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 September 30, 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 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 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 November 1, 2018, the registrant had outstanding 106,227,582 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 September 30, 2018 (unaudited) and December 31, 2017	3
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2018 and 2017 (unaudited)	6
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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	44
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	67
	Item 4.	Controls and Procedures	68

Part II	Other Information
	Item 1.	Legal Proceedings	69
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
	Item 6.	Exhibits	69
Signatures			70

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	September 30, 2018			December 31, 2017
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	13,955,559		$	13,983,674
Allowance for loan losses	(159,732		)	(159,532		)
Net loans	13,795,827			13,824,142
Loans held for sale (including $10,256,000 and $15,327,000 of residential mortgage loans carried at fair value at September 30, 2018 and December 31, 2017, respectively)	16,890			21,398
Investment securities:
Available for sale debt ($553,227,000 and $662,515,000 pledged at September 30, 2018 and
December 31, 2017, respectively, to secure swap and repurchase agreements)	8,674,986			8,725,442
Trading debt	19,676			18,269
Equity	4,467			50,591
Other	127,120			99,005
Total investment securities	8,826,249			8,893,307
Federal funds sold and short-term securities purchased under agreements to resell	14,375			42,775
Long-term securities purchased under agreements to resell	700,000			700,000
Interest earning deposits with banks	334,752			30,631
Cash and due from banks	443,004			438,439
Land, buildings and equipment, net	331,869			335,110
Goodwill	138,921			138,921
Other intangible assets, net	8,470			7,618
Other assets	452,035			401,074
Total assets	$	25,062,392		$	24,833,415
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	6,728,605		$	7,158,962
Savings, interest checking and money market	11,733,057			11,499,620
Time open and C.D.'s of less than $100,000	585,765			634,646
Time open and C.D.'s of $100,000 and over	1,086,193			1,132,218
Total deposits	20,133,620			20,425,446
Federal funds purchased and securities sold under agreements to repurchase	1,862,117			1,507,138
Other borrowings	1,534			1,758
Other liabilities	257,311			180,889
Total liabilities	22,254,582			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	1,804,031			1,815,360
Retained earnings	493,641			221,374
Treasury stock of 516,507 shares at September 30, 2018
and 276,968 shares at December 31, 2017, at cost	(33,174		)	(14,473		)
Accumulated other comprehensive income (loss)	(141,596		)	14,108
Total Commerce Bancshares, Inc. stockholders' equity	2,803,093			2,716,560
Non-controlling interest	4,717			1,624
Total equity	2,807,810			2,718,184
Total liabilities and equity	$	25,062,392		$	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 September 30					For the Nine Months Ended September 30
(In thousands, except per share data)	2018		2017			2018		2017
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	159,182	$	138,827		$	460,332	$	401,423
Interest and fees on loans held for sale	315		287			991		746
Interest on investment securities	59,792		50,585			178,598		160,825
Interest on federal funds sold and short-term securities purchased under
agreements to resell	69		78			426		138
Interest on long-term securities purchased under agreements to resell	3,915		3,805			11,814		11,282
Interest on deposits with banks	1,478		662			4,208		1,421
Total interest income	224,751		194,244			656,369		575,835
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	7,230		4,441			19,338		12,673
Time open and C.D.'s of less than $100,000	834		676			2,190		1,994
Time open and C.D.'s of $100,000 and over	3,899		2,784			10,221		8,369
Interest on federal funds purchased and securities sold under
agreements to repurchase	5,022		2,846			12,979		6,423
Interest on other borrowings	12		906			36		2,705
Total interest expense	16,997		11,653			44,764		32,164
Net interest income	207,754		182,591			611,605		543,671
Provision for loan losses	9,999		10,704			30,438		32,590
Net interest income after provision for loan losses	197,755		171,887			581,167		511,081
NON-INTEREST INCOME
Bank card transaction fees	42,427		39,166			127,095		112,212
Trust fees	37,400		34,620			110,498		99,754
Deposit account charges and other fees	23,755		22,659			70,630		67,462
Capital market fees	1,595		1,755			5,878		6,253
Consumer brokerage services	3,884		3,679			11,623		11,054
Loan fees and sales	3,579		3,590			9,670		10,849
Other	11,074		11,418			32,860		34,296
Total non-interest income	123,714		116,887			368,254		341,880
INVESTMENT SECURITIES GAINS (LOSSES), NET	4,306		(3,037		)	6,641		(2,158		)
NON-INTEREST EXPENSE
Salaries and employee benefits	116,194		111,382			347,677		332,580
Net occupancy	11,631		11,459			34,333		34,332
Equipment	4,592		4,491			13,617		13,876
Supplies and communication	5,103		5,517			15,542		16,672
Data processing and software	22,056		19,968			63,762		59,908
Marketing	4,999		4,676			14,946		12,388
Deposit insurance	3,167		3,479			9,750		10,542
Community service	580		3,006			1,965		8,866
Other	16,737		15,239			47,604		46,320
Total non-interest expense	185,059		179,217			549,196		535,484
Income before income taxes	140,716		106,520			406,866		315,319
Less income taxes	26,647		32,294			79,412		90,402
Net income	114,069		74,226			327,454		224,917
Less non-controlling interest expense (income)	1,493		(338		)	3,564		(111		)
Net income attributable to Commerce Bancshares, Inc.	112,576		74,564			323,890		225,028
Less preferred stock dividends	2,250		2,250			6,750		6,750
Net income available to common shareholders	$	110,326	$	72,314		$	317,140	$	218,278
Net income per common share — basic	$	1.03	$	.68		$	2.97	$	2.04
Net income per common share — diluted	$	1.03	$	.67		$	2.96	$	2.03

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	For the Three Months Ended September 30						For the Nine Months Ended September 30
(In thousands)	2018			2017			2018			2017
	(Unaudited)
Net income	$	114,069		$	74,226		$	327,454		$	224,917
Other comprehensive income (loss):
Net unrealized gains (losses) on securities for which a portion of an other-than-temporary impairment has been recorded in earnings	53			286			(25		)	457
Net unrealized gains (losses) on other securities	(32,232		)	24,356			(125,442		)	54,599
Pension loss amortization	393			349			1,180			1,030
Unrealized losses on cash flow hedge derivatives	(1,029		)	—			(1,029		)	—
Other comprehensive income (loss)	(32,815		)	24,991			(125,316		)	56,086
Comprehensive income	81,254			99,217			202,138			281,003
Less non-controlling interest expense (income)	1,493			(338		)	3,564			(111		)
Comprehensive income attributable to Commerce Bancshares, Inc.	$	79,761		$	99,555		$	198,574		$	281,114

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								323,890									3,564			327,454
Other comprehensive loss														(125,316		)				(125,316		)
Distributions to non-controlling interest																	(471		)	(471		)
Purchases of treasury stock											(39,575		)							(39,575		)
Issuance of stock under purchase and equity compensation plans					(20,884		)				20,874									(10		)
Stock-based compensation					9,555															9,555
Cash dividends on common stock ($.705 per share)								(75,261		)										(75,261		)
Cash dividends on preferred stock ($1.125 per depositary share)								(6,750		)										(6,750		)
Balance September 30, 2018	$	144,784	$	535,407	$	1,804,031		$	493,641		$	(33,174	)	$	(141,596	)	$	4,717		$	2,807,810
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								225,028									(111		)	224,917
Other comprehensive income														56,086						56,086
Distributions to non-controlling interest																	(1,305		)	(1,305		)
Purchases of treasury stock											(11,320		)							(11,320		)
Issuance of stock under purchase and equity compensation plans					(16,726		)				16,719									(7		)
Stock-based compensation					9,149															9,149
Cash dividends on common stock ($.643 per share)								(68,722		)										(68,722		)
Cash dividends on preferred stock ($1.125 per depositary share)								(6,750		)										(6,750		)
Balance September 30, 2017	$	144,784	$	510,015	$	1,548,318		$	440,261		$	(9,895	)	$	67,061		$	3,933		$	2,704,477

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Nine Months Ended September 30
(In thousands)	2018			2017
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	327,454		$	224,917
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	30,438			32,590
Provision for depreciation and amortization	28,824			29,521
Amortization of investment security premiums, net	18,758			28,173
Investment securities (gains) losses, net (A)	(6,641		)	2,158
Net gains on sales of loans held for sale	(4,770		)	(6,200		)
Originations of loans held for sale	(149,397		)	(162,552		)
Proceeds from sales of loans held for sale	156,637			164,588
Net (increase) decrease in trading debt securities	(4,886		)	7,234
Stock-based compensation	9,555			9,149
Increase in interest receivable	(5,021		)	(3,757		)
Increase (decrease) in interest payable	689			(223		)
Increase in income taxes payable	30,107			201
Other changes, net	14,964			8,511
Net cash provided by operating activities	446,711			334,310
INVESTING ACTIVITIES:
Proceeds from sales of investment securities (A)	193,047			369,036
Proceeds from maturities/pay downs of investment securities (A)	1,222,998			1,384,993
Purchases of investment securities (A)	(1,520,235		)	(1,072,782		)
Net increase in loans	(3,588		)	(364,765		)
Long-term securities purchased under agreements to resell	(100,000		)	(75,000		)
Repayments of long-term securities purchased under agreements to resell	100,000			100,000
Purchases of land, buildings and equipment	(21,358		)	(22,853		)
Sales of land, buildings and equipment	2,342			2,570
Net cash provided by (used in) investing activities	(126,794		)	321,199
FINANCING ACTIVITIES:
Net decrease in non-interest bearing, savings, interest checking and money market deposits	(177,368		)	(12,490		)
Net decrease in time open and C.D.'s	(94,906		)	(424,462		)
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase	354,979			(314,921		)
Repayment of long-term borrowings	(224		)	(218		)
Net increase in short-term borrowings	—			722
Purchases of treasury stock	(39,575		)	(11,320		)
Issuance of stock under equity compensation plans	(10		)	(7		)
Cash dividends paid on common stock	(75,261		)	(68,722		)
Cash dividends paid on preferred stock	(6,750		)	(6,750		)
Net cash used in financing activities	(39,115		)	(838,168		)
Increase (decrease) in cash, cash equivalents and restricted cash	280,802			(182,659		)
Cash, cash equivalents and restricted cash at beginning of year	524,352			782,435
Cash, cash equivalents and restricted cash at September 30	$	805,154		$	599,776
(A) Available for sale debt securities, equity securities and other securities
Income tax payments, net	$	46,122		$	87,449
Interest paid on deposits and borrowings	$	44,074		$	32,387
Loans transferred to foreclosed real estate	$	1,312		$	1,166

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 $13.0 million and $12.8 million at September 30, 2018 and 2017, respectively.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 and nine month periods ended September 30, 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 September 30, 2018 and December 31, 2017 are as follows:



(In thousands)	September 30, 2018		December 31, 2017
Commercial:
Business	$	4,966,722	$	4,958,554
Real estate – construction and land	999,691		968,820
Real estate – business	2,726,042		2,697,452
Personal Banking:
Real estate – personal	2,120,672		2,062,787
Consumer	1,967,465		2,104,487
Revolving home equity	375,322		400,587
Consumer credit card	788,111		783,864
Overdrafts	11,534		7,123
Total loans	$	13,955,559	$	13,983,674

At September 30, 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 and nine months ended September 30, 2018 and 2017, respectively, follows:



	For the Three Months Ended September 30							For the Nine Months Ended September 30
(In thousands)	Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	$	93,851		$	65,681	$	159,532	$	93,704		$	65,828	$	159,532
Provision	411			9,588		9,999		2			30,436		30,438
Deductions:
Loans charged off	485			12,515		13,000		1,213			39,203		40,416
Less recoveries on loans	314			2,887		3,201		1,598			8,580		10,178
Net loan charge-offs (recoveries)	171			9,628		9,799		(385		)	30,623		30,238
Balance September 30, 2018	$	94,091		$	65,641	$	159,732	$	94,091		$	65,641	$	159,732
Balance at beginning of period	$	92,739		$	65,093	$	157,832	$	91,361		$	64,571	$	155,932
Provision	24			10,680		10,704		1,026			31,564		32,590
Deductions:
Loans charged off	378			13,592		13,970		1,455			39,337		40,792
Less recoveries on loans	651			2,615		3,266		2,104			7,998		10,102
Net loan charge-offs (recoveries)	(273		)	10,977		10,704		(649		)	31,339		30,690
Balance September 30, 2017	$	93,036		$	64,796	$	157,832	$	93,036		$	64,796	$	157,832

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The following table shows the balance in the allowance for loan losses and the related loan balance at September 30, 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
September 30, 2018
Commercial	$	2,746	$	91,119	$	91,345	$	8,601,336
Personal Banking	898		17,641		64,743		5,245,463
Total	$	3,644	$	108,760	$	156,088	$	13,846,799
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 September 30, 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 15.



(In thousands)	Sept. 30, 2018		Dec. 31, 2017
Non-accrual loans	$	8,369	$	11,983
Restructured loans (accruing)	100,391		102,812
Total impaired loans	$	108,760	$	114,795

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The following table provides additional information about impaired loans held by the Company at September 30, 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
September 30, 2018
With no related allowance recorded:
Business	$	4,871	$	8,936	$	—
	$	4,871	$	8,936	$	—
With an allowance recorded:
Business	$	75,324	$	75,612	$	2,262
Real estate – construction and land	412		416		11
Real estate – business	10,512		11,112		473
Real estate – personal	5,177		7,347		274
Consumer	5,309		5,309		48
Revolving home equity	68		68		—
Consumer credit card	7,087		7,087		576
	$	103,889	$	106,951	$	3,644
Total	$	108,760	$	115,887	$	3,644
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

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Total average impaired loans for the three and nine month periods ended September 30, 2018 and 2017, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended September 30, 2018
Non-accrual loans	$	7,477	$	1,862	$	9,339
Restructured loans (accruing)	83,493		16,409		99,902
Total	$	90,970	$	18,271	$	109,241
For the nine months ended September 30, 2018
Non-accrual loans	$	7,888	$	2,261	$	10,149
Restructured loans (accruing)	81,543		17,426		98,969
Total	$	89,431	$	19,687	$	109,118
For the three months ended September 30, 2017
Non-accrual loans	$	8,938	$	4,238	$	13,176
Restructured loans (accruing)	42,930		18,691		61,621
Total	$	51,868	$	22,929	$	74,797
For the nine months ended September 30, 2017
Non-accrual loans	$	9,800	$	4,098	$	13,898
Restructured loans (accruing)	36,567		16,901		53,468
Total	$	46,367	$	20,999	$	67,366

The table below shows interest income recognized during the three and nine month periods ended September 30, 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 15.



	For the Three Months Ended September 30				For the Nine Months Ended September 30
(In thousands)	2018		2017		2018		2017
Interest income recognized on impaired loans:
Business	$	939	$	473	$	2,817	$	1,418
Real estate – construction and land	6		10		19		30
Real estate – business	110		118		329		354
Real estate – personal	47		104		142		311
Consumer	79		79		238		236
Revolving home equity	2		7		6		20
Consumer credit card	129		162		386		486
Total	$	1,312	$	953	$	3,937	$	2,855

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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 September 30, 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
September 30, 2018
Commercial:
Business	$	4,957,570	$	3,673	$	348	$	5,131	$	4,966,722
Real estate – construction and land	995,134		4,553		—		4		999,691
Real estate – business	2,708,294		16,281		—		1,467		2,726,042
Personal Banking:
Real estate – personal	2,110,198		7,571		1,136		1,767		2,120,672
Consumer	1,936,208		28,249		3,008		—		1,967,465
Revolving home equity	372,931		1,517		874		—		375,322
Consumer credit card	769,158		10,328		8,625		—		788,111
Overdrafts	11,199		335		—		—		11,534
Total	$	13,860,692	$	72,507	$	13,991	$	8,369	$	13,955,559
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

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 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.

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Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
September 30, 2018
Pass	$	4,772,286	$	987,352	$	2,649,964	$	8,409,602
Special mention	40,307		11,474		29,016		80,797
Substandard	148,998		861		45,595		195,454
Non-accrual	5,131		4		1,467		6,602
Total	$	4,966,722	$	999,691	$	2,726,042	$	8,692,455
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 $205.4 million at September 30, 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 $170.3 million at September 30, 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 8% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at September 30, 2018 and December 31, 2017 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
September 30, 2018
FICO score:
Under 600	1.0	%	3.2	%	1.0	%	4.4	%
600 - 659	2.0		4.9		1.8		14.2
660 - 719	9.2		18.3		9.5		35.3
720 - 779	25.4		25.8		23.4		26.6
780 and over	62.4		47.8		64.3		19.5
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. Commercial performing restructured loans are primarily comprised of certain business, construction and business real estate loans classified as substandard, but renewed at rates judged to be non market. These loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card and other small consumer loans under various debt management and assistance programs. Modifications to these loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company also classified as consumer bankruptcy certain personal real estate, revolving home equity, and consumer loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments. Other consumer loans classified as troubled debt restructurings consist of various other workout arrangements with consumer customers.



(In thousands)		September 30, 2018		December 31, 2017
Accruing restructured loans:
	Commercial	$	85,232	$	88,588
	Assistance programs	7,386		6,941
	Consumer bankruptcy	4,327		3,916
	Other consumer	3,446		3,367
Non-accrual loans		5,831		7,796
Total troubled debt restructurings		$	106,222	$	110,608

The table below shows the balance of troubled debt restructurings by loan classification at September 30, 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)	September 30, 2018		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	79,963	$	28
Real estate - construction and land	408		—
Real estate - business	9,045		—
Personal Banking:
Real estate - personal	4,342		292
Consumer	5,309		89
Revolving home equity	68		—
Consumer credit card	7,087		591
Total troubled debt restructurings	$	106,222	$	1,000

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 loans under various debt management and assistance programs were estimated to decrease interest income by approximately $792 thousand on an annual, pre-tax basis, compared to amounts contractually owed. Other modifications to consumer loans mainly involve extensions and other small modifications that did not include the forgiveness of principal or interest.

The allowance for 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

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

If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for 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 $7.7 million at September 30, 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 September 30, 2018, the fair value of these loans was $10.3 million, and the unpaid principal balance was $10.0 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 September 30, 2018 totaled $6.6 million.

At September 30, 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 $1.2 million and $681 thousand at September 30, 2018 and December 31, 2017, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.3 million and $2.7 million at September 30, 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)	September 30, 2018		December 31, 2017
Available for sale debt securities	$	8,674,986	$	8,725,442
Trading debt securities	19,676		18,269
Equity securities:
Readily determinable fair value	2,765		48,838
No readily determinable fair value	1,702		1,753
Other:
Federal Reserve Bank stock	33,498		33,253
Federal Home Loan Bank stock	10,000		10,000
Private equity investments	83,622		55,752
Total investment securities	$	8,826,249	$	8,893,307

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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 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 $2.5 million at cost and $2.8 million at fair value at September 30, 2018. The decline in these balances from prior periods was due to a third party merger transaction in June 2018, in which the majority of these securities were redeemed for cash of $39.9 million. During the first nine months of 2018, unrealized net losses of $151 thousand were recognized in current earnings on equity securities still held at September 30, 2018.

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 (AOCI). A summary of the available for sale debt securities by maturity groupings as of September 30, 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	$	23,624	$	23,532
After 1 but within 5 years	646,024		632,363
After 5 but within 10 years	183,500		177,790
After 10 years	69,283		67,430
Total U.S. government and federal agency obligations	922,431		901,115
Government-sponsored enterprise obligations:
Within 1 year	28,635		28,607
After 1 but within 5 years	121,588		119,494
After 5 but within 10 years	34,985		33,587
After 10 years	42,872		39,428
Total government-sponsored enterprise obligations	228,080		221,116
State and municipal obligations:
Within 1 year	124,946		125,248
After 1 but within 5 years	642,000		640,269
After 5 but within 10 years	551,184		545,707
After 10 years	79,516		77,674
Total state and municipal obligations	1,397,646		1,388,898
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,351,134		3,266,524
Non-agency mortgage-backed securities	1,103,357		1,091,382
Asset-backed securities	1,489,750		1,475,425
Total mortgage and asset-backed securities	5,944,241		5,833,331
Other debt securities:
Within 1 year	9,002		8,984
After 1 but within 5 years	257,635		251,880
After 5 but within 10 years	73,254		69,662
Total other debt securities	339,891		330,526
Total available for sale debt securities	$	8,832,289	$	8,674,986

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $436.2 million, at fair value, at September 30, 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 $14.7 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 AOCI, by security type.



(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2018
U.S. government and federal agency obligations	$	922,431	$	41	$	(21,357	)	$	901,115
Government-sponsored enterprise obligations	228,080		—		(6,964		)	221,116
State and municipal obligations	1,397,646		3,541		(12,289		)	1,388,898
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,351,134		3,875		(88,485		)	3,266,524
Non-agency mortgage-backed securities	1,103,357		6,236		(18,211		)	1,091,382
Asset-backed securities	1,489,750		2,174		(16,499		)	1,475,425
Total mortgage and asset-backed securities	5,944,241		12,285		(123,195		)	5,833,331
Other debt securities	339,891		—		(9,365		)	330,526
Total	$	8,832,289	$	15,867	$	(173,170	)	$	8,674,986
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 September 30, 2018, the fair value of securities on this watch list was $53.5 million compared to $68.0 million at December 31, 2017.

As of September 30, 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 $20.4 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.1 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 September 30, 2018 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	12%	-	51%
Credit support	0%	-	20%
Loss severity	14%	-	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 Nine Months Ended September 30
(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			98
Credit losses on debt securities for which impairment was previously recognized	10			274
Increase in expected cash flows that are recognized over remaining life of security	(138		)	(207		)
Cumulative OTTI credit losses at September 30	$	14,129		$	14,245

Debt securities with unrealized losses recorded in AOCI 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
September 30, 2018
U.S. government and federal agency obligations	$	572,747	$	12,285	$	270,313	$	9,072	$	843,060	$	21,357
Government-sponsored enterprise obligations	139,520		3,909		81,596		3,055		221,116		6,964
State and municipal obligations	715,673		7,472		130,190		4,817		845,863		12,289
Mortgage and asset-backed securities:
Agency mortgage-backed securities	1,958,646		42,485		1,039,348		46,000		2,997,994		88,485
Non-agency mortgage-backed securities	680,691		9,372		374,601		8,839		1,055,292		18,211
Asset-backed securities	735,808		9,758		422,531		6,741		1,158,339		16,499
Total mortgage and asset-backed securities	3,375,145		61,615		1,836,480		61,580		5,211,625		123,195
Other debt securities	258,019		5,813		72,507		3,552		330,526		9,365
Total	$	5,061,104	$	91,094	$	2,391,086	$	82,076	$	7,452,190	$	173,170
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