis point increase in the average rate earned, coupled with growth in average balances of $275.3 million, or 9.2%. Business loan interest income increased $5.8 million due to an increase of 51 basis points in the average rate earned, partly offset by a decline of $119.8 million in average balances. Construction and land loan interest grew $6.8 million due to a 176 basis point increase in the average rate earned and growth of $120.2 million, or 10.3%, in average loan balances. Consumer loan interest increased $3.0 million due to an increase of 46 basis points in the average rate earned and growth in average balances of $60.4 million, or 3.0%. Interest income on investment securities (FTE) was $81.3 million during the third quarter of 2022, which was an increase of $15.6 million over the same quarter last year. The increase in interest income occurred mainly in interest earned on asset-backed securities, which rose $7.6 million due to an increase of 54 basis points in the average rate earned, coupled with higher average balances of $842.9 million, or 27.8%. Interest income earned on mortgage-backed securities increased $5.9 million due to an increase in the average rate earned of 40 basis points, partly offset by a decline of $267.5 million, or 3.8%, in the average balance. In addition, a $1.5 million increase in premium amortization, reflecting slower forward prepayment speed estimates was recorded in the current quarter, compared to a premium amortization adjustment increase of $5.0 million in the prior year. Interest on U.S. government and federal agency obligations grew $2.1 million mainly due to higher average balances of $385.9 million, or 53.0%, and an increase in inflation income on the Company's U.S. Treasury inflation-protected securities (TIPS), while a decrease of 123 basis points in the average rate earned partly offset these increases in income. Interest income related to TIPS, which is tied to the non-seasonally adjusted Consumer Price Index (CPI-U), increased $1.8 million over the same quarter last year. The average balance of the total investment portfolio (excluding unrealized fair value adjustments on available for sale debt securities) was $14.8 billion in the third quarter of 2022, compared to $13.8 billion in the third quarter of 2021. Interest income on securities purchased under agreements to resell decreased $3.0 million from the same quarter last year, due to a decrease of 47 basis points in the average rate earned and a decline of $253.9 million in the average balance. Interest income on balances at the Federal Reserve grew $4.6 million due to an increase of 210 basis points in the average rate earned, partly offset by a decrease of $1.6 billion in the average balance invested. The average fully taxable-equivalent yield on total interest earning assets was 3.21% in the third quarter of 2022, up from 2.62% in the third quarter of 2021. Total interest expense increased $13.8 million compared to the third quarter of 2021 due to increases in interest expense of $6.4 million on interest bearing deposits and $7.4 million on borrowings. The increase in deposit interest expense resulted mainly from an increase of $5.8 million in interest expense on interest checking and money market deposit accounts due to a 15 basis point increase in the average rate paid and higher average balances of $1.1 billion. Interest expense on borrowings was higher due to an increase of 129 basis points in the average rate paid on customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .34% and .06% in the third quarters of 2022 and 2021, respectively. Net interest income (FTE) for the first nine months of 2022 was $695.1 million compared to $636.7 million for the same period in 2021. For the first nine months of 2022, the net interest margin was 2.75% compared to 2.63% for the same period in 2021. Total interest income (FTE) for the first nine months of 2022 increased $58.4 million over the same period last year mainly due to higher interest income on investment securities (FTE) and loans (FTE), partly offset by lower interest earned on securities purchased under agreements to resell and higher interest expense. Loan interest income (FTE) grew $11.9 million, or 2.7%, due to a 20 basis point increase in the average rate earned, partly offset by a $403.8 million decrease in average loan balances. Most of the increase in loan interest occurred in the business real estate and construction loan categories due to 49 Table of Contents higher average rates and balances. In addition, consumer loan interest increased due to higher average balances, partly offset by lower rates earned. These increases were partly offset by lower interest earned on business and credit card loans due to lower average balances, partly offset by higher rates earned. Interest income on investment securities (T/E) increased $70.1 million due to a 37 basis point increase in the average rate earned and a $2.1 billion increase in average balances. Interest earned on U.S. government and federal agency obligations increased $10.8 million, mainly due to higher TIPS interest income. Interest earned on mortgage-backed securities increased $34.8 million mainly due to higher average rates earned, while interest on asset-backed securities increased $16.8 million due to higher average balances and average rates earned. Interest earned on other securities increased $7.9 million mainly due to the receipt of $6.5 million in non-accrual interest on the sale of a private equity investment in the second quarter of 2022. Interest income on securities purchased under agreements to resell decreased $14.9 million due to lower rates earned, partly offset by higher average balances, while interest income on balances at the Federal Reserve increased $7.0 million due to higher average rates earned. Total interest expense for the first nine months of 2022 increased $15.6 million compared to the same period last year. Interest on deposits increased $5.2 million, mainly due to a four basis point increase in the overall rate. Interest expense on interest checking and money market accounts increased $6.2 million due to a five basis point increase in the average rate and higher average balances. Interest expense on borrowings increased $10.4 million, mainly due to higher rates paid on customer repurchase agreements. The overall cost of total interest bearing liabilities increased to .17% compared to .07% 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. 50 Table of Contents Non-Interest Income Three Months Ended September 30 Increase (Decrease) Nine Months Ended September 30 Increase (Decrease) (Dollars in thousands) 2022 2021 Amount % change 2022 2021 Amount % change Trust fees $ 45,406 $ 48,950 (3,544) (7.2) % $ 140,009 $ 139,334 675 .5 % Bank card transaction fees 45,638 42,815 2,823 6.6 131,556 123,118 8,438 6.9 Deposit account charges and other fees 24,521 25,161 (640) (2.5) 72,392 71,724 668 .9 Consumer brokerage services 5,085 4,900 185 3.8 14,599 13,484 1,115 8.3 Capital market fees 3,393 3,794 (401) (10.6) 10,845 12,102 (1,257) (10.4) Loan fees and sales 3,094 6,842 (3,748) (54.8) 10,575 24,472 (13,897) (56.8) Other 11,377 5,044 6,333 125.6 29,734 28,460 1,274 4.5 Total non-interest income $ 138,514 $ 137,506 $ 1,008 .7 % $ 409,710 $ 412,694 (2,984) (.7 %) Non-interest income as a % of total revenue* 36.0 % 39.1 % 37.3 % 39.7 % * 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, 2022 and 2021. Three Months Ended September 30 Nine Months Ended September 30 (Dollars in thousands) 2022 2021 $ change % change 2022 2021 $ change % change Net debit card fees $ 10,508 $ 10,402 $ 106 1.0 % $ 30,593 $ 30,274 $ 319 1.1 % Net credit card fees 3,597 3,863 (266) (6.9) 11,031 11,389 (358) (3.1) Net merchant fees 5,232 5,202 30 .6 15,146 14,711 435 3.0 Net corporate card fees 26,301 23,348 2,953 12.6 74,786 66,744 8,042 12.0 Total bank card transaction fees $ 45,638 $ 42,815 $ 2,823 6.6 % $ 131,556 $ 123,118 $ 8,438 6.9 % For the third quarter of 2022, total non-interest income amounted to $138.5 million compared to $137.5 million in the same quarter last year, which was an increase of $1.0 million, or .7%. The increase was mainly due to higher bank card and other non-interest income, partly offset by lower trust fees and loan fees and sales. Bank card transaction fees for the current quarter grew $2.8 million, or 6.6%, over the same period last year, mainly due to growth of $3.0 million in net corporate card fees. The growth in net corporate card fees was mainly due to higher interchange income, partly offset by higher rewards expense. Trust fees for the quarter decreased $3.5 million, or 7.2%, from the same quarter last year, resulting from lower private client fees and institutional trust fees. Compared to the third quarter of last year, deposit account fees decreased $640 thousand, or 2.5%, mainly due to lower overdraft and return item fees. In September 2022, the Company implemented enhancements to consumer checking accounts that eliminate return item fees and are expected to lower overdraft fees for our customers. Consumer brokerage service fees increased $185 thousand, or 3.8%, due to growth in annuity and mutual fund fees, while loan fees and sales decreased $3.7 million, or 54.8%, due to a decline in mortgage banking revenue. Other non-interest income increased $6.3 million, or 125.6%, mainly due to higher cash sweep commissions and tax credit sales fees of $3.4 million and $1.1 million, respectively. Additionally, a $2.0 million loss on an equity method investment was recorded in the third quarter of 2021. Non-interest income for the first nine months of 2022 was $409.7 million, compared to $412.7 million in the first nine months of 2021, resulting in a decrease of $3.0 million, or .7%. Bank card fees increased $8.4 million, or 6.9%, mainly due to growth of $8.0 million in net corporate card fees. Trust fees increased $675 thousand, or .5%, mainly due to growth in private client trust fees, partly offset by lower institutional trust fees. Deposit account fees increased $668 thousand, or .9%, mainly due to higher corporate cash management fees, partly offset by lower personal account deposit fees. Capital market fees declined $1.3 million, or 10.4%, while consumer brokerage service fees increased $1.1 million, or 8.3%, due to higher annuity and mutual fund fees, partly offset by lower advisory fees. Loan fees and sales decreased $13.9 million, or 56.8%, due to lower mortgage banking revenue. Other income increased $1.3 million, or 4.5%, mainly due to higher cash sweep commissions of $5.3 million and tax credit sales fees of $1.2 million, income of $2.2 million from a life insurance death benefit recorded in the second quarter of 2022, a $2.6 million loss on an equity method investment recorded in 2021 and a lease impairment of $1.1 million recorded in 2021. These increases were partly offset by gains of $3.7 million recorded on branch sales last year coupled with a write-down of $965 thousand on a branch location recorded in the first quarter of 2022. In addition, a decrease of $6.8 million in fair value adjustments was recorded on the Company's deferred compensation plan assets, which are held in a trust, recorded as both an asset and a liability, and affect both other income and other expense. 51 Table of Contents Investment Securities Gains (Losses), Net Three Months Ended September 30 Nine Months Ended September 30 (In thousands) 2022 2021 2022 2021 Net losses on sales of available for sale debt securities $ (10,692) $ — $ (20,274) $ — Fair value adjustments on equity securities, net (25) 137 (1,048) 152 Net gains (losses) on sales of private equity investments 77 — (4,209) 1,611 Fair value adjustments on private equity investments 14,050 12,971 37,133 38,002 Total investment securities gains, net $ 3,410 $ 13,108 $ 11,602 $ 39,765 Net gains on investment securities, which were recognized in earnings during the three months ended September 30, 2022 and 2021, are shown in the table above. Net securities gains of $3.4 million were reported in the third quarter of 2022, compared to net gains of $13.1 million in the same period last year. The net gains in the third quarter of 2022 were primarily comprised of $14.1 million of net gains in fair value on the Company’s private equity investments, partially offset by a loss of $10.7 million on the sale of an available for sale security. The net gains on investment securities for the same quarter last year were mainly comprised of $13.0 million of net gains in fair value on the Company’s private equity investments. Net gains on investment securities of $11.6 million were recognized in earnings for the nine months ended September 30, 2022, compared to net gains of $39.8 million for the same period in 2021. Net gains in the first nine months of 2022 were mainly comprised of net gains of $37.1 million on private equity investments, due to fair value adjustments, offset by losses of $20.3 million on sales of available for sale securities, net losses of $4.2 million on sales of private equity investments, and net losses in fair value of $1.0 million on equity investments. Net gains in the first nine months of 2021 were mainly comprised of a gain of $1.6 million on the sale of a private equity investment and $38.0 million of net gains in fair value on private equity investments. The portion of private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in expense of $6.6 million during the first nine months of 2022 and expense of $7.7 million during the first nine months of 2021. Non-Interest Expense Three Months Ended September 30 Increase (Decrease) Nine Months Ended September 30 Increase (Decrease) (Dollars in thousands) 2022 2021 Amount % change 2022 2021 Amount % change Salaries and employee benefits $ 137,393 $ 132,824 $ 4,569 3.4 % $ 415,589 $ 392,608 $ 22,981 5.9 % Data processing and software 28,050 25,598 2,452 9.6 82,701 76,015 6,686 8.8 Net occupancy 12,544 12,329 215 1.7 37,343 35,877 1,466 4.1 Equipment 5,036 4,440 596 13.4 14,338 13,398 940 7.0 Supplies and communication 4,581 4,530 51 1.1 13,655 12,688 967 7.6 Marketing 6,228 5,623 605 10.8 18,408 16,461 1,947 11.8 Other 19,052 26,276 (7,224) (27.5) 50,003 55,272 (5,269) (9.5) Total non-interest expense $ 212,884 $ 211,620 $ 1,264 .6 % $ 632,037 $ 602,319 $ 29,718 4.9 % Non-interest expense for the third quarter of 2022 amounted to $212.9 million, an increase of $1.3 million, or .6%, compared to expense of $211.6 million in the third quarter of last year. The increase in expense over the same period last year was mainly due to higher salaries expense and data processing and software expense, partly offset by lower other non-interest expense. Salaries and benefits expense increased $4.6 million, or 3.4%, due to higher full-time salaries expense of $5.6 million, or 6.4%, partly offset by lower incentive compensation expense of $2.5 million. Full-time equivalent employees totaled 4,595 at September 30, 2022, compared to 4,582 at September 30, 2021. Data processing and software expense increased $2.5 million, or 9.6%, due to higher software amortization, bank card processing fees and increased costs for service providers. Occupancy expense increased $215 thousand, or 1.7%, and equipment expense increased $596 thousand, or 13.4%, mainly due to higher equipment repair expense and depreciation expense. Marketing expense increased $605 thousand, or 10.8%, while other non-interest expense decreased $7.2 million, or 27.5%. This decrease was mainly due to $8.2 million in litigation settlement costs recorded in the third quarter of 2021, lower legal and professional fees of $1.1 million and higher deferred loan origination costs of $755 thousand. These decreases to expense were partly offset by increases in travel and entertainment expense of $1.5 million and insurance expense of $619 thousand. 52 Table of Contents Non-interest expense amounted to $632.0 million for the first nine months of 2022, an increase of $29.7 million, or 4.9%, over the first nine months of 2021. Salaries and benefits expense increased $23.0 million, or 5.9%, mainly due to higher costs for salaries, incentive compensation, payroll taxes and 401(k) expense. Salaries expense included expense of $5.4 million for special bonuses paid to non-incentivized full-time and part-time employees in the second half of 2022. Data processing and software expense increased $6.7 million, or 8.8%, due to higher costs for service providers, software amortization and bank card processing fees. Occupancy expense increased $1.5 million, or 4.1%, mainly due to higher rent and outside services expense. Equipment expense increased $940 thousand, or 7.0%, mainly due to higher equipment repair and depreciation expense. Supplies and communication expense increased $967 thousand, or 7.6%, mainly due to higher bank card reissuance fees and courier expense, while marketing expense increased $1.9 million, or 11.8%. Other non-interest expense decreased $5.3 million, or 9.5%, mainly due to the litigation settlement mentioned above, coupled with a decline of $6.8 million in fair value equity adjustments on the Company's deferred compensation plan assets. These decreases were partly offset by increases in travel and entertainment expense of $3.9 million and insurance expense of $1.2 million. 53 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, 2022 June 30, 2022 Sept. 30, 2021 2022 2021 ALLOWANCE FOR CREDIT LOSSES ON LOANS Balance at beginning of period $ 138,039 $ 134,710 $ 172,395 $ 150,044 $ 220,834 Provision for credit losses on loans 10,150 7,287 (5,961) $ 6,751 $ (43,749) Net loan charge-offs (recoveries): Commercial: Business 461 19 65 557 (4,848) Real estate-construction and land — — — — 1 Real estate-business (8) (1) (5) (16) (70) Commercial net loan charge-offs (recoveries) 453 18 60 541 (4,917) Personal Banking: Real estate-personal (15) (41) (26) (34) (27) Consumer 827 633 496 2,268 1,637 Revolving home equity (38) (14) (22) (34) 29 Consumer credit card 2,882 2,937 2,908 9,191 17,044 Overdrafts 703 425 243 1,486 544 Personal banking net loan charge-offs 4,359 3,940 3,599 12,877 19,227 Total net loan charge-offs 4,812 3,958 3,659 13,418 14,310 Balance at end of period $ 143,377 $ 138,039 $ 162,775 $ 143,377 $ 162,775 LIABILITY FOR UNFUNDED LENDING COMMITMENTS Balance at beginning of period 24,907 25,032 24,208 24,204 38,307 Provision for credit losses on unfunded lending commitments 5,140 (125) (1,424) 5,843 (15,523) Balance at end of period 30,047 24,907 22,784 30,047 22,784 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS $ 173,424 $ 162,946 $ 185,559 $ 173,424 $ 185,559 Three Months Ended Nine Months Ended September 30 Sept. 30, 2022 June 30, 2022 Sept. 30, 2021 2022 2021 Annualized net loan charge-offs (recoveries)*: Commercial: Business .03 % — % — % .01 % (.11 %) Real estate-construction and land — — — — — Real estate-business — — — — — Commercial net loan charge-offs (recoveries) .02 — — .01 (.06) Personal Banking: Real estate-personal — (.01) — — — Consumer .16 .12 .10 .15 .11 Revolving home equity (.05) (.02) (.03) (.02) .01 Consumer credit card 2.08 2.19 2.04 2.26 3.91 Overdrafts 62.85 30.86 18.87 39.39 17.59 Personal banking net loan charge-offs .30 .28 .25 .30 .45 Total annualized net loan charge-offs .12 % .10 % .10 % .12 % .12 % * as a percentage of average loans (excluding loans held for sale) 54 Table of Contents To determine the amount of the allowance for credit losses on loans and the liability for unfunded lending commitments, the Company has an established process which assesses the risks and losses expected in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded lending commitments, as well as a second, smaller component based on certain individually evaluated loans and unfunded lending commitments. The Company's policies and processes for determining the allowance for credit losses on loans and the liability for unfunded lending commitments are discussed in Note 1 to the consolidated financial statements and in the " Allowance for Credit Losses" discussion within Critical Accounting Estimates and Related Policies in Item 7 of the 2021 Annual Report on Form 10-K. Net loan charge-offs in the third quarter of 2022 amounted to $4.8 million, compared to $4.0 million in the prior quarter and $3.7 million in the third quarter of last year. During the third quarter of 2022, the Company recorded net charge-offs on commercial loans of $453 thousand, compared to net charge-offs of $18 thousand in the prior quarter and $60 thousand in the third quarter of 2021. Business loan net charge-offs increased $442 thousand in the third quarter of 2022, compared to the prior quarte r. Comp ared to the same period last year, total net loan charge-offs in the third quarter of 2022 increased $1.2 million. This increase was driven by increases in net charge-offs on overdraft, business, and consumer loans. For the three months ended September 30, 2022, annualized net charge-offs on average consumer credit card loans totaled 2.08%, compared to 2.19% in the previous quarter and 2.04% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .16%, compared to .12% in the prior quarter and .10% in the same period last year. In the third quarter of 2022, total annualized net loan charge-offs were .12%, compared to .10% in the previous quarter and .10% in the same period last year. For the nine months ended September 30, 2022, net loan charge-offs amounted to $13.4 million, compared to $14.3 million during the same period in the prior year. The decrease in net loan charge-offs in the nine months ended September 30, 2022 was primarily due to a $7.9 million decline in net charge-offs on consumer credit card loans, which was mostly offset by a $5.4 million increase in net charge-offs on business loans driven by two large non-recurring recoveries in 2021. Net charge-offs on overdraft and consumer loans also increased $942 thousand and $631 thousand, respectively. For the nine months ended September 30, 2022, annualized net charge-offs on average consumer credit card loans totaled 2.26%, compared to 3.91% during the same period last year, while consumer loan annualized net charge-offs in the nine months ended September 30, 2022 amounted to .15%, compared to .11% during the same period last year. During first nine months of 2022, total annualized net loan charge-offs were .12%, unchanged from the same period last year. The provision for credit losses on loans was $10.2 million in the current quarter, which was a $2.9 million increase over the $7.3 million provision recorded in the prior quarter and a $16.1 million increase over the $6.0 million benefit recorded for the nine months ended September 30, 2021. The increase in the provision from the prior quarter was due to a slightly less optimistic forecast, which includes a mild recession in the first half of 2023. The provision for credit losses on loans for the third quarter of the prior year reflected lower than projected net charge-offs and an improved forecast at that point in time, resulting in the release of reserves established for uncertainties related to the pandemic during that quarter. For the nine months ended September 30, 2022, the provision for credit losses on loans was $6.8 million, compared to a recovery of $43.7 million during the same period in the prior year. For the nine months ended September 30, 2022, the allowance for credit losses on loans decreased $6.7 million, compared to the allowance for credit losses on loans as of December 31, 2021. The decrease was primarily the net result of reducing the allowance as pandemic economic concerns lessened compared to December 31, 2021, slightly offset by an emerging mild recession uncertainty related to the geopolitical environment, high inflation, and supply constraints on the economy. The allowance for credit losses on commercial loans increased by $5.3 million, while the allowance for credit losses related to personal banking loans, including consumer credit card loans, decreased $12.0 million, mostly related to decreases in consumer credit card loans experienced in the first quarter of 2022. At September 30, 2022, the allowance for credit losses on loans amounted to $143.4 million, compared to $138.0 million at June 30, 2022. This increase in the allowance for credit losses on loans compared to the prior quarter is due to a less optimistic forecast with a mild recession in the first half of 2023. The current period estimation for credit losses continues to consider the uncertainty in the economy as inflation rises and supply chain issues continue. The allowance for credit losses on loans was $162.8 million at September 30, 2021, reflecting pandemic uncertainties and the economic forecast at that point in time, and was .90%, .88% and 1.07% of total loans at September 30, 2022, June 30, 2022 and September 30, 2021, respectively. In the current quarter, the provision for credit losses on unfunded lending commitments was $5.1 million, compared to a benefit of $125 thousand in the prior quarter and a benefit of $1.4 million in the third quarter of 2021. For the nine months ended September 30, 2022, the provision for credit losses on unfunded lending commitments was $5.8 million, compared to a benefit of $15.5 million during the same period in the prior year. At September 30, 2022, the liability for unfunded lending 55 Table of Contents commitments was $30.0 million, compared to $24.9 million at June 30, 2022 and $22.8 million at September 30, 2021. The Company's unfunded lending commitments primarily relate to construction loans, and the Company's estimate for credit losses in its unfunded lending commitments utilizes the same model and forecast as its estimate for credit losses on loans. See Note 2 for further discussion of the model inputs utilized in the Company's estimate of credit losses. The Company considers the allowance for credit losses on loans and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at September 30, 2022. The allowance for credit losses on loans and the liability for unfunded lending commitments are estimates that require significant judgment including projections of the macro-economic environment. The Company utilizes a third-party macro-economic forecast that continuously changes due to economic conditions and events. These changes in the forecast cause fluctuations in the allowance for credit losses on loans and the liability for unfunded lending commitments. The Company uses its best judgment to assess the macro-economic forecast and internal loss data in estimating the allowance for credit losses on loans and the liability for unfunded lending commitments. These estimates are subject to periodic refinement based on changes in the underlying external and internal data. 56 Table of Contents Risk Elements of Loan Portfolio The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual. (Dollars in thousands) September 30, 2022 December 31, 2021 Non-accrual loans $ 7,184 $ 9,157 Foreclosed real estate 354 115 Total non-performing assets $ 7,538 $ 9,272 Non-performing assets as a percentage of total loans .05 % .06 % Non-performing assets as a percentage of total assets .02 % .03 % Total loans past due 90 days and still accruing interest $ 12,538 $ 11,726 Non-accrual loans totaled $7.2 million at September 30, 2022, a decrease of $2.0 million from the balance at December 31, 2021. The decrease occurred mainly in business loans which decreased $1.7 million. At September 30, 2022, non-accrual loans were comprised of business (78.6%), personal real estate (19.3%), and business real estate (2.1%) loans. Foreclosed real estate totaled $354 thousand at September 30, 2022, an increase of $239 thousand when compared to December 31, 2021. Total loans past due 90 days or more and still accruing interest were $12.5 million as of September 30, 2022, an increase of $812 thousand from December 31, 2021. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements. In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled $292.5 million at September 30, 2022 compared with $278.7 million at December 31, 2021, resulting in an increase of $13.8 million, or 4.9%. (In thousands) September 30, 2022 December 31, 2021 Potential problem loans: Business $ 33,249 $ 37,143 Real estate – construction and land 57,647 40,259 Real estate – business 200,418 200,766 Real estate – personal 1,140 526 Total potential problem loans $ 292,454 $ 278,694 At September 30, 2022, the Company had $155.6 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 $140.6 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. 57 Table of Contents Real Estate – Construction and Land Loans The Company's portfolio of construction and land loans, as shown in the table below, amounted to 7.6% of total loans outstanding at September 30, 2022. The largest component of construction and land loans was commercial construction, which increased $55.1 million during the nine months ended September 30, 2022. At September 30, 2022, multi-family residential construction loans totaled approximately $247.4 million, or 25.3%, of the commercial construction loan portfolio, compared to $155.9 million, or 16.9%, at December 31, 2021. (Dollars in thousands) September 30, 2022 % of Total % of Total Loans December 31, 2021 % of Total % of Total Loans Commercial construction $ 977,771 81.0 % 6.1 % $ 922,654 82.5 % 6.1 % Residential construction 138,799 11.5 .9 96,618 8.6 .7 Commercial land and land development 50,145 4.2 .3 48,481 4.3 .3 Residential land and land development 40,240 3.3 .3 50,513 4.6 .3 Total real estate - construction and land loans $ 1,206,955 100.0 % 7.6 % $ 1,118,266 100.0 % 7.4 % Real Estate – Business Loans Total business real estate loans were $3.3 billion at September 30, 2022 and comprised 21.0% 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, 2022, 35.7% 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, 2022 % of Total % of Total Loans December 31, 2021 % of Total % of Total Loans Owner-occupied $ 1,188,189 35.7 % 7.5 % $ 1,188,469 38.9 % 7.8 % Office 512,752 15.4 3.2 380,101 12.4 2.5 Retail 330,033 9.9 2.1 339,874 11.1 2.2 Multi-family 313,740 9.4 2.0 354,282 11.6 2.3 Industrial 313,230 9.4 2.0 99,800 3.3 .7 Hotels 218,319 6.6 1.4 234,673 7.7 1.5 Farm 198,864 6.0 1.3 178,780 5.8 1.2 Senior living 147,455 4.4 .9 174,871 5.7 1.2 Other 109,045 3.2 .6 107,987 3.5 .8 Total real estate - business loans $ 3,331,627 100.0 % 21.0 % $ 3,058,837 100.0 % 20.2 % Revolving Home Equity Loans The Company had $286.0 million in revolving home equity loans at September 30, 2022 that were generally collateralized by residential real estate. Most of these loans (91.7%) 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, 2022, the outstanding principal of loans with an original LTV higher than 80% was $30.1 million, or 10.5% of the portfolio, compared to $30.9 million as of December 31, 2021. Total revolving home equity loan balances over 30 days past due were $1.4 million at September 30, 2022 and $1.6 million at December 31, 2021, and there were no revolving home equity loans on non-accrual status at September 30, 2022 or December 31, 2021. The weighted average FICO score for the total current portfolio balance is 788. At maturity, the accounts are re-underwritten, and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of 2022 through 2024, approximately 12% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 85% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels. Consumer Loans Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs. Auto loans comprised 38.1% of the consumer loan portfolio at September 30, 2022, and outstanding balances for auto loans were $805.6 million and $855.4 million at September 30, 2022 and December 31, 58 Table of Contents 2021, respectively. The balances over 30 days past due amounted to $7.4 million at September 30, 2022 and $9.0 million at December 31, 2021, respectively and comprised 0.9% of the outstanding balances of these loans at September 30, 2022 and 1.1% at December 31, 2021, respectively. For the nine months ended September 30, 2022, $257.5 million of new auto loans were originated, compared to $324.5 million during the first nine months of 2021. At September 30, 2022, the automobile loan portfolio had a weighted average FICO score of 756, and net charge-offs on auto loans were .2% of average auto loans. The Company's consumer loan portfolio also includes fixed rate home equity loans, typically for home repair or remodeling, and these loans comprised 10.9% of the consumer loan portfolio at September 30, 2022. Losses on these loans have historically been low, and the Company saw net recoveries of $29 thousand for the first nine months of 2022. Private banking loans comprised 33.5% of the consumer loan portfolio at September 30, 2022. The Company's private banking loans are generally well-collateralized, and at September 30, 2022 were secured primarily by assets held by the Company's trust department. The remaining portion of the Company's consumer loan portfolio is comprised of health services financing, motorcycles, marine and RV loans. Net charge-offs on private banking, health services financing, motorcycle and marine and RV loans totaled $1.1 million in the first nine months of 2022 and were 0.1% of the average balances of these loans at September 30, 2022. Consumer Credit Card Loans The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at September 30, 2022 of $563.3 million in consumer credit card loans outstanding, approximately $95.7 million, or 17.0%, carried a low promotional rate. Within the next six months, $32.2 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 $279.6 million, or 1.8% of total loans at September 30, 2022, an increase of $18.9 million from year end 2021, as shown in the table below. (In thousands) September 30, 2022 December 31, 2021 Unfunded commitments at September 30, 2022 Extraction $ 215,919 $ 184,840 $ 136,194 Mid-stream shipping and storage 42,080 36,850 94,749 Downstream distribution and refining 11,662 24,915 19,844 Support activities 9,916 14,039 9,749 Total energy lending portfolio $ 279,577 $ 260,644 $ 260,536 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 $1.3 billion at September 30, 2022, compared to $1.2 billion at December 31, 2021. Additional unfunded commitments at September 30, 2022 totaled $1.7 billion. Income Taxes Income tax expense was $33.9 million in the third quarter of 2022, compared to $32.0 million in the second quarter of 2022 and $34.7 million in the third quarter of 2021. The Company's effective tax rate, including the effect of non-controlling interest, was 21.7% in the third quarter of 2022, compared to 21.7% in the second quarter of 2022 and 22.1% in the third quarter of 2021. For the nine months ended September 30, 2022, income tax expense was $97.9 million, compared to $111.9 million for the same period during the previous year, resulting in effective tax rates of 21.5% and 21.2%, respectively. 59 Table of Contents Financial Condition Balance Sheet Total assets of the Company were $32.6 billion at September 30, 2022 and $36.7 billion at December 31, 2021. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $32.3 billion at September 30, 2022 and $35.5 billion at December 31, 2021, and consisted of 49% in loans and 45% in investment securities at September 30, 2022. At September 30, 2022, total loans increased $722.6 million, or 4.8%, compared to balances at December 31, 2021. The increase was mainly due to growth in business real estate, business, and construction loans of $272.8 million, $225.4 million, and $88.7 million, respectively. The growth in business loans was mainly the result of increased commercial and industrial, lease and commercial card lending, partly offset by a decline in tax free loans. Personal real estate loans increased $57.1 million. Consumer loans, which includes automobile, marine and RV, fixed rate home equity and other consumer loans, increased $84.1 million, as growth in other consumer loans was partly offset by a decline in auto loans. These increases in loan balances were partly offset by a decline in consumer credit card loans of $12.1 million. Available for sale debt securities, excluding fair value adjustments, decreased $242.8 million at September 30, 2022 compared to December 31, 2021. Purchases of securities during this period totaled $1.9 billion, offset by sales, maturities and pay downs of $2.2 billion. The largest declines in outstanding balances occurred in agency mortgage-backed securities, state and municipal obligations, and other debt securities, which decreased $467.5 million, $51.2 million, and $54.3 million, respectively. These decreases were partially offset by increases in asset-backed securities and non-agency mortgage-backed securities, which increased $209.8 million and $66.0 million, respectively, at September 30, 2022 compared to December 31, 2021. At September 30, 2022, the duration of the investment portfolio was 3.9 years, and maturities and pay downs of approximately $2.4 billion are expected to occur during the next 12 months. Total deposits at September 30, 2022 amounted to $27.5 billion, a decrease of $2.3 billion compared to December 31, 2021. The decline in deposits largely resulted from a decrease in demand deposits, mainly in business demand deposits (decrease of $1.7 billion). Additionally, certificates of deposit decreased $454.4 million and money market deposits decreased $650.3 million. These decreases were partly offset by growth in government demand deposits of $325.4 million and interest checking deposits of $58.4 million at September 30, 2022 compared to balances at December 31, 2021. The Company's borrowings totaled $2.3 billion at September 30, 2022, a decrease of $719.1 million from balances at December 31, 2021, mainly due to a decline in customer repurchase agreements, partly offset by an increase in federal funds purchased. 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, 2022 September 30, 2021 December 31, 2021 Liquid assets: Available for sale debt securities $ 12,632,510 $ 14,165,656 $ 14,450,027 Federal funds sold 14,020 — 2,800 Securities purchased under agreements to resell 1,275,000 1,750,000 1,625,000 Balances at the Federal Reserve Bank 642,943 1,888,545 3,971,217 Total $ 14,564,473 $ 17,804,201 $ 20,049,044 Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $14.0 million as of September 30, 2022. Resale agreements, maturing through 2025, totaled $1.3 billion at September 30, 2022. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled $1.3 billion in fair value at September 30, 2022. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $642.9 million at September 30, 2022. The fair value of the available for sale debt portfolio was $12.6 billion at September 30, 2022 and included an unrealized net loss of $1.5 billion. 60 Table of Contents Approximately $2.4 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, 2022 September 30, 2021 December 31, 2021 Investment securities pledged for the purpose of securing: Federal Reserve Bank borrowings $ 13,446 $ 18,566 $ 17,465 FHLB borrowings and letters of credit 2,033 3,736 3,218 Securities sold under agreements to repurchase * 2,275,924 2,511,891 3,475,589 Other deposits and swaps 2,483,636 3,210,326 2,897,576 Total pledged securities 4,775,039 5,744,519 6,393,848 Unpledged and available for pledging 6,905,006 7,123,799 6,913,721 Ineligible for pledging 952,465 1,297,338 1,142,458 Total available for sale debt securities, at fair value $ 12,632,510 $ 14,165,656 $ 14,450,027 * Includes securities pledged for collateral swaps, as discussed in Note 12 to the consolidated financial statements. Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At September 30, 2022, such deposits totaled $26.5 billion and represented 96.4% of total deposits. These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources. Certificates of deposit of $100,000 and over totaled $597.1 million at September 30, 2022. These accounts are normally considered more volatile with higher cost and comprised 2.2% of total deposits at September 30, 2022. (In thousands) September 30, 2022 September 30, 2021 December 31, 2021 Core deposit base: Non-interest bearing $ 10,468,591 $ 11,622,855 $ 11,772,374 Interest checking 3,236,160 2,202,422 3,227,822 Savings and money market 12,778,327 12,705,232 13,370,263 Total $ 26,483,078 $ 26,530,509 $ 28,370,459 Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company's outside borrowings are mainly comprised of federal funds purchased and repurchase agreements, as follows: (In thousands) September 30, 2022 September 30, 2021 December 31, 2021 Borrowings: Federal funds purchased $ 311,200 $ 11,345 $ 43,385 Securities sold under agreements to repurchase 2,003,390 2,242,408 2,979,582 Other debt 1,831 4,006 12,560 Total $ 2,316,421 $ 2,257,759 $ 3,035,527 Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Repurchase agreements are borrowings by the Company from its customers in the form of securities sold under agreements to repurchase. These repurchase agreements, which generally mature overnight, are comprised of non-insured customer funds totaling $2.0 billion at September 30, 2022 and are collateralized by securities in the Company's investment portfolio. At September 30, 2022, the value of the collateral pledged for the benefit of customers was $2.0 billion. The Company also borrows on a secured basis through advances from the FHLB. The advances are generally short-term, fixed interest rate borrowings. There were no advances outstanding from the FHLB at September 30, 2022. 61 Table of Contents 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, 2022. September 30, 2022 (In thousands) FHLB Federal Reserve Total Total collateral value established by FHLB and FRB $ 1,905,444 $ 957,517 $ 2,862,961 Letters of credit issued (259,470) — (259,470) Available for future advances $ 1,645,974 $ 957,517 $ 2,603,491 In addition to those mentioned above, several other sources of liquidity are available. No commercial paper has been issued or outstanding during the past ten years. The Company has no subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that through its Capital Markets Group or in other public debt markets, it could generate additional liquidity from sources such as jumbo certificates of deposit or privately placed corporate notes or other forms of debt. The Company receives strong outside rankings from both Standard & Poor's and Moody's on both the consolidated company level and its subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise. These ratings are as follows: Standard & Poor’s Moody’s Commerce Bancshares, Inc. Issuer rating A- Rating outlook Stable Commerce Bank Issuer rating A A2 Baseline credit assessment a1 Short-term rating A-1 P-1 Rating outlook Stable Stable The cash flows from the operating, investing and financing activities of the Company resulted in a net decrease in cash, cash equivalents and restricted cash of $3.3 billion during the first nine months of 2022, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of $469.8 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 $247.2 million. Activity in the investment securities portfolio provided cash of $183.9 million from purchases (net of sales, maturities and pay downs), securities purchased under agreements to resell used cash of $200.0 million, and an increase in the loan portfolio used cash of $736.5 million. These cash outflows were partially offset by repayments related to securities purchased under agreements to resell, which provided cash of $550.0 million. Financing activities used cash of $3.5 billion, largely resulting from a a decrease in deposits of $2.5 billion, paired with a decrease in federal funds purchased and securities sold under agreements to repurchase of $708.4 million. 62 Table of Contents 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, 2022 and December 31, 2021, as shown in the following table. (Dollars in thousands) September 30, 2022 December 31, 2021 Minimum Ratios under Capital Adequacy Guidelines Minimum Ratios for Well-Capitalized Banks * Risk-adjusted assets $ 23,885,207 $ 22,483,748 Tier I common risk-based capital 3,335,957 3,225,044 Tier I risk-based capital 3,335,957 3,225,044 Total risk-based capital 3,509,822 3,399,880 Tier I common risk-based capital ratio 13.97 % 14.34 % 7.00 % 6.50 % Tier I risk-based capital ratio 13.97 14.34 8.50 8.00 Total risk-based capital ratio 14.69 15.12 10.50 10.00 Tier I leverage ratio 9.87 9.13 4.00 5.00 *Under Prompt Corrective Action requirements The Company is subject to a 2.5% capital conservation buffer, which is an amount above the minimum ratios under capital adequacy guidelines, and is required under Basel III. The capital conservation buffer is intended to absorb losses during periods of economic stress. Failure to maintain the buffer will result in constraints on dividends, share repurchases, and executive compensation. In the first quarter of 2020, the interim final rule of the Federal Reserve Bank and other U.S. banking agencies became effective, providing banks that adopt CECL (ASU 2016-13) during the 2020 calendar year the option to delay recognizing the estimated impact on regulatory capital until after a two year deferral period, followed by a three year transition period. In connection with the adoption of CECL on January 1, 2020, the Company elected to utilize this option. As a result, the two year deferral period for the Company extended through December 31, 2021. Beginning on January 1, 2022, the Company began to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. The Company maintains a treasury stock buyback program under authorizations by its Board of Directors (the Board) and normally purchases stock in the open market. During the nine months ended September 30, 2022, the Company purchased 2,352,489 shares at an average price of $69.42 in open market purchases and through stock-based compensation transactions. At September 30, 2022, 3,444,236 shares remained available for purchase under the current Board authorization. The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.265 per share cash dividend on its common stock in the third quarter of 2022, which was a 6.0% increase compared to its 2021 quarterly dividend. Material Cash Requirements, Commitments, Off-Balance Sheet Arrangements and Contingencies The Company's material cash requirements include commitments for contractual obligations (both short-term and long-term), commitments to extend credit, and off-balance sheet arrangements. The Company's material cash requirements for the next 12 months are primarily to fund loan growth. Additionally, the Company will utilize cash to fund deposit maturities and withdrawals that may occur in the next 12 months. Other contractual obligations, purchase commitments, lease obligations, and unfunded commitments may require cash payments by the Company, and these are further discussed in the Company's 2021 Annual Report on Form 10-K. There have been no changes in the Company's material cash requirements since December 31, 2021. Further discussion of the Company's longer-term material cash obligations is below. In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at September 30, 2022 totaled $13.9 billion (including $5.1 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $516.2 million and $1.2 million, respectively, at September 30, 2022. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to $3.6 million at September 30, 2022. The allowance for these commitments is recorded 63 Table of Contents in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheets. At September 30, 2022, the liability for unfunded commitments totaled $30.0 million. See further discussion of the liability for unfunded lending commitments in Note 2 to the consolidated financial statements. During the third quarter of 2020, the Company signed a $106.7 million agreement with U.S. Capital Development to develop a 280,000 square foot commercial office building in a two building complex in Clayton, Missouri, which is expected to be completed in January 2023. As of September 30, 2022, the Company has made payments totaling $83.8 million. While the Company intends to occupy a portion of the office building for executive offices, a 15 year lease agreement has been signed by an anchor tenant to lease approximately 50% of the office building. The Company regularly purchases various state tax credits arising from third party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first nine months of 2022, purchases and sales of tax credits amounted to $95.7 million and $99.9 million, respectively. Fees from sales of tax credits were $4.4 million for the nine months ended September 30, 2022, compared to $3.2 million in the same period last year. At September 30, 2022, the Company expected to fund outstanding purchase commitments of $12.0 million during the remainder of 2022. The Company's sound equity base, along with its long-term low debt level, common and preferred stock availability, and excellent debt ratings, provide several alternatives for future financing. Future acquisitions may utilize partial funding through one or more of these options. Through the various sources of liquidity described above, the Company maintains a liquidity position that it believes will adequately satisfy its financial obligations. The Company is not aware of any trends, events, or commitments that are reasonably likely to increase or decrease its liquidity in a material way. Segment Results The table below is a summary of segment pre-tax income results for the first nine months of 2022 and 2021. (Dollars in thousands) Consumer Commercial Wealth Segment Totals Other/ Elimination Consolidated Totals Nine Months Ended September 30, 2022 Net interest income $ 249,761 $ 333,263 $ 56,731 $ 639,755 $ 47,789 $ 687,544 Provision for credit losses (12,727) (651) 2 (13,376) 782 (12,594) Non-interest income 89,542 167,581 161,051 418,174 (8,464) 409,710 Investment securities gains, net — — — — 11,602 11,602 Non-interest expense (225,232) (272,224) (108,967) (606,423) (25,614) (632,037) Income before income taxes $ 101,344 $ 227,969 $ 108,817 $ 438,130 $ 26,095 $ 464,225 Nine Months Ended September 30, 2021 Net interest income $ 239,157 $ 340,279 $ 53,186 $ 632,622 $ (4,855) $ 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 (220,280) (246,501) (101,377) (568,158) (34,161) (602,319) Income before income taxes $ 110,666 $ 253,713 $ 110,550 $ 474,929 $ 62,250 $ 537,179 Decrease in income before income taxes: Amount $ (9,322) $ (25,744) $ (1,733) $ (36,799) $ (36,155) $ (72,954) Percent (8.4 %) (10.1 %) (1.6 %) (7.7 %) (58.1 %) (13.6 %) Consumer For the nine months ended September 30, 2022, income before income taxes for the Consumer segment decreased $9.3 million, or 8.4%, compared to the first nine months of 2021. The decrease in income before income taxes was mainly due to a decline in non-interest income of $21.4 million, or 19.3%, and higher non-interest expense of $5.0 million, or 2.2%. These decreases to income were partly offset by growth in net interest income of $10.6 million, or 4.4%, and a decrease in the provision for credit losses of $6.4 million, or 33.4%. Net interest income increased due to a $13.0 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios and a $1.6 million decrease in deposit interest expense. These increases to income were partly offset by a $4.0 million decline in loan interest income. Non-interest income decreased mainly due to a decline of $19.6 million in mortgage banking revenue. Non-interest expense increased over 64 Table of Contents the same period in the previous year mainly due to higher salaries expense, marketing expense, and allocated service and support costs (mainly bank card fraud operations and information technology), partly offset by lower allocated service costs for branch employees and mortgage operations. The provision for credit losses totaled $12.7 million, a $6.4 million decrease from the first nine months of 2021, mainly due to lower credit card loan net charge-offs. Commercial For the nine months ended September 30, 2022, income before income taxes for the Commercial segment decreased $25.7 million, or 10.1%, compared to the same period in the previous year. This decrease was mainly due to an increase in non-interest expense and a decline in net interest income, partly offset by an increase in non-interest income. Net interest income decreased $7.0 million, or 2.1%, due higher interest expense on customer repurchase agreements and deposits of $10.0 million and $7.3 million, respectively. These decreases to income were partly offset by a $9.4 million increase in loan interest income. Non-interest income increased $12.5 million, or 8.1%, over the previous year mainly due to growth in net bank card fees (mainly corporate card fees), deposit account fees (mainly corporate cash management fees) and cash sweep commissions, partly offset by a decline in capital market fees. Non-interest expense increased $25.7 million, or 10.4%, mainly due to higher salaries and benefits expense, travel and entertainment expense, and allocated service and support costs (mainly bank operations, branch employees, information technology and commercial payments). The provision for credit losses increased $5.5 million over the same period last year, mainly due to net charge-offs on business loans in the current year compared to net recoveries in the prior year. Wealth Wealth segment pre-tax profitability for the nine months ended September 30, 2022 decreased $1.7 million, or 1.6%, from the same period in the previous year. Net interest income increased $3.5 million, or 6.7%, mainly due to an $8.4 million increase in loan interest income, partly offset by a $5.3 million decrease in net allocated funding credits assigned to the Wealth segment's loan and deposit portfolios. Non-interest income increased $2.3 million, or 1.5%, over the prior year largely due to higher cash sweep commissions, private client trust fees, and brokerage fees. These increases were partly offset by lower mortgage banking revenue and institutional trust fees. Non-interest expense increased $7.6 million, or 7.5%, mainly due to higher salaries and benefits expense, travel and entertainment expense, and marketing expense. The provision for credit losses increased $8 thousand over the same period last year, due to higher overdraft loan net charge-offs. The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision for credit losses and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was lower than in the same period last year by $36.2 million. Unallocated securities gains were $11.6 million in the first nine months of 2022 compared to gains of $39.8 million in 2021. Also, the unallocated provision for credit losses increased by $72.7 million, primarily driven by increases in the liability for unfunded lending commitments and in the provision for credit losses on loans, which are both not allocated to the segments for management reporting purposes. Net charge-offs are allocated to the segments when incurred for management reporting purposes. The provision for credit losses on loans was $6.7 million lower than net charge-offs in 2022, while the provision was $58.1 million lower than net charge-offs, as the provision was a benefit in 2021. For the nine months ended September 30, 2022, the Company's provision on unfunded lending commitments was expense of $5.8 million. These decreases to pre-tax profitability were partly offset by higher net interest income of $52.6 million, non-interest income of $3.6 million, and lower non-interest expense of $8.5 million. Impact of Recently Issued Accounting Standards Reference Rate Reform The Financial Accounting Standards Board ("FASB") issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting", in March 2020, and has been followed by additional clarifying guidance related to derivatives that are modified as a result of reference rate reform. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if they reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Further, the guidance applies to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The expedients and exceptions provided by the new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated for effectiveness after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022. In April 2022, the FASB proposed extending the sunset date under Topic 848 to December 31, 2024. The change is to align the temporary accounting relief guidance with the expected cessation date of LIBOR, which was postponed by administrators earlier this year to June 2023, a year after the current sunset date of ASU 2020-04. 65 Table of Contents In order to assess the impact of transition and ensure a successful transition process, the Company established a LIBOR Transition Program led by the LIBOR Transition Steering Committee (the Committee), which is an internal, cross-functional team with representatives from all relevant business lines, support functions and legal counsel. A LIBOR impact and risk assessment has been performed, and the Committee has developed and prioritized action items. All financial contracts that reference LIBOR have been identified and LIBOR fallback language has been included in key loan provisions of new and renewed loans in preparation from transition from LIBOR. The Company ceased originating new loans with LIBOR as a reference rate at the end of 2021 and is actively working with customers to modify existing loans that reference LIBOR to a new reference rate. The Company plans to finish transitioning the impacted loans by late spring of 2023. Credit Losses The FASB issued ASU 2022-02, "Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures", in March 2022. This ASU eliminates the troubled debt restructuring recognition and measurement guidance and, instead, requires that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The amendments require that an entity disclose current period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. The guidance is effective January 1, 2023. The Company expects no material impact to its consolidated financial statements from adoption of this ASU. 66 Table of Contents AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS Three Months Ended September 30, 2022 and 2021 Third Quarter 2022 Third Quarter 2021 (Dollars in thousands) Average Balance Interest Income/Expense Avg. Rates Earned/Paid Average Balance Interest Income/Expense Avg. Rates Earned/Paid ASSETS: Loans: Business (A) $ 5,317,696 $ 52,813 3.94 % $ 5,437,498 $ 47,032 3.43 % Real estate — construction and land 1,288,721 17,133 5.27 1,168,566 10,326 3.51 Real estate — business 3,258,128 36,121 4.40 2,982,847 26,027 3.46 Real estate — personal 2,844,376 24,065 3.36 2,775,638 22,854 3.27 Consumer 2,101,622 22,110 4.17 2,041,263 19,085 3.71 Revolving home equity 280,923 3,413 4.82 281,689 2,456 3.46 Consumer credit card 550,058 16,711 12.05 566,406 16,112 11.29 Overdrafts 4,438 — — 5,110 — — Total loans 15,645,962 172,366 4.37 15,259,017 143,892 3.74 Loans held for sale 7,170 159 8.80 16,021 187 4.63 Investment securities: U.S. government and federal agency obligations 1,113,442 12,664 4.51 727,566 10,525 5.74 Government-sponsored enterprise obligations 55,753 332 2.36 50,785 295 2.30 State and municipal obligations (A) 2,052,908 11,758 2.27 2,039,942 12,062 2.35 Mortgage-backed securities 6,847,912 33,323 1.93 7,115,419 27,461 1.53 Asset-backed securities 3,870,953 15,782 1.62 3,028,076 8,205 1.08 Other debt securities 587,026 2,852 1.93 608,642 3,125 2.04 Trading debt securities (A) 35,621 246 2.74 32,238 82 1.01 Equity securities (A) 8,838 604 27.11 8,756 528 23.92 Other securities (A) 208,708 3,729 7.09 183,397 3,447 7.46 Total investment securities 14,781,161 81,290 2.18 13,794,821 65,730 1.89 Federal funds sold 13,486 94 2.77 792 1 .50 Securities purchased under agreements to resell 1,379,341 5,984 1.72 1,633,205 9,007 2.19 Interest earning deposits with banks 980,273 5,571 2.25 2,602,896 995 .15 Total interest earning assets 32,807,393 265,464 3.21 33,306,752 219,812 2.62 Allowance for credit losses on loans (137,833) (172,112) Unrealized gain (loss) on debt securities (1,064,534) 230,058 Cash and due from banks 310,713 329,129 Premises and equipment, net 408,884 408,966 Other assets 536,901 523,182 Total assets $ 32,861,524 $ 34,625,975 LIABILITIES AND EQUITY: Interest bearing deposits: Savings $ 1,595,857 177 .04 $ 1,484,923 289 .08 Interest checking and money market 14,423,713 7,368 .20 13,343,180 1,528 .05 Certificates of deposit of less than $100,000 397,071 411 .41 464,367 206 .18 Certificates of deposit of $100,000 and over 578,158 871 .60 1,289,665 450 .14 Total interest bearing deposits 16,994,799 8,827 .21 16,582,135 2,473 .06 Borrowings: Federal funds purchased $ 51,929 $ 315 2.41 13,606 $ 3 .10 Securities sold under agreements to repurchase 2,199,866 7,576 1.37 2,347,270 477 .08 Other borrowings (B) 2,010 9 1.78 347 1 1.14 Total borrowings 2,253,805 7,900 1.39 2,361,223 481 .08 Total interest bearing liabilities 19,248,604 16,727 .34 % 18,943,358 2,954 .06 % Non-interest bearing deposits 10,758,353 11,475,113 Other liabilities 123,691 667,786 Equity 2,730,876 3,539,718 Total liabilities and equity $ 32,861,524 $ 34,625,975 Net interest margin (FTE) $ 248,737 $ 216,858 Net yield on interest earning assets 3.01 % 2.58 % (A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%. (B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above. 67 Table of Contents AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS Nine Months Ended September 30, 2022 and 2021 Nine Months 2022 Nine Months 2021 (Dollars in thousands) Average Balance Interest Income/Expense Avg. Rates Earned/Paid Average Balance Interest Income/Expense Avg. Rates Earned/Paid ASSETS: Loans: Business (A) $ 5,342,326 $ 133,631 3.34 % $ 6,056,664 $ 145,574 3.21 % Real estate — construction and land 1,216,860 40,148 4.41 1,116,603 29,538 3.54 Real estate — business 3,172,832 91,095 3.84 3,006,780 78,494 3.49 Real estate — personal 2,826,441 69,804 3.30 2,801,861 69,715 3.33 Consumer 2,071,019 58,891 3.80 1,998,081 57,567 3.85 Revolving home equity 275,713 8,267 4.01 289,299 7,406 3.42 Consumer credit card 542,895 47,011 11.58 583,471 48,679 11.15 Overdrafts 5,044 — — 4,136 — — Total loans 15,453,130 448,847 3.88 15,856,895 436,973 3.68 Loans held for sale 8,154 470 7.71 25,002 736 3.94 Investment securities: U.S. government and federal agency obligations 1,112,201 35,751 4.30 724,269 24,979 4.61 Government-sponsored enterprise obligations 54,443 962 2.36 50,793 885 2.33 State and municipal obligations (A) 2,085,539 35,655 2.29 1,988,715 35,779 2.41 Mortgage-backed securities 7,105,874 104,695 1.97 6,933,544 69,924 1.35 Asset-backed securities 3,947,148 40,378 1.37 2,592,618 23,594 1.22 Other debt securities 622,065 9,143 1.97 594,984 9,263 2.08 Trading debt securities (A) 40,052 700 2.34 33,171 272 1.10 Equity securities (A) 9,141 1,823 26.66 6,013 1,584 35.22 Other securities (A) 198,763 17,417 11.72 164,911 10,101 8.19 Total investment securities 15,175,226 246,524 2.17 13,089,018 176,381 1.80 Federal funds sold 6,315 114 2.41 715 3 .56 Securities purchased under agreements to resell 1,604,300 15,669 1.31 1,143,061 30,551 3.57 Interest earning deposits with banks 1,606,452 9,150 .76 2,273,448 2,108 .12 Total interest earning assets 33,853,577 720,774 2.85 32,388,139 646,752 2.67 Allowance for credit losses on loans (140,686) (197,631) Unrealized gain (loss) on debt securities (699,908) 236,702 Cash and due from banks 321,994 337,595 Premises and equipment, net 405,856 404,697 Other assets 538,438 533,660 Total assets $ 34,279,271 $ 33,703,162 LIABILITIES AND EQUITY: Interest bearing deposits: Savings $ 1,589,668 512 .04 $ 1,431,386 843 .08 Interest checking and money market 14,738,322 11,071 .10 13,200,461 4,921 .05 Certificates of deposit of less than $100,000 412,739 755 .24 490,655 1,006 .27 Certificates of deposit of $100,000 and over 695,332 1,768 .34 1,291,693 2,173 .22 Total interest bearing deposits 17,436,061 14,106 .11 16,414,195 8,943 .07 Borrowings: Federal funds purchased $ 62,909 $ 546 1.16 $ 24,558 11 .06 Securities sold under agreements to repurchase 2,388,295 10,960 .61 2,207,037 1,101 .07 Other borrowings (B) 1,607 22 1.83 717 5 .93 Total borrowings 2,452,811 11,528 .63 2,232,312 1,117 .07 Total interest bearing liabilities 19,888,872 25,634 .17 % 18,646,507 10,060 .07 % Non-interest bearing deposits 11,168,031 11,011,446 Other liabilities 255,041 601,352 Equity 2,967,327 3,443,857 Total liabilities and equity $ 34,279,271 $ 33,703,162 Net interest margin (FTE) $ 695,140 $ 636,692 Net yield on interest earning assets 2.75 % 2.63 % (A) Stated on a fully taxable-equivalent basis using a federal income tax rate of 21%. (B) Interest expense capitalized on construction projects is not deducted from the interest expense shown above. 68 Table of Contents