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COMMERCE BANCSHARES INC /MO/ - Quarter Report: 2020 September (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

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

For the quarterly period ended September 30, 2020

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

For the transition period from           to   
       
Commission File No. 0-2989
COMMERCE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Missouri43-0889454
(State of Incorporation)(IRS Employer Identification No.)
1000 Walnut,
Kansas City,MO64106
(Address of principal executive offices)(Zip Code)
        
(816) 234-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of classTrading symbol(s)Name of exchange on which registered
$5 Par Value Common StockCBSHNASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No 
As of November 2, 2020, the registrant had outstanding 111,544,176 shares of its $5 par value common stock, registrant’s only class of common stock.



Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q

Page
INDEX

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PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
 
September 30,
2020
December 31, 2019
(Unaudited)
(In thousands)
ASSETS
Loans$16,420,927 $14,737,817 
  Allowance for credit losses on loans(236,360)(160,682)
Net loans16,184,567 14,577,135 
Loans held for sale (including $35,076,000 and $9,181,000 of residential mortgage loans carried at fair value at September 30, 2020 and December 31, 2019, respectively)
39,483 13,809 
Investment securities: 
Available for sale debt, at fair value (amortized cost of $11,182,348,000 and allowance for credit
    losses of $— at September 30, 2020)
11,539,061 8,571,626 
Trading debt25,805 28,161 
Equity4,203 4,209 
Other122,532 137,892 
Total investment securities11,691,601 8,741,888 
Federal funds sold and short-term securities purchased under agreements to resell2,275 — 
Long-term securities purchased under agreements to resell850,000 850,000 
Interest earning deposits with banks1,171,697 395,850 
Cash and due from banks357,616 491,615 
Premises and equipment, net377,853 370,637 
Goodwill138,921 138,921 
Other intangible assets, net7,183 9,534 
Other assets632,621 476,400 
Total assets$31,453,817 $26,065,789 
LIABILITIES AND EQUITY
Deposits: 
   Non-interest bearing$10,727,827 $6,890,687 
   Savings, interest checking and money market12,983,505 11,621,716 
   Certificates of deposit of less than $100,000556,870 626,157 
   Certificates of deposit of $100,000 and over1,433,577 1,381,855 
Total deposits25,701,779 20,520,415 
Federal funds purchased and securities sold under agreements to repurchase1,653,064 1,850,772 
Other borrowings782 2,418 
Other liabilities791,928 553,712 
Total liabilities28,147,553 22,927,317 
Commerce Bancshares, Inc. stockholders’ equity: 
   Preferred stock, $1 par value
      Authorized 2,000,000 shares; issued 6,000 shares at December 31, 2019
   and none at September 30, 2020
 144,784 
   Common stock, $5 par value
 
 Authorized 140,000,000; issued 112,795,605 shares
563,978 563,978 
   Capital surplus2,140,410 2,151,464 
   Retained earnings326,890 201,562 
   Treasury stock of 1,040,557 shares at September 30, 2020
     and 445,952 shares at December 31, 2019, at cost
(69,050)(37,548)
   Accumulated other comprehensive income343,435 110,444 
Total Commerce Bancshares, Inc. stockholders' equity3,305,663 3,134,684 
Non-controlling interest601 3,788 
Total equity3,306,264 3,138,472 
Total liabilities and equity$31,453,817 $26,065,789 
See accompanying notes to consolidated financial statements.
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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands, except per share data)2020201920202019
(Unaudited)
INTEREST INCOME
Interest and fees on loans$150,808 $167,959 $461,500 $502,100 
Interest and fees on loans held for sale264 308 588 1,003 
Interest on investment securities60,534 58,607 164,391 178,687 
Interest on federal funds sold and short-term securities purchased under
   agreements to resell 2 51 
Interest on long-term securities purchased under agreements to resell11,247 3,621 29,445 11,066 
Interest on deposits with banks261 1,241 1,996 5,113 
Total interest income223,114 231,743 657,922 698,020 
INTEREST EXPENSE
Interest on deposits:
   Savings, interest checking and money market3,206 10,225 15,492 30,081 
   Certificates of deposit of less than $100,0001,028 1,740 4,196 4,530 
   Certificates of deposit of $100,000 and over2,512 7,540 11,357 20,473 
Interest on federal funds purchased and securities sold under
   agreements to repurchase406 8,273 5,761 23,839 
Interest on other borrowings 453 1,032 463 
Total interest expense7,152 28,231 37,838 79,386 
Net interest income215,962 203,512 620,084 618,634 
Provision for credit losses3,101 10,963 141,593 35,232 
Net interest income after credit losses212,861 192,549 478,491 583,402 
NON-INTEREST INCOME
Bank card transaction fees37,873 44,510 111,818 126,800 
Trust fees40,769 39,592 118,676 115,223 
Deposit account charges and other fees23,107 24,032 69,063 71,009 
Capital market fees3,194 1,787 10,756 5,610 
Consumer brokerage services4,011 4,030 11,099 11,665 
Loan fees and sales9,769 4,755 17,653 12,302 
Other10,849 14,037 31,685 38,633 
Total non-interest income129,572 132,743 370,750 381,242 
INVESTMENT SECURITIES GAINS (LOSSES), NET16,155 4,909 (1,275)3,874 
NON-INTEREST EXPENSE
Salaries and employee benefits127,308 123,836 383,004 366,026 
Net occupancy12,058 12,293 35,075 34,939 
Equipment4,737 4,941 14,313 14,202 
Supplies and communication4,141 5,106 13,226 15,543 
Data processing and software23,610 23,457 71,002 68,965 
Marketing4,926 6,048 14,706 17,963 
Other14,078 15,339 40,742 54,586 
Total non-interest expense190,858 191,020 572,068 572,224 
Income before income taxes167,730 139,181 275,898 396,294 
Less income taxes34,375 29,101 54,209 80,860 
Net income 133,355 110,080 221,689 315,434 
Less non-controlling interest expense (income)907 838 (2,479)1,083 
Net income attributable to Commerce Bancshares, Inc.132,448 109,242 224,168 314,351 
Less preferred stock dividends7,466 2,250 11,966 6,750 
Net income available to common shareholders$124,982 $106,992 $212,202 $307,601 
Net income per common share — basic$1.12 $.93 $1.90 $2.65 
Net income per common share — diluted$1.11 $.93 $1.89 $2.65 
See accompanying notes to consolidated financial statements.
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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands)2020201920202019
(Unaudited)
Net income$133,355 $110,080 $221,689 $315,434 
Other comprehensive income (loss):
Net unrealized losses on securities for which a portion of an other-than-temporary impairment has been recorded in earnings
 (245) (432)
Net unrealized gains on other securities
330 21,030 165,464 171,421 
Pension loss amortization
327 389 1,038 1,166 
Unrealized gains (losses) on cash flow hedge derivatives(6,483)14,101 66,489 36,687 
Other comprehensive income (loss)(5,826)35,275 232,991 208,842 
Comprehensive income127,529 145,355 454,680 524,276 
Less non-controlling interest expense (income)907 838 (2,479)1,083 
Comprehensive income attributable to Commerce Bancshares, Inc.
$126,622 $144,517 $457,159 $523,193 
See accompanying notes to consolidated financial statements.













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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Three Months Ended September 30, 2020 and 2019
Commerce Bancshares, Inc. Shareholders
 
 

(In thousands, except per share data)
Preferred Stock
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Non-Controlling Interest
Total
(Unaudited)
Balance June 30, 2020$144,784 $563,978 $2,136,874 $232,082 $(69,112)$349,261 $302 $3,358,169 
Net income132,448 907 133,355 
Other comprehensive loss(5,826)(5,826)
Distributions to non-controlling interest(608)(608)
Purchases of treasury stock(167)(167)
Redemption of preferred stock(144,784)(5,216)(150,000)
 Issuance of stock under purchase and equity compensation plans
(229)229  
Stock-based compensation3,765 3,765 
Cash dividends paid on common stock ($0.270 per share)
(30,174)(30,174)
Cash dividends paid on preferred stock ($0.375 per depositary share)
(2,250)(2,250)
Balance September 30, 2020$ $563,978 $2,140,410 $326,890 $(69,050)$343,435 $601 $3,306,264 
Balance June 30, 2019$144,784 $559,432 $2,077,491 $384,232 $(106,106)$108,898 $2,632 $3,171,363 
Net income109,242 838 110,080 
Other comprehensive income35,275 35,275 
Distributions to non-controlling interest(56)(56)
Purchases of treasury stock(33,891)(33,891)
Accelerated share repurchase agreement(37,500)(112,500)(150,000)
 Issuance of stock under purchase and equity compensation plans(834)834 — 
Stock-based compensation
3,486 3,486 
Cash dividends paid on common stock ($0.248 per share)
(27,993)(27,993)
Cash dividends paid on preferred stock ($0.375 per depositary share)
(2,250)(2,250)
Balance September 30, 2019$144,784 $559,432 $2,042,643 $463,231 $(251,663)$144,173 $3,414 $3,106,014 
See accompanying notes to consolidated financial statements.


Table of Contents
Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Nine Months Ended September 30, 2020 and 2019
Commerce Bancshares, Inc. Shareholders
 
 

(In thousands, except per share data)
Preferred Stock
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Non-Controlling Interest
Total
(Unaudited)
Balance December 31, 2019$144,784 $563,978 $2,151,464 $201,562 $(37,548)$110,444 $3,788 $3,138,472 
Adoption of ASU 2016-133,766 3,766 
Balance December 31, 2019, adjusted$144,784 $563,978 $2,151,464 $205,328 $(37,548)$110,444 $3,788 $3,142,238 
Net income224,168 (2,479)221,689 
Other comprehensive income232,991 232,991 
Distributions to non-controlling interest(708)(708)
Purchases of treasury stock(53,760)(53,760)
Redemption of preferred stock(144,784)(5,216)(150,000)
Issuance of stock under purchase and equity compensation plans
(22,285)22,258 (27)
Stock-based compensation11,231 11,231 
Cash dividends on common stock ($0.810 per share)
(90,640)(90,640)
Cash dividends on preferred stock ($1.125 per depositary share)
(6,750)(6,750)
Balance September 30, 2020$ $563,978 $2,140,410 $326,890 $(69,050)$343,435 $601 $3,306,264 
Balance December 31, 2018$144,784 $559,432 $2,084,824 $241,163 $(34,236)$(64,669)$5,851 $2,937,149 
Net income 314,351 1,083 315,434 
Other comprehensive income208,842 208,842 
Distributions to non-controlling interest(3,520)(3,520)
Purchases of treasury stock(119,970)(119,970)
Accelerated share repurchase agreement(37,500)(112,500)(150,000)
Issuance of stock under purchase and equity compensation plans
(15,046)15,043 (3)
Stock-based compensation10,365 10,365 
Cash dividends on common stock ($0.744 per share)
(85,533)(85,533)
Cash dividends on preferred stock ($1.125 per depositary share)
(6,750)(6,750)
Balance September 30, 2019$144,784 $559,432 $2,042,643 $463,231 $(251,663)$144,173 $3,414 $3,106,014 
See accompanying notes to consolidated financial statements.



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Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30
(In thousands)20202019
(Unaudited)
OPERATING ACTIVITIES:
Net income$221,689 $315,434 
Adjustments to reconcile net income to net cash provided by operating activities:
  Provision for credit losses141,593 35,232 
  Provision for depreciation and amortization32,462 30,729 
  Amortization of investment security premiums, net37,623 20,436 
  Investment securities (gains) losses, net (A)1,275 (3,874)
  Net gains on sales of loans held for sale (8,267)(7,881)
  Originations of loans held for sale(169,774)(187,792)
  Proceeds from sales of loans held for sale152,825 194,344 
  Net (increase) decrease in trading debt securities5,636 (428)
  Stock-based compensation11,231 10,365 
 (Increase) decrease in interest receivable(11,012)229 
  Increase (decrease) in interest payable(7,670)5,938 
  Increase (decrease) in income taxes payable(7,942)23,530 
  Other changes, net72,714 (58,928)
Net cash provided by operating activities472,383 377,334 
INVESTING ACTIVITIES:
Proceeds from sales of investment securities (A)574,376 379,641 
Proceeds from maturities/pay downs of investment securities (A)1,856,780 1,007,553 
Purchases of investment securities (A)(5,135,211)(1,306,607)
Net increase in loans(1,710,009)(357,438)
Long-term securities purchased under agreements to resell (150,000)
Purchases of premises and equipment(29,192)(29,441)
Sales of premises and equipment313 2,029 
Net cash used in investing activities(4,442,943)(454,263)
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits
5,138,314 (230,229)
Net increase (decrease) in certificates of deposit(17,565)411,098 
Net decrease in federal funds purchased and securities sold under agreements to repurchase(197,708)(315,115)
Repayment of long-term borrowings (163)
Net increase (decrease) in short-term borrowings(1,636)248,734 
Preferred stock redemption(150,000)— 
Purchases of treasury stock(53,760)(119,970)
Accelerated share repurchase agreement (150,000)
Issuance of stock under equity compensation plans
(27)(3)
Cash dividends paid on common stock(90,640)(85,533)
Cash dividends paid on preferred stock(6,750)(6,750)
Net cash provided by (used in) financing activities4,620,228 (247,931)
Increase (decrease) in cash, cash equivalents and restricted cash649,668 (324,860)
Cash, cash equivalents and restricted cash at beginning of year907,808 1,209,240 
Cash, cash equivalents and restricted cash at September 30$1,557,476 $884,380 
Income tax payments, net$58,750 $54,161 
Interest paid on deposits and borrowings$45,508 $73,448 
Loans transferred to foreclosed real estate$57 $558 
(A) Available for sale debt securities, equity securities, and other securities.
See accompanying notes to consolidated financial statements.

Restricted cash is comprised of cash collateral posted by the Company to secure interest rate swap agreements. This balance is included in other assets in the consolidated balance sheets and totaled $25.9 million and $25.1 million at September 30, 2020 and 2019, respectively.
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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 (Unaudited)

1. Principles of Consolidation and Presentation and Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2019 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three and nine month periods ended September 30, 2020 are not necessarily indicative of results to be attained for the full year or any other interim period.

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

On January 1, 2020, the Company adopted several FASB Accounting Standards Updates (ASUs). The Company's adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its related amendments, resulted in changes to former accounting policies as described in Note 1 to the consolidated financial statements in the 2019 Annual Report on Form 10-K. Further discussion of the impact of adoption is included below, as well as in Note 2, Loans and Allowance for Credit Losses, and Note 3, Investment Securities. Significant accounting policies that were modified as a result of the adoption of ASU 2016-13 are included below.

The Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its related amendments on January 1, 2020. Known as the current expected credit loss (CECL), the standard replaced the incurred loss methodology. The new measurement approach requires the calculation of expected lifetime credit losses and is applied to financial assets measured at amortized cost, including loans and held-to-maturity securities, as well as certain off-balance sheet credit exposures such as unfunded lending commitments. The standard also changed the impairment model of available for sale debt securities.

The Company adopted CECL using the modified retrospective method for all financial assets measured at amortized cost and for unfunded lending commitments. Results for reporting periods beginning on or after January 1, 2020 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net increase to retained earnings of $3.8 million as of January 1, 2020 for the cumulative effect of adopting CECL. The transition adjustment includes a decrease to the allowance for credit losses of $29.7 million related to the commercial loan portfolio, an increase to the allowance for credit losses of $8.7 million related to the personal banking loan portfolio, an increase to the liability for unfunded commitments of $16.1 million, and a tax impact of $1.2 million.

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The table below illustrates the adoption impact of ASU 2016-13 on the Company's allowance for credit losses.

December 31, 2019January 1, 2020
(In thousands)Allowance for loan losses ending balanceCECL AdjustmentAllowance for credit losses beginning balance
Commercial:
   Business$44,268 $(6,328)$37,940 
   Real estate - construction and land21,589 (12,385)9,204 
   Real estate - business25,903 (10,998)14,905 
     Total Commercial:91,760 (29,711)62,049 
Personal Banking:
   Real estate - personal3,125 1,730 4,855 
   Consumer15,932 (1,414)14,518 
   Revolving home equity638 986 1,624 
   Consumer credit card47,997 8,498 56,495 
   Overdrafts1,230 (1,128)102 
      Total Personal Banking:68,922 8,672 77,594 
Allowance for credit losses on loans160,682 (21,039)139,643 
Liability for unfunded lending commitments1,075 16,090 17,165 
Total allowance for credit losses$161,757 $(4,949)$156,808 

The following significant accounting policies have been updated since the Company's 2019 Annual Report on Form 10-K to reflect the adoption of ASU 2016-13.

Loans and Related Earnings
The Company's portfolio of held-for-investment loans includes a net investment in direct financing and sales type leases to commercial and industrial and tax-exempt entities, and collectively, the Company's portfolio of loans and leases is referred to as its "loan portfolio" or "loans". Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at amortized cost, excluding accrued interest receivable. Amortized cost is the outstanding principal balance, net of any deferred fees and costs on originated loans. Origination fee income received on loans and amounts representing the estimated direct costs of origination are deferred and amortized to interest income over the life of the loan using the interest method. Loans are presented net of the allowance for credit losses on loans.
Interest on loans is accrued based upon the principal amount outstanding. The Company has elected the practical expedient to exclude all accrued interest receivable from all required disclosures of amortized cost. Additionally, an election was made not to measure an allowance for credit losses for accrued interest receivables. The Company has also made the election that all interest accrued but not received is reversed against interest income.
Loan and commitment fees, net of costs, are deferred and recognized in income over the term of the loan or commitment as an adjustment of yield. Annual fees charged on credit card loans are capitalized to principal and amortized over 12 months to loan fees and sales. Other credit card fees, such as cash advance fees and late payment fees, are recognized in income as an adjustment of yield when charged to the cardholder’s account.

Past Due Loans
Management reports loans as past due on the day following the contractual repayment date if payment was not received by end of the business day. Loans, or portions of loans, are charged off to the extent deemed uncollectible. Loan charge-offs reduce the allowance for credit losses on loans, and recoveries of loans previously charged off are added back to the allowance. Business, business real estate, construction and land real estate, and personal real estate loans are generally charged down to estimated collectible balances when they are placed on non-accrual status. Consumer loans and related accrued interest are normally charged down to the fair value of related collateral (or are charged off in full if not collateralized) once the loans are more than 120 to 180 days delinquent, depending on the type of loan. Revolving home equity loans are charged down to the fair value of the related collateral once the loans are more than 180 days past due. Credit card loans are charged off against the allowance for credit losses when the receivable is more than 180 days past due.

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Troubled Debt Restructurings
A loan is accounted for as a troubled debt restructuring if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. A troubled debt restructuring typically involves (1) modification of terms such as a reduction of the stated interest rate, loan principal, or accrued interest, (2) a loan renewal at a stated interest rate lower than the current market rate for a new loan with similar risk, or (3) debt that was not reaffirmed in bankruptcy. Business, business real estate, construction and land real estate and personal real estate troubled debt restructurings with impairment charges are placed on non-accrual status. The Company measures the impairment loss of a troubled debt restructuring at the time of modification based on the present value of expected future cash flows. Subsequent to modification, troubled debt restructurings are subject to the Company’s allowance for credit loss model, which is discussed below and in Note 2, Loans and Allowance for Credit Losses. Troubled debt restructurings that are performing under their contractual terms continue to accrue interest, which is recognized in current earnings.
Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020 and provides financial institutions the option to suspend the requirement to categorize certain modifications related to the global Coronavirus Disease 2019 (COVID-19) pandemic as troubled debt restructurings. Additionally, bank regulatory agencies issued additional guidance on implementing the provisions of the CARES Act. The Company follows the guidance under the CARES Act. Refer to Note 2 for additional information.

Allowance for Credit Losses on Loans
The allowance for credit losses on loans is a valuation amount that is deducted from the amortized cost basis of loans not held at fair value to present the net amount expected to be collected over the contractual term of the loans. The allowance for credit losses on loans is measured using relevant information about past events, including historical credit loss experience on loans with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. An allowance will be created upon origination or acquisition of a loan and is updated at subsequent reporting dates. The methodology is applied consistently for each reporting period and reflects management’s current expectations of credit losses. Changes to the allowance for credit losses on loans resulting from periodic evaluations are recorded through increases or decreases to the credit loss expense for loans, which is recorded in provision for credit losses on the consolidated statements of income. Loans that are deemed to be uncollectible are charged off against the related allowance for credit losses on loans.
The allowance for credit losses on loans is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. The allowance for credit losses on a troubled debt restructuring which continues to accrue interest is also measured on a collective basis. Loans that do not share similar risk characteristics, primarily large loans on non-accrual status, are evaluated on an individual basis. The allowance related to these large non-accrual loans is measured using the fair value of the collateral (less selling cost, if applicable) as most of these loans are collateral dependent and the borrower is facing financial difficulty.
As noted above, the allowance for credit losses on loans does not include an allowance for accrued interest.

Liability for Unfunded Lending Commitments
The Company’s unfunded lending commitments are primarily unfunded loan commitments and letters of credit. Expected credit losses for these unfunded lending commitments are calculated over the contractual period during which the Company is exposed to the credit risk. The methodology used to measure credit losses for unfunded lending commitments is the same as the methodology used for loans, however, the estimate of credit risk for unfunded lending commitments takes into consideration the likelihood that funding will occur. The liability for unfunded lending commitments excludes any exposures that are unconditionally cancellable by the Company. The loss estimate is recorded within other liabilities on the consolidated balance sheet. Changes to the liability for unfunded lending commitments are recorded through increases or decreases to the provision for credit losses on the consolidated statements of income.

Investments in Debt and Equity Securities
The majority of the Company's investment portfolio is comprised of debt securities that are classified as available for sale. From time to time, the Company sells securities and utilizes the proceeds to reduce borrowings, fund loan growth, or modify its interest rate profile. Securities classified as available for sale are carried at fair value. Changes in fair value are reported in other comprehensive income (loss), a component of stockholders’ equity. Securities are periodically evaluated for credit losses in accordance with the guidance provided in ASC 326. Further discussion of this evaluation is provided in "Allowance for Credit Losses on Available for Sale Debt Securities" below. Gains and losses realized upon sales of securities are calculated using the specific identification method and are included in investment securities gains (losses), net, in the consolidated statements of income. Purchase premiums and discounts are amortized to interest income using a level yield method over the
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estimated lives of the securities. For certain callable debt securities purchased at a premium, the amortization is instead recorded to the earliest call date. For mortgage and asset-backed securities, prepayment experience is evaluated quarterly to determine if a change in a bond's estimated remaining life is necessary. A corresponding adjustment is then made in the related amortization of premium or discount accretion.

Accrued interest receivable on available for sale debt securities is reported in other assets on the consolidated balance sheet. The Company has elected the practical expedient to exclude the accrued interest from all required disclosures of amortized cost. Additionally, an election was made not to measure an allowance for credit losses for accrued interest receivables. Interest accrued but not received is reversed against interest income.

Equity securities include common and preferred stock with readily determinable fair values. These are also carried at fair value. Certain equity securities do not have readily determinable fair values. The Company has elected under ASU 2016-01 to measure these equity securities without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. The Company has not recorded any impairment or other adjustments to the carrying amount of these equity investments without readily determinable fair values.

Other securities include Federal Reserve Bank stock and Federal Home Loan Bank stock, which are held for debt and regulatory purposes. They are carried at cost and periodically evaluated for impairment. Also included are investments in portfolio concerns held by the Company’s private equity subsidiaries, which consist of both debt and equity instruments. Private equity investments are carried at fair value in accordance with ASC 946-10-15, with changes in fair value reported in current earnings. In the absence of readily ascertainable market values, fair value is estimated using internally developed methods. Changes in fair value which are recognized in current earnings and gains and losses from sales are included in investment securities gains (losses), net in the consolidated statements of income.

Trading account securities, which are debt securities bought and held principally for the purpose of resale in the near term, are carried at fair value. Gains and losses, both realized and unrealized, are recorded in non-interest income.

Purchases and sales of securities are recognized on a trade date basis. A receivable or payable is recognized for pending transaction settlements.

Allowance for Credit Losses on Available for Sale Debt Securities
For available for sale debt securities in an unrealized loss position, the entire loss in fair value is required to be recognized in current earnings if the Company intends to sell the securities or believes it more likely than not that it will be required to sell the security before the anticipated recovery. If neither condition is met, and the Company does not expect to recover the amortized cost basis, the Company determines whether the decline in fair value resulted from credit losses or other factors. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss has occurred, and an allowance for credit losses is recorded. The allowance for credit losses is limited by the amount that the fair value is less than the amortized cost basis. Any impairment not recorded through the provision for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses on the consolidated statements of income. Losses are charged against the allowance for credit losses on securities when management believes the uncollectibility of an available for sale security is confirmed or when either of the conditions regarding intent or requirement to sell is met.

Accrued interest receivable on available for sale debt securities is excluded from the estimate of credit losses.

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2. Loans and Allowance for Credit Losses
Major classifications within the Company’s held for investment loan portfolio at September 30, 2020 and December 31, 2019 are as follows:

(In thousands)
September 30, 2020December 31, 2019
Commercial:
Business$6,683,413 $5,565,449 
Real estate – construction and land1,009,729 899,377 
Real estate – business2,993,192 2,833,554 
Personal Banking:
Real estate – personal2,753,867 2,354,760 
Consumer2,006,360 1,964,145 
Revolving home equity324,203 349,251 
Consumer credit card647,893 764,977 
Overdrafts2,270 6,304 
Total loans (1)
$16,420,927 $14,737,817 
(1) Accrued interest receivable totaled $41.3 million at September 30, 2020 and was included within other assets on the consolidated balance sheet. For the three months ended September 30, 2020, the Company wrote-off accrued interest by reversing interest income of $89 thousand and $1.7 million in the Commercial and Personal Banking portfolios, respectively. Similarly, for the nine months ended September 30, 2020, the Company wrote-off accrued interest of $258 thousand and $4.4 million in the Commercial and Personal Banking portfolios, respectively.

At September 30, 2020, loans of $4.1 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.5 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

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

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

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Key model assumptions in the Company’s allowance for credit loss model include the economic forecast, the reasonable and supportable period, prepayment assumptions and qualitative factors applied for portfolio composition changes, underwriting practices, or significant unique events or conditions. The assumptions utilized in estimating the Company’s allowance for credit losses at September 30, 2020 and June 30, 2020 are discussed below.

Key AssumptionSeptember 30, 2020June 30, 2020
Overall economic forecast
The recovery from the Global Coronavirus Recession (GCR) continues to be gradual
Assumes no additional systemic lockdown measures
Gradual recovery in late 2021 and into 2022
Significant uncertainty regarding the pandemic and its impact on economy
The recovery from the Global Coronavirus Recession (GCR) is gradual
Assumes no second wave of contagion and states continue to loosen lockdown measures
Gradual recovery in late 2021 and into 2022
Significant uncertainty regarding the pandemic and its impact on economy
Reasonable and supportable period and related reversion period
Two years for both commercial and personal banking loans
Reversion to historical average loss rates within two quarters using a straight-line method
Two years for both commercial and personal banking loans
Reversion to historical average loss rates within two quarters using a straight-line method
Forecasted macro-economic variables
Unemployment rate ranging from 8.8% to 5.3% during the supportable forecast period
Real GDP growth ranges from 4.4% to 2.4%
Prime rate of 3.25%
Unemployment rate ranging from 10.9% to 5.7% during the supportable forecast period
Real GDP growth ranges from 3.0% to 25.7%
Prime rate of 3.25%
Prepayment assumptions
Commercial loans
5% for most loan pools
Personal banking loans
Ranging from 21.6% to 23.5% for most loan pools
58.0% for consumer credit cards
Commercial loans
5% for most loan pools
Personal banking loans
Ranging from 18.7% to 23.3% for most loan pools
58.0% for consumer credit cards
Qualitative factors
Added net reserves using qualitative processes related to:
Loans originated in our recent expansion markets, loans that are designated as shared national credits, and certain COVID-19 deferral program loans.
Changes in the composition of the loan portfolios
Loans downgraded to special mention, substandard, or non-accrual status
Added net reserves using qualitative processes related to:
Loans originated in our recent expansion markets and loans that are designated as shared national credits
Changes in the composition of the loan portfolios
Loans downgraded to special mention, substandard, or non-accrual status

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

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

The current forecast projects a sharp recession with a recovery in the next two years as a result of the COVID-19 outbreak. This pandemic is unprecedented and information that could be used in the estimation of the allowance for credit losses changes frequently. Events such as the timing of governmental required business lock downs or possible additional waves of infection could prolong and deepen the projected recession.

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A summary of the activity in the allowance for credit losses on loans and the liability for unfunded lending commitments during the three and nine months ended September 30, 2020 follows:

For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands)
CommercialPersonal Banking

Total
CommercialPersonal Banking

Total
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at end of prior period$130,553 $110,191 $240,744 $91,760 $68,922 $160,682 
Adoption of ASU 2016-13   (29,711)8,672 (21,039)
Balance at beginning of period$130,553 $110,191 $240,744 $62,049 $77,594 $139,643 
Provision for credit losses on loans(1,935)5,135 3,200 69,418 54,141 123,559 
Deductions:
   Loans charged off357 10,292 10,649 4,159 32,127 36,286 
   Less recoveries on loans163 2,902 3,065 1,116 8,328 9,444 
Net loan charge-offs194 7,390 7,584 3,043 23,799 26,842 
Balance September 30, 2020$128,424 $107,936 $236,360 $128,424 $107,936 $236,360 
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at end of prior period$34,052 $1,247 $35,299 $399 $676 $1,075 
Adoption of ASU 2016-13   16,057 33 16,090 
Balance at beginning of period$34,052 $1,247 $35,299 $16,456 $709 $17,165 
Provision for credit losses on unfunded lending commitments(60)(39)(99)17,536 499 18,035 
Balance September 30, 2020$33,992 $1,208 $35,200 $33,992 $1,208 $35,200 
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS$162,416 $109,144 $271,560 $162,416 $109,144 $271,560 

Allowance for loan losses
A summary of the activity in the allowance for loan losses during the three and nine months ended September 30, 2019 follows:

For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands)CommercialPersonal Banking

Total
CommercialPersonal Banking
Total
Balance at beginning of period$91,808 $69,374 $161,182 $92,869 $67,063 $159,932 
Provision for loan losses553 10,410 10,963 55 35,177 35,232 
Deductions:
   Loans charged off490 13,990 14,480 1,436 42,233 43,669 
   Less recoveries on loans199 2,818 3,017 582 8,605 9,187 
Net loan charge-offs291 11,172 11,463 854 33,628 34,482 
Balance September 30, 2019$92,070 $68,612 $160,682 $92,070 $68,612 $160,682 

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Delinquent and non-accrual loans
The Company considers loans past due on the day following the contractual repayment date, if the contractual repayment was not received by the Company as of the end of the business day. The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at September 30, 2020 and December 31, 2019.




(In thousands)
Current or Less Than 30 Days Past Due

30 – 89
Days Past Due
90 Days Past Due and Still AccruingNon-accrual



Total
September 30, 2020
Commercial:
Business$6,636,383 $7,106 $2,629 $37,295 $6,683,413 
Real estate – construction and land991,404 18,320 4 1 1,009,729 
Real estate – business2,987,992 4,137  1,063 2,993,192 
Personal Banking:
Real estate – personal 2,743,260 6,029 2,667 1,911 2,753,867 
Consumer1,983,820 20,329 2,211  2,006,360 
Revolving home equity322,572 1,237 394  324,203 
Consumer credit card629,181 12,181 6,531  647,893 
Overdrafts2,080 190   2,270 
Total $16,296,692 $69,529 $14,436 $40,270 $16,420,927 
December 31, 2019
Commercial:
Business$5,545,104 $12,064 $792 $7,489 $5,565,449 
Real estate – construction and land882,826 13,046 3,503 899,377 
Real estate – business2,830,494 2,030 — 1,030 2,833,554 
Personal Banking:
Real estate – personal 2,345,243 6,129 1,689 1,699 2,354,760 
Consumer1,928,082 34,053 2,010 — 1,964,145 
Revolving home equity347,258 1,743 250 — 349,251 
Consumer credit card742,659 10,703 11,615 — 764,977 
Overdrafts5,972 332 — — 6,304 
Total $14,627,638 $80,100 $19,859 $10,220 $14,737,817 

At September 30, 2020, the Company had $20.6 million of non-accrual business loans that had no allowance for credit loss. The Company did not record any interest income on non-accrual loans during the three and nine months ended September 30, 2020.

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

All loans are analyzed for risk rating updates annually. For larger loans, rating assessments may be more frequent if relevant information is obtained earlier through debt covenant monitoring or overall relationship management. Smaller loans are monitored as identified by the loan officer based on the risk profile of the individual borrower or if the loan becomes past
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due related to credit issues. Loans rated Special Mention, Substandard or Non-accrual are subject to quarterly review and monitoring processes. In addition to the regular monitoring performed by the lending personnel and credit committees, loans are subject to review by a credit review department which verifies the appropriateness of the risk ratings for the loans chosen as part of its risk-based review plan.

The risk category of loans in the Commercial portfolio as of September 30, 2020 are as follows:
Term Loans Amortized Cost Basis by Origination Year
(In thousands)20202019201820172016PriorRevolving Loans Amortized Cost BasisTotal
Business
    Risk Rating:
       Pass$2,394,434 $1,097,498 $518,966 $356,416 $186,992 $307,681 $1,535,511 $6,397,498 
       Special mention29,620 28,518 17,532 1,120 5,773 1,843 63,973 148,379 
       Substandard16,118 26,401 2,139 2,849 3,608 13,879 35,247 100,241 
       Non-accrual19,948 — 2,065 16 125 3,845 11,296 37,295 
   Total Business:$2,460,120 $1,152,417 $540,702 $360,401 $196,498 $327,248 $1,646,027 $6,683,413 
Real estate-construction
    Risk Rating:
       Pass$407,465 $323,632 $131,606 $49,040 $24,660 $682 $32,865 $969,950 
       Special mention— — 10,107 14,555 — — — 24,662 
       Substandard1,354 — 593 13,169 — — — 15,116 
       Non-accrual— — — — — — 
    Total Real estate-construction:$408,820 $323,632 $142,306 $76,764 $24,660 $682 $32,865 $1,009,729 
Real estate- business
    Risk Rating:
       Pass$713,079 $698,287 $384,214 $283,843 $329,613 $238,663 $46,224 $2,693,923 
       Special mention24,660 11,959 45,547 6,943 20,837 1,285 111,233 
       Substandard57,938 6,099 11,228 57,364 17,306 33,472 3,566 186,973 
       Non-accrual285 624 — — 153 — 1,063 
   Total Real-estate business:$795,678 $716,630 $441,613 $348,150 $367,756 $273,573 $49,792 $2,993,192 
Commercial loans
    Risk Rating:
       Pass$3,514,978 $2,119,417 $1,034,786 $689,299 $541,265 $547,026 $1,614,600 $10,061,371 
       Special mention54,280 40,477 73,186 22,618 26,610 3,128 63,975 284,274 
       Substandard75,410 32,500 13,960 73,382 20,914 47,351 38,813 302,330 
       Non-accrual19,950 285 2,689 16 125 3,998 11,296 38,359 
   Total Commercial loans:$3,664,618 $2,192,679 $1,124,621 $785,315 $588,914 $601,503 $1,728,684 $10,686,334 

Information about the credit quality of the Commercial loan portfolio as of December 31, 2019 follows:

Commercial Loans


(In thousands)


Business
Real
 Estate-Construction
Real
Estate-
Business


Total
December 31, 2019
Pass$5,393,928 $856,364 $2,659,827 $8,910,119 
Special mention80,089 42,541 92,626 215,256 
Substandard83,943 470 80,071 164,484 
Non-accrual7,489 1,030 8,521 
Total $5,565,449 $899,377 $2,833,554 $9,298,380 

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The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided as of September 30, 2020 below:
Term Loans Amortized Cost Basis by Origination Year
(In thousands)20202019201820172016PriorRevolving Loans Amortized Cost BasisTotal
Real estate-personal
       Current to 90 days past due$897,007 $532,003 $238,092 $227,499 $247,754 $595,713 $11,221 $2,749,289 
       Over 90 days past due273 394 422 361 357 860 — 2,667 
       Non-accrual— 195 129 45 121 1,421 — 1,911 
   Total Real estate-personal:$897,280 $532,592 $238,643 $227,905 $248,232 $597,994 $11,221 $2,753,867 
Consumer
       Current to 90 days past due$446,909 $380,399 $188,186 $137,253 $90,236 $104,466 $656,700 $2,004,149 
       Over 90 days past due76 337 158 176 162 278 1,024 2,211 
    Total Consumer:$446,985 $380,736 $188,344 $137,429 $90,398 $104,744 $657,724 $2,006,360 
Revolving home equity
       Current to 90 days past due$— $— $— $— $— $— $323,809 $323,809 
       Over 90 days past due— — — — — — 394 394 
   Total Revolving home equity:$— $— $— $— $— $— $324,203 $324,203 
Consumer credit card
       Current to 90 days past due$— $— $— $— $— $— $641,362 $641,362 
       Over 90 days past due— — — — — — 6,531 6,531 
   Total Consumer credit card:$— $— $— $— $— $— $647,893 $647,893 
Overdrafts
       Current to 90 days past due$2,270 $— $— $— $— $— $— $2,270 
       Over 90 days past due— — — — — — — — 
    Total Overdrafts:$2,270 $— $— $— $— $— $— $2,270 
Personal banking loans
       Current to 90 days past due$1,346,186 $912,402 $426,278 $364,752 $337,990 $700,179 $1,633,092 $5,720,879 
       Over 90 days past due349 731 580 537 519 1,138 7,949 11,803 
       Non-accrual— 195 129 45 121 1,421 — 1,911 
   Total Personal banking loans:$1,346,535 $913,328 $426,987 $365,334 $338,630 $702,738 $1,641,041 $5,734,593 

Collateral-dependent loans
The Company's collateral-dependent loans are comprised of large loans on non-accrual status. The Company requires that collateral-dependent loans are either over-collateralized or carry collateral equal to the amortized cost of the loan. The following table presents the amortized cost basis of collateral-dependent loans as of September 30, 2020.
(In thousands)Business AssetsFuture Revenue StreamsEnergyTotal
Commercial:
  Business$18,843 $3,616 $14,276 $36,734 
Total$18,843 $3,616 $14,276 $36,734 

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Other Personal Banking loan information
As noted above, the credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above section on "Credit quality indicators." In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history and is considered supplementary information utilized by the Company, as management does not consider this information in evaluating the allowance for credit losses on loans. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain personal real estate loans for which FICO scores are not obtained because the loans generally pertain to commercial customer activities and are often underwritten with other collateral considerations. These loans totaled $183.3 million at September 30, 2020 and $198.2 million at December 31, 2019. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $193.2 million at September 30, 2020 and $199.2 million at December 31, 2019. As the healthcare loans are guaranteed by the hospital, customer FICO scores are not obtained for these loans. The personal real estate loans and consumer loans excluded below totaled less than 7% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at September 30, 2020 and December 31, 2019 by FICO score.

   Personal Banking Loans
% of Loan Category
Real Estate - PersonalConsumerRevolving Home EquityConsumer Credit Card
September 30, 2020
FICO score:
Under 6001.0 %2.4 %1.4 %5.2 %
600 - 6592.1 3.9 2.5 12.9 
660 - 7198.5 14.5 7.3 32.2 
720 - 77925.7 25.6 22.6 27.5 
780 and over62.7 53.6 66.2 22.2 
Total100.0 %100.0 %100.0 %100.0 %
December 31, 2019
FICO score:
Under 6001.0 %3.0 %1.7 %5.6 %
600 - 6591.9 5.2 1.9 14.3 
660 - 7199.2 15.4 9.0 32.2 
720 - 77925.7 27.0 21.5 26.6 
780 and over62.2 49.4 65.9 21.3 
Total100.0 %100.0 %100.0 %100.0 %

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Troubled debt restructurings
Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected. Commercial performing restructured loans are primarily comprised of certain business, construction and business real estate loans classified as substandard but renewed at rates judged to be non-market. These loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card and other small consumer loans under various debt management and assistance programs. Modifications to these loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. Certain personal real estate, revolving home equity, and consumer loans were classified as consumer bankruptcy troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments. Other consumer loans classified as troubled debt restructurings consist of various other workout arrangements with consumer customers.
Section 4013 of the CARES Act was signed into law on March 27, 2020, and includes a provision that short-term modifications are not troubled debt restructurings, if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to December 31, 2019. In addition to the CARES Act, bank regulatory agencies issued interagency guidance stating suspending the troubled debt restructuring classification would be appropriate if the borrower was less than 30 days past due at the time the modification program is implemented. The guidance also provides that loans generally will not be adversely classified if the short-term modification is related to COVID-19 relief programs. The Company follows the guidance under the CARES Act when determining if a customer’s modification is subject to troubled debt restructuring classification. If it is deemed the modification is not short-term, not COVID-19 related or the customer does not meet the criteria under the guidance to be scoped out of troubled debt restructuring classification, the Company will evaluate the loan modifications under its existing framework which requires modifications that result in a concession to a borrower experiencing financial difficulty be accounted for as a troubled debt restructuring.

(In thousands)September 30, 2020December 31, 2019
Accruing restructured loans:
Commercial
$50,921 $55,934 
Assistance programs
8,208 8,365 
Consumer bankruptcy
3,101 3,592 
Other consumer
2,418 3,621 
Non-accrual loans
8,513 7,938 
Total troubled debt restructurings
$73,161 $79,450 
The table below shows the balance of troubled debt restructurings by loan classification at September 30, 2020, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.

(In thousands)September 30, 2020Balance 90 days past due at any time during previous 12 months
Commercial:
Business$17,696 $674 
Real estate - construction and land41 — 
Real estate - business40,596 — 
Personal Banking:
Real estate - personal3,278 252 
Consumer3,530 103 
Revolving home equity56 — 
Consumer credit card7,964 257 
Total troubled debt restructurings$73,161 $1,286 

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For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. No financial impact resulted from those performing loans where the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. However, the effects of modifications to loans under various debt management and assistance programs were estimated to decrease interest income by approximately $1.1 million on an annual, pre-tax basis, compared to amounts contractually owed. Other modifications to consumer loans mainly involve extensions and other small modifications that did not include the forgiveness of principal or interest.

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

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

The Company had commitments of $13.1 million at September 30, 2020 to lend additional funds to borrowers with restructured loans.

Impaired loans
The following Impaired loans disclosures were superceded by ASC 2016-13.
The table below shows the Company’s balances of impaired loans at December 31, 2019. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section above.

(In thousands)Dec. 31, 2019
Non-accrual loans$10,220 
Restructured loans (accruing)71,512 
Total impaired loans$81,732 

The following table shows the balance in the allowance for loan losses and the related loan balance at December 31, 2019, disaggregated on the basis of impairment methodology. Impaired loans evaluated under Accounting Standards Codification (ASC) 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics, which are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.

Impaired LoansAll Other Loans

(In thousands)
Allowance for Loan LossesLoans OutstandingAllowance for Loan LossesLoans Outstanding
December 31, 2019
Commercial$1,629 $64,500 $90,131 $9,233,880 
Personal Banking1,117 17,232 67,805 5,422,205 
Total$2,746 $81,732 $157,936 $14,656,085 
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The following table provides additional information about impaired loans held by the Company at December 31, 2019, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.



(In thousands)
Recorded Investment
Unpaid Principal
Balance
 Related
Allowance
December 31, 2019
With no related allowance recorded:
Business$7,054 $13,738 $— 
$7,054 $13,738 $— 
With an allowance recorded:
Business$30,437 $30,487 $837 
Real estate – construction and land46 51 
Real estate – business26,963 27,643 791 
Real estate – personal4,729 5,968 258 
Consumer4,421 4,421 35 
Revolving home equity35 35 
Consumer credit card8,047 8,047 823 
$74,678 $76,652 $2,746 
Total$81,732 $90,390 $2,746 

Total average impaired loans for the three and nine month periods ended September 30, 2019 are shown in the table below.


(In thousands)
CommercialPersonal BankingTotal
Average Impaired Loans:
For the three months ended September 30, 2019
Non-accrual loans$9,655 $1,903 $11,558 
Restructured loans (accruing)53,517 15,644 69,161 
Total$63,172 $17,547 $80,719 
For the nine months ended September 30, 2019
Non-accrual loans$9,881 $2,074 $11,955 
Restructured loans (accruing)48,248 15,605 63,853 
Total$58,129 $17,679 $75,808 

The table below shows interest income recognized during the three and nine month periods ended September 30, 2019, respectively, for impaired loans held at the end of each period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section above.

For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands)
20192019
Interest income recognized on impaired loans:
Business$222 $665 
Real estate – construction and land
Real estate – business363 1,088 
Real estate – personal31 92 
Consumer76 227 
Revolving home equity
Consumer credit card181 542 
Total$875 $2,618 

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Loans held for sale
The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 11. The loans are primarily sold to FNMA, FHLMC, and GNMA. At September 30, 2020, the fair value of these loans was $35.1 million, and the unpaid principal balance was $33.3 million

The Company also designates certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which at September 30, 2020 totaled $4.4 million.

At September 30, 2020, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing.
Foreclosed real estate/repossessed assets
The Company’s holdings of foreclosed real estate totaled $57 thousand and $365 thousand at September 30, 2020 and December 31, 2019, respectively. Personal property acquired in repossession, generally autos, marine and recreational vehicles (RV), totaled $1.3 million and $5.5 million at September 30, 2020 and December 31, 2019, respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.

3. Investment Securities
Investment securities consisted of the following at September 30, 2020 and December 31, 2019.

 
(In thousands)
September 30, 2020December 31, 2019
Available for sale debt securities$11,539,061 $8,571,626 
Trading debt securities25,805 28,161 
Equity securities:
   Readily determinable fair value2,803 2,929 
   No readily determinable fair value1,400 1,280 
Other:
   Federal Reserve Bank stock34,070 33,770 
   Federal Home Loan Bank stock10,000 10,000 
   Private equity investments78,462 94,122 
Total investment securities (1)
$11,691,601 $8,741,888 
(1)Accrued interest receivable totaled $39.7 million at September 30, 2020 and was included within other assets on the consolidated balance sheet.

The Company has elected to measure equity securities with no readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. This portfolio includes the Company's holdings of Visa Class B shares, which have a carrying value of zero, as there have not been observable price changes in orderly transactions for identical or similar investments of the same issuer. During the period, the Company did not record any impairment or other adjustments to the carrying amount of these equity securities without a readily determinable fair value.
Other investment securities include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, and investments in portfolio concerns held by the Company's private equity subsidiaries. FRB stock and FHLB stock are held for debt and regulatory purposes. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. These holdings are carried at cost. The private equity investments, in the absence of readily ascertainable market values, are carried at estimated fair value.
The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in accumulated other comprehensive income (AOCI). A summary of the available for sale debt securities by maturity groupings as of September 30, 2020 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, and GNMA, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards,
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automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.
(In thousands)Amortized
Cost
Fair
Value
U.S. government and federal agency obligations:
Within 1 year$59,367 $59,706 
After 1 but within 5 years489,042 521,797 
After 5 but within 10 years225,159 253,555 
Total U.S. government and federal agency obligations773,568 835,058 
Government-sponsored enterprise obligations:
Within 1 year55,185 54,770 
After 10 years35,818 40,531 
Total government-sponsored enterprise obligations91,003 95,301 
State and municipal obligations:
Within 1 year68,787 69,179 
After 1 but within 5 years764,831 803,168 
After 5 but within 10 years597,276 624,525 
After 10 years464,375 472,272 
Total state and municipal obligations1,895,269 1,969,144 
Mortgage and asset-backed securities:
  Agency mortgage-backed securities5,919,500 6,081,802 
  Non-agency mortgage-backed securities324,266 332,970 
  Asset-backed securities1,633,988 1,658,579 
Total mortgage and asset-backed securities7,877,754 8,073,351 
Other debt securities:
Within 1 year23,565 23,701 
After 1 but within 5 years252,180 264,096 
After 5 but within 10 years240,814 249,136 
After 10 years28,195 29,274 
Total other debt securities544,754 566,207 
Total available for sale debt securities$11,182,348 $11,539,061 

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $429.8 million, at fair value, at September 30, 2020. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index.

Allowance for credit losses on available for sale debt securities
As described in Note 1, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2020. The adoption of ASU 2016-13 had no impact to the Company's available for sale securities reported in its consolidated financial statements at January 1, 2020. For the three and nine months ended September 30, 2020, the Company did not recognize a credit loss expense on any available for sale debt securities.

The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis is placed on securities whose credit rating has fallen below Baa3 (Moody's) or BBB- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price, or who have been identified based on management’s judgment. These securities are placed on a watch list and cash flow analyses are prepared on an individual security basis. Inputs to these models include factors such as cash flow projections, contractual payments required, delinquency rates, credit support from other tranches, prepayment speeds, collateral loss severity rates (including loan to values), and various other information related to the underlying collateral. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At September 30, 2020, the fair value of securities on this watch list was $53.3 million compared to $51.6 million at December 31, 2019.


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The Company's model for establishing its allowance for credit losses uses cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. As of September 30, 2020, the Company did not identify any securities for which a credit loss exists. Significant inputs to the cash flow models used at September 30, 2020 to quantify credit losses included the following:

Significant InputsRange
Prepayment CPR0%-25%
Projected cumulative default13%-54%
Credit support0%-20%
Loss severity7%-63%

The table below summarizes debt securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded at September 30, 2020. Unrealized losses on these available for sale securities have not been recognized into income because the issuers' bonds are of investment grade quality (rated Baa3, BBB- or higher), their fair values have not fallen more than 20% below purchase price, and they have not been identified by management as a security needing a more detailed review. Additionally, management does not intend to sell the securities, and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery. The cash flow analyses prepared for securities included on the watch list discussed above did not identify any instances where the present value of expected cash flows were less than the amortized cost basis of the security.

The following table summarizes debt securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded at September 30, 2020, aggregated by major security type and length of impairment period.

Less than 12 months12 months or longerTotal
 
(In thousands)
   Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
September 30, 2020
Government-sponsored enterprise obligations $14,489 $503 $ $ $14,489 $503 
State and municipal obligations84,876 578   84,876 578 
Mortgage and asset-backed securities:
   Agency mortgage-backed securities287,620 5,402   287,620 5,402 
   Non-agency mortgage-backed securities68,513 234 1,069 45 69,582 279 
   Asset-backed securities97,592 1,100 245,198 6,196 342,790 7,296 
Total mortgage and asset-backed securities453,725 6,736 246,267 6,241 699,992 12,977 
Other debt securities43,600 493   43,600 493 
Total $596,690 $8,310 $246,267 $6,241 $842,957 $14,551 

Debt securities available for sale in an unrealized loss position, aggregated by major security type and length of impairment period, are as follows:

Less than 12 months12 months or longerTotal
 
(In thousands)
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
December 31, 2019
U.S. government and federal agency obligations$31,787 $21 $25,405 $21 $57,192 $42 
Government-sponsored enterprise obligations6,155 187 — — 6,155 187 
State and municipal obligations6,700 31 1,554 8,254 32 
Mortgage and asset-backed securities:
  Agency mortgage-backed securities652,352 5,306 147,653 867 800,005 6,173 
  Non-agency mortgage-backed securities102,931 254 189,747 451 292,678 705 
  Asset-backed securities330,876 3,610 152,461 2,108 483,337 5,718 
Total mortgage and asset-backed securities1,086,159 9,170 489,861 3,426 1,576,020 12,596 
Other debt securities5,496 997 6,493 
Total$1,136,297 $9,413 $517,817 $3,451 $1,654,114 $12,864 

The entire available for sale debt portfolio included $843.0 million of securities that were in a loss position at September 30, 2020, compared to $1.7 billion at December 31, 2019.  The total amount of unrealized loss on these securities was $14.6 million
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at September 30, 2020, an increase of $1.7 million compared to the loss at December 31, 2019.  Securities with significant unrealized losses are discussed in the "Allowance for credit losses on available for sale debt securities" section above.

For debt securities classified as available for sale, the following table shows the amortized cost, fair value, and allowance for credit losses of securities available for sale at September 30, 2020 and the corresponding amounts of gross unrealized gains and losses (pre-tax) in AOCI, by security type.

 
 
(In thousands)
Amortized CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for Credit Losses
Fair Value
September 30, 2020
U.S. government and federal agency obligations$773,568 $61,490 $ $ $835,058 
Government-sponsored enterprise obligations91,003 4,801 (503) 95,301 
State and municipal obligations1,895,269 74,453 (578) 1,969,144 
Mortgage and asset-backed securities:
  Agency mortgage-backed securities5,919,500 167,704 (5,402) 6,081,802 
  Non-agency mortgage-backed securities324,266 8,983 (279) 332,970 
  Asset-backed securities1,633,988 31,887 (7,296) 1,658,579 
Total mortgage and asset-backed securities7,877,754 208,574 (12,977) 8,073,351 
Other debt securities544,754 21,946 (493) 566,207 
Total$11,182,348 $371,264 $(14,551)$ $11,539,061 

For debt securities classified as available for sale, the following table shows the amortized cost and fair value of securities available-for-sale at December 31, 2019 and the corresponding amounts of gross unrealized gains and losses (pre-tax) in AOCI, by security type.

 
 
(In thousands)
Amortized CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
December 31, 2019
U.S. government and federal agency obligations$827,861 $23,957 $(42)$851,776 
Government-sponsored enterprise obligations138,734 730 (187)139,277 
State and municipal obligations1,225,532 42,427 (32)1,267,927 
Mortgage and asset-backed securities:
  Agency mortgage-backed securities3,893,247 50,890 (6,173)3,937,964 
  Non-agency mortgage-backed securities796,451 14,036 (705)809,782 
  Asset-backed securities1,228,151 11,056 (5,718)1,233,489 
Total mortgage and asset-backed securities5,917,849 75,982 (12,596)5,981,235 
Other debt securities325,555 5,863 (7)331,411 
Total$8,435,531 $148,959 $(12,864)$8,571,626 



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

For the Nine Months Ended September 30
(In thousands)20202019
Proceeds from sales of securities:
Available for sale debt securities
$574,374 $368,939 
Equity securities
2 3,459 
Other
 7,243 
Total proceeds
$574,376 $379,641 
Investment securities gains (losses), net:
Available for sale debt securities:
Gains realized on sales$16,965 $2,287 
Losses realized on sales (1,559)
Other-than-temporary impairment recognized on debt securities (133)
Equity securities:
Gains realized on sales2 2,865 
 Fair value adjustments, net
(126)318 
Other:
 Gains realized on sales
 1,094 
Fair value adjustments, net (18,116)(998)
Total investment securities gains (losses), net$(1,275)$3,874 

Net gains and losses on investment securities for the nine months ended September 30, 2020 included net gains of $17.0 million realized on sales of available for sale debt securities as well as net losses in fair value of $126 thousand and $18.1 million on equity securities and private equity investments, respectively, due to fair value adjustments.

At September 30, 2020, securities totaling $4.5 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $218.0 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.

4. Goodwill and Other Intangible Assets
The following table presents information about the Company's intangible assets which have estimable useful lives.

September 30, 2020December 31, 2019
 
 
(In thousands)
Gross Carrying AmountAccumulated AmortizationValuation AllowanceNet AmountGross Carrying AmountAccumulated AmortizationValuation AllowanceNet Amount
Amortizable intangible assets:
Core deposit premium$31,270 $(29,818)$ $1,452 $31,270 $(29,485)$— $1,785 
Mortgage servicing rights13,983 (6,102)(2,150)5,731 12,942 (4,866)(327)7,749 
Total $45,253 $(35,920)$(2,150)$7,183 $44,212 $(34,351)$(327)$9,534 

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Aggregate amortization expense on intangible assets was $859 thousand and $395 thousand for the three month periods ended September 30, 2020 and 2019, respectively, and $1.6 million and $1.1 million for the nine month periods ended September 30, 2020 and 2019, respectively. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of September 30, 2020. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.

 (In thousands)
2020$2,143 
20211,243 
20221,013 
2023834 
2024689 

Changes in the carrying amount of goodwill and net other intangible assets for the nine month period ended September 30, 2020 are as follows:

(In thousands)GoodwillCore Deposit PremiumMortgage Servicing Rights
Balance January 1, 2020$138,921 $1,785 $7,749 
Originations— — 1,041 
Amortization— (333)(1,236)
Impairment— — (1,823)
Balance September 30, 2020$138,921 $1,452 $5,731 

Goodwill allocated to the Company’s operating segments at September 30, 2020 and December 31, 2019 is shown below.

(In thousands)
Consumer segment$70,721 
Commercial segment67,454 
Wealth segment746 
Total goodwill$138,921 

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

Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At September 30, 2020, that net liability was $3.3 million, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $318.0 million at September 30, 2020.

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The Company periodically enters into credit risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral and at September 30, 2020, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 2 years to 11 years. At September 30, 2020, the fair value of the Company's guarantee liabilities for RPAs was $1.2 million, and the notional amount of the underlying swaps was $272.8 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default.

6. Leases
The Company has net investments in direct financing and sales-type leases to commercial, industrial, and tax-exempt entities. These leases are included within business loans on the Company's consolidated balance sheets. The Company primarily leases various types of equipment, trucks and trailers, and office furniture and fixtures. Lease agreements may include options to renew or for the lessee to purchase the leased equipment at the end of the lease term. The Company has elected to adopt the lease component expedient in which the lease and nonlease components are combined into the total lease receivable. The Company also leases office space to third parties, and these leases are classified as operating leases. The leases may include options to renew or expand the leased space, and currently the leases have remaining terms of 6 months to 7 years.

The following table provides the components of lease income.

For the Three Months Ended September 30For the Nine Months Ended September 30
(in thousands)2020201920202019
Direct financing and sales-type leases$6,437 $6,092 $19,099 $17,988 
Operating leases(a)
2,270 1,984 6,491 5,816 
Total lease income$8,707 $8,076 $25,590 $23,804 
(a) Includes rent from Tower Properties Company, a related party, of $19 thousand for the three month periods ended September 30, 2020 and 2019, and $57 thousand and $56 thousand, respectively, for the nine months ended September 30, 2020 and 2019.

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

For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands)2020201920202019
Service cost - benefits earned during the period$93 $159 $295 $477 
Interest cost on projected benefit obligation818 1,065 2,463 3,195 
Expected return on plan assets(1,317)(1,196)(3,911)(3,589)
Amortization of prior service cost(67)(68)(203)(203)
Amortization of unrecognized net loss503 586 1,587 1,757 
Net periodic pension cost $30 $546 $231 $1,637 

All benefits accrued under the Company’s defined benefit pension plan have been frozen since January 1, 2011. During the first nine months of 2020, the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets.
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8. Common Stock *
Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 13.

For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands, except per share data)2020201920202019
Basic income per common share:
Net income attributable to Commerce Bancshares, Inc.$132,448 $109,242 $224,168 $314,351 
Less preferred stock dividends7,466 2,250 11,966 6,750 
Net income available to common shareholders124,982 106,992 212,202 307,601 
Less income allocated to nonvested restricted stock1,173 1,040 1,996 2,996 
  Net income allocated to common stock$123,809 $105,952 $210,206 $304,605 
Weighted average common shares outstanding110,720 112,982 110,848 114,475 
   Basic income per common share$1.12 $.93 $1.90 $2.65 
Diluted income per common share:
Net income available to common shareholders$124,982 $106,992 $212,202 $307,601 
Less income allocated to nonvested restricted stock1,170 1,039 1,993 2,991 
  Net income allocated to common stock$123,812 $105,953 $210,209 $304,610 
Weighted average common shares outstanding110,720 112,982 110,848 114,475 
  Net effect of the assumed exercise of stock-based awards - based on
the treasury stock method using the average market price for the respective periods179 267 209 284 
  Weighted average diluted common shares outstanding110,899 113,249 111,057 114,759 
    Diluted income per common share$1.11 $.93 $1.89 $2.65 

Unexercised stock appreciation rights of 394 thousand and 378 thousand for the three month periods ended September 30, 2020 and 2019, respectively, and 281 thousand and 351 thousand for the nine month periods ended September 30, 2020 and 2019, respectively, were excluded from the computation of diluted income per common share because their inclusion would have been anti-dilutive.
On September 1, 2020, the Company redeemed all outstanding shares of its 6.00% Series B Non-Cumulative Perpetual Preferred Stock, $1.00 par value per share (Series B Preferred Stock) and the corresponding depositary shares representing fractional interests in the Series B Preferred Stock (Series B Depositary Shares). The 6,000,000 depositary shares, each representing a 1/1,000th interest in a share of Series B Preferred Stock, were redeemed simultaneously with the redemption of the Series B Preferred Stock at a redemption price of $25 per depositary share. Regular dividends on the outstanding shares of the Series B Preferred Stock were paid separately on September 1, 2020 to all holders of record as of August 14, 2020, in the customary manner, and future dividends ceased to accrue. For the nine month period ended September 30, 2020, preferred stock dividends totaled $12.0 million, and included $5.2 million related to the preferred stock redemption, which is the excess of the redemption costs over the book value of the preferred stock.

* All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December 2019.

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9. Accumulated Other Comprehensive Income
The table below shows the activity and accumulated balances for components of other comprehensive income. The largest component is the unrealized holding gains and losses on available for sale debt securities. Another component is the amortization from other comprehensive income of losses associated with pension benefits, which occurs as the losses are included in current net periodic pension cost. The remaining component is gains and losses in fair value on certain interest rate floors that have been designated as cash flow hedging instruments. Information about unrealized gains and losses on securities can be found in Note 3, and information about unrealized gains and losses on cash flow hedge derivatives is located in Note 11.

The Company adopted ASU 2016-13 (CECL) on January 1, 2020, which changed the impairment model for available for sale debt securities. The new standard requires an allowance for credit losses when the present value of the cash flows expected to be collected is less than the security's amortized cost basis. See further discussion of the Company's CECL adoption in Note 1 and Note 3 to the consolidated financial statements. Further, the new standard superceded the guidance related to other-than-temporary impairment (OTTI), including the requirement to separately disclose the unrealized gains and losses on securities with OTTI. Prior to the Company's adoption of CECL, unrealized gains and losses on debt securities for which an OTTI has been recorded in current earnings were shown separately below. As a result of adopting CECL, the table below will separately disclose unrealized gains and losses on debt securities for which an allowance for credit losses has been recorded. During the first nine months of 2020, there were no securities for which an allowance for credit losses was recorded.

Unrealized Gains (Losses) on Securities (1)Pension Loss Unrealized Gains (Losses) on Cash Flow Hedge Derivatives (2)Total Accumulated Other Comprehensive Income (Loss)
(In thousands)OTTIOther
Balance January 1, 2020$3,264 $98,809 $(21,940)$30,311 $110,444 
Adoption of ASU 2016-13(3,264)3,264    
Balance January 1, 2020, adjusted 102,073 (21,940)30,311 110,444 
Other comprehensive income before reclassifications to current earnings 237,583  94,702 332,285 
Amounts reclassified to current earnings from accumulated other comprehensive income  (16,965)1,384 (6,050)(21,631)
 Current period other comprehensive income, before tax 220,618 1,384 88,652 310,654 
Income tax expense (55,154)(346)(22,163)(77,663)
 Current period other comprehensive income, net of tax 165,464 1,038 66,489 232,991 
Balance September 30, 2020$ $267,537 $(20,902)$96,800 $343,435 
Balance January 1, 2019$3,861 $(52,278)$(23,107)$6,855 $(64,669)
Other comprehensive income (loss) before reclassifications to current earnings(709)229,288 — 46,165 274,744 
Amounts reclassified to current earnings from accumulated other comprehensive income133 (728)1,554 2,751 3,710 
 Current period other comprehensive income (loss), before tax(576)228,560 1,554 48,916 278,454 
Income tax (expense) benefit144 (57,139)(388)(12,229)(69,612)
 Current period other comprehensive income (loss), net of tax(432)171,421 1,166 36,687 208,842 
Transfer of unrealized gain on securities for which impairment was not previously recognized35 (35)— — — 
Balance September 30, 2019$3,464 $119,108 $(21,941)$43,542 $144,173 
(1) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "investment securities gains (losses), net" in the consolidated statements of income.
(2) The pre-tax amounts reclassified from accumulated other comprehensive income to current earnings are included in "interest and fees on loans" in the consolidated statements of income.

10. Segments
The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial and Wealth. The Consumer segment consists of various consumer loan and deposit products offered through its retail branch network of approximately 160 locations.  This segment also includes indirect and other consumer loan financing businesses, along with debit and credit card loan and fee businesses.  Residential mortgage origination, sales and servicing functions are included in this Consumer segment, but residential mortgage loans retained by the Company are not considered part of this segment and are instead included in the Other segment.  The Commercial segment provides corporate lending, leasing, and international services, along with business and governmental deposit products and commercial cash management services.  This segment includes both merchant and commercial bank card products. It also
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includes the Capital Markets Group, which sells fixed income securities and provides safekeeping and accounting services to its business and correspondent bank customers.  The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management, and brokerage services.  This segment also provides various loan and deposit related services to its private banking customers.

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


(In thousands)
ConsumerCommercialWealthSegment TotalsOther/EliminationConsolidated Totals
Three Months Ended September 30, 2020
Net interest income$80,944 $111,807 $15,310 $208,061 $7,901 $215,962 
Provision for credit losses(7,654)(200)13 (7,841)4,740 (3,101)
Non-interest income37,116 47,920 47,701 132,737 (3,165)129,572 
Investment securities gains, net    16,155 16,155 
Non-interest expense(73,074)(78,283)(31,013)(182,370)(8,488)(190,858)
Income before income taxes$37,332 $81,244 $32,011 $150,587 $17,143 $167,730 
Nine Months Ended September 30, 2020
Net interest income$241,195 $300,307 $41,686 $583,188 $36,896 $620,084 
Provision for credit losses(23,885)(3,122)10 (26,997)(114,596)(141,593)
Non-interest income107,492 143,747 139,700 390,939 (20,189)370,750 
Investment securities losses, net    (1,275)(1,275)
Non-interest expense(225,791)(237,350)(93,156)(556,297)(15,771)(572,068)
Income before income taxes$99,011 $203,582 $88,240 $390,833 $(114,935)$275,898 
Three Months Ended September 30, 2019
Net interest income$80,111 $85,402 $11,525 $177,038 $26,474 $203,512 
Provision for loan losses(10,757)(345)(197)(11,299)336 (10,963)
Non-interest income36,049 53,462 45,721 135,232 (2,489)132,743 
Investment securities gains, net— — — — 4,909 4,909 
Non-interest expense(73,872)(76,105)(30,248)(180,225)(10,795)(191,020)
Income before income taxes$31,531 $62,414 $26,801 $120,746 $18,435 $139,181 
Nine Months Ended September 30, 2019
Net interest income$236,215 $256,649 $35,662 $528,526 $90,108 $618,634 
Provision for loan losses(33,061)(1,053)(165)(34,279)(953)(35,232)
Non-interest income98,840 151,655 133,556 384,051 (2,809)381,242 
Investment securities gains, net— — — — 3,874 3,874 
Non-interest expense(223,355)(231,790)(91,708)(546,853)(25,371)(572,224)
Income before income taxes$78,639 $175,461 $77,345 $331,445 $64,849 $396,294 

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

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

The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities.
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11. Derivative Instruments
The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. At September 30, 2020, with the exception of the interest rate floor (discussed below), the Company’s derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings.


(In thousands)
September 30, 2020December 31, 2019
Interest rate swaps$2,425,837 $2,606,181 
Interest rate floors500,000 1,500,000 
Interest rate caps113,495 59,316 
Credit risk participation agreements365,611 316,225 
Foreign exchange contracts9,293 10,936 
 Mortgage loan commitments
60,311 13,755 
Mortgage loan forward sale contracts9,451 1,943 
Forward TBA contracts64,500 17,500 
Total notional amount$3,548,498 $4,525,856 

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

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

As of September 30, 2020, the Company has entered into one interest rate floor with a notional value of $500.0 million, to hedge the risk of declining interest rates on certain floating rate commercial loans indexed to one month LIBOR. The interest rate floor has a purchased strike rate of 2.00% and is effective on December 15, 2020 and matures on December 15, 2026. The premium paid for the floor totaled $10.7 million. As of September 30, 2020, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is approximately 6.2 years. The interest rate floor qualified and was designated as a cash flow hedge, and was assessed for effectiveness using regression analysis. The change in the fair value of the interest rate floor is recorded in AOCI, net of the amortization of the premium paid, which is recorded against interest and fees on loans in the consolidated statements of income. As of September 30, 2020, net deferred gains on the interest rate floor totaled $38.7 million (pre-tax) and was recorded in AOCI in the consolidated balance sheet. As of September 30, 2020, it is expected that $1.4 million (pre-tax) of interest rate floor premium amortization will be reclassified from AOCI into earnings over the next twelve months.

During the quarter ended September 30, 2020, the Company monetized two interest rate floors that were previously classified as cash flow hedges with a combined notional balance of $1.0 billion and an asset fair value of $115.9 million. As of September 30, 2020, the total unrealized gains on the monetized cash flow hedges remaining in AOCI was $90.4 million (pre-tax). The unrealized gains will be reclassified into interest income as the underlying forecasted transactions impact earnings through the original maturity dates of the hedged forecasted transactions, or approximately 5.7 years.

In October 2020, the Company monetized the above interest rate floor that is effective on December 15, 2020 and will amortize a gain of $37.6 million into earnings through December 15, 2026, the original maturity date.

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

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

The fair values of the Company's derivative instruments, whose notional amounts are listed above, are shown in the table below. Information about the valuation methods used to determine fair value is provided in Note 17 on Fair Value Measurements in the 2019 Annual Report on Form 10-K.

The Company's policy is to present its derivative assets and derivative liabilities on a gross basis in its consolidated balance sheets and these are reported in other assets and other liabilities. Certain collateral posted to and from the Company's clearing counterparty has been applied to the fair values of the cleared swaps, such that at September 30, 2020 in the table below, there were no reductions to the positive fair values of cleared swaps and the negative fair values of cleared swaps were reduced by $77.8 million. At December 31, 2019, the positive fair values of cleared swaps were reduced by $617 thousand and the negative fair values of cleared swaps were reduced by $28.5 million.

 Asset DerivativesLiability Derivatives
Sept. 30, 2020Dec. 31, 2019Sept. 30, 2020Dec. 31, 2019
(In thousands)    
  Fair Value  Fair Value
Derivatives designated as hedging instruments:
   Interest rate floors$47,306 $67,192 $ $— 
Total derivatives designated as hedging instruments$47,306 $67,192 $ $— 
Derivative instruments not designated as hedging instruments:
   Interest rate swaps$96,866 $37,774 $(18,981)$(9,916)
   Interest rate caps1 (1)(4)
   Credit risk participation agreements440 140 (1,185)(230)
   Foreign exchange contracts32 97 (50)(32)
   Mortgage loan commitments3,137 459  — 
   Mortgage loan forward sale contracts29 (6)(2)
   Forward TBA contracts39 (147)(35)
Total derivatives not designated as hedging instruments$100,544 $38,482 $(20,370)$(10,219)
 Total$147,850 $105,674 $(20,370)$(10,219)
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The pre-tax effects of derivative instruments on the consolidated statements of income are shown in the tables below.




Amount of Gain or (Loss) Recognized in OCI
Location of Gain (Loss) Reclassified from AOCI into IncomeAmount of Gain (Loss) Reclassified from AOCI into Income
(In thousands)TotalIncluded ComponentExcluded ComponentTotalIncluded ComponentExcluded Component
For the Three Months Ended September 30, 2020
Derivatives in cash flow hedging relationships:
Interest rate floors$(4,481)$(4,087)$(394)Interest and fees on loans$4,163 $5,509 $(1,346)
Total$(4,481)$(4,087)$(394)Total$4,163 $5,509 $(1,346)
For the Nine Months Ended September 30, 2020
Derivatives in cash flow hedging relationships:
Interest rate floors$94,702 $121,621 $(26,919)Interest and fees on loans$6,050 $9,458 $(3,408)
Total$94,702 $121,621 $(26,919)Total$6,050 $9,458 $(3,408)
For the Three Months Ended September 30, 2019
Derivatives in cash flow hedging relationships:
Interest rate floors$17,760 $31,422 $(13,662)Interest and fees on loans$(1,042)$— $(1,042)
Total$17,760 $31,422 $(13,662)Total$(1,042)$— $(1,042)
For the Nine Months Ended September 30, 2019
Derivatives in cash flow hedging relationships:
Interest rate floors$46,165 $77,559 $(31,394)Interest and fees on loans$(2,751)$— $(2,751)
Total$46,165 $77,559 $(31,394)Total$(2,751)$— $(2,751)




Location of Gain or (Loss) Recognized in Income on Derivatives
Amount of Gain or (Loss) Recognized in Income on Derivatives


For the Three Months Ended September 30For the Nine Months Ended September 30
(In thousands)2020201920202019
Derivative instruments:
  Interest rate swapsOther non-interest income$81 $1,519 $369 $2,646 
  Interest rate capsOther non-interest income1 — 20 — 
  Credit risk participation agreementsOther non-interest income(87)37 153 78 
  Foreign exchange contractsOther non-interest income (5)(82)(2)
  Mortgage loan commitmentsLoan fees and sales589 (112)2,678 287 
  Mortgage loan forward sale contractsLoan fees and sales20 (2)19 
  Forward TBA contractsLoan fees and sales(709)(1,412)(482)(819)
Total$(105)$25 $2,675 $2,191 

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

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

Gross Amounts Not Offset in the Balance Sheet
(In thousands)Gross Amount RecognizedGross Amounts Offset in the Balance SheetNet Amounts Presented in the Balance SheetFinancial Instruments Available for OffsetCollateral Received/PledgedNet Amount
September 30, 2020
Assets:
Derivatives subject to master netting agreements
$144,440 $ $144,440 $(9,933)$(37,441)$97,066 
Derivatives not subject to master netting agreements
3,410  3,410 
Total derivatives$147,850 $ $147,850 
Liabilities:
Derivatives subject to master netting agreements
$19,915 $ $19,915 $(9,933)$(8,719)$1,263 
Derivatives not subject to master netting agreements
455  455 
Total derivatives$20,370 $ $20,370 
December 31, 2019
Assets:
Derivatives subject to master netting agreements
$105,147 $— $105,147 $(8,104)$(59,525)$37,518 
Derivatives not subject to master netting agreements
527 — 527 
Total derivatives$105,674 $— $105,674 
Liabilities:
Derivatives subject to master netting agreements
$10,083 $— $10,083 $(8,104)$(437)$1,542 
Derivatives not subject to master netting agreements
136 — 136 
Total derivatives$10,219 $— $10,219 

12. Resale and Repurchase Agreements
The following table shows the extent to which assets and liabilities relating to securities purchased under agreements to resell (resale agreements) and securities sold under agreements to repurchase (repurchase agreements) have been offset in the consolidated balance sheets, in addition to the extent to which they could potentially be offset. Also shown is collateral received or pledged, which consists of marketable securities. The collateral amounts in the table are limited to the outstanding balances of the related asset or liability (after netting is applied); thus, amounts of excess collateral are not shown. The agreements in the following table were transacted under master netting arrangements that contain a conditional right of offset, such as close-out netting, upon default.

Resale and repurchase agreements are agreements to purchase/sell securities subject to an obligation to resell/repurchase the same or similar securities. They are accounted for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral accepted or pledged in resale and repurchase agreements with other financial institutions also may be sold or re-pledged by the secured party but is usually delivered to and held by third party trustees. The Company generally retains custody of securities pledged for repurchase agreements with customers.

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The Company is party to agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase and resale agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the consolidated balance sheets, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $200.0 million at September 30, 2020 and December 31, 2019. At September 30, 2020, the Company had posted collateral of $209.6 million in marketable securities, consisting of agency mortgage-backed bonds, and had accepted $209.0 million in agency mortgage-backed bonds.
Gross Amounts Not Offset in the Balance Sheet
(In thousands)Gross Amount RecognizedGross Amounts Offset in the Balance SheetNet Amounts Presented in the Balance SheetFinancial Instruments Available for OffsetSecurities Collateral Received/PledgedNet Amount
September 30, 2020
Total resale agreements, subject to master netting arrangements
$1,050,000 $(200,000)$850,000 $ $(850,000)$ 
Total repurchase agreements, subject to master netting arrangements
1,846,294 (200,000)1,646,294  (1,646,294) 
December 31, 2019
Total resale agreements, subject to master netting arrangements
$1,050,000 $(200,000)$850,000 $— $(850,000)$— 
Total repurchase agreements, subject to master netting arrangements
2,030,737 (200,000)1,830,737 — (1,830,737)— 
The table below shows the remaining contractual maturities of repurchase agreements outstanding at September 30, 2020 and December 31, 2019, in addition to the various types of marketable securities that have been pledged by the Company as collateral for these borrowings.

Remaining Contractual Maturity of the Agreements
(In thousands)Overnight and continuousUp to 90 daysGreater than 90 daysTotal
September 30, 2020
Repurchase agreements, secured by:
  U.S. government and federal agency obligations$146,935 $ $ $146,935 
  Government-sponsored enterprise obligations21,386   21,386 
  Agency mortgage-backed securities1,167,467 58,729 214,896 1,441,092 
  Non-agency mortgage-backed securities98,651   98,651 
  Asset-backed securities103,861   103,861 
  Other debt securities34,369   34,369 
   Total repurchase agreements, gross amount recognized$1,572,669 $58,729 $214,896 $1,846,294 
December 31, 2019
Repurchase agreements, secured by:
  U.S. government and federal agency obligations$526,283 $— $— $526,283 
  Government-sponsored enterprise obligations32,575 — — 32,575 
  Agency mortgage-backed securities973,774 48,517 227,802 1,250,093 
  Non-agency mortgage-backed securities71,399 — — 71,399 
  Asset-backed securities60,012 40,000 — 100,012 
  Other debt securities50,375 — — 50,375 
   Total repurchase agreements, gross amount recognized$1,714,418 $88,517 $227,802 $2,030,737 

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13. Stock-Based Compensation
The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights (SARs). Most of the awards are issued during the first quarter of each year. The stock-based compensation expense that has been charged against income was $3.8 million and $3.5 million in the three months ended September 30, 2020 and 2019, respectively, and $11.2 million and $10.4 million in the nine months ended September 30, 2020 and 2019, respectively.

Nonvested stock awards granted generally vest in 4 to 7 years and contain restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant. A summary of the status of the Company’s nonvested share awards as of September 30, 2020, and changes during the nine month period then ended, is presented below.

 
 
 

Shares
 Weighted Average Grant Date Fair Value
Nonvested at January 1, 20201,104,211 $47.57
Granted218,257 64.22
Vested(275,070)33.97
Forfeited(6,730)55.42
Nonvested at September 30, 20201,040,668 $54.61

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

Weighted per share average fair value at grant date$10.12 
Assumptions:
Dividend yield
1.7 %
Volatility
20.2 %
Risk-free interest rate
1.0 %
Expected term
5.8 years

A summary of SAR activity during the first nine months of 2020 is presented below.

 
 
 
 
(Dollars in thousands, except per share data)
Rights
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value
Outstanding at January 1, 20201,049,816 $43.55
Granted103,210 63.18
Forfeited(5,600)58.15 
Expired(150)57.07 
Exercised(150,029)34.52
Outstanding at September 30, 2020997,247 $46.866.4 years$10,582 

14. Revenue from Contracts with Customers
The core principle of ASU 2014-09, "Revenue from Contracts with Customers," is that an entity should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For the nine months ended September 30, 2020, approximately 63% of the Company’s total revenue was comprised of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services.

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The following table disaggregates non-interest income subject to ASU 2014-09 by major product line.

Three Months Ended September 30Nine Months Ended September 30
(In thousands)2020201920202019
Bank card transaction fees$37,873 $44,510 $111,818 $126,800 
Trust fees40,769 39,592 118,676 115,223 
Deposit account charges and other fees23,107 24,032 69,063 71,009 
Consumer brokerage services4,011 4,030 11,099 11,665 
Other non-interest income7,566 9,809 23,718 27,003 
Total non-interest income from contracts with customers113,326 121,973 334,374 351,700 
Other non-interest income (1)
16,246 10,770 36,376 29,542 
Total non-interest income$129,572 $132,743 $370,750 $381,242 
(1) This revenue is not within the scope of ASU 2014-09, and includes fees relating to capital market activities, loan fees and sales, derivative instruments, standby letters of credit and various other transactions.
For bank card transaction fees, the majority of debit and credit card fees are earned in the Consumer segment, while corporate card and merchant fees are earned in the Commercial segment. The Consumer and Commercial segments each contribute approximately half of the Company's deposit account charge revenue. All trust fees and nearly all of the consumer brokerage services income are earned in the Wealth segment.    

The following table presents the opening and closing receivable balances for the nine month periods ended September 30, 2020 and 2019 for the Company’s significant revenue categories subject to ASU 2014-09.

(In thousands)September 30, 2020December 31, 2019September 30, 2019December 31, 2018
Bank card transaction fees$11,501 $13,915 $10,871 $13,035 
Trust fees2,122 2,093 2,666 2,721 
Deposit account charges and other fees5,839 6,523 5,154 6,107 
Consumer brokerage services476 596 655 559 

For these revenue categories, none of the transaction price has been allocated to performance obligations that are unsatisfied as of the end of a reporting period.


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

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.
The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value Measurements note in the Company's 2019 Annual Report on Form 10-K. There have been no significant changes in these methodologies since then.

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Instruments Measured at Fair Value on a Recurring Basis

The table below presents the September 30, 2020 and December 31, 2019 carrying values of assets and liabilities measured at fair value on a recurring basis. There were no transfers among levels during the first nine months of 2020 or the year ended December 31, 2019.

Fair Value Measurements Using
(In thousands)
Total Fair Value
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
September 30, 2020
Assets:
  Residential mortgage loans held for sale$35,076 $ $35,076 $ 
  Available for sale debt securities:
     U.S. government and federal agency obligations835,058 835,058   
     Government-sponsored enterprise obligations95,301  95,301  
     State and municipal obligations1,969,144  1,961,278 7,866 
     Agency mortgage-backed securities6,081,802  6,081,802  
     Non-agency mortgage-backed securities332,970  332,970  
     Asset-backed securities1,658,579  1,658,579  
     Other debt securities566,207  566,207  
  Trading debt securities25,805  25,805  
  Equity securities2,803 2,803   
  Private equity investments78,462   78,462 
  Derivatives *147,850  144,273 3,577 
  Assets held in trust for deferred compensation plan17,294 17,294   
  Total assets11,846,351 855,155 10,901,291 89,905 
Liabilities:
  Derivatives *
20,370  19,185 1,185 
Liabilities held in trust for deferred compensation plan
17,294 17,294   
  Total liabilities$37,664 $17,294 $19,185 $1,185 
December 31, 2019
Assets:
  Residential mortgage loans held for sale$9,181 $— $9,181 $— 
  Available for sale debt securities:
     U.S. government and federal agency obligations851,776 851,776 — — 
     Government-sponsored enterprise obligations139,277 — 139,277 — 
     State and municipal obligations1,267,927 — 1,258,074 9,853 
     Agency mortgage-backed securities3,937,964 — 3,937,964 — 
     Non-agency mortgage-backed securities809,782 — 809,782 — 
     Asset-backed securities1,233,489 — 1,233,489 — 
     Other debt securities331,411 — 331,411 — 
  Trading debt securities28,161 — 28,161 — 
  Equity securities2,929 2,929 — — 
  Private equity investments94,122 — — 94,122 
  Derivatives *105,674 — 105,075 599 
  Assets held in trust for deferred compensation plan16,518 16,518 — — 
  Total assets8,828,211 871,223 7,852,414 104,574 
Liabilities:
  Derivatives *
10,219 — 9,989 230 
Liabilities held in trust for deferred compensation plan
16,518 16,518 — — 
  Total liabilities$26,737 $16,518 $9,989 $230 
* The fair value of each class of derivative is shown in Note 11.

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

Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)


(In thousands)
State and Municipal Obligations
Private Equity
Investments
DerivativesTotal
For the three months ended September 30, 2020
Balance June 30, 2020$9,490 $73,846 $1,888 $85,224 
Total gains or losses (realized/unrealized):
   Included in earnings  2,389 504 2,893 
   Included in other comprehensive income *271   271 
Investment securities called(2,000)  (2,000)
Discount accretion105   105 
Purchases of private equity investments 2,522  2,522 
Sale/pay down of private equity investments (295) (295)
Balance September 30, 2020$7,866 $78,462 $2,392 $88,720 
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2020$ $2,409 $3,050 $5,459 
Total gains or losses for the three months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2020$258 $ $ $258 
For the nine months ended September 30, 2020
Balance January 1, 2020$9,853 $94,122 $369 $104,344 
Total gains or losses (realized/unrealized):
   Included in earnings (18,116)2,832 (15,284)
   Included in other comprehensive income *(101)  (101)
Investment securities called(2,000)  (2,000)
Discount accretion114   114 
Purchases of private equity investments 2,791  2,791 
Sale/pay down of private equity investments (364) (364)
Capitalized interest/dividends 29  29 
Sale of risk participation agreement  (809)(809)
Balance September 30, 2020$7,866 $78,462 $2,392 $88,720 
Total gains or losses for the nine months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2020$ $(18,096)$3,262 $(14,834)
Total gains or losses for the nine months included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2020$(52)$ $ $(52)

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Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)


(In thousands)
State and Municipal Obligations
Private Equity
Investments
DerivativesTotal
For the three months ended September 30, 2019
Balance June 30, 2019$11,641 $86,411 $883 $98,935 
Total gains or losses (realized/unrealized):
Included in earnings— 2,020 (75)1,945 
Included in other comprehensive income *(65)— — (65)
Investment securities called(1,715)— — (1,715)
Discount accretion36 — — 36 
Purchases of private equity investments— 5,010 — 5,010 
Purchase of risk participation agreement— — 200 200 
Sale of risk participation agreement— — (241)(241)
Balance September 30, 2019$9,897 $93,441 $767 $104,105 
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2019$— $2,020 $860 $2,880 
For the nine months ended September 30, 2019
Balance January 1, 2019$14,158 $85,659 $490 $100,307 
Total gains or losses (realized/unrealized):
Included in earnings— (998)365 (633)
Included in other comprehensive income *294 — — 294 
Investment securities called(4,635)— — (4,635)
Discount accretion80 — — 80 
Purchases of private equity investments— 14,899 — 14,899 
Sale/pay down of private equity investments— (6,150)— (6,150)
Capitalized interest/dividends— 31 — 31 
Purchase of risk participation agreement— — 226 226 
Sale of risk participation agreement— — (314)(314)
Balance September 30, 2019$9,897 $93,441 $767 $104,105 
Total gains or losses for the nine months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2019$— $(2,448)$916 $(1,532)
* Included in "net unrealized gains (losses) on other securities" in the consolidated statements of comprehensive income.

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Gains and losses included in earnings for the Level 3 assets and liabilities in the previous table are reported in the following line items in the consolidated statements of income:
(In thousands)Loan Fees and SalesOther Non-Interest IncomeInvestment Securities Gains (Losses), Net
Total
For the three months ended September 30, 2020
Total gains or losses included in earnings$591 $(87)$2,389 $2,893 
Change in unrealized gains or losses relating to assets still held at September 30, 2020$3,137 $(87)$2,409 $5,459 
For the nine months ended September 30, 2020
Total gains or losses included in earnings $2,679 $153 $(18,116)$(15,284)
Change in unrealized gains or losses relating to assets still held at September 30, 2020$3,137 $125 $(18,096)$(14,834)
For the three months ended September 30, 2019
Total gains or losses included in earnings $(112)$37 $2,020 $1,945 
Change in unrealized gains or losses relating to assets still held at September 30, 2019$823 $37 $2,020 $2,880 
For the nine months ended September 30, 2019
Total gains or losses included in earnings$287 $78 $(998)$(633)
Change in unrealized gains or losses relating to assets still held at September 30, 2019$823 $93 $(2,448)$(1,532)

Level 3 Inputs
The Company's significant Level 3 measurements, which employ unobservable inputs that are readily quantifiable, pertain to auction rate securities (ARS), investments in portfolio concerns held by the Company's private equity subsidiaries, and held for sale residential mortgage loan commitments. ARS are included in state and municipal securities and totaled $7.9 million at September 30, 2020, while private equity investments, included in other securities, totaled $78.5 million.
Information about these inputs is presented in the table below.

Quantitative Information about Level 3 Fair Value MeasurementsWeighted
Valuation TechniqueUnobservable InputRangeAverage*
Auction rate securitiesDiscounted cash flowEstimated market recovery period5 years5 years
Estimated market rate1.9%-2.3%1.9%
Private equity investmentsMarket comparable companiesEBITDA multiple4.0-6.05.3
Mortgage loan commitmentsDiscounted cash flowProbability of funding58.7%-99.8%84.1%
Embedded servicing value.6%-1.0%0.9%
* Unobservable inputs were weighted by the relative fair value of the instruments.

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Instruments Measured at Fair Value on a Nonrecurring Basis
For assets measured at fair value on a nonrecurring basis during the first nine months of 2020 and 2019, and still held as of September 30, 2020 and 2019, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation inputs used to determine each adjustment, and the carrying value of the related individual assets or portfolios at September 30, 2020 and 2019.

Fair Value Measurements Using
(In thousands)

Fair Value
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total Gains (Losses) Recognized During the Nine Months Ended September 30
September 30, 2020
  Collateral dependent impaired loans$11,772 $ $ $11,772 $(3,214)
  Mortgage servicing rights5,731   5,731 (1,823)
September 30, 2019
  Collateral dependent impaired loans$171 $— $— $171 $(139)
  Mortgage servicing rights7,235 — — 7,235 (404)
  Long-lived assets820 — — 820 (318)

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

Quantitative Information about Level 3 Fair Value MeasurementsWeighted
Valuation TechniqueUnobservable InputRangeAverage*
Mortgage servicing rightsDiscounted cash flowDiscount rate9.16 %-9.30 %9.28 %
Prepayment speeds (CPR)*13.22 %-14.80 %14.58 %
Loan servicing costs - annually per loan
    Performing loans$71 -$72 $72 
    Delinquent loans$200 -$750 
    Loans in foreclosure$1,000 
*Ranges and weighted averages based on interest rate tranches.

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are updated periodically for changes in market conditions. Actual rates may differ from our estimates. Increases in prepayment speed and discount rates negatively impact the fair value of our mortgage servicing rights.

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

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The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as follows at September 30, 2020 and December 31, 2019:

Carrying Amount
Estimated Fair Value at September 30, 2020

(In thousands)

Level 1
Level 2
Level 3
Total
Financial Assets
Loans:
Business$6,683,413 $ $ $6,623,709 $6,623,709 
Real estate - construction and land
1,009,729   978,403 978,403 
Real estate - business
2,993,192   2,986,961 2,986,961 
Real estate - personal
2,753,867   2,766,421 2,766,421 
Consumer
2,006,360   1,990,589 1,990,589 
Revolving home equity324,203   320,264 320,264 
Consumer credit card647,893   576,898 576,898 
Overdrafts
2,270   2,227 2,227 
Total loans16,420,927   16,245,472 16,245,472 
Loans held for sale39,483  39,483  39,483 
Investment securities11,691,601 837,861 10,721,942 131,798 11,691,601 
Federal funds sold2,275 2,275   2,275 
Securities purchased under agreements to resell850,000   903,772 903,772 
Interest earning deposits with banks1,171,697 1,171,697   1,171,697 
Cash and due from banks357,616 357,616   357,616 
Derivative instruments147,850  144,273 3,577 147,850 
Assets held in trust for deferred compensation plan17,294 17,294   17,294 
       Total$30,698,743 $2,386,743 $10,905,698 $17,284,619 $30,577,060 
Financial Liabilities
Non-interest bearing deposits$10,727,827 $10,727,827 $ $ $10,727,827 
Savings, interest checking and money market deposits12,983,505 12,983,505  — 12,983,505 
Certificates of deposit1,990,447   2,002,118 2,002,118 
Federal funds purchased6,770 6,770  — 6,770 
Securities sold under agreements to repurchase1,646,294   1,646,338 1,646,338 
Derivative instruments20,370  19,185 1,185 20,370 
Liabilities held in trust for deferred compensation plan17,294 17,294  — 17,294 
       Total$27,392,507 $23,735,396 $19,185 $3,649,641 $27,404,222 

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Carrying AmountEstimated Fair Value at December 31, 2019

(In thousands)
Level 1
Level 2
Level 3
Total
Financial Assets
Loans:
Business$5,565,449 $— $— $5,526,303 $5,526,303 
Real estate - construction and land
899,377 — — 898,152 898,152 
Real estate - business
2,833,554 — — 2,849,213 2,849,213 
Real estate - personal
2,354,760 — — 2,333,002 2,333,002 
Consumer
1,964,145 — — 1,938,505 1,938,505 
Revolving home equity349,251 — — 344,424 344,424 
Consumer credit card764,977 — — 708,209 708,209 
Overdrafts
6,304 — — 4,478 4,478 
Total loans14,737,817 — — 14,602,286 14,602,286 
Loans held for sale13,809 — 13,809 — 13,809 
Investment securities8,741,888 854,705 7,738,158 149,025 8,741,888 
Securities purchased under agreements to resell850,000 — — 869,592 869,592 
Interest earning deposits with banks395,850 395,850 — — 395,850 
Cash and due from banks491,615 491,615 — — 491,615 
Derivative instruments105,674 — 105,075 599 105,674 
Assets held in trust for deferred compensation plan16,518 16,518 — — 16,518 
       Total$25,353,171 $1,758,688 $7,857,042 $15,621,502 $25,237,232 
Financial Liabilities
Non-interest bearing deposits$6,890,687 $6,890,687 $— $— $6,890,687 
Savings, interest checking and money market deposits11,621,716 11,621,716 — — 11,621,716 
Certificates of deposit2,008,012 — — 2,022,629 2,022,629 
Federal funds purchased20,035 20,035 — — 20,035 
Securities sold under agreements to repurchase1,830,737 — — 1,831,518 1,831,518 
Other borrowings988 — 988 — 988 
Derivative instruments10,219 — 9,989 230 10,219 
Liabilities held in trust for deferred compensation plan16,518 16,518 — — 16,518 
       Total$22,398,912 $18,548,956 $10,977 $3,854,377 $22,414,310 

17. Legal and Regulatory Proceedings
The Company has various legal proceedings pending at September 30, 2020, arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at early stages of the legal process. The Company records a loss accrual for all legal and regulatory matters for which it deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet progressed to the point where a loss amount can be determined to be probable and estimable.

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 2019 Annual Report on Form 10-K. Results of operations for the three and nine month periods ended September 30, 2020 are not necessarily indicative of results to be attained for any other period.

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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 2019 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, 2020, there were no material changes to the Risk Factors disclosed in the Company's 2019 Annual Report on Form 10-K.

Critical Accounting Policies
The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses and the valuation of certain investment securities. A discussion of these policies can be found in the sections captioned "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2019 Annual Report on Form 10-K. On January 1, 2020, the Company adopted ASU 2016-13 (CECL), and as a result, the Company's "Allowance for Loan Losses" accounting policy has been replaced by its "Allowance for Credit Losses" policy. There have been no other changes in the Company's application of critical accounting policies since December 31, 2019.

Allowance for Credit Losses
The Company’s Allowance for Credit Losses policy covers the collectability of its loan portfolio, the exposure of its unfunded lending commitments, and the potential for credit losses in its available for sale investment portfolio. The Company performs periodic and systematic detailed reviews of its loan portfolio and unfunded lending commitments to assess overall collectability. The level of the allowance for credit losses on loans and unfunded lending commitments reflects the Company's estimate of the losses inherent in the loan portfolio and unfunded lending commitments at any point in time. While these estimates are based on substantive methods for determining allowance requirements, actual outcomes may differ significantly from estimated results, especially when determining allowances for business, construction and business real estate loans, as well as for their related unfunded lending commitments. These loans and commitments are normally larger and more complex, and their collection rates are harder to predict. Personal banking loans, including personal real estate, credit card and consumer loans, are individually smaller and perform in a more homogenous manner, making loss estimates more predictable. Additionally, the allowance for credit losses requires the calculation of expected lifetime credit losses utilizing a forward-looking forecast of macroeconomic conditions, which may differ significantly from actual results. Further discussion of the methodology used in establishing the allowance is provided in the Allowance for Credit Losses on Loans and Liability for Unfunded Lending Commitments section of Item 2 and in Note 1 to the consolidated financial statements.

The level of the allowance for credit losses on available for sale securities reflects the Company’s estimate of the losses inherent in the available for sale debt security portfolio. In order to estimate the allowance for credit losses on available for sale debt securities, the Company performs quarterly reviews of its investment portfolio to identify securities in an unrealized loss position. If the unrealized loss is not expected to be recovered, the Company performs further analyses to determine whether any portion of the unrealized loss indicates that a credit loss exists. Further discussion of the methodology used in establishing the allowance for credit losses on available for sale securities is provided in Note 1 to the consolidated financial statements.
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Selected Financial Data
Three Months Ended September 30Nine Months Ended September 30
 2020201920202019
Per Share Data
   Net income per common share — basic$1.12 $.93 *$1.90 $2.65 *
   Net income per common share — diluted1.11 .93 *1.89 2.65 *
   Cash dividends on common stock.270 .248 *.810 .744 *
   Book value per common share29.64 26.27 *
   Market price56.29 57.76 *
Selected Ratios
(Based on average balance sheets)
   Loans to deposits (1)
66.23 %72.48 %69.12 %71.47 %
   Non-interest bearing deposits to total deposits39.61 31.85 36.96 31.86 
   Equity to loans (1)
20.54 21.88 20.96 21.58 
   Equity to deposits13.60 15.86 14.49 15.43 
   Equity to total assets10.90 12.41 11.42 12.21 
   Return on total assets1.71 1.72 1.04 1.68 
   Return on common equity15.21 14.21 8.93 14.11 
(Based on end-of-period data)
   Non-interest income to revenue (2)
37.50 39.48 37.42 38.13 
   Efficiency ratio (3)
55.00 56.66 57.37 57.08 
   Tier I common risk-based capital ratio13.45 13.76 
   Tier I risk-based capital ratio
13.45 14.50 
   Total risk-based capital ratio 14.62 15.33 
   Tangible common equity to tangible assets ratio (4)
10.11 10.95 
   Tier I leverage ratio
9.39 11.32 

* Restated for the 5% stock dividend distributed in December 2019.
(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)
20202019
Total equity$3,306,264 $3,106,014 
Less non-controlling interest601 3,414 
Less preferred stock 144,784 
Less goodwill 138,921 138,921 
Less core deposit premium1,452 1,904 
Total tangible common equity (a)$3,165,290 $2,816,991 
Total assets$31,453,817 $25,876,479 
Less goodwill138,921 138,921 
Less core deposit premium1,452 1,904 
Total tangible assets (b)$31,313,444 $25,735,654 
Tangible common equity to tangible assets ratio (a)/(b)10.11 %10.95 %

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Results of Operations

Summary
  Three Months Ended September 30Nine Months Ended September 30
(Dollars in thousands)20202019% change20202019% change
Net interest income$215,962 $203,512 6.1 %$620,084 $618,634 .2 %
Provision for credit losses(3,101)(10,963)(71.7)(141,593)(35,232)N.M.
Non-interest income129,572 132,743 (2.4)370,750 381,242 (2.8)
Investment securities gains (losses), net16,155 4,909 N.M.(1,275)3,874 N.M.
Non-interest expense(190,858)(191,020)(0.1)(572,068)(572,224)— 
Income taxes(34,375)(29,101)18.1 (54,209)(80,860)(33.0)
Non-controlling interest income (expense)(907)(838)8.2 2,479 (1,083)N.M.
Net income attributable to Commerce Bancshares, Inc.132,448 109,242 21.2 224,168 314,351 (28.7)
Preferred stock dividends(7,466)(2,250)N.M.(11,966)(6,750)77.3 
Net income available to common shareholders$124,982 $106,992 16.8 %$212,202 $307,601 (31.0)%
N.M. - Not meaningful.

For the quarter ended September 30, 2020, net income attributable to Commerce Bancshares, Inc. (net income) amounted to $132.4 million, an increase of $23.2 million, or 21.2%, compared to the third quarter of the previous year. For the current quarter, the annualized return on average assets was 1.71%, the annualized return on average common equity was 15.21%, and the efficiency ratio was 55.00%. Diluted earnings per common share was $1.11, an increase of 19.4% compared to $.93 per share in the third quarter of 2019, and increased 226.5% compared to $.34 per share in the previous quarter.

Compared to the third quarter of last year, net interest income increased $12.5 million, or 6.1%, mainly due to a decline of $21.1 million in interest expense on deposits and borrowings, and increases in interest income on long-term securities purchased under agreements to resell and investment securities of $7.6 million and $1.9 million, respectively. These increases to net interest income were partly offset by a decrease of $17.2 million in interest income on loans. The provision for credit losses totaled $3.1 million for the current quarter, representing a decrease of $7.8 million from the third quarter of 2019. Non-interest income decreased $3.2 million, or 2.4%, compared to the third quarter of 2019, mainly due to lower net bank card fees, partly offset by growth in loan fees and sales. Net investment securities gains totaled $16.2 million in the current quarter compared to gains of $4.9 million in the same quarter last year. Net securities gains in the current quarter primarily resulted from gains of $13.4 million on the sales of mortgage-backed securities coupled with unrealized gains of $2.4 million in the Company's private equity investment portfolio. Non-interest expense decreased $162 thousand, from the third quarter of 2019 mainly due to lower travel and entertainment, marketing and supplies and communication expense, partly offset by higher salaries and employee benefits expense.

Net income for the first nine months of 2020 was $224.2 million, a decrease of $90.2 million, or 28.7%, from the same period last year. Diluted earnings per common share was $1.89, a decrease of 28.7% compared to $2.65 per share in the same period last year. For the first nine months of 2020, the annualized return on average assets was 1.04%, the annualized return on average common equity was 8.93% and the efficiency ratio was 57.37%. Net interest income increased $1.5 million over the same period last year. This increase was largely due to an increase of $18.4 million in interest income on long-term securities purchased under agreements to resell and a decrease of $41.5 million in interest expense on deposits and borrowings, partly offset by decreases in interest income on loans and investment securities of $41.0 million and $14.3 million, respectively. The provision for credit losses was $141.6 million for the first nine months of 2020, up $106.4 million over the same period last year. Non-interest income decreased $10.5 million, or 2.8%, from the first nine months of last year due to lower net bank card fees and swap fees, partly offset by growth in loan fees and sales, capital market fees and trust fees. Non-interest expense was flat with the prior year as higher salaries and benefits expense of $17.0 million was offset by lower marketing and travel and entertainment expense and higher deferred origination costs.
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Net Interest Income
The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.

Analysis of Changes in Net Interest Income
Three Months Ended September 30, 2020 vs. 2019Nine Months Ended September 30, 2020 vs. 2019
 Change due toChange due to
 
(In thousands)
Average
Volume
Average
Rate

Total
Average
Volume
Average
Rate

Total
Interest income, fully taxable equivalent basis:
Loans:
  Business$14,850 $(16,241)$(1,391)$36,880 $(44,164)$(7,284)
  Real estate - construction and land743 (4,245)(3,502)817 (10,102)(9,285)
  Real estate - business1,181 (6,787)(5,606)2,149 (16,376)(14,227)
  Real estate - personal5,378 (2,488)2,890 12,521 (5,131)7,390 
  Consumer833 (3,493)(2,660)1,504 (4,517)(3,013)
  Revolving home equity(321)(1,574)(1,895)(825)(3,489)(4,314)
  Consumer credit card(3,659)(1,722)(5,381)(8,390)(2,407)(10,797)
  Overdrafts— — — — — — 
     Total interest on loans19,005 (36,550)(17,545)44,656 (86,186)(41,530)
Loans held for sale12 (56)(44)(310)(105)(415)
Investment securities:
  U.S. government and federal agency securities(327)2,606 2,279 (1,463)(2,760)(4,223)
  Government-sponsored enterprise obligations(535)(137)(672)(1,402)815 (587)
  State and municipal obligations4,704 (2,754)1,950 4,772 (3,660)1,112 
  Mortgage-backed securities10,152 (10,492)(340)17,380 (22,036)(4,656)
  Asset-backed securities1,572 (3,480)(1,908)(1,276)(5,384)(6,660)
  Other securities899 (177)722 1,675 (969)706 
     Total interest on investment securities16,465 (14,434)2,031 19,686 (33,994)(14,308)
Federal funds sold and short-term securities purchased under
   agreements to resell(5)(2)(7)(46)(3)(49)
Long-term securities purchased under agreements to resell692 6,934 7,626 2,289 16,090 18,379 
Interest earning deposits with banks4,352 (5,332)(980)14,693 (17,810)(3,117)
Total interest income40,521 (49,440)(8,919)80,968 (122,008)(41,040)
Interest expense:
Deposits:
  Savings74 (68)139 (116)23 
  Interest checking and money market1,255 (8,280)(7,025)1,937 (16,549)(14,612)
  Certificates of deposit of less than $100,000(131)(581)(712)(151)(183)(334)
  Certificates of deposit of $100,000 and over(244)(4,784)(5,028)(217)(8,899)(9,116)
     Total interest on deposits954 (13,713)(12,759)1,708 (25,747)(24,039)
Federal funds purchased and securities sold under
   agreements to repurchase(624)(7,243)(7,867)1,107 (19,185)(18,078)
Other borrowings(444)(9)(453)2,464 (1,895)569 
Total interest expense(114)(20,965)(21,079)5,279 (46,827)(41,548)
Net interest income, tax equivalent basis$40,635 $(28,475)$12,160 $75,689 $(75,181)$508 

Net interest income in the third quarter of 2020 was $216.0 million, an increase of $12.5 million over the third quarter of 2019. On a tax equivalent (T/E) basis, net interest income totaled $219.1 million in the third quarter of 2020, up $12.2 million over the same period last year and up $12.9 million over the previous quarter. The increase in net interest income compared to the third quarter of 2019 was mainly due to lower interest expense on interest bearing deposits and borrowings of $21.1 million and higher interest income on long-term securities purchased under agreements to resell of $7.6 million and investment securities (T/E) of $2.0 million, partly offset by lower interest income on loans (T/E) of $17.5 million. The decrease in interest
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earned on loans (T/E) was mainly the result of lower yields on all loan products, especially commercial loans, many of which have variable rates, partly offset by higher business and personal real estate loan balances. Total interest income on investment securities (T/E) increased $2.0 million over the third quarter of last year mainly due to growth in average balances, while the decrease in expense on interest bearing deposits and borrowings was a result of a decline in the average rate paid. The Company's net yield on earning assets (T/E) was 2.97% in the current quarter compared to 3.43% in the third quarter of 2019.

Total interest income (T/E) decreased $8.9 million from the third quarter of 2019. Interest income on loans (T/E) was $152.0 million during the third quarter of 2020, and decreased $17.5 million, or 10.4%, from the same quarter last year. The decrease in interest income from the same quarter last year was primarily due to a decline of 102 basis points in the average rate earned, partly offset by growth of $2.1 billion, or 14.5%, in average loan balances. Most of the decrease in interest income occurred in the business, business real estate, consumer credit card, construction, and consumer loan categories. Business loan interest decreased $1.4 million mainly due to a 90 basis point decline in the average rate earned, partly offset by growth of $1.4 billion in average balances. The growth in average balances was mainly the result of Paycheck Protection Plan (PPP) loans secured for customers in the second quarter of 2020 as part of the program sponsored by the Small Business Administration ("SBA"). Business real estate loan interest income fell $5.6 million due to an 89 basis point decrease in the average rate earned, partly offset by higher average balances of $106.3 million, or 3.7%. Consumer credit card loan interest declined $5.4 million due to a decline of $117.2 million, or 15.4%, in average balances, coupled with a decrease of 102 basis points in the average rate earned. Construction loan interest decreased $3.5 million due to a decline of 172 basis points in the average rate earned, partly offset by growth in the average balance of $54.1 million. Consumer loan interest declined $2.7 million due to a decrease of 69 basis points in the average rate earned, partly offset by growth in the average balance of $67.9 million, or 3.5%. These decreases to interest income (T/E) were partly offset by an increase of $2.9 million in interest income on personal real estate loans, due to growth of $547.1 million, or 25.2%, in average balances, while the average rate earned on these loans declined 35 basis points.

Interest income on investment securities (T/E) was $62.5 million during the third quarter of 2020, which was an increase of $2.0 million over the same quarter last year. The increase in interest income occurred mainly in interest income on U.S. government & federal agency obligations, which grew $2.3 million due to higher 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, grew $2.3 million over the same quarter last year. In addition, interest income on state and municipal obligations increased $2.0 million and resulted from growth in the average balance of $595.3 million, or 50.8%, partly offset by a 61 basis point decrease in the average rate earned. These increases to interest income on investment securities (T/E) was partly offset by a decline in interest income on asset-backed securities of $1.9 million, mainly due to a decline in the average rate earned of 90 basis points, partly offset by higher average balances of $223.3 million. Interest earned on mortgage-backed securities declined slightly by $340 thousand due to a 66 basis point decline in the average rate earned offset by an increase of $1.5 billion in the average balance. Adjustments to premium amortization, due to faster prepayment speeds on various mortgage-backed and asset-backed securities, increased interest income $1.0 million in the current quarter, compared to a $368 thousand decrease in 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 $11.1 billion in the third quarter of 2020, compared to $8.7 billion in the third quarter of 2019.

Interest income on long-term securities purchased under agreements to resell increased $7.6 million over the same quarter last year, due to an increase of 325 basis points in the average rate earned, as these assets were structured with floor spreads to protect against falling rates. Of the $850 million in securities purchased under agreements to resell held by the Company throughout 2020, $450 million of those agreements will mature throughout 2021. Interest income on balances at the Federal Reserve declined $980 thousand mainly due to a 207 basis point decrease in the average rate earned, partly offset by a $797.9 million increase in the average balance invested.

The average tax equivalent yield on total interest earning assets was 3.07% in the third quarter of 2020, down from 3.90% in the third quarter of 2019.

Total interest expense decreased $21.1 million compared to the third quarter of 2019 due to a $12.8 million decrease in interest expense on interest bearing deposits and an $8.3 million decrease in interest expense on borrowings. The decrease in deposit interest expense resulted mainly from a 40 basis point decline in the overall average rate paid, slightly offset by higher average balances of $1.5 billion. Interest expense on interest checking and money market accounts declined $7.0 million, due to a 28 basis point decrease in the average rate paid, while interest expense on jumbo certificates of deposit (CD) declined $5.0 million due to a 130 basis point decrease in the average rate paid. Interest expense on borrowings decreased due to lower rates paid, mainly on customer repurchase agreements. The overall average rate incurred on all interest bearing liabilities was .17% and .73% in the third quarters of 2020 and 2019, respectively.

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Net interest income (T/E) for the first nine months of 2020 was $629.8 million compared to $629.3 million for the same period in 2019. For the first nine months of 2020, the net interest margin was 3.07% compared to 3.52% for the same period in 2019.

Total interest income (T/E) for the first nine months of 2020 decreased $41.0 million from the same period last year mainly due to lower interest income on loans. Loan interest income (T/E) declined $41.5 million, or 8.2%, due to an 84 basis point decline in the average rate earned, partly offset by a $1.6 billion increase in total average loan balances. Interest rates were impacted by actions taken by the Federal Reserve during the first quarter of 2020 to lower short-term interest rates. Most of the decrease in loan interest occurred in business real estate, construction and business loans, due to lower interest rates, partly offset by higher average loan balances in these categories. Consumer credit card loan interest decreased due to declines in both the average balance and rate. These decreases to income were partly offset by an increase in interest income on personal real estate loans of $7.4 million due to higher average balances, partly offset by a decline in the average rate earned. Interest income on investment securities (T/E) declined $14.3 million mainly due to a 47 basis point decline in the average rate earned, partly offset by an increase of $935.1 million in average balances. Interest earned on asset-backed securities declined $6.7 million due to lower average balances and rates, while interest earned on mortgage-backed securities declined $4.7 million due to lower average rates earned, partly offset by higher average balances. U.S. government and federal agency obligations declined $4.2 million, mainly due to lower TIPS interest income of $3.6 million. Interest income on balances at the Federal Reserve decreased $3.1 million due to a 211 basis point decline in the average rate earned, partly offset by an $835.2 million increase in the average balance invested. These decreases to interest income were partly offset by an increase of $18.4 million in interest income earned on long-term securities purchased under agreements to resell due to higher average balances and rates.

Total interest expense for the first nine months of 2020 decreased $41.5 million compared to the same period last year. Interest expense on interest bearing deposits decreased $24.0 million, mainly due to a 26 basis point decrease in the overall rate paid. Interest expense on interest checking and money market account balances decreased $14.6 million due to a 20 basis point decrease in rates paid. Interest expense on jumbo CD's declined $9.1 million due to an 87 basis point decline in rates paid. Interest expense on borrowings decreased $17.5 million, mainly due to lower rates paid on customer repurchase agreements. The overall cost of total interest bearing liabilities decreased to .31% compared to .69% 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.

Non-Interest Income
  Three Months Ended September 30Nine Months Ended September 30
(Dollars in thousands)20202019% change20202019% change
Bank card transaction fees$37,873 $44,510 (14.9)%$111,818 $126,800 (11.8)%
Trust fees40,769 39,592 3.0 118,676 115,223 3.0 
Deposit account charges and other fees23,107 24,032 (3.8)69,063 71,009 (2.7)
Capital market fees3,194 1,787 78.7 10,756 5,610 91.7 
Consumer brokerage services4,011 4,030 (0.5)11,099 11,665 (4.9)
Loan fees and sales9,769 4,755 105.4 17,653 12,302 43.5 
Other10,849 14,037 (22.7)31,685 38,633 (18.0)
Total non-interest income$129,572 $132,743 (2.4)%$370,750 $381,242 (2.8)%
Non-interest income as a % of total revenue*37.5 %39.5 %37.4 %38.1 %
* 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, 2020 and 2019.
Three Months Ended September 30Nine Months Ended September 30
(Dollars in thousands)20202019% change20202019% change
Net debit card fees$9,721 $10,490 (7.3)%$27,863 $29,605 (5.9)%
Net credit card fees3,359 3,642 (7.8)9,749 10,667 (8.6)
Net merchant fees4,551 4,495 1.2 13,165 14,249 (7.6)
Net corporate card fees20,242 25,883 (21.8)61,041 72,279 (15.5)
Total bank card transaction fees$37,873 $44,510 (14.9)%$111,818 $126,800 (11.8)%

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For the third quarter of 2020, total non-interest income amounted to $129.6 million compared with $132.7 million in the same quarter last year, which was a decrease of $3.2 million, or 2.4%. The decrease was mainly due to lower net bank card fees and other non-interest income, partly offset by higher loan fees and sales. Bank card transaction fees for the current quarter declined $6.6 million, or 14.9%, from the same period last year, due to lower net corporate card fees of $5.6 million, net debit card fees of $769 thousand and net credit card fees of $283 thousand. The decline in net corporate card fees from the same quarter last year was mainly due to lower transaction volume, while the decrease in net debit and credit card fees was mainly due to lower interchange income. Trust fees for the quarter increased $1.2 million, or 3.0%, over the same quarter last year, resulting mainly from higher private client fees, which were up 3.5%. Compared to the same period last year, deposit account fees decreased $925 thousand, or 3.8%, mainly due to lower overdraft and return item fees, partly offset by an increase in corporate cash management fees. Capital market fees increased $1.4 million, or 78.7%, while consumer brokerage service fees decreased slightly from the same quarter last year. Loan fees and sales increased $5.0 million, or 105.4%, due to higher mortgage banking revenue. Other non-interest income decreased $3.2 million, or 22.7%, mainly due to lower interest rate swap fees, cash sweep commissions and gains on sales of leased assets to customers upon termination. These decreases were partly offset by growth in tax credit sales income.

Non-interest income for the first nine months of 2020 was $370.8 million compared to $381.2 million last year, resulting in a decrease of $10.5 million, or 2.8%. Bank card fees decreased $15.0 million, or 11.8%, due to declines in net corporate card fees of $11.2 million, net debit card fees of $1.7 million, net merchant fees of $1.1 million and net credit card fees of $918 thousand. Trust fee income increased $3.5 million, or 3.0%, as a result of growth in private client trust fees, partly offset by a decline in corporate trust fee income. Deposit account fees decreased $1.9 million due to lower overdraft and return item fees of $6.0 million, partly offset by higher corporate cash management fees of $4.1 million. Capital market fees increased $5.1 million, or 91.7%, as a result of higher sales volume, while consumer brokerage fees declined $566 thousand, or 4.9%. Loan fees and sales increased $5.4 million, or 43.5%, due to higher mortgage banking revenue. Other non-interest income decreased $6.9 million, mainly due to lower swap fees and lower gains on sales of leased assets. In addition, fair value adjustments on the Company's deferred compensation plan assets, which are held in a trust and recorded as both an asset and a liability, decreased $1.4 million from the same period last year, affecting both other income and other expense. These decreases were partly offset by an increase in tax credit sales income.

Investment Securities Gains (Losses), Net
Three Months Ended September 30Nine Months Ended September 30
(In thousands)2020201920202019
Net gains on sales of available for sale debt securities$13,674 $38 $16,965 $728 
Net gains on sales of equity securities 2,865 2 2,865 
Net losses on sales and fair value adjustments of private equity investments2,389 2,020 (18,116)96 
Fair value adjustments on equity securities, net92 56 (126)318 
Other (70) (133)
Total investment securities gains (losses), net$16,155 $4,909 $(1,275)$3,874 

Net gains on investment securities, which were recognized in earnings during the three months ended September 30, 2020 and 2019, are shown in the table above. Net securities gains of $16.2 million were reported in the third quarter of 2020, compared to net gains of $4.9 million in the same period last year. The net gains in the third quarter of 2020 were primarily comprised of net gains of $13.7 million 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. The net gains on investment securities for the same quarter last year were mainly comprised of a gain of $2.9 million on the sale of an equity investment and $2.0 million of net gains in fair value on the Company’s private equity investments.

Net losses on investment securities of $1.3 million were recognized in earnings for the nine months ended September 30, 2020, compared to net gains of $3.9 million for the same period in 2019. Net losses in the first nine months of 2020 were mainly comprised of fair value adjustments on private equity investments partly offset by net gains on the sales of available for sale debt securities. Net gains in the first nine months of 2019 were mainly comprised of net gains on the sales of available for sale debt securities and equity 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 income of $3.2 million during the first nine months of 2020 and expense of $291 thousand during the first nine months of 2019.
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Non-Interest Expense
  Three Months Ended September 30Nine Months Ended September 30
(Dollars in thousands)20202019% change20202019% change
Salaries and employee benefits$127,308 $123,836 2.8 %$383,004 $366,026 4.6 %
Net occupancy12,058 12,293 (1.9)35,075 34,939 .4 
Equipment4,737 4,941 (4.1)14,313 14,202 .8 
Supplies and communication4,141 5,106 (18.9)13,226 15,543 (14.9)
Data processing and software23,610 23,457 .7 71,002 68,965 3.0 
Marketing4,926 6,048 (18.6)14,706 17,963 (18.1)
Other14,078 15,339 (8.2)40,742 54,586 (25.4)
Total non-interest expense$190,858 $191,020 (.1)%$572,068 $572,224 — %

Non-interest expense for the third quarter of 2020 amounted to $190.9 million, a decrease of $162 thousand, or .1%, compared to expense of $191.0 million in the third quarter of last year. The decrease in expense was primarily due to lower travel and entertainment, marketing, and supplies and communication expense, partly offset by higher costs for salaries and employee benefits. Salaries expense increased $2.9 million, or 2.8%, driven by growth in full-time salary costs and incentive compensation. Employee benefits expense totaled $18.7 million, reflecting an increase of $559 thousand, or 3.1%, mainly as a result of higher healthcare expense. Full-time equivalent employees totaled 4,825 at September 30, 2020, compared to 4,873 at September 30, 2019. Supplies and communication expense declined $965 thousand, or 18.9%, due to lower supplies, postage and bank card issuance expense, while marketing expense declined $1.1 million, or 18.6%. Other non-interest expense decreased $1.3 million mainly due to lower travel and entertainment expense, partly offset by an increase in FDIC insurance expense, resulting from higher deposit account balances during the current quarter than in the third quarter of 2019.

Non-interest expense amounted to $572.1 million for the first nine months of 2020, a decrease of $156 thousand compared to expense of $572.2 million in the same period last year. Salaries and benefits expense increased $17.0 million, or 4.6%, mainly due to higher costs for full-time salaries and incentive compensation. Supplies and communication expense declined $2.3 million, or 14.9%, mainly due to lower debit and credit card reissuance expense. Data processing expense increased $2.0 million, or 3.0%, mostly due to higher costs for service providers, partly offset by lower bank card processing expense, while marketing expense declined $3.3 million, or 18.1%. Other non-interest expense decreased $13.8 million, or 25.4%, mainly due to lower travel and entertainment expense and higher deferred origination costs, in addition to the previously mentioned fair value equity adjustments of $1.4 million on the Company's deferred compensation plan assets. These decreases to expense were partly offset by a $1.4 million increase in impairment expense on the Company's mortgage servicing rights and an increase in FDIC insurance expense.

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

 Three Months EndedNine Months Ended September 30
Sept. 30, 2020June 30, 2020Sept. 30, 201920202019
ALLOWANCE FOR CREDIT LOSSES ON LOANS
Balance at end of prior period$240,744 $171,653 $161,182 $160,682 $159,932 
   Adoption of ASU 2016-13 — — (21,039)— 
Balance at beginning of period$240,744 $171,653 $161,182 $139,643 $159,932 
   Provision for credit losses on loans3,200 77,491 10,963 $123,559 $35,232 
   Net loan charge-offs (recoveries):
     Commercial:
        Business208 3,249 335 3,084 1,066 
        Real estate-construction and land(1)— — (1)(117)
        Real estate-business(13)(6)(44)(40)(95)
Commercial net loan charge-offs194 3,243 291 3,043 854 
     Personal Banking:
        Real estate-personal(198)(71)(30)(273)50 
        Consumer211 1,362 2,069 3,284 5,716 
        Revolving home equity(86)(34)119 (158)254 
        Consumer credit card7,263 3,584 8,568 20,004 26,592 
        Overdrafts200 316 446 942 1,016 
Personal banking net loan charge-offs
7,390 5,157 11,172 23,799 33,628 
Total net loan charge-offs7,584 8,400 11,463 26,842 34,482 
Balance at end of period$236,360 $240,744 $160,682 $236,360 $160,682 
LIABILITY FOR UNFUNDED LENDING COMMITMENTS
Balance at end of prior period$35,299 $32,250 $1,075 $1,075 $1,075 
   Adoption of ASU 2016-13 — — 16,090 — 
Balance at beginning of period35,299 32,250 1,075 17,165 1,075 
Provision for credit losses on unfunded lending commitments(99)3,049 — 18,035 — 
Balance at end of period35,200 35,299 1,075 35,200 1,075 
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LIABILITY FOR UNFUNDED LENDING COMMITMENTS$271,560 $276,043 $161,757 $271,560 $161,757 

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 Three Months EndedNine Months Ended September 30
Sept. 30, 2020June 30, 2020Sept. 30, 201920202019
Annualized net loan charge-offs (recoveries)*:
Commercial:
  Business.01 %.19 %.03 %.07 %.03 %
  Real estate-construction and land — —  (.02)
  Real estate-business — (.01) — 
Commercial net loan charge-offs.01 .12 .01 .04 .01 
Personal Banking:
  Real estate-personal(.03)(.01)(.01)(.01)— 
  Consumer.04 .28 .43 .22 .40 
  Revolving home equity(.10)(.04).13 (.06).09 
  Consumer credit card4.47 2.17 4.45 3.93 4.62 
  Overdrafts29.59 43.65 19.15 39.16 22.16 
Personal banking net loan charge-offs
.52 .37 .85 .57 .86 
Total annualized net loan charge-offs.18 %.21 %.32 %.23 %.33 %
    * 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 inherent in its portfolios. This process provides an allowance based on estimates of allowances for pools of loans and unfunded 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 2 above.

Net loan charge-offs in the third quarter of 2020 amounted to $7.6 million compared to $8.4 million in the prior quarter and $11.5 million in the third quarter of last year. During the third quarter of 2020, the Company recorded net charge-offs on commercial loans of $194 thousand, compared to charge-offs of $3.2 million in the prior quarter. The decrease in commercial loan net charge-offs was primarily driven by a $3.0 million decrease in net charge-offs on business loans this quarter, compared to the second quarter of 2020. In addition to the decrease in commercial net loan charge-offs, net charge-offs on consumer loans decreased $1.2 million in the third quarter of 2020 compared to the prior quarter. These decreases were partially offset by an increase of $3.7 million in net charge-offs on consumer credit card loans in the third quarter of 2020 compared to the prior quarter. Compared to the same period last year, net loan charge-offs in the third quarter of 2020 decreased $3.9 million. The decrease in net charge-offs during the third quarter of 2020 was driven by lower net charge-offs on consumer loans and consumer credit card loans of $1.9 million and $1.3 million, respectively. These decreases were primarily the result of various COVID-19 relief programs that allowed customers to defer loan payments without advancing in past due or charge-off status.

For the three months ended September 30, 2020, annualized net charge-offs on average consumer credit card loans totaled 4.47%, compared to 2.17% in the previous quarter and 4.45% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .04%, compared to .28% in the prior quarter and .43% in the same period last year. In the third quarter of 2020, total annualized net loan charge-offs were .18%, compared to .21% in the previous quarter, and .32% in the same period last year.

As noted in Note 1, the Company adopted ASU 2016-13, known as CECL, on January 1, 2020. Upon adoption, the allowance for credit losses on loans was reduced $21.0 million and the liability for unfunded lending commitments increased $16.1 million. The decrease in the allowance for credit losses on loans was significantly influenced by the forecasted economic environment used in the estimation process as required by CECL, which was forecasted to be stable in both the short term and the long term, characterized by low unemployment. As the estimation model for credit losses on lending commitments became governed by CECL, the Company increased the related liability for unfunded lending commitments, mostly related to construction lending as the Company expected to fully fund the commitments under these contracts.

In the current quarter, the provision for credit losses on loans totaled $3.2 million, a $74.3 million decrease from the provision of $77.5 million in the prior quarter, and decreased $7.8 million compared to the third quarter of 2019. In the current quarter, there was a recovery on the provision for credit losses on unfunded lending commitments of $99 thousand, compared to provision expense of $3.0 million in the prior quarter. The economic forecast used to estimate the allowance for credit losses in
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September was slightly more optimistic than the forecast utilized in June, which resulted in no additional increase to the allowance for credit losses as of September 30, 2020, and significantly decreased the provision for credit losses this quarter, compared to the prior quarter.

For the quarter ended September 30, 2020, the allowance for credit losses related to commercial loans decreased $2.1 million and the allowance for credit losses related to personal banking loans decreased $2.3 million, compared to the allowance for credit losses on loans as of June 30, 2020. The decrease was primarily due to the slight improvement in the forecasted economic environment compared to the forecast as of June 30, 2020. Due to the pandemic induced recession that started during the first quarter of 2020, the allowance for credit losses increased in the 1st and 2nd quarters of 2020 to capture the expected losses over the life of loans using projections of how the pandemic will impact the economic environment along with other data and assumptions. At September 30, 2020 the projected economic environment was similar to the projected environment at June 30, 2020, just slightly improved. As such, additional reserves were not needed to estimate the expected losses over the life of the loans. Businesses continue to experience disruptions caused by COVID-19 even though state and local governments have partially reopened non-essential businesses throughout the country. Consumer spending has been negatively impacted by the sudden and dramatic increase in unemployment in addition to health risks associated with the virus. The allowance for credit losses related to business loans decreased $11.0 million due to slight decreases in loan balances coupled with the slight improvement in the economic forecast and was partially offset by an increase in the allowance for credit losses on business real estate loans of $8.1 million, primarily related to certain loans with a potential to be impacted by the pandemic. Additionally, the allowance for credit losses on personal banking loans decreased $2.3 million compared to June 30, 2020, primarily related to the slightly improved forecast projections.

For the nine months ended September 30, 2020, net loan charge-offs totaled $26.8 million, compared to $34.5 million in the same period last year. During the first nine months of 2020, the Company recorded net charge-offs of $3.0 million on commercial loans, compared to net charge-offs of $854 thousand in the first nine months of 2019. Offsetting the increase in commercial loan net charge-offs, consumer credit card loan and consumer loan net charge-offs decreased $6.6 million and $2.4 million, respectively, in the first nine months of 2020, compared to the first nine months of the prior year. The provision for credit losses on loans for the first nine months of 2020 was $123.6 million and exceeded net loan charge-offs for the period by $96.7 million. In the same period last year, provision expense totaled $35.2 million and exceeded net loan charge-offs by $750 thousand.

At September 30, 2020, the allowance for credit losses on loans amounted to $236.4 million, an increase of $96.8 million compared to $139.6 million at January 1, 2020, the adoption date of CECL. Additionally, the liability for unfunded lending commitments increased $18.0 million from $17.2 million at January 1, 2020 to $35.2 million at September 30, 2020. The allowance for credit losses related to commercial loans increased $66.4 million, due to increases in the allowance on business, construction and business real estate loans of $40.7 million, $9.3 million, and $16.4 million, respectively. Compared to January 1, 2020, the allowance for credit losses on consumer credit card, personal real estate, and consumer loans increased $22.7 million, $3.9 million, and $3.6 million, respectively. These large increases resulted from the sudden entrance into a sharp recession brought on by an unprecedented pandemic. The economic outlook quickly shifted from a stable economy with low unemployment at the beginning of the year to an uncertain economic projection at September 30, 2020, defined by high unemployment, periods of governmental shut down of non-essential businesses, and other business and personal disruptions caused by COVID-19. Given the significant uncertainty of the economic projections of a pandemic induced recession, the estimate uses a short reasonable and supportable forecasted period. As the length and depth of the current recession becomes more certain in the coming months, key assumptions utilized in the Company's CECL model may be modified. See Note 2 for explanations of the various model assumptions utilized in this estimate. Traditional credit quality indicators, such as net charge-off experience, greater than 90 days delinquent statistics and decreases in the internal risk rating to special mention or substandard ratings, are lagging credit quality indicators and do not yet reflect the expected impacts of this crisis. Changes in these indicators are delayed as the Company offered certain assistance programs to impacted customers as allowed by various regulations and as customers are able to participate in various governmental support programs. See Note 2 for further discussion of the credit quality indicators, and refer to Risk Elements of the Loan Portfolio, Loans with Special Risk Characteristics for further information about the assistance programs offered by the Company to its customers.

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. Events such as the timing of governmental required business lock downs or possible additional waves of infection could prolong and deepen the projected recession. Alternatively, events such as
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additional government stimulus payments or the development of a vaccine to cure the virus could shorten the projected recession and accelerate a recovery.

The table below shows the composition of the allowance by loan class at January 1, 2020 (at the adoption of CECL), June 30, 2020, and September 30, 2020.

January 1, 2020 (Implementation)June 30, 2020September 30, 2020
(Dollars in thousands)Allowance for Credit LossesACL as a % of LoansAllowance for Credit LossesACL as a % of LoansAllowance for Credit LossesACL as a % of Loans
Commercial:
  Business$37,940 .68 %$89,706 1.31 %$78,659 1.18 %
  RE - construction and land9,204 1.02 17,594 1.89 18,455 1.83 
  RE - business14,905 .53 23,253 .79 31,310 1.05 
62,049 .67 130,553 1.22 128,424 1.20 
Personal Banking:
  RE - personal4,855 .21 7,712 .29 8,725 .32 
  Consumer14,518 .74 24,341 1.24 18,140 .90 
  Revolving home equity1,624 .46 2,087 .62 1,783 .55 
  Consumer credit card56,495 7.39 75,953 11.39 79,230 12.23 
  Overdrafts102 1.62 98 1.89 58 2.56 
77,594 1.43 110,191 1.95 107,936 1.88 
Total$139,643 .95 %$240,744 1.47 %$236,360 1.44 %

At September 30, 2020, the allowance for credit losses on loans amounted to $236.4 million, compared to $240.7 million and $139.6 million at June 30, 2020 and January 1, 2020, respectively, and was 1.44%, 1.47% and .95% of total loans at September 30, 2020, June 30, 2020 and January 1, 2020, respectively. The Company considers the allowance for credit losses and the liability for unfunded commitments adequate to cover losses expected in the loan portfolio, including unfunded commitments, at September 30, 2020.

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, 2020December 31, 2019
Non-accrual loans$40,270 $10,220 
Foreclosed real estate57 365 
Total non-performing assets$40,327 $10,585 
Non-performing assets as a percentage of total loans.25 %.07 %
Non-performing assets as a percentage of total assets.13 %.04 %
Total loans past due 90 days and still accruing interest$14,436 $19,859 

Non-accrual loans totaled $40.3 million at September 30, 2020, an increase of $30.1 million from the balance at December 31, 2019. The increase occurred mainly in business loans which increased $29.8 million. At September 30, 2020, non-accrual loans were comprised mainly of business (92.6%), personal real estate (4.8%), and business real estate (2.6%) loans. Total loans past due 90 days or more and still accruing interest were $14.4 million as of September 30, 2020, a decrease of $5.4 million from December 31, 2019. 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.

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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 $304.2 million at September 30, 2020 compared with $164.8 million at December 31, 2019, resulting in an increase of $139.5 million, or 84.6%.


(In thousands)
September 30, 2020December 31, 2019
Potential problem loans:
  Business$100,241 $83,943 
  Real estate – construction and land15,116 470 
  Real estate – business186,973 80,071 
  Real estate – personal1,911 283 
Total potential problem loans$304,241 $164,767 

At September 30, 2020, the Company had $73.2 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 $50.9 million which are classified as substandard and included in the table above because of this classification.

Loans with Special Risk Characteristics
Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. 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 6.1% of total loans outstanding at September 30, 2020. The largest component of construction and land loans was commercial construction, which increased $124.0 million during the nine months ended September 30, 2020. At September 30, 2020, multi-family residential construction loans totaled approximately $259.1 million, or 32.6%, of the commercial construction loan portfolio, compared to $213.4 million, or 31.8%, at December 31, 2019.

(Dollars in thousands)
September 30,
2020


% of Total
% of
Total
Loans
December 31, 2019
    

% of Total
% of
Total
Loans
Residential land and land development$58,381 5.7 %.4 %$65,687 7.3 %.4 %
Residential construction114,839 11.4 .6 128,575 14.3 .9 
Commercial land and land development41,934 4.2 .3 34,525 3.8 .2 
Commercial construction794,575 78.7 4.8 670,590 74.6 4.6 
Total real estate - construction and land loans$1,009,729 100.0 %6.1 %$899,377 100.0 %6.1 %

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Real Estate – Business Loans
Total business real estate loans were $3.0 billion at September 30, 2020 and comprised 18.2% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At September 30, 2020, 36.3% 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,
2020


% of Total
% of
Total
Loans
December 31, 2019


% of Total
% of
Total
Loans
Owner-occupied$1,087,880 36.3 %6.6 %$1,048,716 37.0 %7.1 %
Multi-family341,374 11.4 2.1 306,577 10.8 2.1 
Office340,801 11.4 2.1 297,278 10.5 2.0 
Retail355,359 11.9 2.2 383,234 13.5 2.6 
Hotels265,819 8.9 1.6 210,557 7.4 1.4 
Farm178,441 6.0 1.1 177,669 6.3 1.2 
Senior living192,887 6.4 1.2 164,000 5.8 1.1 
Industrial97,824 3.3 .6 108,285 3.8 .7 
Other132,807 4.4 .7 137,238 4.9 1.0 
Total real estate - business loans$2,993,192 100.0 %18.2 %$2,833,554 100.0 %19.2 %

Revolving Home Equity Loans
The Company had $324.2 million in revolving home equity loans at September 30, 2020 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, 2020, the outstanding principal of loans with an original LTV higher than 80% was $34.1 million, or 10.5% of the portfolio, compared to $41.1 million as of December 31, 2019. Total revolving home equity loan balances over 30 days past due or on non-accrual status were $1.6 million at September 30, 2020 compared to $2.0 million at December 31, 2019. The weighted average FICO score for the total current portfolio balance is 794. 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 2020 through 2022, approximately 12.8% of the Company's current outstanding balances are expected to mature. Of these balances, approximately 94% 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. Outstanding balances for auto loans were $901.3 million and $908.3 million at September 30, 2020 and December 31, 2019, respectively. The balances over 30 days past due amounted to $7.5 million at September 30, 2020 compared to $13.2 million at December 31, 2019, and comprised .8% and 1.5% of the outstanding balances of these loans at September 30, 2020 and December 31, 2019, respectively. For the nine months ended September 30, 2020, $321.1 million of new auto loans were originated, compared to $311.2 million during the first nine months of 2019.  At September 30, 2020, the automobile loan portfolio had a weighted average FICO score of 759.

Outstanding balances for motorcycle loans were $70.9 million at September 30, 2020, compared to $71.9 million at December 31, 2019. The balances over 30 days past due amounted to $766 thousand and $1.3 million at September 30, 2020 and December 31, 2019, respectively, and comprised 1.1% of the outstanding balance of these loans at September 30, 2020, compared to 1.9% at December 31, 2019. During the first nine months of 2020, new motorcycle loan originations totaled $28.3 million compared to $19.8 million during the first nine months of 2019.

The Company's balance of marine and RV loans totaled $27.3 million at September 30, 2020, compared to $35.4 million at December 31, 2019, and the balances over 30 days past due amounted to $810 thousand and $1.5 million at September 30, 2020 and December 31, 2019, respectively. The net charge-offs on marine and RV loans decreased from $216 thousand in the first nine months of 2019 to $86 thousand in the first nine months of 2020.

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Consumer Credit Card Loans
The Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at September 30, 2020 of $647.9 million in consumer credit card loans outstanding, approximately $98.3 million, or 15.2%, carried a low promotional rate. Within the next six months, $42.1 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters.

Energy Lending
The Company's energy lending portfolio is comprised of lending to the petroleum and natural gas sectors and totaled $169.9 million, or 1.0% of total loans at September 30, 2020, and $197.4 million at December 31, 2019, a decrease of $27.5 million.

(In thousands)
September 30, 2020December 31, 2019Unfunded commitments at September 30, 2020
Extraction$153,013 $177,903 $35,330 
Mid-stream shipping and storage4,400 4,763 58,603 
Downstream distribution and refining5,201 7,168 35,269 
Support activities7,288 7,598 13,919 
Total energy lending portfolio$169,902 $197,432 $143,121 

Information about the credit quality of the Company's energy lending portfolio as of September 30, 2020 and December 31, 2019 is provided in the table below.

(Dollars in thousands)September 30, 2020% of Energy LendingDecember 31, 2019% of Energy Lending
Pass$107,083 63.0 %$170,938 86.6 %
Special mention18,351 10.8 6,961 3.5 
Substandard30,193 17.8 16,600 8.4 
Non-accrual14,275 8.4 2,933 1.5 
Total$169,902 100.0 %$197,432 100.0 %

Energy lending balances classified as substandard and non-accrual represented 17.8% and 8.4% respectively, of total energy lending loan balances at September 30, 2020. The Company recorded $3.0 million of net loan charge-offs on energy loans during the nine months ended September 30, 2020. There were no net loan charge-offs on energy loans for the year ended December 31, 2019.

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Pandemic-Sensitive Industry Lending
As a result of the ongoing COVID-19 global pandemic, the United States economy is currently in an unprecedented state of uncertainty. While nearly every industry has been impacted to some degree by business disruptions, the Company identified the following industries and lending exposures, excluding PPP loans, within its loan portfolio at September 30, 2020 and December 31, 2019.

(In thousands)September 30, 2020% of Loan Portfolio at September 30, 2020December 31, 2019Unfunded commitments at September 30, 2020
Hospitals$757,728 5.1 %$678,466 $1,709,338 
Multifamily and student housing608,334 4.1 528,280 260,066 
Commercial real estate - retail388,619 2.6 405,795 28,062 
Senior living310,012 2.1 301,441 95,932 
Hotels291,131 2.0 256,512 50,673 
Energy149,617 1.0 198,162 143,121 
Retail stores141,012 .9 147,223 155,050 
Restaurants66,935 .4 82,398 21,541 
Total$2,713,388 18.2 %$2,598,277 $2,463,783 

Due to the significant deterioration of the U.S. economy resulting from the COVID-19 pandemic, the Company saw an increase in loan payment deferral requests through the end of the second quarter. Loans on active deferral decreased significantly in the third quarter. A summary of loan balances related to active loan payment deferral requests as of September 30, 2020 are shown in the table below.

(Dollars in thousands)
Number of Payment Deferral Requests (1)
Loan Balance Outstanding at September 30, 2020% of Portfolio - based on September 30, 2020 Loan Balance
Commercial (2)
11 $48,148 .5 %
Real estate - personal111 $24,847 .9 %
Consumer credit card73 $496 .1 %
Consumer629 $11,044 .6 %
Total824 $84,535 .5 %
(1) Excludes deferrals offered through the Company's skip pay program.
(2) Excludes commercial card payment deferral requests.
Active payment deferral requests on commercial loans as of September 30, 2020, categorized by industry, are listed below:

(Dollars in thousands)Number of Payment Deferral RequestsLoan Balance Outstanding at September 30, 2020
Nursing and residential care facilities2$30,237 
Hotels316,842 
Merchant wholesalers, equipment and appliances2472 
Real estate developer/owner1337 
Personal and laundry services1136 
Restaurants and dining187 
Truck transportation137 
Total (1)
11$48,148 
(1) As of October 21, 2020, $43.5 million of commercial requests have been deferred more than 90 days.
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Small Business Lending
During April 2020, in response to the COVID-19 crisis, the federal government created the Paycheck Protection Program, 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 for 7,618 customers, with a median loan size of $34 thousand. The Company understands that the 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 range from two to five years, however, the Company believes that the majority of the loan balances are expected to be forgiven by the SBA. The process of loan forgiveness began during the third quarter of 2020, and the Company believes the majority of loan balances will be forgiven in 2021.

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, 2020, compared to $1.1 billion at December 31, 2019. Additional unfunded commitments at September 30, 2020 totaled $1.7 billion. During the quarter ended September 30, 2020, the Company placed a SNC loan on non-accrual status of approximately $16.1 million. The SNC loan had additional unfunded commitments of $15.4 million as of September 30, 2020.

Income Taxes
Income tax expense was $34.4 million in the third quarter of 2020, compared to $9.7 million in the second quarter of 2020 and $29.1 million in the third quarter of 2019. The Company's effective tax rate, including the effect of non-controlling interest, was 20.6% in the third quarter of 2020, compared to 19.5% in the second quarter of 2020 and 21.0% in the third quarter of 2019. For the nine months ended September 30, 2020, income tax expense was $54.2 million, compared to $80.9 million for the same period during the previous year, resulting in effective tax rates of 19.5% and 20.5%, respectively.

Financial Condition

Balance Sheet
Total assets of the Company were $31.5 billion at September 30, 2020 and $26.1 billion at December 31, 2019. Earning assets (excluding the allowance for credit losses on loans and fair value adjustments on debt securities) amounted to $28.8 billion at September 30, 2020 and $24.6 billion at December 31, 2019, and consisted of 55% in loans and 38% in investment securities at September 30, 2020.

At September 30, 2020, total loans increased $1.6 billion, or 11.2%, compared with balances at December 31, 2019. This increase was mainly due to growth in business loans of $1.1 billion. Growth in business loans was mainly the result of increased commercial and industrial lending activities for PPP loans. Lease and commercial card lending also grew, offset by lower tax free loans. During the nine months ended September 30, 2020, personal real estate loans grew $339.1 million, business real estate loans grew $159.6 million, and construction loans increased $110.4 million. These increases were partially offset by decreases of $117.1 million in consumer card loans and $25.0 million in revolving home equity loans. Consumer loans, which includes automobile, marine and RV, fixed rate home equity and other consumers loans, increased $42.2 million compared to balances at December 31, 2019, primarily due to growth in other consumer loans of $88.0 million, partly offset by lower automobile, marine and RV, and fixed rate home equity loans.

Available for sale investment securities, excluding fair value adjustments, increased $2.7 billion at September 30, 2020 compared to December 31, 2019. Purchases of securities during this period totaled $5.2 billion, offset by sales, maturities, and pay downs of $2.4 billion. The largest increases in outstanding balances occurred in agency mortgage-backed securities, state and municipal obligations, and asset-backed securities which increased $2.0 billion, $669.7 million, and $405.8 million, respectively. These increases were partially offset by a decrease in non-agency mortgage-backed securities of $472.2 million at September 30, 2020 compared to December 31, 2019. At September 30, 2020, the duration of the investment portfolio was 3.4 years, and maturities and pay downs of approximately $1.7 billion are expected to occur during the next 12 months.

Total deposits at September 30, 2020 amounted to $25.7 billion, an increase of $5.2 billion compared to December 31, 2019. The increase in deposits largely resulted from increases in demand deposits, mainly business demand deposits (increase of $3.2
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billion) and money market deposits (increase of $786.3 million). Savings and interest checking deposits also increased $575.5 million at September 30, 2020 compared to balances at December 31, 2019. The Company’s borrowings totaled $1.7 billion at September 30, 2020, a decrease of $199.3 million from balances at December 31, 2019, mainly due to a decline in customer repurchase agreements.

Liquidity and Capital Resources

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

(In thousands)
September 30, 2020June 30, 2020December 31, 2019
Liquid assets:
  Available for sale debt securities$11,539,061 $10,317,427 $8,571,626 
  Federal funds sold2,275 — — 
  Long-term securities purchased under agreements to resell850,000 850,000 850,000 
  Balances at the Federal Reserve Bank1,171,697 1,404,968 395,850 
  Total$13,563,033 $12,572,395 $9,817,476 

Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled $2.3 million as of September 30, 2020. Long-term resale agreements, maturing through 2023, totaled $850.0 million at September 30, 2020. 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 $896.9 million in fair value at September 30, 2020. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled $1.2 billion at September 30, 2020. The fair value of the available for sale debt portfolio was $11.5 billion at September 30, 2020 and included an unrealized net gain of $356.7 million. The total net unrealized gain included net gains of $195.6 million on mortgage-backed and asset-backed securities, $73.9 million on state and municipal obligations, $61.5 million on U.S. government and federal agency obligations, $21.4 million on other debt securities, and $4.3 million on government-sponsored enterprise obligations.

Approximately $1.7 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, 2020June 30, 2020December 31, 2019
Investment securities pledged for the purpose of securing:
  Federal Reserve Bank borrowings$41,568 $44,039 $48,304 
  FHLB borrowings and letters of credit5,873 6,462 7,637 
  Securities sold under agreements to repurchase *1,905,050 1,958,464 2,083,716 
  Other deposits and swaps2,529,873 2,542,103 2,149,575 
  Total pledged securities4,482,364 4,551,068 4,289,232 
  Unpledged and available for pledging5,602,707 4,119,554 3,029,268 
  Ineligible for pledging1,453,990 1,646,805 1,253,126 
  Total available for sale debt securities, at fair value$11,539,061 $10,317,427 $8,571,626 
* 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, 2020, such deposits totaled $23.7 billion and represented 92.3% 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 $1.4 billion at September 30, 2020. These accounts are normally considered more volatile and higher costing and comprised 5.6% of total deposits at September 30, 2020.
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(In thousands)
September 30, 2020June 30, 2020December 31, 2019
Core deposit base:
 Non-interest bearing $10,727,827 $9,700,261 $6,890,687 
 Interest checking1,926,133 1,812,871 2,130,591 
 Savings and money market11,057,372 10,980,122 9,491,125 
 Total$23,711,332 $22,493,254 $18,512,403 

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, 2020June 30, 2020December 31, 2019
Borrowings:
 Federal funds purchased$6,770 $36,965 $20,035 
 Securities sold under agreements to repurchase1,646,294 1,703,473 1,830,737 
 Other debt782 1,475 2,418 
 Total$1,653,846 $1,741,913 $1,853,190 

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 $1.6 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, 2020.
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, 2020.

September 30, 2020
(In thousands)

FHLB
Federal Reserve

Total
Collateral value pledged$2,736,771 $1,175,780 $3,912,551 
Letters of credit issued(121,445)— (121,445)
Available for future advances$2,615,326 $1,175,780 $3,791,106 

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 it could generate additional liquidity through its Capital Markets Group from sources such as jumbo certificates of deposit or privately placed corporate 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:

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Standard & Poor’sMoody’s
Commerce Bancshares, Inc.
Issuer ratingA-
Rating outlookStableStable
Preferred stock(1)
BBB-Baa1
Commerce Bank
Issuer ratingAA2
Baseline credit assessmenta1
Short-term ratingA-1P-1
Rating outlookStableStable
(1)Ratings at time of preferred stock redemption.

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 $649.7 million during the first nine months of 2020, 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 $472.4 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 $4.4 billion. Activity in the investment securities portfolio used cash of $2.7 billion from purchases (net of sales, maturities and pay downs), while growth in the loan portfolio used cash of $1.7 billion. Financing activities provided cash of $4.6 billion, largely resulting from an increase in deposits of $5.1 billion partially offset by a decrease of $197.7 million in federal funds purchased and securities sold under agreements to repurchase, preferred stock redemption of $150.0 million, dividend payments of $97.4 million on common and preferred stock, and treasury stock purchases of $53.8 million. While the future short-term liquidity needs arising from daily operations might vary more than the prior few years due to the COVID-19 pandemic, the Company believes it will be able to meet these cash flow needs.

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, 2020 and December 31, 2019, as shown in the following table.

(Dollars in thousands)
September 30, 2020December 31, 2019
Minimum Ratios under Capital Adequacy Guidelines
Minimum Ratios
for
Well-Capitalized
Banks *
Risk-adjusted assets$21,217,792 $19,713,813 
Tier I common risk-based capital2,853,960 2,745,538 
Tier I risk-based capital2,853,960 2,890,322 
Total risk-based capital3,101,780 3,052,079 
Tier I common risk-based capital ratio13.45 %13.93 %7.00 %6.50 %
Tier I risk-based capital ratio13.45 %14.66 %8.50 %8.00 %
Total risk-based capital ratio14.62 %15.48 %10.50 %10.00 %
Tier I leverage ratio9.39 %11.38 %4.00 %5.00 %
*under Prompt Corrective Action requirements

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 has 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, 2020, the Company purchased
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880,419 shares at an average price of $61.06 in open market purchases and through stock-based compensation transactions. At September 30, 2020, 3,550,539 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 $.27 per share cash dividend on its common stock in the third quarter of 2020, which was an 8.9% increase compared to its 2019 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). Regular dividends on the outstanding shares of the Series B Preferred Stock were paid separately on September 1, 2020 to holders of record as of the close of business on August 14, 2020, in the customary manner. On and after the September 1, 2020, all dividends on the shares of Series B Preferred Stock ceased to accrue.

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, 2020 totaled $12.8 billion (including $4.9 billion in unused, approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled $318.0 million and $30.4 million, respectively, at September 30, 2020. 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 $3.3 million at September 30, 2020. In conjunction with its adoption of ASU 2016-13, the Company recorded an increase to the allowance for credit losses on these unfunded lending commitments. The allowance is recorded in the Company’s liability for unfunded lending commitments within other liabilities on its consolidated balance sheet. At September 30, 2020, the liability for unfunded commitments totaled $35.2 million. See further discussion of the liability for unfunded lending commitments in Note 1 and 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. 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 2020, purchases and sales of tax credits amounted to $121.6 million and $116.6 million, respectively. Fees from sales of tax credits were $3.7 million for the nine months ended September 30, 2020, compared to $2.7 million in the same period last year. At September 30, 2020, the Company expected to fund outstanding purchase commitments of $62.0 million during the remainder of 2020 and $120.3 million in 2021.

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Segment Results

The table below is a summary of segment pre-tax income results for the first nine months of 2020 and 2019.


(Dollars in thousands)
Consumer
Commercial
Wealth
Segment
Totals
Other/ Elimination
Consolidated Totals
Nine Months Ended September 30, 2020
Net interest income$241,195 $300,307 $41,686 $583,188 $36,896 $620,084 
Provision for credit losses(23,885)(3,122)10 (26,997)(114,596)(141,593)
Non-interest income107,492 143,747 139,700 390,939 (20,189)370,750 
Investment securities losses, net    (1,275)(1,275)
Non-interest expense(225,791)(237,350)(93,156)(556,297)(15,771)(572,068)
Income before income taxes$99,011 $203,582 $88,240 $390,833 $(114,935)$275,898 
Nine Months Ended September 30, 2019
Net interest income$236,215 $256,649 $35,662 $528,526 $90,108 $618,634 
Provision for loan losses(33,061)(1,053)(165)(34,279)(953)(35,232)
Non-interest income98,840 151,655 133,556 384,051 (2,809)381,242 
Investment securities losses, net— — — — 3,874 3,874 
Non-interest expense(223,355)(231,790)(91,708)(546,853)(25,371)(572,224)
Income before income taxes$78,639 $175,461 $77,345 $331,445 $64,849 $396,294 
Increase (decrease) in income before income taxes:
   Amount$20,372 $28,121 $10,895 $59,388 $(179,784)$(120,396)
   Percent25.9 %16.0 %14.1 %17.9 %N.M.(30.4 %)

Consumer
For the nine months ended September 30, 2020, income before income taxes for the Consumer segment increased $20.4 million, or 25.9%, compared to the first nine months of 2019. This increase in income before income taxes was mainly due to growth in net interest income of $5.0 million, or 2.1%, non-interest income of $8.7 million, or 8.8%, and a decrease in the provision for credit losses of $9.2 million. These increases to income were partly offset by higher non-interest expense of $2.4 million, or 1.1%. Net interest income increased due to a $15.5 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios, partly offset by a $13.6 million decrease in loan interest income. Non-interest income increased mainly due to growth in mortgage banking revenue, partly offset by decreases in deposit account fees (mainly overdraft and return item fees) and net credit and debit card fees (mainly lower interchange fees, partly offset by lower rewards expense). Non-interest expense increased over the same period in the previous year due to higher salaries and allocated support costs for information technology and an impairment on mortgage servicing rights. These increases were partly offset by lower supplies and communication expense and allocated support costs for marketing expense. The provision for credit losses totaled $23.9 million, a $9.2 million decrease from the first nine months of 2019, mainly due to lower credit card and personal loan net charge-offs.

Commercial
For the nine months ended September 30, 2020, income before income taxes for the Commercial segment increased $28.1 million, or 16.0%, compared to the same period in the previous year. This increase was mainly due to higher net interest income, partly offset by lower non-interest income and increases in non-interest expense and the provision for credit losses. Net interest income increased $43.7 million, or 17.0%, due to a $49.4 million increase in net allocated funding credits and decreases in interest expense on deposits and customer repurchase agreements of $19.7 million and $14.6 million, respectively. These increases to income were partly offset by a $40.0 million decrease in loan interest income. Non-interest income decreased $7.9 million, or 5.2%, from the previous year mainly due to lower net corporate card fees (driven by lower transaction volume), swap fees and gains on sales of leased assets. These decreases were partly offset by higher capital market and deposit account fees (mainly corporate cash management fees). Non-interest expense increased $5.6 million, or 2.4%, mainly due to growth in salaries expense and allocated support costs for information technology. These increases were partly offset by higher deferred origination costs, lower travel and entertainment expense and allocated teller services costs. The
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provision for credit losses increased $2.1 million over the same period last year, mainly due to higher net charge-offs on business loans, partly offset by net recoveries on lease and commercial card loans.

Wealth
Wealth segment pre-tax profitability for the nine months ended September 30, 2020 increased $10.9 million, or 14.1%, over the same period in the previous year. Net interest income increased $6.0 million, or 16.9%, mainly due to a $9.9 million increase in net allocated funding credits and lower deposit interest expense of $1.3 million, partly offset by a $5.2 million decrease in loan interest income. Non-interest income increased $6.1 million, or 4.6%, over the prior year largely due to higher trust fee income (mainly private client trust fees) and mortgage banking revenue. Non-interest expense increased $1.4 million, or 1.6%, due to higher salaries expense and allocated servicing and support costs (mainly mortgage loan processing and information technology), partly offset by lower travel and entertainment expense. The provision for credit losses decreased $175 thousand from the same period last year mainly due to net recoveries on revolving home equity loans.

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 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 $179.8 million. This decrease was partly due to lower net interest income of $53.2 million and a decrease in non-interest income of $17.4 million, partly offset by lower non-interest expense of $9.6 million. Unallocated securities losses were $1.3 million in the first nine months of 2020 compared to gains of $3.9 million in 2019. Also, the unallocated provision for credit losses increased $113.6 million, primarily driven by an increase in the allowance for credit losses on loans and the liability for unfunded lending commitments, which is not allocated to segments for management reporting purposes. Net charge-offs are allocated to segments when incurred for management reporting purposes. At September 30, 2020, the Company's provision for credit losses on unfunded lending commitments was $18.0 million. Additionally, the provision for credit losses on loans was $96.7 million in excess of net charge-offs in the first nine months of 2020, while the provision was $750 thousand in excess of net charge-offs during the first nine months of 2019.

Impact of Recently Issued Accounting Standards

Financial Instruments ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", known as the current expected credit loss (CECL) model, was issued in June 2016, and has been followed by additional clarifying guidance on specified implementation issues. This new standard is effective for fiscal years beginning after December 15, 2019 and was adopted by the Company on January 1, 2020 using the modified retrospective method.

This new measurement approach requires the calculation of expected lifetime credit losses and is applied to financial assets measured at amortized cost, including loans and held-to-maturity securities as well as certain unfunded lending commitments such as loan commitments. The standard also changes the impairment model of available for sale debt securities.

The allowance for loan losses under the previously required incurred loss model that is reported on the Company's consolidated balance sheet is different under the requirements of the CECL model. At adoption, a cumulative-effect adjustment for the change in the allowance for credit losses increased retained earnings by $3.8 million. The cumulative-effect adjustment to retained earnings, net of taxes, was comprised of the impact to the allowance for credit losses on outstanding loans and the impact to the liability for unfunded lending commitments. There is no implementation impact on held-to-maturity debt securities as the Company does not hold any held-to-maturity debt securities.

The new accounting standard does not require the use of a specific loss estimation method for purposes of determining the allowance for credit losses. The Company selected a methodology that uses historical net charge-off rates, adjusted by the impacts of a reasonable and supportable forecast and the impacts of other qualitative factors to determine the expected credit losses. Key assumptions include the application of historical loss rates, prepayment speeds, forecast results of a reasonable and supportable period, the period to revert to historical loss rates, and qualitative factors. The forecast is determined using projections of certain macroeconomic variables, such as, unemployment rate, prime rate, BBB corporate yield, and house price index. The model design and methodology requires management judgment.

The allowance for credit losses on the commercial portfolio decreased due to the relatively short contractual lives of the commercial loan portfolios coupled with an economic forecast predicting stable macroeconomic factors similar to the current environment at adoption. The allowance for credit losses on the personal banking portfolio increased due to the relatively longer contractual lives of certain portfolios, primarily those collateralized with personal real estate. Because the commercial loan portfolio represented 63% of total loans at December 31, 2019, the change in its allowance for credit losses had a more
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significant impact on the total allowance for credit losses, and resulted in a net reduction in the allowance for credit losses. The Company's allowance for loan losses to total loans ratio declined from 1.09% at December 31, 2019, to .95% at adoption. Offsetting the overall reduction in the allowance for credit losses for outstanding loans was an increase in the liability for unfunded lending commitments. The liability increased as the loss estimation was required to be expanded over the contractual commitment period. The adoption also resulted in an immaterial adjustment to retained earnings at January 1, 2020. Further discussion of the accounting impact of the Company's adoption is included in Note 1 to the consolidated financial statements.

Additionally, the Company elected to phase the estimated impact of CECL into regulatory capital in accordance with the interim final rule of the Federal Reserve Bank and other U.S. banking agencies. Further discussion of the impact of this election is discussed in Capital Management within Liquidity and Capital Resources.

Intangible Assets The FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", in January 2017. Under current guidance, a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill by following procedures that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the new amendments, the goodwill impairment test compares the fair value of a reporting unit with its carrying amount and an impairment charge is measured as the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments were effective for impairment tests beginning January 1, 2020 and did not have a significant effect on the Company's consolidated financial statements.

Financial Instruments The FASB issued ASU 2018-13, "Changes to the Disclosure Requirements of Fair Value Measurement", in August 2018. The amendments in the ASU eliminate or modify certain disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. In addition, the amendments in the ASU also require the addition of new disclosure requirements on fair value measurement, including the disclosure of changes in unrealized gains and losses for the period included in AOCI for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance was effective January 1, 2020 and did not have a significant effect on the Company's consolidated financial statements.

Retirement Benefits The FASB issued ASU 2018-14, "Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)", in August 2018. The amendments in the ASU eliminate disclosures that are no longer considered cost beneficial and clarify specific requirements of disclosures. In addition, the amendments in the ASU also add new disclosures, including the explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments were effective January 1, 2020 and did not have a significant effect on the Company's consolidated financial statements.

Intangible Assets The FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", in August 2018. Under current guidance, the accounting for implementation costs of a hosting arrangement that is a service contract is not specifically addressed. Under the new amendments, the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract are aligned with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software or hosting arrangements that include internal-use software license. The guidance was effective January 1, 2020 and did not have a significant effect on the Company's consolidated financial statements.

Income Taxes The FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes", in December 2019. The amendments in the ASU eliminate certain exceptions under current guidance for investments, intraperiod allocations, and the methodology for calculating interim income tax. In addition, the amendments also add new guidance to simplify accounting for income taxes. The amendments are effective January 1, 2021, but early adoption is permitted. The Company is still assessing the impact on the Company's consolidated financial statements.

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 reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33. The guidance is effective January 1, 2021 and is not expected to 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. The new 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. The expedients and exceptions provided by the new guidance do not apply to contract modifications made and hedging relationships entered
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into or evaluated after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022. The Company has established a LIBOR Transition Program, which is led by the LIBOR Transition Steering Committee (Committee) whose purpose is to guide the overall transition process for the Company. The Committee is an internal, cross-functional team with representatives from all relevant business lines, support functions and legal counsel. An initial LIBOR impact and risk assessment has been performed, and the Committee has developed and prioritized action items. Changes to the Company's systems have been identified and the process of installing and testing code has started. All financial contracts that reference LIBOR have been identified and are being monitored on an ongoing basis. Remediation of these contracts is expected to be consistent with industry timing. LIBOR fallback language has been included in key loan provisions of new and renewed loans in preparation for transition from LIBOR to the new benchmark rate when such transition occurs.

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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Three Months Ended September 30, 2020 and 2019
 Third Quarter 2020Third Quarter 2019
(Dollars in thousands)
Average Balance
Interest Income/Expense
Avg. Rates Earned/Paid
Average BalanceInterest Income/ExpenseAvg. Rates Earned/Paid
ASSETS:
Loans:
Business(A)
$6,709,200 $49,680 2.95 %$5,263,312 $51,071 3.85 %
Real estate — construction and land
974,346 9,167 3.74 920,206 12,669 5.46 
Real estate — business
2,989,652 26,547 3.53 2,883,379 32,153 4.42 
Real estate — personal
2,722,300 24,334 3.56 2,175,156 21,444 3.91 
Consumer
1,992,314 21,004 4.19 1,924,434 23,664 4.88 
Revolving home equity
329,361 2,722 3.29 354,040 4,617 5.17 
Consumer credit card
646,185 18,513 11.40 763,377 23,894 12.42 
Overdrafts
2,689   9,240 
Total loans16,366,047 151,967 3.69 14,293,144 169,512 4.71 
Loans held for sale24,728 264 4.25 19,882 308 6.15 
Investment securities:
U.S. government and federal agency obligations
770,361 7,189 3.71 825,544 4,910 2.36 
Government-sponsored enterprise obligations
102,749 560 2.17 181,929 1,232 2.69 
State and municipal obligations(A)
1,767,526 11,240 2.53 1,172,259 9,290 3.14 
Mortgage-backed securities
6,259,926 30,607 1.95 4,712,508 30,947 2.61 
Asset-backed securities
1,520,988 7,250 1.90 1,297,685 9,158 2.80 
Other debt securities
514,166 3,036 2.35 334,218 2,217 2.63 
Trading debt securities(A)
27,267 114 1.66 29,622 217 2.91 
Equity securities(A)
4,193 497 47.15 4,705 423 35.67 
Other securities(A)
120,253 2,038 6.74 134,896 2,106 6.19 
Total investment securities11,087,429 62,531 2.24 8,693,366 60,500 2.76 
Federal funds sold and short-term securities
purchased under agreements to resell
337   1,080 2.57 
Long-term securities purchased
under agreements to resell
849,994 11,247 5.26 713,030 3,621 2.01 
Interest earning deposits with banks1,024,435 261 .10 226,582 1,241 2.17 
Total interest earning assets29,352,970 226,270 3.07 23,947,084 235,189 3.90 
Allowance for credit losses on loans(240,286)(160,387)
Unrealized gain on debt securities368,154 152,706 
Cash and due from banks326,030 367,005 
Premises and equipment, net404,144 380,198 
Other assets659,509 544,988 
Total assets$30,870,521 $25,231,594 
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings
$1,193,079 269 .09 $924,581 263 .11 
Interest checking and money market
11,731,494 2,937 .10 10,409,111 9,962 .38 
Certificates of deposit of less than $100,000
573,207 1,028 .71 620,138 1,740 1.11 
Certificates of deposit of $100,000 and over
1,447,968 2,512 .69 1,503,805 7,540 1.99 
Total interest bearing deposits14,945,748 6,746 .18 13,457,635 19,505 .58 
Borrowings:
Federal funds purchased and securities sold
under agreements to repurchase
1,855,971 406 .09 1,884,939 8,273 1.74 
Other borrowings
1,225   77,248 453 2.33 
Total borrowings1,857,196 406 .09 1,962,187 8,726 1.76 
Total interest bearing liabilities16,802,944 7,152 .17 %15,419,822 28,231 .73 %
Non-interest bearing deposits9,801,562 6,290,036 
Other liabilities899,890 390,560 
Equity3,366,125 3,131,176 
Total liabilities and equity$30,870,521 $25,231,594 
Net interest margin (T/E)$219,118 $206,958 
Net yield on interest earning assets2.97 %3.43 %
(A) Stated on a tax equivalent basis using a federal income tax rate of 21%.

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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS
Nine Months Ended September 30, 2020 and 2019
Nine Months 2020Nine Months 2019
(Dollars in thousands)
Average Balance
Interest Income/Expense
Avg. Rates Earned/Paid
Average BalanceInterest Income/ExpenseAvg. Rates Earned/Paid
ASSETS:
Loans:
Business(A)
$6,322,644 $146,437 3.09 %$5,164,329 $153,721 3.98 %
Real estate — construction and land
931,517 28,952 4.15 912,063 38,237 5.61 
Real estate — business
2,935,319 83,382 3.79 2,872,090 97,609 4.54 
Real estate — personal
2,565,740 70,829 3.69 2,143,394 63,439 3.96 
Consumer
1,962,466 65,845 4.48 1,920,521 68,858 4.79 
Revolving home equity
340,900 9,722 3.81 362,163 14,036 5.18 
Consumer credit card
679,101 60,102 11.82 770,143 70,899 12.31 
Overdrafts
3,213   6,130 — — 
Total loans15,740,900 465,269 3.95 14,150,833 506,799 4.79 
Loans held for sale14,692 588 5.35 19,660 1,003 6.82 
Investment securities: 
U.S. government and federal agency obligations
783,006 12,244 2.09 859,354 16,467 2.56 
Government-sponsored enterprise obligations
117,135 2,958 3.37 193,574 3,545 2.45 
State and municipal obligations(A)
1,426,432 30,187 2.83 1,225,465 29,075 3.17 
Mortgage-backed securities
5,426,861 87,017 2.14 4,563,836 91,673 2.69 
Asset-backed securities
1,349,316 22,496 2.23 1,411,085 29,156 2.76 
Other debt securities
414,553 7,907 2.55 333,758 6,659 2.67 
Trading debt securities(A)
31,087 560 2.41 28,416 656 3.09 
Equity securities(A)
4,201 1,492 47.44 4,664 1,269 36.38 
Other securities(A)
134,481 5,450 5.41 131,813 6,119 6.21 
Total investment securities9,687,072 170,311 2.35 8,751,965 184,619 2.82 
Federal funds sold and short-term securities
purchased under agreements to resell
252 2 1.06 2,479 51 2.75 
Long-term securities purchased
under agreements to resell
849,998 29,445 4.63 704,391 11,066 2.10 
Interest earning deposits with banks1,126,600 1,996 .24 291,417 5,113 2.35 
Total interest earning assets27,419,514 667,611 3.25 23,920,745 708,651 3.96 
Allowance for credit losses on loans(184,001)(160,359)
Unrealized gain (loss) on debt securities280,616 49,335 
Cash and due from banks351,435 367,747 
Premises and equipment, net397,093 377,953 
Other assets657,969 501,650 
Total assets$28,922,626 $25,057,071 
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings
$1,086,120 780 .10 $917,081 757 .11 
Interest checking and money market
11,318,376 14,712 .17 10,603,476 29,324 .37 
Certificates of deposit of less than $100,000
600,295 4,196 .93 605,369 4,530 1.00 
Certificates of deposit of $100,000 and over
1,364,798 11,357 1.11 1,384,106 20,473 1.98 
Total interest bearing deposits14,369,589 31,045 .29 13,510,032 55,084 .55 
Borrowings:
Federal funds purchased and securities sold
under agreements to repurchase
1,945,669 5,761 .40 1,817,082 23,839 1.75 
Other borrowings
168,748 1,032 .82 26,883 463 2.30 
Total borrowings2,114,417 6,793 .43 1,843,965 24,302 1.76 
Total interest bearing liabilities16,484,006 37,838 .31 %15,353,997 79,386 .69 %
Non-interest bearing deposits8,425,068 6,316,671 
Other liabilities710,824 327,727 
Equity3,302,728 3,058,676 
Total liabilities and equity$28,922,626 $25,057,071 
Net interest margin (T/E)$629,773 $629,265 
Net yield on interest earning assets3.07 %3.52 %
(A) Stated on a tax equivalent basis using a federal income tax rate of 21%.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest income sensitivity to movement in interest rates. The Company performs monthly simulations that model interest rate movements and risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2019 Annual Report on Form 10-K.

The tables below show the effects of gradual shifts in interest rates over a twelve month period on the Company’s net interest income versus the Company's net interest income in a flat rate scenario.  Simulation A presents three rising rate scenarios and in each scenario, rates are assumed to change evenly over 12 months. In these scenarios, the balance sheet remains flat with the exception of deposit balances, which may fluctuate based on changes in rates. For instance, the Company may experience deposit disintermediation if the spread between market rates and bank deposit rates widens as rates rise.

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

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

Simulation ASeptember 30, 2020June 30, 2020
 (Dollars in millions)
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
300 basis points rising$53.8 7.03 %$(513.5)$51.9 6.49 %$(503.1)
200 basis points rising$47.3 6.18 %$(360.4)$44.8 5.60 %$(349.7)
100 basis points rising$29.3 3.83 %$(188.4)$28.8 3.60 %$(182.4)

Simulation BSeptember 30, 2020June 30, 2020
 (Dollars in millions)
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
Assumed Deposit (Attrition)/Growth
300 basis points rising$39.4 5.15 %$(1,214.8)$38.7 4.83 %$(1,078.2)
200 basis points rising$34.6 4.53 %$(1,069.6)$33.0 4.12 %$(931.8)
100 basis points rising$18.6 2.44 %$(911.8)$18.6 2.32 %$(777.3)

Under Simulation A, rising rates push interest income up more quickly than funding costs. This is predominately due to interest earning deposits with the Federal Reserve and variable rate loans repricing up with market rates, while deposit rates only partially reprice higher. Deposits at the Federal Reserve declined during the quarter, which typically results in a less sensitive balance sheet, but this was offset by the monetization of off-balance sheet floors, which no longer lose income in rising rate scenarios. The Company did not model a 100 basis point falling scenario due to the already low interest rate environment.

In Simulation B, the assumed higher levels of deposit attrition were modeled to capture the results of a shrinking balance sheet.

Projecting deposit activity in a period of historically low interest rates is difficult, and the Company cannot predict how deposits will actually react to shifting rates.  The comparisons above provide insight into potential effects of changes in rates and deposit levels on net interest income.  The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of interest rate risk.
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Item 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2020. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 1A. RISK FACTORS

The section titled "Risk Factors" in Part I, Item 1A of the Company's 2019 Annual Report on Form 10-K includes a discussion of the many risks and uncertainties the Company faces, any one or more of which could have a material adverse effect on its business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment. The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in the Company's 2019 Annual Report on Form 10-K. Except as presented below, there have been no material changes to the risk factors described in the Company's 2019 Annual Report on Form 10-K.

Public health threats or outbreaks of communicable diseases has adversely affected, and is expected to continue to adversely effect on the Company's operations and financial results
The Company may face risks related to public health threats or outbreaks of communicable diseases. A widespread healthcare crisis, such as an outbreak of a communicable disease could adversely affect the global economy and the Company’s financial performance. For example, the ongoing global COVID-19 pandemic has destabilized the financial markets in which the Company operates, and likely will continue to cause significant disruption in the global economies and financial markets, including the Company's local markets. The Company is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. In reaction to and as preventative measure to attempt to slow the spread of the pandemic, government authorities have in many states and municipalities implemented mandatory closures, shelter-in-place orders, and social distancing protocols, including orders within many of the geographic areas that the Company operates. Although the Company is considered an essential business, access to its branches and office locations have been restricted, for the safety of its employees and customers. Limiting customers' access to the Company's physical business has prevented some customers from transacting with the Company and lower demand for lending and other services offered by the Company, adversely affecting its cash flows, financial condition, results of operations, profitability and asset quality and could continue to do so for an indefinite period of time. This could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity. In particular, the continued spread of COVID-19 and efforts to contain the virus could:
continue to impact customer demand of the Company’s lending and related services, leading to lower revenue;
cause the Company to experience an increase in costs as a result of the Company implementing operational changes to accommodate its newly-remote workforce;
cause delayed payments from customers and uncollectible accounts, defaults, foreclosures, and declining collateral values, resulting in losses to the Company;
result in losses on the Company's investment portfolio, due to volatility in the markets and lower trading volume driven by economic uncertainty;
cause market interest rates to continue to decline, which could adversely affect the Company's net interest income and profitability;
cause the Company's credit losses to grow substantially;
impact availability of qualified personnel; and
cause other unpredictable events.
The situation surrounding COVID-19 remains uncertain and the potential for a material impact on the Company’s results of operations, financial condition, and liquidity increases the longer the virus impacts activity levels in the United States and globally. The ultimate extent of the impact on our business, financial condition, liquidity, results of operations and cash flows will depend on future developments, which are highly uncertain and cannot be predicted. The Company continues to adapt to the changing dynamics of the COVID-19 impacts to the economy, needs of our employees and customers, and authoritative measures mandated by federal, state, and local governments. However, there is no assurance that our business continuity and disaster recovery program can adequately mitigate the risks of such business disruptions and interruptions. New information regarding the severity of the COVID-19 pandemic and ongoing reactions to the pandemic by customers and government authorities will continue to impact access to the Company's business, as well as the economies and markets in which the Company operates. The COVID-19 pandemic may cause prolonged global or national recessionary economic conditions or
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longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on the Company's business, results of operations and financial condition. Beyond the current COVID-19 pandemic, the potential impacts of epidemics, pandemics, or other outbreaks of an illness, disease, or virus could therefore materially and adversely affect the Company's business, revenue, operations, financial condition, liquidity and cash flows.

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

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

 
 
 
Period
Total Number of Shares Purchased
 Average Price Paid per Share
Total Number of Shares Purchased as part of Publicly Announced Program
 Maximum Number that May Yet Be Purchased Under the Program
July 1 - 31, 2020609 $57.29 609 3,552,792 
August 1 - 31, 20201,757 $60.02 1,757 3,551,035 
September 1 - 30, 2020496 $55.83 496 3,550,539 
Total2,862 $58.71 2,862 3,550,539 

The Company's stock purchases shown above were made under authorizations by the Board of Directors. Under the most recent authorization in November 2019 of 5,000,000 shares, 3,550,539 shares remained available for purchase at September 30, 2020.


Item 6. EXHIBITS


3.1 — Termination of Certificate of Designation of 6.00% Series B Non-Cumulative Perpetual Preferred Stock of Commerce Bancshares, Inc. was filed in current report on Form 8-K (Commission file number 0-2989) dated September 1, 2020, and the same is hereby incorporated by reference.

10.1 Development Services Agreement *

10.2Development Services Agreement Amendment 1 *

10.3Development Services Agreement Amendment 2

10.4Development Services Agreement Amendment 3

10.5Development Services Agreement Amendment 4

10.6Development Services Agreement Amendment 5

10.7Development Services Agreement Amendment 6

10.8Development Services Agreement Amendment 7

10.9Development Services Agreement Amendment 8

10.10Development Services Agreement Amendment 9

10.11Development Services Agreement Amendment 10

10.12 — Development Services Agreement Amendment 11 *

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

31.2 — Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32 — Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

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


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



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SIGNATURES

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


COMMERCE BANCSHARES, INC.
By 
/s/  THOMAS J. NOACK
Thomas J. Noack
Senior Vice President & Secretary

Date: November 5, 2020
By /s/  PAUL A. STEINER
Paul A. Steiner
Controller
(Chief Accounting Officer)

Date: November 5, 2020

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