Edgar Filing: COMMERCE BANCSHARES INC /MO/

Document

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



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
Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017	3
		Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2018 and 2017 (unaudited)	6
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	41
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61
	Item 4.	Controls and Procedures	62

Part II	Other Information
	Item 1.	Legal Proceedings	63
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
	Item 6.	Exhibits	63
Signatures			64

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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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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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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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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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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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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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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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

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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

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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

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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	%

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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

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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

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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.

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(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.

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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%

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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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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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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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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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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