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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
_________________________________________________________

For the quarterly period ended March 31, 2018

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

For the transition period from           to          
Commission File No. 0-2989
 
COMMERCE BANCSHARES, INC.
 
(Exact name of registrant as specified in its charter)
Missouri
 
43-0889454
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 
 
1000 Walnut,
Kansas City, MO
 
64106
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(816) 234-2000
 
 
(Registrant’s telephone number, including area code)
 
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ
As of May 1, 2018, the registrant had outstanding 106,597,248 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
 
March 31, 2018
 
December 31, 2017
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
 
 
 
Loans
$
13,893,361

 
$
13,983,674

  Allowance for loan losses
(159,532
)
 
(159,532
)
Net loans
13,733,829

 
13,824,142

Loans held for sale (including $6,480,000 and $15,327,000 of residential mortgage loans carried at fair value at March 31, 2018 and December 31, 2017, respectively)
16,435

 
21,398

Investment securities:
 
 
 

Available for sale debt ($659,378,000 and $662,515,000 pledged at March 31, 2018 and
 
 
 
    December 31, 2017, respectively, to secure swap and repurchase agreements)
8,432,180

 
8,725,442

Trading debt
32,025

 
18,269

Equity
51,512

 
50,591

Other
108,320

 
99,005

Total investment securities
8,624,037

 
8,893,307

Federal funds sold and short-term securities purchased under agreements to resell
17,000

 
42,775

Long-term securities purchased under agreements to resell
700,000

 
700,000

Interest earning deposits with banks
134,697

 
30,631

Cash and due from banks
423,048

 
438,439

Land, buildings and equipment, net
332,253

 
335,110

Goodwill
138,921

 
138,921

Other intangible assets, net
7,893

 
7,618

Other assets
483,129

 
401,074

Total assets
$
24,611,242

 
$
24,833,415

LIABILITIES AND EQUITY
 
 
 
Deposits:
 
 
 

   Non-interest bearing
$
6,953,430

 
$
7,158,962

   Savings, interest checking and money market
11,828,138

 
11,499,620

   Time open and C.D.'s of less than $100,000
615,401

 
634,646

   Time open and C.D.'s of $100,000 and over
1,141,502

 
1,132,218

Total deposits
20,538,471

 
20,425,446

Federal funds purchased and securities sold under agreements to repurchase
1,132,329

 
1,507,138

Other borrowings
9,214

 
1,758

Other liabilities
225,500

 
180,889

Total liabilities
21,905,514

 
22,115,231

Commerce Bancshares, Inc. stockholders’ equity:
 
 
 

   Preferred stock, $1 par value
 
 
 
      Authorized 2,000,000 shares; issued 6,000 shares
144,784

 
144,784

   Common stock, $5 par value
 
 
 

 Authorized 120,000,000 shares;
 
 
 
   issued 107,081,397 shares
535,407

 
535,407

   Capital surplus
1,802,785

 
1,815,360

   Retained earnings
325,390

 
221,374

   Treasury stock of 272,802 shares at March 31, 2018
 
 
 
     and 276,968 shares at December 31, 2017, at cost
(15,681
)
 
(14,473
)
   Accumulated other comprehensive income (loss)
(89,563
)
 
14,108

Total Commerce Bancshares, Inc. stockholders' equity
2,703,122

 
2,716,560

Non-controlling interest
2,606

 
1,624

Total equity
2,705,728

 
2,718,184

Total liabilities and equity
$
24,611,242

 
$
24,833,415

See accompanying notes to consolidated financial statements.

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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
 
 
For the Three Months Ended March 31
(In thousands, except per share data)
 
2018
2017
 
(Unaudited)
INTEREST INCOME
 
 
 
Interest and fees on loans
 
$
147,015

$
128,323

Interest and fees on loans held for sale
 
304

196

Interest on investment securities
 
53,242

55,265

Interest on federal funds sold and short-term securities purchased under
 
 
 
   agreements to resell
 
180

23

Interest on long-term securities purchased under agreements to resell
 
4,114

3,793

Interest on deposits with banks
 
1,140

397

Total interest income
 
205,995

187,997

INTEREST EXPENSE
 
 
 
Interest on deposits:
 
 
 
   Savings, interest checking and money market
 
5,589

3,890

   Time open and C.D.'s of less than $100,000
 
662

644

   Time open and C.D.'s of $100,000 and over
 
2,839

2,763

Interest on federal funds purchased and securities sold under
 
 
 
   agreements to repurchase
 
4,001

1,539

Interest on other borrowings
 
12

888

Total interest expense
 
13,103

9,724

Net interest income
 
192,892

178,273

Provision for loan losses
 
10,396

11,128

Net interest income after provision for loan losses
 
182,496

167,145

NON-INTEREST INCOME
 
 
 
Bank card transaction fees
 
41,453

35,751

Trust fees
 
36,062

32,014

Deposit account charges and other fees
 
22,982

21,942

Capital market fees
 
2,291

2,342

Consumer brokerage services
 
3,768

3,649

Loan fees and sales
 
2,862

3,168

Other
 
10,272

10,747

Total non-interest income
 
119,690

109,613

INVESTMENT SECURITIES GAINS (LOSSES), NET
 
5,410

(772
)
NON-INTEREST EXPENSE
 
 
 
Salaries and employee benefits
 
115,894

112,369

Net occupancy
 
11,584

11,443

Equipment
 
4,431

4,609

Supplies and communication
 
5,313

5,709

Data processing and software
 
20,690

19,905

Marketing
 
4,805

3,224

Deposit insurance
 
3,457

3,471

Community service
 
729

2,944

Other
 
15,374

15,703

Total non-interest expense
 
182,277

179,377

Income before income taxes
 
125,319

96,609

Less income taxes
 
23,258

24,907

Net income
 
102,061

71,702

Less non-controlling interest expense
 
1,077

198

Net income attributable to Commerce Bancshares, Inc.
 
100,984

71,504

Less preferred stock dividends
 
2,250

2,250

Net income available to common shareholders
 
$
98,734

$
69,254

Net income per common share — basic
 
$
.92

$
.65

Net income per common share — diluted
 
$
.92

$
.65

See accompanying notes to consolidated financial statements.

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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
For the Three Months Ended March 31
(In thousands)
 
 
2018
2017
 
 
(Unaudited)
Net income
 
 
$
102,061

$
71,702

Other comprehensive income (loss):
 
 
 
 
Net unrealized gains on securities for which a portion of an other-than-temporary impairment has been recorded in earnings
 
 
45

95

Net unrealized gains (losses) on other securities
 
 
(73,721
)
19,002

Pension loss amortization
 
 
393

340

Other comprehensive income (loss)
 
 
(73,283
)
19,437

Comprehensive income
 
 
28,778

91,139

Less non-controlling interest expense
 
 
1,077

198

Comprehensive income attributable to Commerce Bancshares, Inc.
 
$
27,701

$
90,941

See accompanying notes to consolidated financial statements.














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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
 
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, 2017
$
144,784

$
535,407

$
1,815,360

$
221,374

$
(14,473
)
$
14,108

$
1,624

$
2,718,184

Adoption of ASU 2018-02
 
 


(2,932
)
 
2,932

 

Adoption of ASU 2016-01
 




33,320



(33,320
)



Net income
 




100,984





1,077

102,061

Other comprehensive income (loss)
 








(73,283
)


(73,283
)
Distributions to non-controlling interest
 










(95
)
(95
)
Purchases of treasury stock
 






(17,067
)




(17,067
)
Issuance of stock under purchase and equity compensation plans
 


(15,865
)


15,859





(6
)
Stock-based compensation
 


3,290









3,290

Cash dividends on common stock ($.235 per share)
 




(25,106
)






(25,106
)
Cash dividends on preferred stock ($.375 per depositary share)
 




(2,250
)






(2,250
)
Balance March 31, 2018
$
144,784

$
535,407

$
1,802,785

$
325,390

$
(15,681
)
$
(89,563
)
$
2,606

$
2,705,728

Balance December 31, 2016
$
144,784

$
510,015

$
1,552,454

$
292,849

$
(15,294
)
$
10,975

$
5,349

$
2,501,132

Adoption of ASU 2016-09




3,441

(2,144
)






1,297

Net income
 




71,504





198

71,702

Other comprehensive income
 








19,437



19,437

Distributions to non-controlling interest
 










(685
)
(685
)
Purchases of treasury stock
 






(7,284
)




(7,284
)
Issuance of stock under purchase and equity compensation plans
 


(14,996
)


14,990





(6
)
Stock-based compensation
 


3,135









3,135

Cash dividends on common stock ($.214 per share)
 




(22,913
)






(22,913
)
Cash dividends on preferred stock ($.375 per depositary share)
 
 
 
(2,250
)
 
 
 
(2,250
)
Balance March 31, 2017
$
144,784

$
510,015

$
1,544,034

$
337,046

$
(7,588
)
$
30,412

$
4,862

$
2,563,565

See accompanying notes to consolidated financial statements.



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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Three Months Ended March 31
(In thousands)
2018
 
2017
 
(Unaudited)
OPERATING ACTIVITIES:
 
 
 
Net income
$
102,061

 
$
71,702

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Provision for loan losses
10,396

 
11,128

  Provision for depreciation and amortization
9,620

 
10,019

  Amortization of investment security premiums, net
7,233

 
9,231

  Investment securities (gains) losses, net (A)
(5,410
)
 
772

  Net gains on sales of loans held for sale
(1,147
)
 
(866
)
  Originations of loans held for sale
(44,066
)
 
(34,716
)
  Proceeds from sales of loans held for sale
49,255

 
34,446

  Net (increase) decrease in trading debt securities
(18,543
)
 
7,763

  Stock-based compensation
3,290

 
3,135

  (Increase) decrease in interest receivable
744

 
(686
)
  Increase (decrease) in interest payable
(732
)
 
39

  Increase in income taxes payable
22,076

 
21,156

  Other changes, net
9,212

 
5,152

Net cash provided by operating activities
143,989

 
138,275

INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of investment securities (A)
148,652

 
98

Proceeds from maturities/pay downs of investment securities (A)
358,690

 
483,090

Purchases of investment securities (A)
(298,554
)
 
(482,642
)
Net (increase) decrease in loans
78,838

 
(169,185
)
Purchases of land, buildings and equipment
(4,982
)
 
(5,456
)
Sales of land, buildings and equipment
718

 
717

Net cash provided by (used in) investing activities
283,362

 
(173,378
)
FINANCING ACTIVITIES:
 
 
 
Net increase in non-interest bearing, savings, interest checking and money market deposits
54,986

 
49,469

Net increase (decrease) in time open and C.D.'s
(9,961
)
 
174,052

Net decrease in federal funds purchased and securities sold under agreements to repurchase
(374,809
)
 
(402,756
)
Repayment of long-term borrowings
(74
)
 
(74
)
Net increase in short-term borrowings
7,530

 

Purchases of treasury stock
(17,067
)
 
(7,284
)
Issuance of stock under equity compensation plans
(6
)
 
(6
)
Cash dividends paid on common stock
(25,106
)
 
(22,913
)
Cash dividends paid on preferred stock
(2,250
)
 
(2,250
)
Net cash used in financing activities
(366,757
)
 
(211,762
)
Increase (decrease) in cash, cash equivalents and restricted cash
60,594

 
(246,865
)
Cash, cash equivalents and restricted cash at beginning of year
524,352

 
801,641

Cash, cash equivalents and restricted cash at March 31
$
584,946

 
$
554,776

(A) Available for sale debt securities, equity securities and other securities
 
 
 
Income tax payments, net
$
147

 
$
2,850

Interest paid on deposits and borrowings
$
13,835

 
$
9,685

Loans transferred to foreclosed real estate
$
1,028

 
$
134

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 $10.2 million and $16.2 million at March 31, 2018 and 2017, respectively.


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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 (Unaudited)
 
1. Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2017 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 month period ended March 31, 2018 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.

These financial statements reflect the adoption of several FASB Accounting Standards Updates (ASUs) on January 1, 2018. In some cases, the adoption of these ASUs resulted in changes to former accounting policies as described in Note 1 to the financial statements in the 2017 Annual Report on Form 10-K. The ASUs which affected the Company's 2018 financial statements include:
ASU 2014-09, Revenue from Contracts with Customers, which is discussed further in Note 13.
ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which is discussed further in Note 3 - Investment Securities, Note 8 - Accumulated Other Comprehensive Income, and Note 15 - Fair Value of Financial Instruments.
ASU 2016-18, Restricted Cash, which requires that the beginning and end of period amounts shown on the statement of cash flows include not only cash and cash equivalents, but also restricted cash and restricted cash equivalents, as considered such by the reporting entity.
ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which is discussed further in Note 6 - Pension.
ASU 2018-02, Reclassification for Certain Tax Effects from Accumulated Other Comprehensive Income, which is discussed further in Note 8 - Accumulated Other Comprehensive Income.







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Table of Contents

2. Loans and Allowance for Loan Losses
Major classifications within the Company’s held for investment loan portfolio at March 31, 2018 and December 31, 2017 are as follows:

(In thousands)
 
March 31, 2018
 
December 31, 2017
Commercial:
 
 
 
 
Business
 
$
4,960,614

 
$
4,958,554

Real estate – construction and land
 
932,058

 
968,820

Real estate – business
 
2,724,584

 
2,697,452

Personal Banking:
 
 
 
 
Real estate – personal
 
2,069,012

 
2,062,787

Consumer
 
2,069,235

 
2,104,487

Revolving home equity
 
382,825

 
400,587

Consumer credit card
 
752,651

 
783,864

Overdrafts
 
2,382

 
7,123

Total loans
 
$
13,893,361

 
$
13,983,674


At March 31, 2018, loans of $3.7 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 $1.7 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

Allowance for loan losses    
A summary of the activity in the allowance for loan losses during the three months ended March 31, 2018 and 2017, respectively, follows:
 
 
 
For the Three Months Ended March 31
(In thousands)
 
 
Commercial
Personal Banking

Total
Balance at January 1
 
$
93,704

$
65,828

$
159,532

Provision
 
(894
)
11,290

10,396

Deductions:
 
 
 
 
   Loans charged off
 
366

13,365

13,731

   Less recoveries on loans
 
621

2,714

3,335

Net loan charge-offs (recoveries)
 
(255
)
10,651

10,396

Balance March 31, 2018
 
$
93,065

$
66,467

$
159,532

Balance at January 1
 
$
91,361

$
64,571

$
155,932

Provision
 
1,113

10,015

11,128

Deductions:
 
 
 
 
   Loans charged off
 
546

12,330

12,876

   Less recoveries on loans
 
1,023

2,625

3,648

Net loan charge-offs (recoveries)
 
(477
)
9,705

9,228

Balance March 31, 2017
 
$
92,951

$
64,881

$
157,832



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Table of Contents

The following table shows the balance in the allowance for loan losses and the related loan balance at March 31, 2018 and December 31, 2017, 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 discussed below, which are deemed to have similar risk characteristics and are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.
 
Impaired Loans
 
All Other Loans

(In thousands)
Allowance for Loan Losses
Loans Outstanding
 
Allowance for Loan Losses
Loans Outstanding
March 31, 2018
 
 
 
 
 
Commercial
$
2,391

$
82,699

 
$
90,674

$
8,534,557

Personal Banking
1,107

20,828

 
65,360

5,255,277

Total
$
3,498

$
103,527

 
$
156,034

$
13,789,834

December 31, 2017
 
 
 
 
 
Commercial
$
3,067

$
92,613

 
$
90,637

$
8,532,213

Personal Banking
1,176

22,182

 
64,652

5,336,666

Total
$
4,243

$
114,795

 
$
155,289

$
13,868,879


Impaired loans
The table below shows the Company’s investment in impaired loans at March 31, 2018 and December 31, 2017. 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 on page 14.
(In thousands)
 
Mar. 31, 2018
 
Dec. 31, 2017
Non-accrual loans
 
$
10,277

 
$
11,983

Restructured loans (accruing)
 
93,250

 
102,812

Total impaired loans
 
$
103,527

 
$
114,795



10

Table of Contents

The following table provides additional information about impaired loans held by the Company at March 31, 2018 and December 31, 2017, 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
March 31, 2018
 
 
 
With no related allowance recorded:
 
 
 
Business
$
5,221

$
9,000

$

Real estate – business
1,299

1,303


 
$
6,520

$
10,303

$

With an allowance recorded:
 
 
 
Business
$
64,228

$
64,448

$
1,905

Real estate – construction and land
1,458

1,462

42

Real estate – business
10,493

11,021

444

Real estate – personal
8,589

11,412

415

Consumer
5,415

5,415

52

Revolving home equity
153

153

17

Consumer credit card
6,671

6,671

623

 
$
97,007

$
100,582

$
3,498

Total
$
103,527

$
110,885

$
3,498

December 31, 2017
 
 
 
With no related allowance recorded:
 
 
 
Business
$
5,356

$
9,000

$

Real estate – business
1,299

1,303


Consumer
779

817


 
$
7,434

$
11,120

$

With an allowance recorded:
 
 
 
Business
$
72,589

$
73,168

$
2,455

Real estate – construction and land
837

841

27

Real estate – business
12,532

13,071

585

Real estate – personal
9,126

11,914

532

Consumer
5,388

5,426

67

Revolving home equity
204

204

11

Consumer credit card
6,685

6,685

566

 
$
107,361

$
111,309

$
4,243

Total
$
114,795

$
122,429

$
4,243



Total average impaired loans for the three month periods ended March 31, 2018 and 2017, respectively, are shown in the table below.

(In thousands)
Commercial
Personal Banking
Total
Average Impaired Loans:
 
 
 
For the three months ended March 31, 2018
 
 
 
Non-accrual loans
$
8,523

$
2,928

$
11,451

Restructured loans (accruing)
79,258

18,773

98,031

Total
$
87,781

$
21,701

$
109,482

For the three months ended March 31, 2017
 
 
 
Non-accrual loans
$
10,613

$
3,509

$
14,122

Restructured loans (accruing)
31,885

16,204

48,089

Total
$
42,498

$
19,713

$
62,211



11

Table of Contents

The table below shows interest income recognized during the three month periods ended March 31, 2018 and 2017, 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 on page 14.
 
 
For the Three Months Ended March 31
(In thousands)
 
2018
2017
Interest income recognized on impaired loans:
 
 
 
Business
 
$
760

$
263

Real estate – construction and land
 
24

1

Real estate – business
 
113

62

Real estate – personal
 
111

37

Consumer
 
80

82

Revolving home equity
 
2

6

Consumer credit card
 
128

135

Total
 
$
1,218

$
586


Delinquent and non-accrual loans
The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at March 31, 2018 and December 31, 2017.




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

30 – 89
Days Past Due
90 Days Past Due and Still Accruing
Non-accrual



Total
March 31, 2018
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
4,928,806

$
25,792

$
459

$
5,557

$
4,960,614

Real estate – construction and land
929,113

2,940


5

932,058

Real estate – business
2,717,484

4,554


2,546

2,724,584

Personal Banking:
 
 
 
 
 
Real estate – personal
2,059,965

5,962

916

2,169

2,069,012

Consumer
2,044,135

22,374

2,726


2,069,235

Revolving home equity
379,309

2,277

1,239


382,825

Consumer credit card
734,498

8,565

9,588


752,651

Overdrafts
2,123

259



2,382

Total
$
13,795,433

$
72,723

$
14,928

$
10,277

$
13,893,361

December 31, 2017
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
4,949,148

$
3,085

$
374

$
5,947

$
4,958,554

Real estate – construction and land
967,321

1,473

21

5

968,820

Real estate – business
2,694,234

482


2,736

2,697,452

Personal Banking:
 
 
 
 
 
Real estate – personal
2,050,787

6,218

3,321

2,461

2,062,787

Consumer
2,067,025

32,674

3,954

834

2,104,487

Revolving home equity
397,349

1,962

1,276


400,587

Consumer credit card
764,568

10,115

9,181


783,864

Overdrafts
6,840

283



7,123

Total
$
13,897,272

$
56,292

$
18,127

$
11,983

$
13,983,674

The increase in business loans which were delinquent 30-89 days relates to one borrower who was past due at March 31, 2018 but has subsequently brought the loan to a current status.

Credit quality
The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial

12

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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.
Commercial Loans


(In thousands)


Business
Real
 Estate-Construction
Real
Estate-
Business


Total
March 31, 2018
 
 
 
 
Pass
$
4,716,879

$
919,050

$
2,632,074

$
8,268,003

Special mention
88,442

10,694

50,925

150,061

Substandard
149,736

2,309

39,039

191,084

Non-accrual
5,557

5

2,546

8,108

Total
$
4,960,614

$
932,058

$
2,724,584

$
8,617,256

December 31, 2017
 
 
 
 
Pass
$
4,740,013

$
955,499

$
2,593,005

$
8,288,517

Special mention
59,177

10,614

50,577

120,368

Substandard
153,417

2,702

51,134

207,253

Non-accrual
5,947

5

2,736

8,688

Total
$
4,958,554

$
968,820

$
2,697,452

$
8,624,826


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 "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain personal real estate loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. These loans totaled $216.2 million at March 31, 2018 and $219.2 million at December 31, 2017. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $148.9 million at March 31, 2018 and $145.0 million at December 31, 2017. As the healthcare loans are guaranteed by the hospital, FICO scores are not considered relevant for this program. 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 March 31, 2018 and December 31, 2017 by FICO score.
   Personal Banking Loans
 
% of Loan Category
 
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
March 31, 2018
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.3
%
3.5
%
1.1
%
5.2
%
600 - 659
1.7

5.3

1.7

15.1

660 - 719
10.0

17.3

9.1

36.1

720 - 779
26.0

26.9

23.2

25.6

780 and over
61.0

47.0

64.9

18.0

Total
100.0
%
100.0
%
100.0
%
100.0
%
December 31, 2017
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.3
%
3.3
%
1.1
%
4.7
%
600 - 659
2.1

5.5

1.7

14.4

660 - 719
10.5

17.3

9.5

34.4

720 - 779
25.6

26.8

21.4

26.0

780 and over
60.5

47.1

66.3

20.5

Total
100.0
%
100.0
%
100.0
%
100.0
%



13

Table of Contents

Troubled debt restructurings
As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings, as shown in the table below. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected. Other performing restructured loans are comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result were classified as troubled debt restructurings. 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 loans under various debt management and assistance programs. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company also classified certain loans as troubled debt restructings because they were not reaffirmed by the borrower in bankruptcy proceedings. These loans are comprised of personal real estate, revolving home equity and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments.
(In thousands)
March 31, 2018
December 31, 2017
Accruing loans:
 
 
 
Non-market interest rates
$
77,922

$
88,588

 
Assistance programs
6,671

6,685

 
Bankruptcy non-affirmation
8,386

7,283

 
Other
271

256

Non-accrual loans
7,619

7,796

Total troubled debt restructurings
$
100,869

$
110,608


The table below shows the balance of troubled debt restructurings by loan classification at March 31, 2018, 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)
March 31, 2018
Balance 90 days past due at any time during previous 12 months
Commercial:
 
 
Business
$
69,156

$
43

Real estate - construction and land
1,399


Real estate - business
10,546

1,299

Personal Banking:
 
 
Real estate - personal
7,476

389

Consumer
5,469

106

Revolving home equity
152

74

Consumer credit card
6,671

744

Total troubled debt restructurings
$
100,869

$
2,655


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. The effects of modifications to consumer credit card loans were estimated to decrease interest income by approximately $896 thousand on an annual, pre-tax basis, compared to amounts contractually owed.

The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to

14

Table of Contents

collect under contractual terms. Performing commercial loans have had no other concessions granted other than being renewed at an interest rate judged not to be market. As such, they have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.

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

The Company had commitments of $10.6 million at March 31, 2018 to lend additional funds to borrowers with restructured loans.

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 10. The loans are primarily sold to FNMA, FHLMC, and GNMA. At March 31, 2018, the fair value of these loans was $6.5 million, and the unpaid principal balance was $6.3 million.

The Company also designates 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 March 31, 2018 totaled $10.0 million.

At March 31, 2018, 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 $1.3 million and $681 thousand at March 31, 2018 and December 31, 2017, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $3.1 million and $2.7 million at March 31, 2018 and December 31, 2017, 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 as shown in this report reflect revised categories as required by the Company’s adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, on January 1, 2018. That new guidance refined the definition of equity securities and required their segregation from available for sale debt securities. For comparability purposes, prior period disclosures in this report have been revised to show the new categorization.
 
(In thousands)
March 31, 2018
December 31, 2017
Available for sale debt securities
$
8,432,180

$
8,725,442

Trading debt securities
32,025

18,269

Equity securities:
 
 
   Readily determinable fair value
49,784

48,838

   No readily determinable fair value
1,728

1,753

Other:


 
   Federal Reserve Bank stock
33,369

33,253

   Federal Home Loan Bank stock
10,000

10,000

   Private equity investments
64,951

55,752

Total investment securities
$
8,624,037

$
8,893,307


While changes in the fair value of available for sale debt securities continue to be recorded in the equity category of accumulated other comprehensive income, the new guidance requires changes in the fair value of equity securities to be recorded in current

15

Table of Contents

earnings. As required by the new guidance, the unrealized gain in fair value on equity securities (recorded in accumulated other comprehensive income at December 31, 2017) was reclassified to retained earnings on January 1, 2018. The amount of the reclassification was $33.3 million, net of tax.
Equity securities include common and preferred stock with readily determinable fair values that totaled $4.4 million at cost and $49.8 million at fair value at March 31, 2018. The majority of these securities are expected to be redeemed for cash in a third party merger transaction expected to occur by the end of the third quarter of 2018. The portion of unrealized net gains on equity securities recognized in current earnings during the first quarter of 2018, which related to securities still held at March 31, 2018, totaled $947 thousand.
Equity securities also include securities with a carrying value of $1.7 million that do not have readily determinable fair values. The Company has elected, under the ASU, to measure these at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. The Company did not record any impairment or other adjustments to the carrying amount of these investments during the period.
Other investment securities whose accounting is not addressed in the ASU 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. A summary of the available for sale debt securities by maturity groupings as of March 31, 2018 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, 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, 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.

16

Table of Contents

(In thousands)
Amortized Cost
Fair Value
U.S. government and federal agency obligations:
 
 
Within 1 year
$
52,205

$
52,521

After 1 but within 5 years
644,016

636,542

After 5 but within 10 years
156,769

154,484

After 10 years
68,835

68,376

Total U.S. government and federal agency obligations
921,825

911,923

Government-sponsored enterprise obligations:
 
 
Within 1 year
193,937

193,623

After 1 but within 5 years
121,580

120,181

After 5 but within 10 years
34,983

34,152

After 10 years
42,831

40,643

Total government-sponsored enterprise obligations
393,331

388,599

State and municipal obligations:
 
 
Within 1 year
157,082

157,746

After 1 but within 5 years
567,474

569,318

After 5 but within 10 years
649,164

646,866

After 10 years
43,729

42,915

Total state and municipal obligations
1,417,449

1,416,845

Mortgage and asset-backed securities:
 
 
  Agency mortgage-backed securities
3,003,975

2,954,994

  Non-agency mortgage-backed securities
966,401

960,612

  Asset-backed securities
1,476,947

1,466,035

Total mortgage and asset-backed securities
5,447,323

5,381,641

Other debt securities:
 
 
Within 1 year
3,999

3,981

After 1 but within 5 years
262,778

258,315

After 5 but within 10 years
73,723

70,876

Total other debt securities
340,500

333,172

Total available for sale debt securities
$
8,520,428

$
8,432,180


Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $442.4 million, at fair value, at March 31, 2018. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $17.2 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Interest on these bonds is currently being paid at the maximum failed auction rates.


17

Table of Contents

For debt securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.
 
 
(In thousands)
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
March 31, 2018
 
 
 
 
U.S. government and federal agency obligations
$
921,825

$
1,617

$
(11,519
)
$
911,923

Government-sponsored enterprise obligations
393,331


(4,732
)
388,599

State and municipal obligations
1,417,449

7,572

(8,176
)
1,416,845

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
3,003,975

8,074

(57,055
)
2,954,994

  Non-agency mortgage-backed securities
966,401

6,530

(12,319
)
960,612

  Asset-backed securities
1,476,947

2,323

(13,235
)
1,466,035

Total mortgage and asset-backed securities
5,447,323

16,927

(82,609
)
5,381,641

Other debt securities
340,500

9

(7,337
)
333,172

Total
$
8,520,428

$
26,125

$
(114,373
)
$
8,432,180

December 31, 2017
 
 
 
 
U.S. government and federal agency obligations
$
917,494

$
4,096

$
(4,443
)
$
917,147

Government-sponsored enterprise obligations
408,266

26

(1,929
)
406,363

State and municipal obligations
1,592,707

21,413

(2,754
)
1,611,366

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
3,046,701

17,956

(23,744
)
3,040,913

  Non-agency mortgage-backed securities
903,920

6,710

(4,837
)
905,793

  Asset-backed securities
1,495,380

2,657

(5,237
)
1,492,800

Total mortgage and asset-backed securities
5,446,001

27,323

(33,818
)
5,439,506

Other debt securities
350,988

1,250

(1,178
)
351,060

Total
$
8,715,456

$
54,108

$
(44,122
)
$
8,725,442


The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or who have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, cash flow analyses are prepared. For more complex analyses, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. 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 March 31, 2018, the fair value of securities on this watch list was $62.8 million compared to $68.0 million at December 31, 2017.

As of March 31, 2018, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $24.8 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.2 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at March 31, 2018 included the following:

Significant Inputs
Range
Prepayment CPR
0%
-
25%
Projected cumulative default
15%
-
52%
Credit support
0%
-
63%
Loss severity
15%
-
63%


18

Table of Contents

The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities.
 
For the Three Months Ended March 31
(In thousands)
2018
2017
Cumulative OTTI credit losses at January 1
$
14,199

$
14,080

Credit losses on debt securities for which impairment was not previously recognized
58


Credit losses on debt securities for which impairment was previously recognized
10

109

Increase in expected cash flows that are recognized over remaining life of security
(54
)
(73
)
Cumulative OTTI credit losses at March 31
$
14,213

$
14,116


Debt securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period.
 
Less than 12 months
 
12 months or longer
 
Total
 
(In thousands)
   Fair Value
Unrealized
Losses
 
Fair Value
Unrealized
Losses
 
Fair Value
Unrealized
Losses
March 31, 2018
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
653,945

$
9,647

 
$
59,435

$
1,872

 
$
713,380

$
11,519

Government-sponsored enterprise obligations
338,752

4,588

 
49,847

144

 
388,599

4,732

State and municipal obligations
529,699

6,427

 
44,474

1,749

 
574,173

8,176

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
1,922,859

35,455

 
591,341

21,600

 
2,514,200

57,055

   Non-agency mortgage-backed securities
729,615

9,447

 
137,775

2,872

 
867,390

12,319

   Asset-backed securities
884,800

11,101

 
207,087

2,134

 
1,091,887

13,235

Total mortgage and asset-backed securities
3,537,274

56,003

 
936,203

26,606

 
4,473,477

82,609

Other debt securities
305,412

6,462

 
19,779

875

 
325,191

7,337

Total
$
5,365,082

$
83,127

 
$
1,109,738

$
31,246

 
$
6,474,820

$
114,373

December 31, 2017
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
618,617

$
4,443

 
$

$

 
$
618,617

$
4,443

Government-sponsored enterprise obligations
286,393

1,712

 
49,766

217

 
336,159

1,929

State and municipal obligations
282,843

1,752

 
49,339

1,002

 
332,182

2,754

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
1,320,689

9,433

 
619,300

14,311

 
1,939,989

23,744

   Non-agency mortgage-backed securities
577,017

2,966

 
153,813

1,871

 
730,830

4,837

   Asset-backed securities
786,048

3,168

 
264,295

2,069

 
1,050,343

5,237

Total mortgage and asset-backed securities
2,683,754

15,567

 
1,037,408

18,251

 
3,721,162

33,818

Other debt securities
144,090

727

 
20,202

451

 
164,292

1,178

Total
$
4,015,697

$
24,201

 
$
1,156,715

$
19,921

 
$
5,172,412

$
44,122


The available for sale debt portfolio included $6.5 billion of securities that were in a loss position at March 31, 2018, compared to $5.2 billion at December 31, 2017.  The total amount of unrealized loss on these securities was $114.4 million at March 31, 2018, an increase of $70.3 million compared to the loss at December 31, 2017.  This increase in losses was mainly due to a rising rate environment. 

    

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Table of Contents

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 Three Months Ended March 31
(In thousands)
2018
2017
Proceeds from sales of securities:
 
 
Available for sale debt securities
$
148,637

$

Equity securities
15


Other

98

Total proceeds
$
148,652

$
98

 
 
 
Investment securities gains (losses), net:
 
 
Available for sale debt securities:
 
 
Gains realized on sales
$
212

$

Gains realized on donations of securities

2,157

Other-than-temporary impairment recognized on debt securities
(68
)
(109
)
Equity securities:
 
 
Gains realized on sales
14


 Fair value adjustments, net
947


Other:
 
 
 Gains realized on sales

58

Fair value adjustments, net
4,305

(2,878
)
Total investment securities gains (losses), net
$
5,410

$
(772
)

At March 31, 2018, securities totaling $3.7 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 $659.4 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.

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Table of Contents

4. Goodwill and Other Intangible Assets
The following table presents information about the Company's intangible assets which have estimable useful lives.
 
March 31, 2018
 
December 31, 2017
 
 
(In thousands)
Gross Carrying Amount
Accumulated Amortization
Valuation Allowance
Net Amount
 
Gross Carrying Amount
Accumulated Amortization
Valuation Allowance
Net Amount
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
Core deposit premium
$
31,270

$
(28,482
)
$

$
2,788

 
$
31,270

$
(28,305
)
$

$
2,965

Mortgage servicing rights
8,493

(3,388
)

5,105

 
7,906

(3,244
)
(9
)
4,653

Total
$
39,763

$
(31,870
)
$

$
7,893

 
$
39,176

$
(31,549
)
$
(9
)
$
7,618


Aggregate amortization expense on intangible assets was $321 thousand and $348 thousand for the three month periods ended March 31, 2018 and 2017, 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 March 31, 2018. 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)
 
2018
$
1,202

2019
1,043

2020
893

2021
777

2022
684


Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2018 are as follows:
(In thousands)
Goodwill
Core Deposit Premium
Mortgage Servicing Rights
Balance January 1, 2018
$
138,921

$
2,965

$
4,653

Originations


587

Amortization

(177
)
(144
)
Impairment reversal


9

Balance March 31, 2018
$
138,921

$
2,788

$
5,105


Goodwill allocated to the Company’s operating segments at March 31, 2018 and December 31, 2017 is shown below.
(In thousands)
 
Consumer segment
$
70,721

Commercial segment
67,454

Wealth segment
746

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 March 31, 2018, that net liability was $2.3 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 $389.6 million at March 31, 2018.

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Table of Contents

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 March 31, 2018, 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 to 11 years. At March 31, 2018, the fair value of the Company's guarantee liabilities for RPAs was $91 thousand, and the notional amount of the underlying swaps was $103.9 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. Pension
The amount of net pension cost is shown in the table below:
 
 
For the Three Months Ended March 31
(In thousands)
 
2018
2017
Service cost - benefits earned during the period
 
$
153

$
129

Interest cost on projected benefit obligation
 
950

973

Expected return on plan assets
 
(1,437
)
(1,438
)
Amortization of prior service cost
 
(68
)
(68
)
Amortization of unrecognized net loss
 
592

617

Net periodic pension cost
 
$
190

$
213


Substantially all benefits accrued under the Company’s defined benefit pension plan were frozen effective January 1, 2005, and the remaining benefits were frozen effective January 1, 2011. During the first three months of 2018, 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. The Company has no plans to make any further contributions, other than those related to the CERP, during the remainder of 2018.

The Company adopted ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, on January 1, 2018. This guidance requires that the service cost component of net periodic pension cost be reported in the same income statement line item as other compensation costs, while other components of net periodic pension cost be reported separately from the service cost component. Historically, the Company has reported all components of pension cost in salaries and employee benefits. Beginning in 2018, only the service cost component has been included in this category, and the other components have been recorded in other non-interest expense. Prior period financial statements have not been revised because the amount of the reclassification was not significant.


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Table of Contents

7. 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 12.
 
 
For the Three Months Ended March 31
(In thousands, except per share data)
 
2018
2017
Basic income per common share:
 
 
 
Net income attributable to Commerce Bancshares, Inc.
 
$
100,984

$
71,504

Less preferred stock dividends