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 June 30, ~~2016~~2017



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, ~~or a~~ smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting ~~company”~~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 ~~July 31, 2016~~,August 1, 2017, the registrant had outstanding ~~96,563,720~~101,625,940 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 June 30, ~~2016~~2017 (unaudited) and December 31, ~~2015~~2016	3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, ~~2016~~2017 and ~~2015~~2016 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, ~~2016~~2017 and ~~2015~~2016 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Six Months Ended June 30, ~~2016~~2017 and ~~2015~~2016 (unaudited)	6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2016~~2017 and ~~2015~~2016 (unaudited)	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59
	Item 4.	Controls and Procedures	60

Part II	Other Information
	Item 1.	Legal Proceedings	61
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
	Item 6.	Exhibits	61
Signatures			62
Index to Exhibits			63

~~Table of Contents~~

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


	June 30, 2016			December 31, 2015			June 30, 2017			December 31, 2016
	(Unaudited)						(Unaudited)
	(In thousands)						(In thousands)
ASSETS
Loans	$	13,091,888		$	12,436,692		$	13,626,592		$	13,412,736
Allowance for loan losses	(153,832		)	(151,532		)	(157,832		)	(155,932		)
Net loans	12,938,056			12,285,160			13,468,760			13,256,804
Loans held for sale (including $7,094,000 of residential mortgage loans carried at fair value at June 30, 2016 and $4,981,000 at December 31, 2015)	33,254			7,607
Loans held for sale (including $14,118,000 and $9,263,000 of residential mortgage loans carried at fair value at June 30, 2017 and December 31, 2016, respectively)							22,002			14,456
Investment securities:
Available for sale ($583,208,000 pledged at June 30, 2016 and $568,257,000 at
December 31, 2015 to secure swap and repurchase agreements)	9,221,346			9,777,004
Available for sale ($719,820,000 and $568,553,000 pledged at June 30, 2017 and
December 31, 2016, respectively, to secure swap and repurchase agreements)							9,439,701			9,649,203
Trading	30,512			11,890			22,291			22,225
Non-marketable	111,931			112,786			102,388			99,558
Total investment securities	9,363,789			9,901,680			9,564,380			9,770,986
Federal funds sold and short-term securities purchased under agreements to resell	13,725			14,505			16,520			15,470
Long-term securities purchased under agreements to resell	825,000			875,000			625,000			725,000
Interest earning deposits with banks	183,223			23,803			80,860			272,275
Cash and due from banks	428,300			464,411			433,747			494,690
Land, buildings and equipment, net	342,237			352,581			334,586			337,705
Goodwill	138,921			138,921			138,921			138,921
Other intangible assets, net	6,561			6,669			7,002			6,709
Other assets	436,627			534,625			387,065			608,408
Total assets	$	24,709,693		$	24,604,962		$	25,078,843		$	25,641,424
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	6,906,265		$	7,146,398		$	7,314,506		$	7,429,398
Savings, interest checking and money market	10,978,734			10,834,746			11,427,615			11,430,789
Time open and C.D.'s of less than $100,000	749,160			785,191			679,668			713,075
Time open and C.D.'s of $100,000 and over	1,515,888			1,212,518			1,403,873			1,527,833
Total deposits	20,150,047			19,978,853			20,825,662			21,101,095
Federal funds purchased and securities sold under agreements to repurchase	1,632,272			1,963,552			1,256,444			1,723,905
Other borrowings	103,878			103,818			101,903			102,049
Other liabilities	296,675			191,321			266,627			213,243
Total liabilities	22,182,872			22,237,544			22,450,636			23,140,292
Commerce Bancshares, Inc. stockholders’ equity:
Preferred stock, $1 par value
Authorized 2,000,000 shares; issued 6,000 shares	144,784			144,784			144,784			144,784
Common stock, $5 par value
Authorized 120,000,000 shares;
issued 97,972,433 shares	489,862			489,862
issued 102,003,046 shares							510,015			510,015
Capital surplus	1,333,995			1,337,677			1,546,534			1,552,454
Retained earnings	470,558			383,313			390,853			292,849
Treasury stock of 1,244,063 shares at June 30, 2016
and 603,003 shares at December 31, 2015, at cost	(51,707		)	(26,116		)
Treasury stock of 207,294 shares at June 30, 2017
and 364,711 shares at December 31, 2016, at cost							(10,373		)	(15,294		)
Accumulated other comprehensive income	134,424			32,470			42,070			10,975
Total Commerce Bancshares, Inc. stockholders' equity	2,521,916			2,361,990			2,623,883			2,495,783
Non-controlling interest	4,905			5,428			4,324			5,349
Total equity	2,526,821			2,367,418			2,628,207			2,501,132
Total liabilities and equity	$	24,709,693		$	24,604,962		$	25,078,843		$	25,641,424

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME


	For the Three Months Ended June 30					For the Six Months Ended June 30					For the Three Months Ended June 30					For the Six Months Ended June 30
(In thousands, except per share data)	2016			2015		2016			2015		2017		2016			2017		2016
	(Unaudited)										(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	121,151		$	113,467	$	240,484		$	224,753	$	134,273	$	121,151		$	262,596	$	240,484
Interest and fees on loans held for sale	692			39		827			60		263		692			459		827
Interest on investment securities	54,698			53,264		103,589			91,700		54,975		54,698			110,240		103,589
Interest on federal funds sold and short-term securities purchased under
agreements to resell	19			15		43			24		37		19			60		43
Interest on long-term securities purchased under agreements to resell	3,354			3,670		6,829			6,721		3,684		3,354			7,477		6,829
Interest on deposits with banks	151			122		421			301		362		151			759		421
Total interest income	180,065			170,577		352,193			323,559		193,594		180,065			381,591		352,193
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	3,548			3,287		7,032			6,595		4,342		3,548			8,232		7,032
Time open and C.D.'s of less than $100,000	709			818		1,451			1,698		674		709			1,318		1,451
Time open and C.D.'s of $100,000 and over	2,347			1,504		4,333			2,914		2,822		2,347			5,585		4,333
Interest on federal funds purchased and securities sold under
agreements to repurchase	725			421		1,613			788		2,038		725			3,577		1,613
Interest on other borrowings	907			890		2,160			1,769		911		907			1,799		2,160
Total interest expense	8,236			6,920		16,589			13,764		10,787		8,236			20,511		16,589
Net interest income	171,829			163,657		335,604			309,795		182,807		171,829			361,080		335,604
Provision for loan losses	9,216			6,757		18,655			11,177		10,758		9,216			21,886		18,655
Net interest income after provision for loan losses	162,613			156,900		316,949			298,618		172,049		162,613			339,194		316,949
NON-INTEREST INCOME
Bank card transaction fees	45,065			45,672		89,535			87,971		44,999		45,065			88,203		89,535
Trust fees	31,464			30,531		61,834			60,117		33,120		30,241			65,134		59,484
Deposit account charges and other fees	21,328			19,637		42,019			38,136		22,861		21,328			44,803		42,019
Capital market fees	2,500			2,738		5,225			5,740		2,156		2,500			4,498		5,225
Consumer brokerage services	3,491			3,507		7,000			6,843		3,726		3,491			7,375		7,000
Loan fees and sales	3,196			2,183		5,706			4,272		4,091		3,196			7,259		5,706
Other	9,526			9,967		24,275			17,730		12,131		10,749			22,878		26,625
Total non-interest income	116,570			114,235		235,594			220,809		123,084		116,570			240,150		235,594
INVESTMENT SECURITIES GAINS (LOSSES), NET	(744		)	2,143		(1,739		)	8,178		1,651		(744		)	879		(1,739		)
NON-INTEREST EXPENSE
Salaries and employee benefits	104,808			99,655		211,667			197,729		108,829		104,808			221,198		211,667
Net occupancy	11,092			10,999		22,395			22,560		11,430		11,092			22,873		22,395
Equipment	4,781			4,679		9,415			9,382		4,776		4,781			9,385		9,415
Supplies and communication	5,693			5,226		12,522			10,807		5,446		5,693			11,155		12,522
Data processing and software	22,770			21,045		45,669			40,551		23,356		22,770			46,453		45,669
Marketing	4,389			4,307		8,202			8,225		4,488		4,389			7,712		8,202
Deposit insurance	3,143			3,019		6,308			6,020		3,592		3,143			7,063		6,308
Other	20,413			16,533		38,384			34,034		22,677		20,413			45,585		38,384
Total non-interest expense	177,089			165,463		354,562			329,308		184,594		177,089			371,424		354,562
Income before income taxes	101,350			107,815		196,242			198,297		112,190		101,350			208,799		196,242
Less income taxes	31,542			32,492		60,912			60,960		33,201		31,542			58,108		60,912
Net income	69,808			75,323		135,330			137,337		78,989		69,808			150,691		135,330
Less non-controlling interest expense (income)	(85		)	970		63			1,929		29		(85		)	227		63
Net income attributable to Commerce Bancshares, Inc.	69,893			74,353		135,267			135,408		78,960		69,893			150,464		135,267
Less preferred stock dividends	2,250			2,250		4,500			4,500		2,250		2,250			4,500		4,500
Net income available to common shareholders	$	67,643		$	72,103	$	130,767		$	130,908	$	76,710	$	67,643		$	145,964	$	130,767
Net income per common share — basic	$	.70		$	.72	$	1.35		$	1.30	$	.75	$	.67		$	1.43	$	1.29
Net income per common share — diluted	$	.70		$	.72	$	1.35		$	1.30	$	.75	$	.66		$	1.43	$	1.28

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


		For the Three Months Ended June 30						For the Six Months Ended June 30							For the Three Months Ended June 30					For the Six Months Ended June 30
(In thousands)		2016			2015			2016			2015				2017		2016			2017		2016
		(Unaudited)													(Unaudited)
Net income		$	69,808		$	75,323		$	135,330		$	137,337			$	78,989	$	69,808		$	150,691	$	135,330
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		—			149			(398		)	21				76		—			171		(398		)
Net unrealized gains (losses) on other securities		31,139			(43,483		)	101,634			(14,137		)
Net unrealized gains on other securities															11,241		31,139			30,243		101,634
Pension loss amortization		356			406			718			812				341		356			681		718
Other comprehensive income (loss)		31,495			(42,928		)	101,954			(13,304		)
Other comprehensive income															11,658		31,495			31,095		101,954
Comprehensive income		101,303			32,395			237,284			124,033				90,647		101,303			181,786		237,284
Less non-controlling interest expense (income)		(85		)	970			63			1,929				29		(85		)	227		63
Comprehensive income attributable to Commerce Bancshares, Inc.	Comprehensive income attributable to Commerce Bancshares, Inc.	$	101,388		$	31,425		$	237,221		$	122,104		Comprehensive income attributable to Commerce Bancshares, Inc.	$	90,618	$	101,388		$	181,559	$	237,221

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


			Commerce Bancshares, Inc. Shareholders																						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			Preferred Stock		Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Non-Controlling Interest			Total
	(Unaudited)																						(Unaudited)
Balance January 1, 2016	$	144,784	$	489,862	$	1,337,677		$	383,313		$	(26,116	)	$	32,470		$	5,428		$	2,367,418
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																														150,464								227			150,691
Other comprehensive income																																				31,095					31,095
Distributions to non-controlling interest																																						(1,252		)	(1,252		)
Purchases of treasury stock																																	(10,628		)						(10,628		)
Issuance of stock under purchase and equity compensation plans																											(15,556		)				15,549								(7		)
Stock-based compensation																											6,195														6,195
Cash dividends on common stock ($.450 per share)																														(45,816		)									(45,816		)
Cash dividends on preferred stock ($.750 per depositary share)																														(4,500		)									(4,500		)
Balance June 30, 2017																							$	144,784	$	510,015	$	1,546,534		$	390,853		$	(10,373	)	$	42,070	$	4,324		$	2,628,207
Balance December 31, 2015																							$	144,784	$	489,862	$	1,337,677		$	383,313		$	(26,116	)	$	32,470	$	5,428		$	2,367,418
Net income								135,267									63			135,330										135,267								63			135,330
Other comprehensive income														101,954						101,954																101,954					101,954
Distributions to non-controlling interest																	(586		)	(586		)																(586		)	(586		)
Purchases of treasury stock											(37,462		)							(37,462		)											(37,462		)						(37,462		)
Issuance of stock under purchase and equity compensation plans					(11,873		)				11,871									(2		)					(11,873		)				11,871								(2		)
Excess tax benefit related to equity compensation plans					1,904															1,904							1,904														1,904
Stock-based compensation					6,287															6,287							6,287														6,287
Cash dividends on common stock ($.450 per share)								(43,522		)										(43,522		)
Cash dividends on common stock ($.429 per share)																														(43,522		)									(43,522		)
Cash dividends on preferred stock ($.750 per depositary share)								(4,500		)										(4,500		)								(4,500		)									(4,500		)
Balance June 30, 2016	$	144,784	$	489,862	$	1,333,995		$	470,558		$	(51,707	)	$	134,424		$	4,905		$	2,526,821		$	144,784	$	489,862	$	1,333,995		$	470,558		$	(51,707	)	$	134,424	$	4,905		$	2,526,821
Balance January 1, 2015	$	144,784	$	484,155	$	1,229,075		$	426,648		$	(16,562	)	$	62,093		$	4,053		$	2,334,246
Net income								135,408									1,929			137,337
Other comprehensive income														(13,304		)				(13,304		)
Distributions to non-controlling interest																	(543		)	(543		)
Purchases of treasury stock											(3,575		)							(3,575		)
Accelerated share repurchase agreements					40,000						(140,000		)							(100,000		)
Issuance of stock under purchase and equity compensation plans					(14,682		)				16,572									1,890
Excess tax benefit related to equity compensation plans					1,662															1,662
Stock-based compensation					5,252															5,252
Cash dividends on common stock ($.429 per share)								(43,105		)										(43,105		)
Cash dividends on preferred stock ($.750 per depositary share)								(4,500		)										(4,500		)
Balance June 30, 2015	$	144,784	$	484,155	$	1,261,307		$	514,451		$	(143,565	)	$	48,789		$	5,439		$	2,315,360

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Six Months Ended June 30							For the Six Months Ended June 30
(In thousands)	2016				2015			2017				2016
	(Unaudited)							(Unaudited)
OPERATING ACTIVITIES:
Net income	$	135,330			$	137,337		$	150,691			$	135,330
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	18,655				11,177			21,886				18,655
Provision for depreciation and amortization	20,689				21,287			19,890				20,689
Amortization of investment security premiums, net	16,014				17,797			17,827				16,014
Investment securities (gains) losses, net (A)	1,739				(8,178		)	(879		)		1,739
Net gains on sales of loans held for sale	(2,994		)		(1,234		)	(3,547		)		(2,880		)
Originations of loans held for sale	(70,880		)		(50,143		)	(96,943		)		(70,880		)
Proceeds from sales and repayments of loans held for sale	96,352				43,593
Net (increase) decrease in trading securities, excluding unsettled transactions	81,184				(1,310		)
Proceeds from sales of loans held for sale								92,423				68,486
Net decrease in trading securities, excluding unsettled transactions								6,097				81,184
Stock-based compensation	6,287				5,252			6,195				6,287
(Increase) decrease in interest receivable	60				(618		)	(428		)		60
Increase (decrease) in interest payable	57				(201		)	(692		)		57
Increase in income taxes payable	73				17,622			1,483				73
Excess tax benefit related to equity compensation plans	(1,904		)		(1,662		)
Other changes, net	(9,785		)		2,842			(1,985		)		(9,785		)
Net cash provided by operating activities	290,877				193,561			212,018				265,029
INVESTING ACTIVITIES:
Proceeds from sales of investment securities (A)	2,071				683,202			6,552				2,071
Proceeds from maturities/pay downs of investment securities (A)	1,109,707				1,323,921			910,411				1,109,707
Purchases of investment securities (A)	(414,154		)		(1,710,977		)	(625,931		)		(414,154		)
Net increase in loans	(721,274		)		(477,902		)	(234,405		)		(693,522		)
Repayments of long-term securities purchased under agreements to resell	50,000				—			100,000				50,000
Purchases of land, buildings and equipment	(13,649		)		(15,523		)	(14,117		)		(13,649		)
Sales of land, buildings and equipment	5,399				3,430			2,527				5,399
Net cash provided by (used in) investing activities	18,100				(193,849		)
Net cash provided by investing activities								145,037				45,852
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits	(38,985		)		34,287			77,562				(38,985		)
Net increase (decrease) in time open and C.D.'s	267,339				(89,049		)	(157,367		)		267,339
Net decrease in federal funds purchased and short-term securities sold under agreements to repurchase	(331,280		)		(196,475		)	(467,461		)		(331,280		)
Repayment of long-term borrowings	(840		)		(215		)	(146		)		(840		)
Additional long-term borrowings	900			—	—			—			—	900
Purchases of treasury stock	(37,462		)		(3,575		)	(10,628		)		(37,462		)
Accelerated share repurchase agreements	—				(100,000		)
Issuance of stock under equity compensation plans	(2		)		1,890			(7		)		(2		)
Excess tax benefit related to equity compensation plans	1,904				1,662
Cash dividends paid on common stock	(43,522		)		(43,105		)	(45,816		)		(43,522		)
Cash dividends paid on preferred stock	(4,500		)		(4,500		)	(4,500		)		(4,500		)
Net cash used in financing activities	(186,448		)		(399,080		)	(608,363		)		(188,352		)
Increase (decrease) in cash and cash equivalents	122,529				(399,368		)	(251,308		)		122,529
Cash and cash equivalents at beginning of year	502,719				1,100,717			782,435				502,719
Cash and cash equivalents at June 30	$	625,248			$	701,349		$	531,127			$	625,248
(A) Available for sale and non-marketable securities
Income tax payments, net	$	59,886			$	42,077		$	54,621			$	59,886
Interest paid on deposits and borrowings	$	16,532			$	13,964		$	21,203			$	16,532
Loans transferred to foreclosed real estate	$	861			$	2,133		$	461			$	861
Loans transferred from held for investment to held for sale	$	50,360			$	—		$	—			$	50,360
Settlement of accelerated stock repurchase agreement and receipt of treasury stock	$	—			$	60,000

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, ~~2016~~2017 (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 ~~2015~~2016 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 six month periods ended June 30, ~~2016~~2017 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.

2. Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at June 30, ~~2016~~2017 and December 31, ~~2015~~2016 are as follows:


(In thousands)	June 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Commercial:
Business	$	4,840,248	$	4,397,893	$	4,852,408	$	4,776,365
Real estate – construction and land	819,896		624,070		848,152		791,236
Real estate – business	2,399,271		2,355,544		2,727,349		2,643,374
Personal Banking:
Real estate – personal	1,927,340		1,915,953		2,009,203		2,010,397
Consumer	1,939,486		1,924,365		2,038,514		1,990,801
Revolving home equity	408,301		432,981		403,387		413,634
Consumer credit card	753,166		779,744		740,865		776,465
Overdrafts	4,180		6,142		6,714		10,464
Total loans	$	13,091,888	$	12,436,692	$	13,626,592	$	13,412,736

At June 30, ~~2016~~,2017, loans of ~~$3.7~~$3.9 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 ~~$1.6~~$1.6 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

~~Table of Contents~~

Allowance for loan losses

A summary of the activity in the allowance for loan losses during the three and six months ended June 30, ~~2016~~2017 and ~~2015~~,2016, respectively, follows:


		For the Three Months Ended June 30							For the Six Months Ended June 30								For the Three Months Ended June 30							For the Six Months Ended June 30
(In thousands)		Commercial			Personal Banking		Total		Commercial			Personal Banking		Total			Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	Balance at beginning of period	$	86,027		$	66,105	$	152,132	$	82,086		$	69,446	$	151,532	Balance at beginning of period	$	92,951		$	64,881	$	157,832	$	91,361		$	64,571	$	155,932
Provision	Provision	1,569			7,647		9,216		5,720			12,935		18,655		Provision	(111		)	10,869		10,758		1,002			20,884		21,886
Deductions:	Deductions:															Deductions:
Loans charged off	Loans charged off	661			11,984		12,645		2,174			23,761		25,935		Loans charged off	531			13,415		13,946		1,077			25,745		26,822
Less recoveries on loans	Less recoveries on loans	2,263			2,866		5,129		3,566			6,014		9,580		Less recoveries on loans	430			2,758		3,188		1,453			5,383		6,836
Net loan charge-offs (recoveries)	Net loan charge-offs (recoveries)	(1,602		)	9,118		7,516		(1,392		)	17,747		16,355		Net loan charge-offs (recoveries)	101			10,657		10,758		(376		)	20,362		19,986
Balance June 30, 2016		$	89,198		$	64,634	$	153,832	$	89,198		$	64,634	$	153,832
Balance June 30, 2017																Balance June 30, 2017	$	92,739		$	65,093	$	157,832	$	92,739		$	65,093	$	157,832
Balance at beginning of period	Balance at beginning of period	$	88,906		$	64,626	$	153,532	$	89,622		$	66,910	$	156,532	Balance at beginning of period	$	86,027		$	66,105	$	152,132	$	82,086		$	69,446	$	151,532
Provision	Provision	(2,361		)	9,118		6,757		(4,113		)	15,290		11,177		Provision	1,569			7,647		9,216		5,720			12,935		18,655
Deductions:	Deductions:															Deductions:
Loans charged off	Loans charged off	1,408			11,297		12,705		2,132			22,873		25,005		Loans charged off	661			11,984		12,645		2,174			23,761		25,935
Less recoveries on loans	Less recoveries on loans	1,192			2,756		3,948		2,952			5,876		8,828		Less recoveries on loans	2,263			2,866		5,129		3,566			6,014		9,580
Net loan charge-offs (recoveries)	Net loan charge-offs (recoveries)	216			8,541		8,757		(820		)	16,997		16,177		Net loan charge-offs (recoveries)	(1,602		)	9,118		7,516		(1,392		)	17,747		16,355
Balance June 30, 2015		$	86,329		$	65,203	$	151,532	$	86,329		$	65,203	$	151,532
Balance June 30, 2016																Balance June 30, 2016	$	89,198		$	64,634	$	153,832	$	89,198		$	64,634	$	153,832

The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, ~~2016~~2017 and December 31, ~~2015~~,2016, disaggregated on the basis of impairment methodology. Impaired loans evaluated under 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				Impaired Loans				All Other Loans
(In thousands)	Allowance for Loan Losses		Loans Outstanding		Allowance for Loan Losses		Loans Outstanding		Allowance for Loan Losses		Loans Outstanding		Allowance for Loan Losses		Loans Outstanding
June 30, 2016
June 30, 2017
Commercial	$	1,571	$	49,695	$	87,627	$	8,009,720	$	1,454	$	44,937	$	91,285	$	8,382,972
Personal Banking	1,333		21,498		63,301		5,010,975		1,433		20,221		63,660		5,178,462
Total	$	2,904	$	71,193	$	150,928	$	13,020,695	$	2,887	$	65,158	$	154,945	$	13,561,434
December 31, 2015
December 31, 2016
Commercial	$	1,927	$	43,027	$	80,159	$	7,334,480	$	1,817	$	44,795	$	89,544	$	8,166,180
Personal Banking	1,557		22,287		67,889		5,036,898		1,292		19,737		63,279		5,182,024
Total	$	3,484	$	65,314	$	148,048	$	12,371,378	$	3,109	$	64,532	$	152,823	$	13,348,204

Impaired loans

The table below shows the Company’s investment in impaired loans at June 30, ~~2016~~2017 and December 31, ~~2015~~.2016. 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)	June 30, 2016		Dec. 31, 2015		June 30, 2017		Dec. 31, 2016
Non-accrual loans	$	24,524	$	26,575	$	13,362	$	14,283
Restructured loans (accruing)	46,669		38,739		51,796		50,249
Total impaired loans	$	71,193	$	65,314	$	65,158	$	64,532

~~Table of Contents~~

The following table provides additional information about impaired loans held by the Company at June 30, ~~2016~~2017 and December 31, ~~2015~~,2016, 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		Recorded Investment		Unpaid Principal Balance		Related Allowance
June 30, 2016
June 30, 2017
With no related allowance recorded:
Business	$	11,777	$	15,217	$	—	$	5,566	$	9,000	$	—
Real estate – construction and land	2,160		3,462		—		537		752		—
Real estate – business	3,072		3,261		—
Real estate – personal	352		373		—
	$	17,361	$	22,313	$	—	$	6,103	$	9,752	$	—
With an allowance recorded:
Business	$	24,905	$	25,639	$	1,059	$	29,226	$	29,821	$	914
Real estate – construction and land	160		162		7		65		68		3
Real estate – business	7,621		9,145		505		9,543		10,961		537
Real estate – personal	7,419		10,310		694		6,286		9,258		570
Consumer	5,596		5,596		68		6,242		6,280		259
Revolving home equity	400		447		21		582		582		10
Consumer credit card	7,731		7,731		550		7,111		7,111		594
	$	53,832	$	59,030	$	2,904	$	59,055	$	64,081	$	2,887
Total	$	71,193	$	81,343	$	2,904	$	65,158	$	73,833	$	2,887
December 31, 2015
December 31, 2016
With no related allowance recorded:
Business	$	9,330	$	11,777	$	—	$	7,375	$	10,470	$	—
Real estate – construction and land	2,961		8,956		—		557		752		—
Real estate – business	4,793		6,264		—
Real estate – personal	373		373		—
	$	17,457	$	27,370	$	—	$	7,932	$	11,222	$	—
With an allowance recorded:
Business	$	18,227	$	20,031	$	1,119	$	29,924	$	31,795	$	1,318
Real estate – construction and land	1,227		2,804		63		69		72		3
Real estate – business	6,489		9,008		745		6,870		8,072		496
Real estate – personal	7,667		10,530		831		6,394		9,199		642
Consumer	5,599		5,599		63		5,281		5,281		57
Revolving home equity	704		852		67		584		584		1
Consumer credit card	7,944		7,944		596		7,478		7,478		592
	$	47,857	$	56,768	$	3,484	$	56,600	$	62,481	$	3,109
Total	$	65,314	$	84,138	$	3,484	$	64,532	$	73,703	$	3,109

~~Table of Contents~~

Total average impaired loans for the three and six month periods ended June 30, ~~2016~~2017 and ~~2015~~,2016, respectively, are shown in the table below.


(In thousands)	Commercial		Personal Banking		Total		Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended June 30, 2017
Non-accrual loans							$	9,867	$	4,539	$	14,406
Restructured loans (accruing)							34,765		15,780		50,545
Total							$	44,632	$	20,319	$	64,951
For the six months ended June 30, 2017
Non-accrual loans							$	10,238	$	4,027	$	14,265
Restructured loans (accruing)							33,333		15,991		49,324
Total							$	43,571	$	20,018	$	63,589
For the three months ended June 30, 2016
Non-accrual loans	$	22,098	$	4,461	$	26,559	$	22,098	$	4,461	$	26,559
Restructured loans (accruing)	28,775		17,297		46,072		28,775		17,297		46,072
Total	$	50,873	$	21,758	$	72,631	$	50,873	$	21,758	$	72,631
For the six months ended June 30, 2016
Non-accrual loans	$	21,551	$	4,542	$	26,093	$	21,551	$	4,542	$	26,093
Restructured loans (accruing)	27,977		17,499		45,476		27,977		17,499		45,476
Total	$	49,528	$	22,041	$	71,569	$	49,528	$	22,041	$	71,569
For the three months ended June 30, 2015
Non-accrual loans	$	25,063	$	5,948	$	31,011
Restructured loans (accruing)	14,254		18,968		33,222
Total	$	39,317	$	24,916	$	64,233
For the six months ended June 30, 2015
Non-accrual loans	$	28,155	$	6,102	$	34,257
Restructured loans (accruing)	18,245		19,176		37,421
Total	$	46,400	$	25,278	$	71,678

The table below shows interest income recognized during the three and six month periods ended June 30, ~~2016~~2017 and ~~2015~~,2016, respectively, for impaired loans held at the end of each ~~respective~~ 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 June 30				For the Six Months Ended June 30				For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands)	2016		2015		2016		2015		2017		2016		2017		2016
Interest income recognized on impaired loans:
Business	$	236	$	42	$	472	$	84	$	319	$	236	$	637	$	472
Real estate – construction and land	3		42		5		84		1		3		2		5
Real estate – business	56		15		112		30		88		56		175		112
Real estate – personal	42		48		84		96		36		42		71		84
Consumer	89		85		177		169		80		89		159		177
Revolving home equity	4		6		7		11		6		4		12		7
Consumer credit card	159		179		318		357		145		159		289		318
Total	$	589	$	417	$	1,175	$	831	$	675	$	589	$	1,345	$	1,175

~~Table of Contents~~

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 June 30, ~~2016~~2017 and December 31, ~~2015~~.2016.


(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		Current or Less Than 30 Days Past Due		30 – 89 Days Past Due		90 Days Past Due and Still Accruing		Non-accrual		Total
June 30, 2016
June 30, 2017
Commercial:
Business	$	4,815,328	$	11,924	$	280	$	12,716	$	4,840,248	$	4,842,945	$	2,761	$	372	$	6,330	$	4,852,408
Real estate – construction and land	815,890		1,836		—		2,170		819,896		843,289		4,319		—		544		848,152
Real estate – business	2,388,292		3,743		2,000		5,236		2,399,271		2,721,612		3,904		—		1,833		2,727,349
Personal Banking:
Real estate – personal	1,913,469		7,083		2,495		4,293		1,927,340		1,997,661		6,060		1,978		3,504		2,009,203
Consumer	1,919,044		17,896		2,546		—		1,939,486		2,012,634		22,526		2,203		1,151		2,038,514
Revolving home equity	403,831		2,993		1,368		109		408,301		400,306		2,154		927		—		403,387
Consumer credit card	737,946		8,017		7,203		—		753,166		722,604		9,111		9,150		—		740,865
Overdrafts	3,917		263		—		—		4,180		6,414		300		—		—		6,714
Total	$	12,997,717	$	53,755	$	15,892	$	24,524	$	13,091,888	$	13,547,465	$	51,135	$	14,630	$	13,362	$	13,626,592
December 31, 2015
December 31, 2016
Commercial:
Business	$	4,384,149	$	2,306	$	564	$	10,874	$	4,397,893	$	4,763,274	$	3,735	$	674	$	8,682	$	4,776,365
Real estate – construction and land	617,838		3,142		—		3,090		624,070		789,633		1,039		—		564		791,236
Real estate – business	2,340,919		6,762		—		7,863		2,355,544		2,639,586		2,154		—		1,634		2,643,374
Personal Banking:
Real estate – personal	1,901,330		7,117		3,081		4,425		1,915,953		1,995,724		9,162		2,108		3,403		2,010,397
Consumer	1,903,389		18,273		2,703		—		1,924,365		1,957,358		29,783		3,660		—		1,990,801
Revolving home equity	427,998		2,641		2,019		323		432,981		411,483		1,032		1,119		—		413,634
Consumer credit card	762,750		8,894		8,100		—		779,744		757,443		10,187		8,835		—		776,465
Overdrafts	5,834		308		—		—		6,142		10,014		450		—		—		10,464
Total	$	12,344,207	$	49,443	$	16,467	$	26,575	$	12,436,692	$	13,324,515	$	57,542	$	16,396	$	14,283	$	13,412,736

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.

~~Table of Contents~~

																	Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total		Business		Real Estate-Construction		Real Estate- Business		Total
June 30, 2016
June 30, 2017
Pass	$	4,702,346	$	808,815	$	2,318,106	$	7,829,267	$	4,617,838	$	843,151	$	2,629,544	$	8,090,533
Special mention	66,786		8,561		24,770		100,117		180,380		1,754		44,279		226,413
Substandard	58,400		350		51,159		109,909		47,860		2,703		51,693		102,256
Non-accrual	12,716		2,170		5,236		20,122		6,330		544		1,833		8,707
Total	$	4,840,248	$	819,896	$	2,399,271	$	8,059,415	$	4,852,408	$	848,152	$	2,727,349	$	8,427,909
December 31, 2015
December 31, 2016
Pass	$	4,278,857	$	618,788	$	2,281,565	$	7,179,210	$	4,607,553	$	788,778	$	2,543,348	$	7,939,679
Special mention	49,302		1,033		15,009		65,344		116,642		722		45,479		162,843
Substandard	58,860		1,159		51,107		111,126		43,488		1,172		52,913		97,573
Non-accrual	10,874		3,090		7,863		21,827		8,682		564		1,634		10,880
Total	$	4,397,893	$	624,070	$	2,355,544	$	7,377,507	$	4,776,365	$	791,236	$	2,643,374	$	8,210,975

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 Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At June 30, ~~2016~~,2017, these were comprised of ~~$259.7~~$227.4 million in personal real estate loans, or ~~5.2%~~4.4% of the Personal Banking portfolio, compared to ~~$257.8~~$237.2 million at December 31, ~~2015~~.2016. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at June 30, ~~2016~~2017 and December 31, ~~2015~~2016 by FICO score.

																	Personal Banking Loans
	% of Loan Category								% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card		Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
June 30, 2016
June 30, 2017
FICO score:
Under 600	1.5	%	4.3	%	1.3	%	4.0	%	1.2	%	3.2	%	1.0	%	4.9	%
600 - 659	2.8		8.9		3.9		11.8		2.7		5.7		1.8		14.8
660 - 719	9.6		21.6		13.4		31.4		10.6		18.5		9.5		34.8
720 - 779	24.4		26.2		28.4		28.0		26.1		26.9		21.8		25.8
780 and over	61.7		39.0		53.0		24.8		59.4		45.7		65.9		19.7
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2015
December 31, 2016
FICO score:
Under 600	1.5	%	4.5	%	1.5	%	3.9	%	1.3	%	3.4	%	1.0	%	4.9	%
600 - 659	3.0		9.7		3.9		12.0		2.6		6.4		1.8		15.5
660 - 719	9.1		21.8		13.6		31.7		10.4		19.7		9.7		34.9
720 - 779	25.0		26.4		28.4		27.9		25.4		26.3		21.1		25.1
780 and over	61.4		37.6		52.6		24.5		60.3		44.2		66.4		19.6
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

~~Table of Contents~~

Troubled debt restructurings

As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to ~~$61.5~~$59.2 million at June 30, ~~2016~~.2017. 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, and those non-accrual loans totaled ~~$14.8~~$7.4 million at June 30, ~~2016~~.2017. Other performing restructured loans totaled ~~$46.7~~$51.8 million at June 30, ~~2016~~.2017. These include 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 the loans were classified as troubled debt restructurings. These commercial loans totaled ~~$30.3~~$36.8 million at June 30, ~~2016~~.2017. 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. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled ~~$7.7~~$7.1 million at June 30, ~~2016~~.2017. 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 has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At June 30, ~~2016~~,2017, these loans totaled ~~$8.3~~$7.6 million in 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 under the terms of the loan agreements.

The following table shows the outstanding balances of loans classified as troubled debt restructurings at June 30, ~~2016~~,2017, 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)	June 30, 2016		Balance 90 days past due at any time during previous 12 months		June 30, 2017		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	35,833	$	—	$	34,088	$	—
Real estate - construction and land	1,736		—		537		—
Real estate - business	5,457		—		7,710		—
Personal Banking:
Real estate - personal	4,823		683		3,995		353
Consumer	5,619		57		5,149		50
Revolving home equity	291		33		582		47
Consumer credit card	7,731		504		7,111		649
Total restructured loans	$	61,490	$	1,277	$	59,172	$	1,099

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 ~~$970~~$862 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 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

~~Table of Contents~~

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 ~~$11.6~~$3.6 million at June 30, ~~2016~~2017 to lend additional funds to borrowers with restructured loans.

Loans held for sale

~~Beginning January 1, 2015,~~The Company designates certain long-term fixed rate personal real estate ~~loan originations have been designated~~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 June 30, ~~2016~~,2017, the fair value of these loans was ~~$7.1~~$14.1 million, and the unpaid principal balance was ~~$6.8~~$13.6 million.

~~Beginning in the third quarter of 2015, the~~The Company ~~has designated certain~~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 ~~at various times while~~within 210 days after the ~~student is attending school or shortly after graduation. At June 30, 2016,~~last disbursement to the ~~balance of these loans was $5.3 million.~~student. These loans are carried at lower of cost or fair ~~value.~~

In March 2016, the Company designated certain loans secured by automobiles, totaling $50.4 million, as held for sale. This amount approximated nearly 5% of the total auto loan portfolio and was initiated in order to rebalance the auto loan portfolio in relation to the Company's other loan categories. The group of loans held for sale are representative of the overall auto loan portfolio. The loans are being marketed to other financial institutions such as regional banks and credit unions, and in June 2016, loans of $21.8 million were sold and a gain of $114 thousand was recorded, bringing the balancevalue, which at June 30, ~~2016 to $20.8~~2017 totaled $7.9 million. ~~These loans are carried at lower of cost or fair value.~~

At June 30, ~~2016,~~2017, none of the loans held for sale were on non-accrual status ~~and $22 thousand were~~or 90 days past due and still accruing. Interest income with respect to loans held for sale is accrued based on the principal amount outstanding and the loan's contractual interest rate. Gains and losses in fair value resulting from the application of the fair value option, or lower of cost or fair value accounting, are recognized in loan fees and sales in the consolidated statements of income.

Foreclosed real estate/repossessed assets

The Company’s holdings of foreclosed real estate totaled ~~$1.6 million~~$515 thousand and ~~$2.8 million~~$366 thousand at June 30, ~~2016~~2017 and December 31, ~~2015~~,2016, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled ~~$2.8~~$2.4 million and ~~$3.3~~$2.2 million at June 30, ~~2016~~2017 and December 31, ~~2015~~,2016, 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, at fair value, consisted of the following at June 30, ~~2016~~2017 and December 31, ~~2015~~.2016.


(In thousands)	June 30, 2016		Dec. 31, 2015		June 30, 2017		December 31, 2016
Available for sale	$	9,221,346	$	9,777,004	$	9,439,701	$	9,649,203
Trading	30,512		11,890		22,291		22,225
Non-marketable	111,931		112,786		102,388		99,558
Total investment securities	$	9,363,789	$	9,901,680	$	9,564,380	$	9,770,986

Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. The available for sale and the trading portfolios are carried at fair value. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled ~~$46.9~~$47.1 million at June 30, ~~2016~~2017 and ~~$46.8~~$46.9 million at December 31, ~~2015~~.2016. Investment in Federal Reserve Bank 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. Non-marketable securities also include private equity investments, which amounted to ~~$64.7~~$55.0 million at June 30, ~~2016~~2017 and ~~$65.6~~$52.3 million at December 31, ~~2015~~.2016. In the absence of readily ascertainable market values, these securities are carried at estimated fair value.

~~Table of Contents~~

A summary of the available for sale investment securities by maturity groupings as of June 30, ~~2016~~2017 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 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.


(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	59,365	$	59,898	$	58,665	$	58,829
After 1 but within 5 years	499,992		517,665		499,601		502,990
After 5 but within 10 years	105,802		109,977		318,318		318,212
After 10 years	35,642		33,379		35,444		32,524
Total U.S. government and federal agency obligations	700,801		720,919		912,028		912,555
Government-sponsored enterprise obligations:
Within 1 year	81,208		81,302		98,069		98,206
After 1 but within 5 years	452,204		459,978		336,302		335,723
After 5 but within 10 years	14,988		15,260
After 10 years	5,630		5,637		12,493		12,356
Total government-sponsored enterprise obligations	554,030		562,177		446,864		446,285
State and municipal obligations:
Within 1 year	135,577		136,305		171,936		172,890
After 1 but within 5 years	642,897		662,010		643,200		654,145
After 5 but within 10 years	923,727		971,348		879,036		900,292
After 10 years	61,917		64,198		50,896		50,470
Total state and municipal obligations	1,764,118		1,833,861		1,745,068		1,777,797
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,509,991		2,589,915		2,604,217		2,620,198
Non-agency mortgage-backed securities	814,917		831,616		1,063,236		1,066,889
Asset-backed securities	2,293,845		2,298,725		2,249,399		2,250,426
Total mortgage and asset-backed securities	5,618,753		5,720,256		5,916,852		5,937,513
Other debt securities:
Within 1 year	5,996		6,052		13,387		13,389
After 1 but within 5 years	88,771		90,755		176,199		177,812
After 5 but within 10 years	222,737		231,176		125,910		126,503
After 10 years	11,588		11,281
Total other debt securities	329,092		339,264		315,496		317,704
Equity securities	5,678		44,869		5,463		47,847
Total available for sale investment securities	$	8,972,472	$	9,221,346	$	9,341,771	$	9,439,701

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled ~~$400.5~~$432.0 million,, at fair value, at June 30, ~~2016~~.2017. 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 $16.8 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. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of ~~$44.8~~$47.7 million at June 30, ~~2016~~.2017.

~~Table of Contents~~

For 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		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2016
June 30, 2017
U.S. government and federal agency obligations	$	700,801	$	22,381	$	(2,263	)	$	720,919	$	912,028	$	5,575	$	(5,048	)	$	912,555
Government-sponsored enterprise obligations	554,030		8,147		—			562,177		446,864		892		(1,471		)	446,285
State and municipal obligations	1,764,118		70,435		(692		)	1,833,861		1,745,068		34,717		(1,988		)	1,777,797
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,509,991		79,952		(28		)	2,589,915		2,604,217		29,780		(13,799		)	2,620,198
Non-agency mortgage-backed securities	814,917		16,803		(104		)	831,616		1,063,236		8,063		(4,410		)	1,066,889
Asset-backed securities	2,293,845		15,664		(10,784		)	2,298,725		2,249,399		5,725		(4,698		)	2,250,426
Total mortgage and asset-backed securities	5,618,753		112,419		(10,916		)	5,720,256		5,916,852		43,568		(22,907		)	5,937,513
Other debt securities	329,092		10,546		(374		)	339,264		315,496		2,745		(537		)	317,704
Equity securities	5,678		39,191		—			44,869		5,463		42,384		—			47,847
Total	$	8,972,472	$	263,119	$	(14,245	)	$	9,221,346	$	9,341,771	$	129,881	$	(31,951	)	$	9,439,701
December 31, 2015
December 31, 2016
U.S. government and federal agency obligations	$	729,846	$	5,051	$	(7,821	)	$	727,076	$	919,904	$	7,312	$	(6,312	)	$	920,904
Government-sponsored enterprise obligations	794,912		2,657		(4,546		)	793,023		450,448		1,126		(1,576		)	449,998
State and municipal obligations	1,706,635		37,061		(1,739		)	1,741,957		1,778,684		12,223		(12,693		)	1,778,214
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,579,031		47,856		(8,606		)	2,618,281		2,674,964		31,610		(20,643		)	2,685,931
Non-agency mortgage-backed securities	879,186		8,596		(7,819		)	879,963		1,054,446		7,686		(6,493		)	1,055,639
Asset-backed securities	2,660,201		1,287		(17,107		)	2,644,381		2,389,176		3,338		(11,213		)	2,381,301
Total mortgage and asset-backed securities	6,118,418		57,739		(33,532		)	6,142,625		6,118,586		42,634		(38,349		)	6,122,871
Other debt securities	335,925		377		(4,982		)	331,320		327,030		935		(2,012		)	325,953
Equity securities	5,678		35,325		—			41,003		5,678		45,585		—			51,263
Total	$	9,691,414	$	138,210	$	(52,620	)	$	9,777,004	$	9,600,330	$	109,815	$	(60,942	)	$	9,649,203

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 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 June 30, ~~2016~~,2017, the fair value of securities on this watch list was ~~$78.9~~$68.9 million compared to ~~$95.8~~$79.6 million at December 31, ~~2015~~.2016.

As of June 30, ~~2016~~,2017, 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 ~~$37.1 million~~.$30.3 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled ~~$14.4 million~~.$14.3 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 June 30, ~~2016~~2017 included the following:

Significant Inputs Range
Prepayment CPR 0% - 25%
Projected cumulative default 17% - 52%
Credit support 0% - 27%
Loss severity 18% - 63%

~~Table of Contents~~



Significant Inputs	Range
Prepayment CPR	4%	-	25%
Projected cumulative default	14%	-	51%
Credit support	0%	-	38%
Loss severity	16%	-	63%

The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities.


	For the Six Months Ended June 30						For the Six Months Ended June 30
(In thousands)	2016			2015			2017			2016
Cumulative OTTI credit losses at January 1	$	14,129		$	13,734		$	14,080		$	14,129
Credit losses on debt securities for which impairment was not previously recognized	—			76			46			—
Credit losses on debt securities for which impairment was previously recognized	270			407			274			270
Increase in expected cash flows that are recognized over remaining life of security	(37		)	(51		)	(146		)	(37		)
Cumulative OTTI credit losses at June 30	$	14,362		$	14,166		$	14,254		$	14,362

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				Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2016
U.S. government and federal agency obligations	$	—	$	—	$	33,379	$	2,263	$	33,379	$	2,263
State and municipal obligations	17,375		334		9,478		358		26,853		692
Mortgage and asset-backed securities:
Agency mortgage-backed securities	14,257		22		2,611		6		16,868		28
Non-agency mortgage-backed securities	3,790		2		57,411		102		61,201		104
Asset-backed securities	529,895		6,782		189,558		4,002		719,453		10,784
Total mortgage and asset-backed securities	547,942		6,806		249,580		4,110		797,522		10,916
Other debt securities	—		—		19,685		374		19,685		374
Total	$	565,317	$	7,140	$	312,122	$	7,105	$	877,439	$	14,245
December 31, 2015
June 30, 2017
U.S. government and federal agency obligations	$	491,998	$	3,098	$	31,012	$	4,723	$	523,010	$	7,821	$	145,884	$	5,048	$	—	$	—	$	145,884	$	5,048
Government-sponsored enterprise obligations	157,830		1,975		110,250		2,571		268,080		4,546		181,682		1,471		—		—		181,682		1,471
State and municipal obligations	66,998		544		31,120		1,195		98,118		1,739		168,613		1,365		13,761		623		182,374		1,988
Mortgage and asset-backed securities:
Agency mortgage-backed securities	530,035		2,989		291,902		5,617		821,937		8,606		959,777		13,795		1,720		4		961,497		13,799
Non-agency mortgage-backed securities	653,603		7,059		54,536		760		708,139		7,819		503,709		4,165		47,189		245		550,898		4,410
Asset-backed securities	2,207,922		12,492		223,311		4,615		2,431,233		17,107		795,526		2,606		234,619		2,092		1,030,145		4,698
Total mortgage and asset-backed securities	3,391,560		22,540		569,749		10,992		3,961,309		33,532		2,259,012		20,566		283,528		2,341		2,542,540		22,907
Other debt securities	244,452		3,687		25,218		1,295		269,670		4,982		65,547		500		1,463		37		67,010		537
Total	$	4,352,838	$	31,844	$	767,349	$	20,776	$	5,120,187	$	52,620	$	2,820,738	$	28,950	$	298,752	$	3,001	$	3,119,490	$	31,951
December 31, 2016
U.S. government and federal agency obligations													$	349,538	$	2,823	$	32,208	$	3,489	$	381,746	$	6,312
Government-sponsored enterprise obligations													190,441		1,576		—		—		190,441		1,576
State and municipal obligations													700,779		12,164		15,195		529		715,974		12,693
Mortgage and asset-backed securities:
Agency mortgage-backed securities													1,147,416		20,638		2,150		5		1,149,566		20,643
Non-agency mortgage-backed securities													688,131		6,373		34,946		120		723,077		6,493
Asset-backed securities													780,209		5,277		358,778		5,936		1,138,987		11,213
Total mortgage and asset-backed securities													2,615,756		32,288		395,874		6,061		3,011,630		38,349
Other debt securities													179,639		1,986		975		26		180,614		2,012
Total													$	4,036,153	$	50,837	$	444,252	$	10,105	$	4,480,405	$	60,942

~~The total available for sale portfolio consisted of approximately~~ ~~2,000~~ ~~individual securities at~~ ~~June 30, 2016. The portfolio included~~ ~~145~~ ~~securities, having an aggregate fair value of~~ ~~$877.4 million, that were in an unrealized loss position at~~ ~~June 30, 2016, compared to~~ ~~466~~ ~~securities, with a fair value of~~ ~~$5.1 billion, at~~ ~~December 31, 2015. The total amount of unrealized losses on these securities decreased~~ ~~$38.4 million~~ to ~~$14.2 million~~ at ~~June 30, 2016, largely due to a lower rate environment. At~~ ~~June 30, 2016, the fair value of securities in an unrealized loss position for~~ ~~12 months~~ ~~or longer totaled~~ ~~$312.1 million, or~~ ~~3.4%~~ ~~of the total portfolio value.~~

The Company’s holdings of state and municipal obligations included gross unrealized losses of ~~$692 thousand~~$2.0 million at June 30, ~~2016, most~~2017, of which $230 thousand related to auction rate securities. This portfolio totaled ~~$1.8~~$1.8 billion at fair value, or ~~19.9%~~18.8% of total available for sale securities. The average credit quality of the portfolio, excluding auction rate securities, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and the Company has processes and procedures in place to monitor its holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner.

~~Table of Contents~~

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


	For the Six Months Ended June 30						For the Six Months Ended June 30
(In thousands)	2016			2015			2017			2016
Proceeds from sales of available for sale securities	$	—		$	675,870
Proceeds from sales of non-marketable securities	2,071			7,332
Proceeds from sales of securities:
Available for sale							$	4,972		$	—
Non-marketable							1,580			2,071
Total proceeds	$	2,071		$	683,202		$	6,552		$	2,071

Investment securities gains (losses), net:
Available for sale:
Gains realized on sales	$	—		$	2,813
Losses realized on called bonds							$	(254	)	$	—
Losses realized on sales							(22		)	—
Gains realized on donations							4,315			—
Other-than-temporary impairment recognized on debt securities	(270		)	(483		)	(320		)	(270		)
Non-marketable:
Gains realized on sales	2,260			1,673			642			2,260
Losses realized on sales							(652		)	—
Fair value adjustments, net	(3,729		)	4,175			(2,830		)	(3,729		)
Investment securities gains (losses), net	$	(1,739	)	$	8,178
Total gains (losses), net							$	879		$	(1,739	)

At June 30, ~~2016~~,2017, securities totaling ~~$4.6~~$3.9 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the Federal Reserve Bank and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated ~~$583.2~~$719.8 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.

~~Table of Contents~~

4. Goodwill and Other Intangible Assets

The following table presents information about the Company's intangible assets which have estimable useful lives.


	June 30, 2016										December 31, 2015										June 30, 2017										December 31, 2016
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Valuation Allowance			Net Amount		Gross Carrying Amount		Accumulated Amortization			Valuation Allowance			Net Amount		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	$	(26,900	)	$	—		$	4,370	$	31,270	$	(26,239	)	$	—		$	5,031	$	31,270	$	(27,914	)	$	—		$	3,356	$	31,270	$	(27,429	)	$	—		$	3,841
Mortgage servicing rights	4,821		(2,599		)	(31		)	2,191		4,638		(2,971		)	(29		)	1,638		6,637		(2,975		)	(16		)	3,646		5,672		(2,782		)	(22		)	2,868
Total	$	36,091	$	(29,499	)	$	(31	)	$	6,561	$	35,908	$	(29,210	)	$	(29	)	$	6,669	$	37,907	$	(30,889	)	$	(16	)	$	7,002	$	36,942	$	(30,211	)	$	(22	)	$	6,709

Aggregate amortization expense on intangible assets was ~~$399~~$330 thousand and ~~$472~~$399 thousand for the three month periods ended June 30, ~~2016~~2017 and ~~2015~~,2016, respectively, and ~~$794~~$678 thousand and ~~$945~~$794 thousand for the six month periods ended June 30, ~~2016~~2017 and ~~2015,~~2016, 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 June 30, ~~2016~~.2017. 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)
2016	$	1,527
2017	1,162		$	1,141
2018	892		1,091
2019	737		917
2020	602		765
2021			651

Changes in the carrying amount of goodwill and net other intangible assets for the six month period endedJune 30, ~~2016~~2017 is as follows:


(In thousands)	Goodwill		Core Deposit Premium			Mortgage Servicing Rights			Goodwill		Core Deposit Premium			Mortgage Servicing Rights
Balance January 1, 2016	$	138,921	$	5,031		$	1,638
Balance January 1, 2017									$	138,921	$	3,841		$	2,868
Originations	—		—			688			—		—			965
Amortization	—		(661		)	(133		)	—		(485		)	(193		)
Impairment	—		—			(2		)
Balance June 30, 2016	$	138,921	$	4,370		$	2,191
Impairment reversal									—		—			6
Balance June 30, 2017									$	138,921	$	3,356		$	3,646

Goodwill allocated to the Company’s operating segments at June 30, ~~2016~~2017 and December 31, ~~2015~~2016 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.

~~Table of Contents~~

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 June 30, ~~2016~~,2017, that net liability was ~~$2.6~~$2.1 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 ~~$359.0~~$338.8 million at June 30, ~~2016~~.2017.

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 June 30, ~~2016~~,2017, 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 3 to 11 years. At June 30, ~~2016~~,2017, the fair value of the Company's guarantee liabilities for RPAs was ~~$289~~$139 thousand,, and the notional amount of the underlying swaps was ~~$58.0 million~~.$75.3 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 June 30						For the Six Months Ended June 30						For the Three Months Ended June 30						For the Six Months Ended June 30
(In thousands)	2016			2015			2016			2015			2017			2016			2017			2016
Service cost - benefits earned during the period	$	138		$	126		$	271		$	252		$	128		$	138		$	257		$	271
Interest cost on projected benefit obligation	1,005			1,216			1,972			2,432			973			1,005			1,946			1,972
Expected return on plan assets	(1,439		)	(1,523		)	(2,876		)	(3,046		)	(1,438		)	(1,439		)	(2,876		)	(2,876		)
Amortization of prior service cost	(67		)	—			(135		)	—			(68		)	(67		)	(136		)	(135		)
Amortization of unrecognized net loss	642			654			1,293			1,309			617			642			1,234			1,293
Net periodic pension cost	$	279		$	473		$	525		$	947		$	212		$	279		$	425		$	525

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 six months of ~~2016,~~2017, 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 2017.~~2016~~.

Effective January 1, 2016, the Company changed the method used to estimate the interest cost component of net periodic pension cost for its defined benefit pension plan. Prior to the change, the interest cost component was estimated by utilizing a single weighted average discount rate derived from the yield curve used to measure the projected benefit obligation. Under the new method, the interest cost component is estimated by applying the specific annual spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. This change provides a more precise measurement of the interest cost by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates. The Company accounted for this change prospectively as a change in accounting estimate. The change resulted in a decrease of approximately $851 thousand in the estimated annual net periodic pension cost for 2016.

~~Table of Contents~~

7. Common ~~and Preferred~~ 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 June 30				For the Six Months Ended June 30				For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands, except per share data)	2016		2015		2016		2015		2017		2016		2017		2016
Basic income per common share:
Net income attributable to Commerce Bancshares, Inc.									$	78,960	$	69,893	$	150,464	$	135,267
Less preferred stock dividends									2,250		2,250		4,500		4,500
Net income available to common shareholders	$	67,643	$	72,103	$	130,767	$	130,908	$	76,710	$	67,643	145,964		130,767
Less income allocated to nonvested restricted stock	940		997		1,834		1,793		943		940		1,888		1,834
Net income allocated to common stock	$	66,703	$	71,106	$	128,933	$	129,115	$	75,767	$	66,703	$	144,076	$	128,933
Weighted average common shares outstanding	95,382		99,099		95,474		99,573		100,555		100,151		100,463		100,247
Basic income per common share	$	.70	$	.72	$	1.35	$	1.30	$	.75	$	.67	$	1.43	$	1.29
Diluted income per common share:
Net income available to common shareholders	$	67,643	$	72,103	$	130,767	$	130,908	$	76,710	$	67,643	$	145,964	$	130,767
Less income allocated to nonvested restricted stock	938		995		1,831		1,789		941		938		1,883		1,831
Net income allocated to common stock	$	66,705	$	71,108	$	128,936	$	129,119	$	75,769	$	66,705	$	144,081	$	128,936
Weighted average common shares outstanding	95,382		99,099		95,474		99,573		100,555		100,151		100,463		100,247
Net effect of the assumed exercise of stock-based awards - based on
the treasury stock method using the average market price for the respective periods	249		338		232		327		344		261		370		245
Weighted average diluted common shares outstanding	95,631		99,437		95,706		99,900		100,899		100,412		100,833		100,492
Diluted income per common share	$	.70	$	.72	$	1.35	$	1.30	$	.75	$	.66	$	1.43	$	1.28

Unexercised ~~stock options and~~ stock appreciation rights of ~~198~~126 thousand and ~~377~~208 thousand were excluded in the computation of diluted income per common share for the six month periods ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively, because their inclusion would have been anti-dilutive.

The Company also has 6,000,000 depositary shares outstanding, representing 6,000 shares of 6.00% Series B Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share, having an aggregate liquidation preference of $150.0 million (“Series B Preferred Stock”). Each depositary share has a liquidation preference of $25.00 per share. Dividends on the Series B Preferred Stock, if declared, accrue and are payable quarterly, in arrears, at a rate of 6.00%. The Series B Preferred Stock qualifies as Tier 1 capital for the purposes of the regulatory capital calculations. In the event that the Company does not declare and pay dividends on the Series B Preferred Stock for the most recent dividend period, the ability of the Company to declare or pay dividends on, purchase, redeem or otherwise acquire shares of its common stock or any securities of the Company that rank junior to the Series B Preferred Stock is subject to certain restrictions under the terms of the Series B Preferred Stock.

* All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December ~~2015.~~2016.

~~Table of Contents~~

8. Accumulated Other Comprehensive Income

The table below shows the activity and accumulated balances for components of other comprehensive income. The largest component is the unrealized holding gains and losses on available for sale securities. Unrealized gains and losses on debt securities for which an other-than-temporary impairment (OTTI) has been recorded in current earnings are shown separately below. The other component is the amortization from other comprehensive income of losses associated with pension benefits, which occurs as the losses are included in current net periodic pension cost.


	Unrealized Gains (Losses) on Securities (1)						Pension Loss (2)			Total Accumulated Other Comprehensive Income			Unrealized Gains (Losses) on Securities (1)						Pension Loss (2)			Total Accumulated Other Comprehensive Income
(In thousands)	OTTI			Other									OTTI			Other
Balance January 1, 2017													$	2,975		$	27,328		$	(19,328	)	$	10,975
Other comprehensive income (loss) before reclassifications													(44		)	53,072			—			53,028
Amounts reclassified from accumulated other comprehensive income													320			(4,293		)	1,098			(2,875		)
Current period other comprehensive income, before tax													276			48,779			1,098			50,153
Income tax expense													(105		)	(18,536		)	(417		)	(19,058		)
Current period other comprehensive income, net of tax													171			30,243			681			31,095
Transfer of unrealized gain on securities for which impairment was not previously recognized													24			(24		)	—			—
Balance June 30, 2017													$	3,170		$	57,547		$	(18,647	)	$	42,070
Balance January 1, 2016	$	3,316		$	49,750		$	(20,596	)	$	32,470		$	3,316		$	49,750		$	(20,596	)	$	32,470
Other comprehensive income (loss) before reclassifications	(911		)	163,925			—			163,014			(911		)	163,925			—			163,014
Amounts reclassified from accumulated other comprehensive income	270			—			1,158			1,428			270			—			1,158			1,428
Current period other comprehensive income (loss), before tax	(641		)	163,925			1,158			164,442			(641		)	163,925			1,158			164,442
Income tax (expense) benefit	243			(62,291		)	(440		)	(62,488		)	243			(62,291		)	(440		)	(62,488		)
Current period other comprehensive income (loss), net of tax	(398		)	101,634			718			101,954			(398		)	101,634			718			101,954
Balance June 30, 2016	$	2,918		$	151,384		$	(19,878	)	$	134,424		$	2,918		$	151,384		$	(19,878	)	$	134,424
Balance January 1, 2015	$	3,791		$	81,310		$	(23,008	)	$	62,093
Other comprehensive income (loss) before reclassifications	(449		)	(19,988		)	—			(20,437		)
Amounts reclassified from accumulated other comprehensive income	483			(2,813		)	1,309			(1,021		)
Current period other comprehensive income (loss), before tax	34			(22,801		)	1,309			(21,458		)
Income tax (expense) benefit	(13		)	8,664			(497		)	8,154
Current period other comprehensive income (loss), net of tax	21			(14,137		)	812			(13,304		)
Reclassification for securities for which impairment was not previously recognized	43			(43		)	—			—
Balance June 30, 2015	$	3,855		$	67,130		$	(22,196	)	$	48,789

(1) The pre-tax amounts reclassified from accumulated other comprehensive income are included in "investment securities gains (losses), net" in the consolidated statements of income.

(2) The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension cost as "amortization of prior service cost" and "amortization of unrecognized net loss" (see Note 6), for inclusion in the consolidated statements of income.

9. Segments

The Company segregates financial information for use in assessing its performance and allocating resources among three operating segments: Consumer, Commercial and Wealth. The Consumer segment ~~includes the~~consists of various consumer ~~portion of the~~loan and deposit products offered through its retail branch network ~~(loans, deposits, and other personal banking services),~~of approximately 180 locations. This segment also includes indirect and other consumer loan financing ~~and consumer~~businesses, along with debit and credit ~~bank cards.~~card loan and fee businesses. Residential mortgage origination, sales and servicing functions are included in this consumer segment, but residential mortgage loans retained by the Company are not considered part of this segment. The Commercial segment provides corporate lending, ~~(including the Small Business Banking product line within the branch network),~~ leasing, and international services, along with business and ~~business, government~~governmental deposit products and ~~related~~ commercial cash management ~~services, as well as~~services. This segment includes both merchant and commercial bank card products. ~~The Commercial segment~~It also includes the Capital Markets Group which sells fixed income securities and provides ~~investment~~ safekeeping and ~~bond~~ accounting ~~services.~~services to its business and correspondent bank customers. The Wealth segment provides traditional trust and estate ~~tax~~ planning, advisory and discretionary investment management, and brokerage services. This segment also provides various loan and deposit related services ~~and includes the Private Banking product portfolio.~~ to its private banking customers.

~~Table of Contents~~

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


(In thousands)	Consumer			Commercial			Wealth			Segment Totals			Other/Elimination			Consolidated Totals			Consumer			Commercial			Wealth			Segment Totals			Other/Elimination			Consolidated Totals
Three Months Ended June 30, 2017
Net interest income																			$	69,274		$	81,718		$	11,933		$	162,925		$	19,882		$	182,807
Provision for loan losses																			(10,802		)	111			24			(10,667		)	(91		)	(10,758		)
Non-interest income																			34,459			49,746			38,851			123,056			28			123,084
Investment securities gains, net																			—			—			—			—			1,651			1,651
Non-interest expense																			(73,603		)	(74,054		)	(29,446		)	(177,103		)	(7,491		)	(184,594		)
Income before income taxes																			$	19,328		$	57,521		$	21,362		$	98,211		$	13,979		$	112,190
Six Months Ended June 30, 2017
Net interest income																			$	136,628		$	161,505		$	23,771		$	321,904		$	39,176		$	361,080
Provision for loan losses																			(20,464		)	624			1			(19,839		)	(2,047		)	(21,886		)
Non-interest income																			66,017			96,879			76,557			239,453			697			240,150
Investment securities gains, net																			—			—			—			—			879			879
Non-interest expense																			(145,126		)	(147,839		)	(59,795		)	(352,760		)	(18,664		)	(371,424		)
Income before income taxes																			$	37,055		$	111,169		$	40,534		$	188,758		$	20,041		$	208,799
Three Months Ended June 30, 2016
Net interest income	$	67,221		$	77,104		$	10,947		$	155,272		$	16,557		$	171,829		$	67,227		$	77,249		$	10,947		$	155,423		$	16,406		$	171,829
Provision for loan losses	(8,775		)	1,468			(9		)	(7,316		)	(1,900		)	(9,216		)	(8,775		)	1,468			(9		)	(7,316		)	(1,900		)	(9,216		)
Non-interest income	33,040			48,289			36,619			117,948			(1,378		)	116,570			33,038			48,289			36,618			117,945			(1,375		)	116,570
Investment securities losses, net	—			—			—			—			(744		)	(744		)	—			—			—			—			(744		)	(744		)
Non-interest expense	(70,560		)	(70,779		)	(28,300		)	(169,639		)	(7,450		)	(177,089		)	(70,522		)	(70,637		)	(28,356		)	(169,515		)	(7,574		)	(177,089		)
Income before income taxes	$	20,926		$	56,082		$	19,257		$	96,265		$	5,085		$	101,350		$	20,968		$	56,369		$	19,200		$	96,537		$	4,813		$	101,350
Six Months Ended June 30, 2016
Net interest income	$	133,791		$	153,015		$	21,822		$	308,628		$	26,976		$	335,604		$	133,791		$	153,266		$	21,822		$	308,879		$	26,725		$	335,604
Provision for loan losses	(17,500		)	1,487			(115		)	(16,128		)	(2,527		)	(18,655		)	(17,500		)	1,487			(115		)	(16,128		)	(2,527		)	(18,655		)
Non-interest income	62,936			99,408			71,021			233,365			2,229			235,594			62,935			99,408			71,020			233,363			2,231			235,594
Investment securities losses, net	—			—			—			—			(1,739		)	(1,739		)	—			—			—			—			(1,739		)	(1,739		)
Non-interest expense	(139,536		)	(140,536		)	(56,840		)	(336,912		)	(17,650		)	(354,562		)	(139,526		)	(140,250		)	(56,944		)	(336,720		)	(17,842		)	(354,562		)
Income before income taxes	$	39,691		$	113,374		$	35,888		$	188,953		$	7,289		$	196,242		$	39,700		$	113,911		$	35,783		$	189,394		$	6,848		$	196,242
Three Months Ended June 30, 2015
Net interest income	$	66,516		$	73,112		$	10,752		$	150,380		$	13,277		$	163,657
Provision for loan losses	(8,572		)	(201		)	1			(8,772		)	2,015			(6,757		)
Non-interest income	29,751			49,618			34,878			114,247			(12		)	114,235
Investment securities gains, net	—			—			—			—			2,143			2,143
Non-interest expense	(67,590		)	(65,614		)	(26,980		)	(160,184		)	(5,279		)	(165,463		)
Income before income taxes	$	20,105		$	56,915		$	18,651		$	95,671		$	12,144		$	107,815
Six Months Ended June 30, 2015
Net interest income	$	132,180		$	144,223		$	21,494		$	297,897		$	11,898		$	309,795
Provision for loan losses	(16,895		)	676			8			(16,211		)	5,034			(11,177		)
Non-interest income	56,363			97,199			68,537			222,099			(1,290		)	220,809
Investment securities gains, net	—			—			—			—			8,178			8,178
Non-interest expense	(134,282		)	(130,384		)	(54,250		)	(318,916		)	(10,392		)	(329,308		)
Income before income taxes	$	37,366		$	111,714		$	35,789		$	184,869		$	13,428		$	198,297

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

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

The performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities.

~~Table of Contents~~

10. Derivative Instruments

The notional amounts of the Company’s derivative instruments are shown in the table below. These contractual amounts, along with other terms of the derivative, are used to determine amounts to be exchanged between counterparties and are not a measure of loss exposure. The Company’s derivative instruments are accounted for as free-standing derivatives, and changes in their fair value are recorded in current earnings.


(In thousands)	June 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Interest rate swaps	$	1,293,615	$	1,020,310	$	1,693,637	$	1,685,099
Interest rate caps	62,969		66,118		32,890		59,379
Credit risk participation agreements	64,510		62,456		118,081		121,514
Foreign exchange contracts	4,705		15,535		5,556		4,046
Mortgage loan commitments	18,420		8,605		29,429		12,429
Mortgage loan forward sale contracts	3,636		642		1,026		6,626
Forward TBA contracts	19,500		11,000		43,000		15,000
Total notional amount	$	1,467,355	$	1,184,666	$	1,923,619	$	1,904,093

The largest group of notional amounts relate to interest rate swap contracts sold to commercial customers who wish to modify their interest rate sensitivity. These swaps are offset by matching contracts purchased by the Company from other financial dealer institutions. Contracts with dealers that require central clearing are novated to a regulated clearing ~~agency~~organization who becomes the Company's legal counterparty. Because of the matching terms of the offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings.

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

The banking customer counterparties are engaged in a variety of businesses, including real estate and building materials, manufacturing, education, communications, retail product distribution, and retirement communities. At ~~June 30, 2016~~, the largest potential loss exposures were in the groups related to real estate, distribution, and retirement communities. If the counterparties in these groups failed to perform, and if the underlying collateral proved to be of no value, the Company estimates that it would incur losses of $16.9 million (real estate), $4.0 million (distribution), and $3.6 million (retirement communities) at ~~June 30, 2016~~.

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

~~In 2015, the Company initiated a~~Under its program ~~of secondary market sales of~~to sell residential mortgage loans ~~and has designated~~in the secondary market, the Company designates certain newly-originated residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments and forward loan sale commitments. Changes in the fair values of the loan commitments and funded loans prior to sale that are due to changes in interest rates are economically hedged with forward contracts to sell residential mortgage-backed securities in the to-be-announced (TBA) market. These forward TBA contracts are also considered to be derivatives and are settled in cash at the security settlement date.

~~Table of Contents~~

The fair values of the Company's derivative instruments, whose notional amounts are listed above, are shown in the table below. Derivative instruments with a positive fair value (asset derivatives) are reported in other assets in the consolidated balance sheets, while derivative instruments with a negative fair value (liability derivatives) are reported in other liabilities in the consolidated balance sheets. Information about the valuation methods used to determine fair value is provided in Note 13 on Fair Value Measurements.


	Asset Derivatives				Liability Derivatives						Asset Derivatives				Liability Derivatives
	June 30, 2016		Dec. 31, 2015		June 30, 2016			Dec. 31, 2015			June 30, 2017		Dec. 31, 2016		June 30, 2017			Dec. 31, 2016
(In thousands)	Fair Value				Fair Value						Fair Value				Fair Value
Derivative instruments:
Interest rate swaps	$	34,405	$	11,993	$	(34,415	)	$	(11,993	)	$	10,887	$	12,987	$	(5,987	)	$	(12,987	)
Interest rate caps	31		73		(31		)	(73		)	34		78		(34		)	(78		)
Credit risk participation agreements	1		1		(289		)	(195		)	58		65		(139		)	(156		)
Foreign exchange contracts	24		437		(9		)	(430		)	39		66		(53		)	(4		)
Mortgage loan commitments	790		263		—			—			872		355		—			(6		)
Mortgage loan forward sale contracts	4		—		(4		)	—			—		—		—			(63		)
Forward TBA contracts	—		4		(258		)	(38		)	137		15		(34		)	(45		)
Total	$	35,255	$	12,771	$	(35,006	)	$	(12,729	)	$	12,027	$	13,566	$	(6,247	)	$	(13,339	)

Due to rule changes by the Company's clearing counterparty effective January 2017, collateral previously recorded in "other assets" has been reclassified and offset against the fair values of cleared swaps, such that at June 30, 2017, the positive fair values of cleared swaps were reduced by $2.4 million and the negative fair values of cleared swaps were reduced by $7.3 million, as reflected in the table above.

The effects of derivative instruments on the consolidated statements of income are shown in the table below.


	Location of Gain or (Loss) Recognized in Income on Derivatives	Amount of Gain or (Loss) Recognized in Income on Derivatives											Location of Gain or (Loss) Recognized in Income on Derivatives	Amount of Gain or (Loss) Recognized in Income on Derivatives
		For the Three Months Ended June 30						For the Six Months Ended June 30						For the Three Months Ended June 30						For the Six Months Ended June 30
(In thousands)		2016			2015			2016			2015			2017			2016			2017			2016
Derivative instruments:
Interest rate swaps	Other non-interest income	$	769		$	1,627		$	2,995		$	2,810	Other non-interest income	$	456		$	769		$	599		$	2,995
Credit risk participation agreements	Other non-interest income	(23		)	75			(58		)	48		Other non-interest income	1			(23		)	11			(58		)
Foreign exchange contracts	Other non-interest income	57			761			8			322		Other non-interest income	(55		)	57			(75		)	8
Mortgage loan commitments	Loan fees and sales	19			(63		)	527			345		Loan fees and sales	(32		)	19			522			527
Mortgage loan forward sale contracts	Loan fees and sales	1			4			—			1		Loan fees and sales	(4		)	1			62			—
Forward TBA contracts	Loan fees and sales	(397		)	390			(726		)	385		Loan fees and sales	(160		)	(397		)	(258		)	(726		)
Total		$	426		$	2,794		$	2,746		$	3,911		$	206		$	426		$	861		$	2,746

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

~~Table of Contents~~

The Company is party to master netting arrangements with most of its swap derivative counterparties; however, the Company does not offset derivative assets and liabilities under these arrangements on its consolidated balance sheet. Collateral, usually in the form of marketable securities, is exchanged between the Company and dealer bank counterparties and is generally subject to thresholds and transfer minimums. By contract, it may be sold or re-pledged by the secured party until recalled at a subsequent valuation date by the pledging party. For those swap transactions requiring central clearing, the Company posts cash and securities to its clearing agency. At June 30, 2016, the Company had a net liability position with dealer bank and clearing agency counterparties totaling $34.4 million, and had posted securities with a fair value of $5.6 million and cash totaling $35.9 million.agent. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below.


							Gross Amounts Not Offset in the Balance Sheet														Gross Amounts Not Offset in the Balance Sheet
(In thousands)	Gross Amount Recognized		Gross Amounts Offset in the Balance Sheet		Net Amounts Presented in the Balance Sheet		Financial Instruments Available for Offset			Collateral Received/Pledged			Net Amount		Gross Amount Recognized		Gross Amounts Offset in the Balance Sheet		Net Amounts Presented in the Balance Sheet		Financial Instruments Available for Offset			Collateral Received/Pledged			Net Amount
June 30, 2016
June 30, 2017
Assets:
Derivatives subject to master netting agreements	$	34,437	$	—	$	34,437	$	(31	)	$	—		$	34,406	$	11,088	$	—	$	11,088	$	(514	)	$	—		$	10,574
Derivatives not subject to master netting agreements	818		—		818										939		—		939
Total derivatives	35,255		—		35,255										12,027		—		12,027
Liabilities:
Derivatives subject to master netting agreements	$	34,993	$	—	$	34,993	$	(31	)	$	(33,218	)	$	1,744	$	6,066	$	—	$	6,066	$	(514	)	$	(1,710	)	$	3,842
Derivatives not subject to master netting agreements	13		—		13										181		—		181
Total derivatives	35,006		—		35,006										6,247		—		6,247
December 31, 2015
December 31, 2016
Assets:
Derivatives subject to master netting agreements	$	12,071	$	—	$	12,071	$	(94	)	$	—		$	11,977	$	13,111	$	—	$	13,111	$	(3,391	)	$	—		$	9,720
Derivatives not subject to master netting agreements	700		—		700										455		—		455
Total derivatives	12,771		—		12,771										13,566		—		13,566
Liabilities:
Derivatives subject to master netting agreements	$	12,299	$	—	$	12,299	$	(94	)	$	(10,927	)	$	1,278	$	13,124	$	—	$	13,124	$	(3,391	)	$	(5,292	)	$	4,441
Derivatives not subject to master netting agreements	430		—		430										215		—		215
Total derivatives	12,729		—		12,729										13,339		—		13,339

11. Resale and Repurchase Agreements

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

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

~~Table of Contents~~

The Company is party to several agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resale agreements with the same financial institution counterparty. These repurchase and resale agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the consolidated balance sheets, as permitted under the netting provisions of ASC 210-20-45. The collateral swaps totaled $700.0 million at June 30, 2017 and $550.0 million at ~~both~~ December 31, 2016. At June 30, ~~2016~~ ~~and~~ ~~December 31, 2015. At~~ ~~June 30, 2016~~,2017, the Company had posted collateral of ~~$577.6~~$718.1 million in marketable securities, consisting of agency mortgage-backed bonds and treasuries, and had accepted ~~$570.2~~$724.4 million in investment grade asset-backed, commercial mortgage-backed, and corporate bonds.


								Gross Amounts Not Offset in the Balance Sheet														Gross Amounts Not Offset in the Balance Sheet
(In thousands)	Gross Amount Recognized		Gross Amounts Offset in the Balance Sheet			Net Amounts Presented in the Balance Sheet		Financial Instruments Available for Offset		Securities Collateral Received/Pledged			Net Amount		Gross Amount Recognized		Gross Amounts Offset in the Balance Sheet			Net Amounts Presented in the Balance Sheet		Financial Instruments Available for Offset		Securities Collateral Received/Pledged			Net Amount
June 30, 2016
June 30, 2017
Total resale agreements, subject to master netting arrangements	$	1,375,000	$	(550,000	)	$	825,000	$	—	$	(825,000	)	$	—	$	1,325,000	$	(700,000	)	$	625,000	$	—	$	(625,000	)	$	—
Total repurchase agreements, subject to master netting arrangements	2,150,462		(550,000		)	1,600,462		—		(1,600,462		)	—		1,702,934		(700,000		)	1,002,934		—		(1,002,934		)	—
December 31, 2015
December 31, 2016
Total resale agreements, subject to master netting arrangements	$	1,425,000	$	(550,000	)	$	875,000	$	—	$	(875,000	)	$	—	$	1,275,000	$	(550,000	)	$	725,000	$	—	$	(725,000	)	$	—
Total repurchase agreements, subject to master netting arrangements	1,956,582		(550,000		)	1,406,582		—		(1,406,582		)	—		2,221,065		(550,000		)	1,671,065		—		(1,671,065		)	—

The table below shows the remaining contractual maturities of repurchase agreements outstanding at June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, in addition to the various types of marketable securities that have been pledged as collateral for these borrowings.


	Remaining Contractual Maturity of the Agreements								Remaining Contractual Maturity of the Agreements
(In thousands)	Overnight and continuous		Up to 90 days		Greater than 90 days		Total		Overnight and continuous		Up to 90 days		Greater than 90 days		Total
June 30, 2016
June 30, 2017
Repurchase agreements, secured by:
U.S. government and federal agency obligations	$	235,265	$	—	$	300,000	$	535,265	$	330,173	$	1,728	$	450,000	$	781,901
Government-sponsored enterprise obligations	257,607		—		—		257,607		180,496		—		—		180,496
Agency mortgage-backed securities	377,702		2,337		250,000		630,039		379,441		70,325		200,000		649,766
Asset-backed securities	642,551		85,000		—		727,551		10,771		80,000		—		90,771
Total repurchase agreements, gross amount recognized	$	1,513,125	$	87,337	$	550,000	$	2,150,462	$	900,881	$	152,053	$	650,000	$	1,702,934
December 31, 2015
December 31, 2016
Repurchase agreements, secured by:
U.S. government and federal agency obligations	$	210,346	$	—	$	300,000	$	510,346	$	294,600	$	—	$	300,000	$	594,600
Government-sponsored enterprise obligations	356,970		—		24,096		381,066		147,694		—		3,237		150,931
Agency mortgage-backed securities	579,974		2,292		225,904		808,170		693,851		24,380		252,473		970,704
Asset-backed securities	212,000		45,000		—		257,000		474,830		30,000		—		504,830
Total repurchase agreements, gross amount recognized	$	1,359,290	$	47,292	$	550,000	$	1,956,582	$	1,610,975	$	54,380	$	555,710	$	2,221,065

~~Table of Contents~~

12. Stock-Based Compensation

The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights (SARs). Most of the awards are issued during the first quarter of each year. The stock-based compensation expense that has been charged against income was ~~$2.9~~$3.1 million and ~~$2.5~~$2.9 million in the three ~~month periods~~months ended June 30, ~~2016~~2017 and ~~2015~~,2016, respectively, and ~~$6.3~~$6.2 million and ~~$5.3~~$6.3 million in the six months ended June 30, 2017 and 2016, ~~and 2015,~~ respectively.

The Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," on January 1, 2017. The Company elected to change its method of accounting for forfeitures, as allowed by this guidance. In 2016 and prior years, accruals of compensation cost were reduced by an estimate of awards not expected to vest and further adjusted when actual forfeitures occurred. In 2017 and subsequent years, forfeitures will be accounted for when they occur and recognized in

compensation cost at that time. The effect of this change, which was recognized as a cumulative-effect adjustment on January 1, 2017, increased equity and increased deferred tax assets by approximately $1.3 million. ASU 2016-09 also changed the classification of excess tax benefits and deficiencies arising from stock-based payment transactions, resulting in reductions in income tax expense of $4.5 million in the first quarter of 2017 and $1.6 million in the second quarter of 2017.

Nonvested stock awards generally vest in 4 to 7 years and contain restrictions as to transferability, sale, pledging, or assigning, among others, prior to the end of the vesting period. Dividend and voting rights are conferred upon grant. A summary of the status of the Company’s nonvested share awards as of June 30, ~~2016~~,2017, and changes during the six month period then ended, is presented below.


	Shares		Weighted Average Grant Date Fair Value	Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2016	1,384,417		$34.38
Nonvested at January 1, 2017				1,392,451		$34.67
Granted	209,347		41.81	233,520		57.32
Vested	(234,655	)	30.45	(394,130	)	30.79
Forfeited	(23,840	)	36.36	(9,388	)	38.78
Nonvested at June 30, 2016	1,335,269		$36.20
Nonvested at June 30, 2017				1,222,453		$40.22

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



Weighted per share average fair value at grant date		$~~7.49~~12.54
Assumptions:
Dividend yield	~~2.2~~1.6		%
Volatility	~~21.2~~21.1		%
Risk-free interest rate	~~1.8~~2.4		%
Expected term	~~7.2~~7.0 years

A summary of SAR activity during the first six months of ~~2016~~2017 is presented below.


(Dollars in thousands, except per share data)	Rights		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value		Rights		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2016	1,588,457		$33.74
Outstanding at January 1, 2017							1,324,954		$34.53
Granted	251,982		41.35				165,592		57.53
Forfeited	(11,714	)	37.55				(4,182	)	42.82
Expired	(859	)	37.59				(797	)	36.22
Exercised	(347,100	)	31.48				(263,503	)	30.58
Outstanding at June 30, 2016	1,480,766		$35.53	5.5 years	$	18,313
Outstanding at June 30, 2017							1,222,064		$38.47	6.5 years	$	22,583

~~Table of Contents~~

13. Fair Value Measurements

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

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.

The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value ~~of Financial Instruments~~Measurements note in the Company's ~~2015~~2016 Annual Report on Form 10-K. There have been no significant changes in these methodologies since ~~then.~~then, except for a change in the valuation of cleared interest rate swaps as discussed in Note 10.

~~Table of Contents~~

Instruments Measured at Fair Value on a Recurring Basis

The table below presents the June 30, ~~2016~~2017 and December 31, ~~2015~~2016 carrying values of assets and liabilities measured at fair value on a recurring basis. There were no transfers among levels during the first six months of ~~2016~~2017 or the year ended December 31, ~~2015~~.2016.


			Fair Value Measurements Using								Fair Value Measurements Using
(In thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2016
June 30, 2017
Assets:
Residential mortgage loans held for sale	$	7,094	$	—	$	7,094	$	—	$	14,118	$	—	$	14,118	$	—
Available for sale securities:
U.S. government and federal agency obligations	720,919		720,919		—		—		912,555		912,555		—		—
Government-sponsored enterprise obligations	562,177		—		562,177		—		446,285		—		446,285		—
State and municipal obligations	1,833,861		—		1,816,182		17,679		1,777,797		—		1,760,972		16,825
Agency mortgage-backed securities	2,589,915		—		2,589,915		—		2,620,198		—		2,620,198		—
Non-agency mortgage-backed securities	831,616		—		831,616		—		1,066,889		—		1,066,889		—
Asset-backed securities	2,298,725		—		2,298,725		—		2,250,426		—		2,250,426		—
Other debt securities	339,264		—		339,264		—		317,704		—		317,704		—
Equity securities	44,869		22,047		22,822		—		47,847		21,156		26,691		—
Trading securities	30,512		—		30,512		—		22,291		—		22,291		—
Private equity investments	62,813		—		—		62,813		53,557		—		—		53,557
Derivatives *	35,255		—		34,464		791		12,027		—		11,097		930
Assets held in trust for deferred compensation plan	9,701		9,701		—		—		11,893		11,893		—		—
Total assets	9,366,721		752,667		8,532,771		81,283		9,553,587		945,604		8,536,671		71,312
Liabilities:
Derivatives *	35,006		—		34,717		289		6,247		—		6,108		139
Liabilities held in trust for deferred compensation plan	9,701		9,701		—		—		11,893		11,893		—		—
Total liabilities	$	44,707	$	9,701	$	34,717	$	289	$	18,140	$	11,893	$	6,108	$	139
December 31, 2015
December 31, 2016
Assets:
Residential mortgage loans held for sale	$	4,981	$	—	$	4,981	$	—	$	9,263	$	—	$	9,263	$	—
Available for sale securities:
U.S. government and federal agency obligations	727,076		727,076		—		—		920,904		920,904		—		—
Government-sponsored enterprise obligations	793,023		—		793,023		—		449,998		—		449,998		—
State and municipal obligations	1,741,957		—		1,724,762		17,195		1,778,214		—		1,761,532		16,682
Agency mortgage-backed securities	2,618,281		—		2,618,281		—		2,685,931		—		2,685,931		—
Non-agency mortgage-backed securities	879,963		—		879,963		—		1,055,639		—		1,055,639		—
Asset-backed securities	2,644,381		—		2,644,381		—		2,381,301		—		2,381,301		—
Other debt securities	331,320		—		331,320		—		325,953		—		325,953		—
Equity securities	41,003		20,263		20,740		—		51,263		24,967		26,296		—
Trading securities	11,890		—		11,890		—		22,225		—		22,225		—
Private equity investments	63,032		—		—		63,032		50,820		—		—		50,820
Derivatives *	12,771		—		12,507		264		13,566		—		13,146		420
Assets held in trust for deferred compensation plan	9,278		9,278		—		—		10,261		10,261		—		—
Total assets	9,878,956		756,617		9,041,848		80,491		9,755,338		956,132		8,731,284		67,922
Liabilities:
Derivatives *	12,729		—		12,534		195		13,339		—		13,177		162
Liabilities held in trust for deferred compensation plan	9,278		9,278		—		—		10,261		10,261		—		—
Total liabilities	$	22,007	$	9,278	$	12,534	$	195	$	23,600	$	10,261	$	13,177	$	162

* The fair value of each class of derivative is shown in Note 10.

~~Table of Contents~~

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


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)												Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(In thousands)	State and Municipal Obligations			Private Equity Investments			Derivatives			Total			State and Municipal Obligations			Private Equity Investments			Derivatives			Total
For the three months ended June 30, 2017
Balance March 31, 2017													$	17,083		$	52,800		$	822		$	70,705
Total gains or losses (realized/unrealized):
Included in earnings													—			48			(31		)	17
Included in other comprehensive income *													319			—			—			319
Investment securities called													(600		)	—			—			(600		)
Discount accretion													23			—			—			23
Purchases of private equity investments													—			2,259			—			2,259
Sale/pay down of private equity investments													—			(1,550		)	—			(1,550		)
Balance June 30, 2017													$	16,825		$	53,557		$	791		$	71,173
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2017													$	—		$	48		$	872		$	920
For the six months ended June 30, 2017
Balance January 1, 2017													$	16,682		$	50,820		$	258		$	67,760
Total gains or losses (realized/unrealized):
Included in earnings													—			(2,830		)	533			(2,297		)
Included in other comprehensive income *													710			—			—			710
Investment securities called													(600		)	—			—			(600		)
Discount accretion													33			—			—			33
Purchases of private equity investments													—			7,084			—			7,084
Sale/pay down of private equity investments													—			(1,550		)	—			(1,550		)
Capitalized interest/dividends													—			33			—			33
Balance June 30, 2017													$	16,825		$	53,557		$	791		$	71,173
Total gains or losses for the six months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2017													$	—		$	(2,655	)	$	882		$	(1,773	)
For the three months ended June 30, 2016
Balance March 31, 2016	$	17,209		$	67,432		$	506		$	85,147		$	17,209		$	67,432		$	506		$	85,147
Total gains or losses (realized/unrealized):
Included in earnings	—			(2,810		)	(4		)	(2,814		)	—			(2,810		)	(4		)	(2,814		)
Included in other comprehensive income *	401			—			—			401			401			—			—			401
Discount accretion	69			—			—			69			69			—			—			69
Purchases of private equity investments	—			575			—			575			—			575			—			575
Sale/pay down of private equity investments	—			(2,398		)	—			(2,398		)	—			(2,398		)	—			(2,398		)
Capitalized interest/dividends	—			14			—			14			—			14			—			14
Balance June 30, 2016	$	17,679		$	62,813		$	502		$	80,994		$	17,679		$	62,813		$	502		$	80,994
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2016	$	—		$	(2,810	)	$	767		$	(2,043	)	$	—		$	(2,810	)	$	767		$	(2,043	)
For the six months ended June 30, 2016
Balance January 1, 2016	$	17,195		$	63,032		$	69		$	80,296		$	17,195		$	63,032		$	69		$	80,296
Total gains or losses (realized/unrealized):
Included in earnings	—			(3,724		)	469			(3,255		)	—			(3,724		)	469			(3,255		)
Included in other comprehensive income *	502			—			—			502			502			—			—			502
Investment securities called	(100		)	—			—			(100		)	(100		)	—			—			(100		)
Discount accretion	82			—			—			82			82			—			—			82
Purchases of private equity investments	—			5,841			—			5,841			—			5,841			—			5,841
Sale/pay down of private equity investments	—			(2,398		)	—			(2,398		)	—			(2,398		)	—			(2,398		)
Capitalized interest/dividends	—			62			—			62			—			62			—			62
Sale of risk participation agreement	—			—			(36		)	(36		)	—			—			(36		)	(36		)
Balance June 30, 2016	$	17,679		$	62,813		$	502		$	80,994		$	17,679		$	62,813		$	502		$	80,994
Total gains or losses for the six months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2016	$	—		$	(3,724	)	$	732		$	(2,992	)	$	—		$	(3,724	)	$	732		$	(2,992	)
For the three months ended June 30, 2015
Balance March 31, 2015	$	93,271		$	61,162		$	158		$	154,591
Total gains or losses (realized/unrealized):
Included in earnings	—			875			12			887
Included in other comprehensive income *	(352		)	—			—			(352		)
Discount accretion	21			—			—			21
Purchases of private equity investments	—			1,437			—			1,437
Sale/pay down of private equity investments	—			(4,800		)	—			(4,800		)
Capitalized interest/dividends	—			52			—			52
Balance June 30, 2015	$	92,940		$	58,726		$	170		$	151,836
Total gains or losses for the three months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2015	$	—		$	875		$	420		$	1,295
For the six months ended June 30, 2015
Balance January 1, 2015	$	95,143		$	57,581		$	(223	)	$	152,501
Total gains or losses (realized/unrealized):
Included in earnings	—			4,175			393			4,568
Included in other comprehensive income *	(354		)	—			—			(354		)
Investment securities called	(2,000		)	—			—			(2,000		)
Discount accretion	151			—			—			151
Purchases of private equity investments	—			1,653			—			1,653
Sale/pay down of private equity investments	—			(4,800		)	—			(4,800		)
Capitalized interest/dividends	—			117			—			117
Balance June 30, 2015	$	92,940		$	58,726		$	170		$	151,836
Total gains or losses for the six months included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2015	$	—		$	4,175		$	393		$	4,568

* Included in "net unrealized gains (losses) on other securities" in the consolidated statements of comprehensive income.

~~Table of Contents~~

Gains and losses included in earnings for the Level 3 assets and liabilities in the previous table are reported in the following line items in the consolidated statements of income:


(In thousands)	Loan Fees and Sales			Other Non-Interest Income			Investment Securities Gains (Losses), Net			Total			Loan Fees and Sales			Other Non-Interest Income			Investment Securities Gains (Losses), Net			Total
For the three months ended June 30, 2017
Total gains or losses included in earnings													$	(32	)	$	1		$	48		$	17
Change in unrealized gains or losses relating to assets still held at June 30, 2017													$	871		$	1		$	48		$	920
For the six months ended June 30, 2017
Total gains or losses included in earnings													$	522		$	11		$	(2,830	)	$	(2,297	)
Change in unrealized gains or losses relating to assets still held at June 30, 2017													$	871		$	11		$	(2,655	)	$	(1,773	)
For the three months ended June 30, 2016
Total gains or losses included in earnings	$	19		$	(23	)	$	(2,810	)	$	(2,814	)	$	19		$	(23	)	$	(2,810	)	$	(2,814	)
Change in unrealized gains or losses relating to assets still held at June 30, 2016	$	790		$	(23	)	$	(2,810	)	$	(2,043	)	$	790		$	(23	)	$	(2,810	)	$	(2,043	)
For the six months ended June 30, 2016
Total gains or losses included in earnings	$	527		$	(58	)	$	(3,724	)	$	(3,255	)	$	527		$	(58	)	$	(3,724	)	$	(3,255	)
Change in unrealized gains or losses relating to assets still held at June 30, 2016	$	790		$	(58	)	$	(3,724	)	$	(2,992	)	$	790		$	(58	)	$	(3,724	)	$	(2,992	)
For the three months ended June 30, 2015
Total gains or losses included in earnings	$	(63	)	$	75		$	875		$	887
Change in unrealized gains or losses relating to assets still held at June 30, 2015	$	345		$	75		$	875		$	1,295
For the six months ended June 30, 2015
Total gains or losses included in earnings	$	345		$	48		$	4,175		$	4,568
Change in unrealized gains or losses relating to assets still held at June 30, 2015	$	345		$	48		$	4,175		$	4,568

Level 3 Inputs

The Company's significant Level 3 measurements which employ unobservable inputs that are readily quantifiable pertain to auction rate securities (ARS) held by the Bank, investments in portfolio concerns held by the Company's private equity subsidiaries, and held for sale residential mortgage loan commitments. ARS are included in state and municipal securities and totaled ~~$17.7~~$16.8 million at June 30, ~~2016~~,2017, while private equity investments, included in non-marketable securities, totaled ~~$62.8 million~~.$53.6 million.

Information about these inputs is presented in the table and discussions below.


Quantitative Information about Level 3 Fair Value Measurements	Quantitative Information about Level 3 Fair Value Measurements					Weighted	Quantitative Information about Level 3 Fair Value Measurements					Weighted
	Valuation Technique	Unobservable Input	Range			Average	Valuation Technique	Unobservable Input	Range			Average
Auction rate securities	Discounted cash flow	Estimated market recovery period			5 years		Discounted cash flow	Estimated market recovery period			5 years
		Estimated market rate	2.3%	-	3.4%			Estimated market rate	2.8%	-	3.1%
Private equity investments	Market comparable companies	EBITDA multiple	4.0	-	5.5		Market comparable companies	EBITDA multiple	4.0	-	5.8
Mortgage loan commitments	Discounted cash flow	Probability of funding	59.4%	-	95.6%	78.9%	Discounted cash flow	Probability of funding	53.0%	-	99.3%	80.2%
		Embedded servicing value	.9%	-	1.0%	1.0%		Embedded servicing value	(.2)%	-	2.2%	1.0%

~~Table of Contents~~

Instruments Measured at Fair Value on a Nonrecurring Basis

For assets measured at fair value on a nonrecurring basis during the first six months of ~~2016~~2017 and ~~2015~~,2016, and still held as of June 30, ~~2016~~2017 and ~~2015~~,2016, the following table provides the adjustments to fair value recognized during the respective periods, the level of valuation inputs used to determine each adjustment, and the carrying value of the related individual assets or portfolios at June 30, ~~2016~~2017 and ~~2015~~.2016.


			Fair Value Measurements Using											Fair Value Measurements Using
(In thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) Recognized During the Six Months Ended June 30, 2016			Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses) Recognized During the Six Months Ended June 30
June 30, 2017
Collateral dependent impaired loans												$	2,044	$	—	$	—	$	2,044	$	(550	)
Mortgage servicing rights												3,646		—		—		3,646		6
Foreclosed assets												75		—		—		75		(58		)
Long-lived assets												1,834		—		—		1,834		(343		)

June 30, 2016
Collateral dependent impaired loans	$	5,001	$	—	$	—	$	5,001	$	(1,491	)	$	5,001	$	—	$	—	$	5,001	$	(1,491	)
Mortgage servicing rights	2,191		—		—		2,191		(2		)	2,191		—		—		2,191		(2		)
Foreclosed assets	28		—		—		28		(10		)	28		—		—		28		(10		)
Long-lived assets	1,871		—		—		1,871		(956		)	1,871		—		—		1,871		(956		)

June 30, 2015
Collateral dependent impaired loans	$	3,897	$	—	$	—	$	3,897	$	(1,340	)
Mortgage servicing rights	1,242		—		—		1,242		53
Foreclosed assets	608		—		—		608		(162		)
Long-lived assets	2,425		—		—		2,425		(1,667		)

14. Fair Value of Financial Instruments

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

The methods and inputs used in the estimation of fair value for the financial instruments in the table below are discussed in the Fair Value Measurements and the Fair Value of Financial Instruments notes in the Company's ~~2015~~2016 Annual Report on Form 10-K. There have been no significant changes in these methods and inputs since December 31, ~~2015~~.2016, except as mentioned in Note 10 on Derivatives.

~~Table of Contents~~

The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as follows:


	Fair Value Hierarchy Level	June 30, 2016				December 31, 2015				Fair Value Hierarchy Level	June 30, 2017				December 31, 2016
(In thousands)		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value			Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets
Loans:
Business	Level 3	$	4,840,248	$	4,902,110	$	4,397,893	$	4,421,237	Level 3	$	4,852,408	$	4,866,125	$	4,776,365	$	4,787,469
Real estate - construction and land	Level 3	819,896		829,857		624,070		633,083		Level 3	848,152		859,171		791,236		800,426
Real estate - business	Level 3	2,399,271		2,448,134		2,355,544		2,387,101		Level 3	2,727,349		2,740,841		2,643,374		2,658,093
Real estate - personal	Level 3	1,927,340		1,976,674		1,915,953		1,940,863		Level 3	2,009,203		2,022,671		2,010,397		2,005,227
Consumer	Level 3	1,939,486		1,943,943		1,924,365		1,916,747		Level 3	2,038,514		2,021,537		1,990,801		1,974,784
Revolving home equity	Level 3	408,301		410,995		432,981		434,607		Level 3	403,387		404,177		413,634		414,499
Consumer credit card	Level 3	753,166		769,991		779,744		793,428		Level 3	740,865		754,763		776,465		794,856
Overdrafts	Level 3	4,180		4,180		6,142		6,142		Level 3	6,714		6,714		10,464		10,464
Loans held for sale	Level 2	33,254		33,337		7,607		7,607		Level 2	22,002		22,002		14,456		14,456
Investment securities:
Available for sale	Level 1	742,966		742,966		747,339		747,339		Level 1	933,711		933,711		945,871		945,871
Available for sale	Level 2	8,460,701		8,460,701		9,012,470		9,012,470		Level 2	8,489,165		8,489,165		8,686,650		8,686,650
Available for sale	Level 3	17,679		17,679		17,195		17,195		Level 3	16,825		16,825		16,682		16,682
Trading	Level 2	30,512		30,512		11,890		11,890		Level 2	22,291		22,291		22,225		22,225
Non-marketable	Level 3	111,931		111,931		112,786		112,786		Level 3	102,388		102,388		99,558		99,558
Federal funds sold	Level 1	13,725		13,725		14,505		14,505		Level 1	16,520		16,520		15,470		15,470
Securities purchased under agreements to resell	Level 3	825,000		833,366		875,000		879,546		Level 3	625,000		628,148		725,000		728,179
Interest earning deposits with banks	Level 1	183,223		183,223		23,803		23,803		Level 1	80,860		80,860		272,275		272,275
Cash and due from banks	Level 1	428,300		428,300		464,411		464,411		Level 1	433,747		433,747		494,690		494,690
Derivative instruments	Level 2	34,464		34,464		12,507		12,507		Level 2	11,097		11,097		13,146		13,146
Derivative instruments	Level 3	791		791		264		264		Level 3	930		930		420		420
Assets held in trust for deferred compensation plan	Level 1	9,701		9,701		9,278		9,278		Level 1	11,893		11,893		10,261		10,261
Financial Liabilities
Non-interest bearing deposits	Level 1	$	6,906,265	$	6,906,265	$	7,146,398	$	7,146,398	Level 1	$	7,314,506	$	7,314,506	$	7,429,398	$	7,429,398
Savings, interest checking and money market deposits	Level 1	10,978,734		10,978,734		10,834,746				Level 1	11,427,615		11,427,615		11,430,789
Time open and certificates of deposit	Level 3	2,265,048		2,264,742		1,997,709		1,993,521		Level 3	2,083,541		2,075,563		2,240,908		2,235,218
Federal funds purchased	Level 1	31,810		31,810		556,970		556,970		Level 1	253,510		253,510		52,840		52,840
Securities sold under agreements to repurchase	Level 3	1,600,462		1,600,553		1,406,582		1,406,670		Level 3	1,002,934		1,003,183		1,671,065		1,671,227
Other borrowings	Level 3	103,878		107,967		103,818		108,542		Level 3	101,903		102,907		102,049		104,298
Derivative instruments	Level 2	34,717		34,717		12,534		12,534		Level 2	6,108		6,108		13,177		13,177
Derivative instruments	Level 3	289		289		195		195		Level 3	139		139		162		162
Liabilities held in trust for deferred compensation plan	Level 1	9,701		9,701		9,278		9,278		Level 1	11,893		11,893		10,261		10,261

15. Legal and Regulatory Proceedings

On August 15, 2014, a customer filed a class action complaint against the Bank in the Circuit Court, Jackson County, Missouri. The case is Cassandra Warren, et al v. Commerce Bank (Case No. 1416-CV19197). In the case, the customer alleges violation of the Missouri usury statute in connection with the Bank charging overdraft fees in connection with point-of-sale/debit and automated-teller machine cards. The class was certified and consists of Missouri customers of the Bank who may have been similarly affected. The case has been stayed pending the final outcome of a similar case in which a ruling has been made in favor of the bank defendant. The Company believes that the stay will remain in effect until any appeals in the similar case have run their course. The Company believes the Warren complaint lacks merit and will defend itself vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time.

The Company has been in ongoing discussions with the U.S. Department of Labor concerning an investigation involving ERISA regulations related to a managed trust account. The investigation concluded in a non-material settlement between the Company and the U.S. Department of Labor during July 2017.

The Company has various other legal proceedings pending at June 30, ~~2016,~~2017, arising in the normal course of business. While some matters pending against the Company specify damages claimed by plaintiffs, others do not seek a specified amount of damages or are at very early stages of the legal process. The Company records a loss accrual for all legal and regulatory matters for which it

~~Table of Contents~~

deems a loss is probable and can be reasonably estimated. Some ~~legal~~ matters, which are atin the early stages, ~~in the legal process,~~ have not yet progressed to the point where a loss amount can be determined to be probable and estimable.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's ~~2015~~2016 Annual Report on Form 10-K. Results of operations for the three and six month periods ended June 30, ~~2016~~2017 are not necessarily indicative of results to be attained for any other period.

Forward-Looking Information

This report may contain "forward-looking statements" that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in the forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Such possible events or factors include: changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's ~~2015~~2016 Annual Report on Form 10-K.

Critical Accounting Policies

The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan losses, the valuation of certain investment securities, and accounting for income taxes. A discussion of these policies can be found in the sections captioned "Critical Accounting Policies" and "Allowance for Loan Losses" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's ~~2015~~2016 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, ~~2015~~.2016.

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Selected Financial Data


	Three Months Ended June 30						Six Months Ended June 30						Three Months Ended June 30						Six Months Ended June 30
	2016			2015			2016			2015			2017			2016			2017			2016
Per Share Data
Net income per common share — basic	$	.70		$	.72	*	$	1.35		$	1.30	*	$	.75		$	.67	*	$	1.43		$	1.29	*
Net income per common share — diluted	.70			.72		*	1.35			1.30		*	.75			.66		*	1.43			1.28		*
Cash dividends on common stock	.225			.214		*	.450			.429		*	.225			.214		*	.450			.429		*
Book value per common share							24.67			22.15		*							24.44			23.49		*
Market price							47.90			44.54		*							56.83			45.62		*
Selected Ratios
(Based on average balance sheets)
Loans to deposits ⁽¹⁾	63.45		%	60.75		%	63.13		%	60.24		%	65.25		%	63.45		%	64.82		%	63.13		%
Non-interest bearing deposits to total deposits	33.83			34.92			34.13			34.61			34.03			33.83			34.25			34.13
Equity to loans ⁽¹⁾	19.15			20.33			19.15			20.47			19.26			19.15			19.00			19.15
Equity to deposits	12.15			12.35			12.09			12.33			12.57			12.15			12.32			12.09
Equity to total assets	10.13			10.05			9.99			10.05			10.42			10.13			10.23			9.99
Return on total assets	1.15			1.26			1.11			1.15			1.26			1.15			1.21			1.11
Return on common equity	11.69			12.91			11.44			11.81			12.48			11.69			12.12			11.44
(Based on end-of-period data)
Non-interest income to revenue ⁽²⁾	40.42			41.11			41.25			41.61			40.24			40.42			39.94			41.25
Efficiency ratio ⁽³⁾	61.27			59.39			61.93			61.89			60.24			61.27			61.67			61.93
Tier I common risk-based capital ratio							11.50			11.76									12.28			11.50
Tier I risk-based capital ratio							12.29			12.62									13.05			12.29
Total risk-based capital ratio							13.23			13.62									14.00			13.23
Tangible common equity to tangible assets ratio ⁽⁴⁾							9.09			8.58									9.37			9.09
Tier I leverage ratio							9.36			9.08									9.87			9.36

* Restated for the 5% stock dividend distributed in December ~~2015.~~2016.

(1) Includes loans held for sale.

(2) Revenue includes net interest income and non-interest income.

(3) The efficiency ratio is calculated as non-interest expense (excluding intangibles amortization) as a percent of revenue.

(4) The tangible common equity to tangible assets ratio is a measurement which management believes is a useful indicator of capital adequacy and utilization. It provides a meaningful basis for period to period and company to company comparisons, and also assists regulators, investors and analysts in analyzing the financial position of the Company. Tangible common equity and tangible assets are non-GAAP measures and should not be viewed as substitutes for, or superior to, data prepared in accordance with GAAP.

The following table is a reconciliation of the GAAP financial measures of total equity and total assets to the non-GAAP measures of total tangible common equity and total tangible assets.

June 30
(Dollars in thousands) 2016 2015
Total equity $ 2,526,821
$ 2,315,360
Less non-controlling interest 4,905
5,439
Less preferred stock 144,784
144,784
Less goodwill 138,921
138,921
Less core deposit premium 4,370
5,736
Total tangible common equity (a) $ 2,233,841
$ 2,020,480
Total assets $ 24,709,693
$ 23,705,935
Less goodwill 138,921
138,921
Less core deposit premium 4,370
5,736
Total tangible assets (b) $ 24,566,402
$ 23,561,278
Tangible common equity to tangible assets ratio (a)/(b) 9.09 % 8.58 %

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	June 30
(Dollars in thousands)	2017			2016
Total equity	$	2,628,207		$	2,526,821
Less non-controlling interest	4,324			4,905
Less preferred stock	144,784			144,784
Less goodwill	138,921			138,921
Less core deposit premium	3,356			4,370
Total tangible common equity (a)	$	2,336,822		$	2,233,841
Total assets	$	25,078,843		$	24,709,693
Less goodwill	138,921			138,921
Less core deposit premium	3,356			4,370
Total tangible assets (b)	$	24,936,566		$	24,566,402
Tangible common equity to tangible assets ratio (a)/(b)	9.37		%	9.09		%

Results of Operations

Summary


	Three Months Ended June 30								Six Months Ended June 30								Three Months Ended June 30								Six Months Ended June 30
(Dollars in thousands)	2016			2015			% change		2016			2015			% change		2017			2016			% change		2017			2016			% change
Net interest income	$	171,829		$	163,657		5.0	%	$	335,604		$	309,795		8.3	%	$	182,807		$	171,829		6.4	%	$	361,080		$	335,604		7.6	%
Provision for loan losses	(9,216		)	(6,757		)	36.4		(18,655		)	(11,177		)	66.9		(10,758		)	(9,216		)	16.7		(21,886		)	(18,655		)	17.3
Non-interest income	116,570			114,235			2.0		235,594			220,809			6.7		123,084			116,570			5.6		240,150			235,594			1.9
Investment securities gains (losses), net	(744		)	2,143			N.M.		(1,739		)	8,178			N.M.		1,651			(744		)	N.M.		879			(1,739		)	N.M.
Non-interest expense	(177,089		)	(165,463		)	7.0		(354,562		)	(329,308		)	7.7		(184,594		)	(177,089		)	4.2		(371,424		)	(354,562		)	4.8
Income taxes	(31,542		)	(32,492		)	(2.9	)	(60,912		)	(60,960		)	(.1	)	(33,201		)	(31,542		)	5.3		(58,108		)	(60,912		)	(4.6	)
Non-controlling interest (expense) income	85			(970		)	N.M.		(63		)	(1,929		)	(96.7	)	(29		)	85			N.M.		(227		)	(63		)	N.M.
Net income attributable to Commerce Bancshares, Inc.	69,893			74,353			(6.0	)	135,267			135,408			(.1	)	78,960			69,893			13.0		150,464			135,267			11.2
Preferred stock dividends	(2,250		)	(2,250		)	—		(4,500		)	(4,500		)	—		(2,250		)	(2,250		)	—		(4,500		)	(4,500		)	—
Net income available to common shareholders	$	67,643		$	72,103		(6.2	)%	$	130,767		$	130,908		(.1	)%	$	76,710		$	67,643		13.4	%	$	145,964		$	130,767		11.6	%

For the quarter ended June 30, ~~2016~~,2017, net income attributable to Commerce Bancshares, Inc. (net income) amounted to ~~$69.9~~$79.0 million,, ~~a decrease~~ an increase of ~~$4.5~~$9.1 million, or ~~6.0%~~13.0%, compared to the second quarter of the previous ~~year, and an increase of $4.5 million, or 6.9%, compared to the previous quarter.~~year. For the current quarter, the annualized return on average assets was ~~1.15%~~1.26%, the annualized return on average common equity was ~~11.69%,~~12.48% and the efficiency ratio was ~~61.27%~~60.24%. Diluted earnings per common share was ~~$.70, a decrease~~$.75, an increase of ~~2.8%~~13.6% compared to ~~$.72~~$.66 per share in the second quarter of ~~2015~~2016 and an increase of ~~7.7%~~10.3% compared to ~~$.65~~$.68 per share in the previous quarter.

Compared to the second quarter of last year, net interest income increased ~~$8.2~~$11.0 million, or ~~5.0%~~6.4%, mainly due to growth of ~~$8.3~~$13.1 million in interest income on loans, ~~and $1.4 million in investment securities,~~ partly offset by an increase of ~~$995 thousand~~$2.6 million in ~~deposit~~deposits and borrowings interest expense. The provision for loan losses totaled ~~$9.2~~$10.8 million for the current quarter, representing an increase of ~~$2.5~~$1.5 million over the second quarter of ~~2015.~~2016. Non-interest income increased ~~$2.3~~$6.5 million, or ~~2.0%~~5.6%, ~~with~~compared to the ~~largest increases occurring~~second quarter of 2016, mainly due to combined growth of $5.3 million in trust, deposit ~~trust,~~ and loan ~~fees.~~fee income, in addition to current quarter gains of $1.7 million on sales of branch properties and equipment leased by customers. Non-interest expense increased ~~$11.6~~$7.5 million, or ~~7.0%~~4.2%, over the second quarter of ~~2015,~~2016 primarily due to increases in salaries and benefits ~~data processing,~~ and ~~bank card rewards expense. Additionally,~~the contribution of $2.3 million in appreciated securities to a related foundation. A $2.2 million securities gain was recorded on the transaction, resulting in a pre-tax loss of $97 thousand and tax benefits of $873 thousand. The Company made a similar contribution to the foundation in the ~~second~~first quarter of ~~2015, a recovery on a letter of credit exposure was recorded totaling $2.8 million that did not re-occur~~2017 and intends to make similar contributions in ~~2016.~~ subsequent quarters this year.

Net investment securities ~~losses~~gains totaled ~~$744 thousand~~$1.7 million in the current quarter ~~compared to gains~~and $879 thousand in the first six months of ~~$2.1~~2017. Gains resulting from the securities donations were $2.2 million in both the first and second quarters of 2017, partly offset by losses in fair value on private equity securities of $2.8 million in the ~~same quarter last year. The current quarter losses were mainly comprised of fair value adjustments to the Company's private equity portfolio.~~six month period.

Net income for the first six months of ~~2016~~2017 was ~~$135.3~~$150.5 million, ~~a slight decrease from~~an increase of $15.2 million, or 11.2%, over the same period last year. Diluted earnings per common share was ~~$1.35,~~$1.43, an increase of ~~3.8%~~11.7% compared to ~~$1.30~~$1.28 per share in the same period last year. For the first six months of ~~2016,~~2017, the annualized return on average assets was ~~1.11%~~1.21%, the annualized return on average common equity was ~~11.44%~~12.12%, and the efficiency ratio was ~~61.93%~~61.67%. Net interest income increased ~~$25.8~~$25.5 million, or ~~8.3%~~7.6%, over the same period last year. This growth was largely due to increases of ~~$16.5~~$22.1 million in loan interest income and ~~$11.9~~$6.7 million in investment securities interest income, offset by a ~~$1.6~~$3.9 million increase in ~~deposit~~deposits and borrowings interest expense. The provision for loan losses was ~~$18.7~~$21.9 million for the first six months of ~~2016,~~2017, up ~~$7.5~~$3.2 million over the same period last year. Non-interest income increased ~~$14.8~~$4.6 million, or ~~6.7%~~1.9%, over the first six months of last year ~~largely~~ due to growth in ~~deposit,~~ trust, ~~bank card,~~deposit and loan fees. Non-interest expense increased ~~$25.3~~$16.9 million, or ~~7.7%~~4.8%, ~~mainly~~ due to higher salaries and benefits expense ~~and data processing and software costs,~~of $9.5 million, in addition to ~~the prior year letter~~securities contributions of ~~credit recovery~~$4.5 million, as mentioned above. Net investment securities losses totaled $1.7 million in the first six months of 2016 compared to net gains of $8.2 million in the first six months of 2015, with the majority of these pertaining to the private equity portfolio.

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Net Interest Income

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates. Changes not solely due to volume or rate changes are allocated to rate.

Analysis of Changes in Net Interest Income


	Three Months Ended June 30, 2016 vs. 2015									Six Months Ended June 30, 2016 vs. 2015									Three Months Ended June 30, 2017 vs. 2016									Six Months Ended June 30, 2017 vs. 2016
	Change due to									Change due to									Change due to									Change due to
(In thousands)	Average Volume			Average Rate			Total			Average Volume			Average Rate			Total			Average Volume			Average Rate			Total			Average Volume			Average Rate			Total
Interest income, fully taxable equivalent basis:
Loans:
Business	$	3,896		$	1,154		$	5,050		$	7,132		$	1,960		$	9,092		$	978		$	3,766		$	4,744		$	3,934		$	5,303		$	9,237
Real estate - construction and land	3,243			(382		)	2,861			5,780			(851		)	4,929			631			1,836			2,467			1,888			2,488			4,376
Real estate - business	965			(901		)	64			1,894			(891		)	1,003			2,870			415			3,285			5,282			(242		)	5,040
Real estate - personal	139			(105		)	34			442			(246		)	196			919			(144		)	775			1,878			(431		)	1,447
Consumer	1,094			(618		)	476			3,119			(1,339		)	1,780			662			735			1,397			1,047			689			1,736
Revolving home equity	(147		)	(17		)	(164		)	(155		)	(104		)	(259		)	(121		)	256			135			(332		)	348			16
Consumer credit card	112			(423		)	(311		)	209			(620		)	(411		)	(192		)	713			521			(315		)	984			669
Overdrafts																			—			—			—			—			—			—
Total interest on loans	9,302			(1,292		)	8,010			18,421			(2,091		)	16,330			5,747			7,577			13,324			13,382			9,139			22,521
Loans held for sale	654			(1		)	653			772			(5		)	767			(442		)	13			(429		)	(388		)	20			(368		)
Investment securities:
U.S. government and federal agency securities	4,142			(4,547		)	(405		)	285			5,980			6,265			1,843			(2,159		)	(316		)	2,023			1,682			3,705
Government-sponsored enterprise obligations	(1,456		)	1,978			522			(2,787		)	2,069			(718		)	(1,632		)	(1,601		)	(3,233		)	(3,279		)	(1,916		)	(5,195		)
State and municipal obligations	(308		)	447			139			(671		)	1,058			387			70			50			120			651			(106		)	545
Mortgage-backed securities	1,515			(2,180		)	(665		)	4,661			(3,467		)	1,194			1,846			(36		)	1,810			3,862			(790		)	3,072
Asset-backed securities	(1,183		)	2,511			1,328			(2,510		)	5,813			3,303			(153		)	1,596			1,443			(776		)	2,904			2,128
Other securities	673			(101		)	572			2,074			(392		)	1,682			(360		)	906			546			(835		)	4,516			3,681
Total interest on investment securities	3,383			(1,892		)	1,491			1,052			11,061			12,113			1,614			(1,244		)	370			1,646			6,290			7,936
Federal funds sold and short-term securities purchased under
agreements to resell	(1		)	5			4			4			15			19			2			16			18			(9		)	26			17
Long-term securities purchased under agreements to resell	(783		)	467			(316		)	(1,362		)	1,470			108			(648		)	978			330			(1,159		)	1,807			648
Interest earning deposits with banks	(46		)	75			29			(88		)	208			120			17			194			211			2			336			338
Total interest income	12,509			(2,638		)	9,871			18,799			10,658			29,457			6,290			7,534			13,824			13,474			17,618			31,092
Interest expense:
Deposits:
Savings	13			3			16			32			9			41			12			4			16			23			11			34
Interest checking and money market	136			109			245			186			210			396			109			669			778			258			908			1,166
Time open & C.D.'s of less than $100,000	(81		)	(28		)	(109		)	(170		)	(77		)	(247		)	(66		)	31			(35		)	(132		)	(1		)	(133		)
Time open & C.D.'s of $100,000 and over	119			724			843			96			1,323			1,419			(184		)	659			475			76			1,176			1,252
Total interest on deposits	187			808			995			144			1,465			1,609			(129		)	1,363			1,234			225			2,094			2,319
Federal funds purchased and securities sold under
agreements to repurchase	(115		)	419			304			(149		)	974			825			89			1,224			1,313			67			1,897			1,964
Other borrowings	(2		)	19			17			2,370			(1,979		)	391			(17		)	21			4			(1,254		)	893			(361		)
Total interest expense	70			1,246			1,316			2,365			460			2,825			(57		)	2,608			2,551			(962		)	4,884			3,922
Net interest income, tax equivalent basis	$	12,439		$	(3,884	)	$	8,555		$	16,434		$	10,198		$	26,632		$	6,347		$	4,926		$	11,273		$	14,436		$	12,734		$	27,170

Net interest income in the second quarter of ~~2016~~2017 was ~~$171.8~~$182.8 million, an increase of ~~$8.2~~$11.0 million over the second quarter of ~~2015.~~2016. On a tax equivalent (T/E) basis, net interest income totaled ~~$179.6~~$190.9 million in the second quarter of ~~2016,~~2017, up ~~$8.6~~$11.3 million over the same period last year and up ~~$8.2~~$3.5 million over the previous quarter. The increase in net interest income compared to the second quarter of ~~2015~~2016 was mainly due to higher interest income on loans (T/E) of ~~$8.7 million, coupled with~~$13.3 million. The increase in interest on loans was a result of higher ~~interest~~loan yields on nearly all loan products, especially commercial loans, many of which have variable rates.

Interest income on investment securities (T/E) increased $370 thousand over the second quarter of ~~$1.5 million. The increase in securities interest was~~2016, mainly due to ~~increased earnings~~higher interest income earned on ~~government-sponsored enterprise obligations of $1.6 million, as a result of early maturity calls on certain~~mortgage-backed and asset-backed securities. Securities interest also includes

~~Table of Contents~~

inflation-related interest on the Company's holdings of U.S. Treasury inflation-protected securities (TIPS), which is tied to the Consumer Price Index. Interest income related to TIPS increased ~~$4.2~~$2.5 million in the first six months of ~~2016~~2017 compared to the same period in ~~2015,~~2016, and totaled ~~$3.7~~$2.9 million in the current quarter ~~negative $1.5 million in the prior quarter~~ and ~~$5.1~~$3.7 million in the second quarter of ~~2015.~~2016. The Company's net yield on earning assets (T/E) was ~~3.11%~~3.19% in the current quarter compared to ~~2.95% in the previous quarter and 3.04%~~3.11% in the second quarter of 2015. Excluding the effects of inflation income and the additional earnings on government-sponsored enterprise obligations, the net yield on earning assets would have been 3.01% in the current quarter, 2.98% in the previous quarter and 2.95% in the second quarter of 2015.2016.

Total interest income (T/E) increased ~~$9.9~~$13.8 million over the second quarter of ~~2015.~~2016. Interest income on loans (T/E) was $136.8 million during the second quarter of 2017, and increased $13.3 million, or 10.8%, ~~including loans held for sale, increased $8.7 million~~over the same quarter last year. The increase was due to ~~an increase~~growth of ~~$1.2 billion,~~$669.4 million, or ~~10.1%~~5.2%, in average loan balances, ~~partly offset by~~and an ~~eight~~increase of 20 basis ~~point decrease~~points in average rates earned. ~~The higher balances contributed $10.0 million to interest income; however, the lower rates depressed interest income by $1.3 million, resulting in an $8.7 million net increase in interest income.~~ Most of the increase in interest income occurred in the business, construction, and ~~consumer~~business real estate loan categories. The largest increase to interest income occurred in business loan interest, which grew ~~$5.1~~$4.7 million due to higher average balances of ~~$556.1~~$136.0 million, or ~~13.4%~~2.9%, coupled with ~~an 11~~a 31 basis point increase in the average rate earned. Construction loan interest grew ~~$2.9~~$2.5 million, as average balances increased ~~$357.3~~$73.2 million, or ~~82.7%~~9.3%, ~~partly offset by a decline~~and the average rate earned increased 84 basis points. Business real estate loan interest increased $3.3 million due to an increase in average balances of 19$312.0 million, or 13.1%, with an increase of five basis points in the average rate earned. ~~Average balances of business real estate~~Interest on consumer loans increased ~~$101.3~~$1.4 million or 4.4%, while the average rate earned declined 14 basis points and mostly offset the growth in average balances, resulting in a slight increase in interest income. Consumer loan interest totaled $18.8 million, an increase of $1.1 million over ~~the~~ the same period last ~~year. The average balance of consumer loans grew $162.3 million, or 8.9%, partly offset by a decline of nine basis points in~~year as the average rate ~~earned. Most of the~~increased 14 basis points, coupled with a $69.8 million increase in average consumer loan balances resulted from growth of $197.0 million in auto loans and other consumer loans, partly offset by a decrease of $45.9 million in marine and recreational vehicle (RV) loans, as that portfolio continues to pay down.balances.

Interest income on investment securities (T/E) was ~~$60.1~~$60.5 million during the second quarter of ~~2016,~~2017, which was an increase of ~~$1.5 million~~$370 thousand over the same quarter last year. The increase resulted mainly from increased earnings on mortgage-backed and asset-backed securities, partly offset by lower TIPS interest of $869 thousand and lower interest earned on government-sponsored enterprise obligations. Higher interest on mortgage-backed securities of $1.8 million resulted from an increase of $313.7 million in average balances. Interest income on asset-backed securities grew $1.4 million mainly due to a 27 basis point increase in the average rate earned. Partly offsetting these increases was a $3.2 million decline in interest income on government-sponsored enterprise obligations, ~~as a~~which was partly the result of early maturity calls on certain securities ~~coupled with higher interest income on asset-backed~~in the second quarter of 2016. The average balance of government-sponsored enterprise obligations decreased $216.0 million and ~~corporate debt securities. Higher interest income on asset-backed securities resulted from an increase of 42 basis points in~~ the average rate earned partly offset by lower balances of $461.8 million, while growth in interest income on corporate debt securities resulted from both higher balances and rates earned. These increases were partly offset by lower TIPS interest of $1.4 million and lower interest income earned on mortgage-backed securities. The decline in interest income on mortgage-backed securities was mainly due to a 25decreased 144 basis ~~point decrease in the average rate earned, partly offset by higher balances of $233.4 million.~~points. During the current quarter and the same quarter last year, adjustments to premium amortization expense, due to changes in prepayment speeds on various mortgage and asset-backed securities, were not significant. ~~However, such adjustments increased interest income by $1.2 million in the same quarter last year.~~ The average balance of the total investment portfolio (excluding unrealized fair value adjustments) was $9.6 billion in the second quarter of 2017, compared to $9.4 billion in the second quarter of ~~2016, compared to $9.6 billion in the second quarter of 2015.~~2016.

Interest income on long-term securities purchased under agreements to resell ~~decreased $316~~increased $330 thousand ~~from~~over the second quarter of ~~2015,~~2016, due to ~~a decrease~~an increase in the average rate earned of 58 basis points, partly offset by lower balances invested of ~~$225.0 million, partly offset by higher average rates earned of 24 basis points.~~$159.3 million.

The average tax equivalent yield on total interest earning assets was 3.37% in the second quarter of 2017, up from 3.25% in the second quarter of ~~2016, up from 3.16% in the second quarter of 2015.~~2016.

Total interest expense increased ~~$1.3~~$2.6 million compared to the second quarter of ~~2015,~~2016, due to a ~~$995 thousand~~$1.2 million increase in interest expense on interest bearing deposits and a ~~$321 thousand~~$1.3 million increase in interest expense on borrowings. The increase in deposit expense resulted mainly ~~resulted~~ from ~~a slight~~an increase of three basis points in the overall average ~~rates~~rate paid ~~including~~on deposits. Interest expense on C.D.'s of $100,000 and over rose $475 thousand due to a 3217 basis point increase in average rates paid, but was partly offset by lower average balances of $125.9 million. In addition, interest expense on ~~short-term jumbo C.D. balances. Increases of $535.9 million in average~~interest checking and money market ~~account~~accounts increased $778 thousand, as average balances increased $379.1 million and ~~$415.3 million in short-term jumbo C.D. balances also contributed to higher deposit expense.~~average rates paid rose slightly. Interest expense on borrowings increased due to higher rates paid on customer repurchase agreements and overnight federal funds ~~purchased and repurchase agreements, partly offset by lower average balances of repurchase agreements.~~purchased. The overall average rate incurred on all interest bearing liabilities was ~~.22%~~.29% and ~~.19%~~.22% in the second quarters of ~~2016~~2017 and ~~2015,~~2016, respectively.

Net interest income (T/E) for the first six months of ~~2016~~2017 was ~~$351.0~~$378.2 million compared to ~~$324.4~~$351.0 million for the same period in ~~2015.~~2016. For the first six months of ~~2016,~~2017, the net interest margin was ~~3.03%~~3.16% compared to ~~2.90%~~3.03% for the first six months of ~~2015.~~2016.

Total interest income (T/E) for the first six months of ~~2016~~2017 increased ~~$29.5~~$31.1 million over the same period last year, due to higher interest income on loans and investment securities. Loan interest income (T/E)~~, including loans held for sale,~~ rose ~~$17.1~~$22.5 million due to ~~a $1.1 billion~~an $803.8 million, or 6.3%, increase in total average loan balances ~~but was partly offset by~~and a ~~nine~~12 basis point ~~decline~~increase in the average rate earned. Most of the increase in loan interest occurred in the business, ~~construction~~business real estate and ~~consumer~~construction loan categories. The growth in

~~Table~~ interest income of ~~Contents~~

~~interest income~~$7.9 million on investment securities (T/E) was mainly due to a 27$163.4 million increase in average balances coupled with a 13 basis point increase in the average rate earned. Increased earnings were recorded for U.S. government and federal agency securities due to higher TIPS interest of ~~$4.2 million. In addition,~~$2.5 million, while interest earned on non-marketable investments rose $3.8 million partly due to one-time interest receipts of $2.7 million on a private equity investment in the first quarter of 2017. Other increases in interest income occurred in mortgage-backed and asset-backed ~~corporate debt and mortgage-backed~~ securities, ~~increased $3.3 million, $2.0~~which grew $3.1 million and ~~$1.2~~$2.1 million, respectively. These increases were partly offset by lower interest earned on government-sponsored enterprise obligations of $5.2 million, which saw

declines in average balances and rates earned. Interest income on long-term resell agreements grew ~~$108~~$648 thousand due to higher average rates earned, partly offset by lower average balances.

Total interest expense for the first six months of ~~2016~~2017 increased ~~$2.8~~$3.9 million compared to last year. Interest expense on interest bearing deposits increased ~~$1.6~~$2.3 million, mainly due to a three basis point increase in the overall average rate paid. The overall rate increase included an increase of 15 basis points in rates paid on C.D.'s of $100,000 and over, in addition to a slight increase in ~~overall average~~ rates paid ~~in addition to higher average~~on interest checking and money market account ~~balances and short-term jumbo C.D.~~ balances. Interest expense on borrowings also increased ~~$1.2~~$1.6 million, mainly due to higher rates paid on federal funds purchased and repurchase ~~agreements, partly offset by lower average balances of repurchase~~ agreements. Interest expense on FHLB borrowings ~~also increased,~~declined $404 thousand, mainly due to lower average balances, partly offset by higher ~~short-term borrowings outstanding during the first quarter of 2016.~~rates paid. The overall cost of total interest bearing liabilities increased to ~~.22%~~.27% compared to ~~.19%~~.22% in the same period ~~in the prior~~last year.

Summaries of average assets and liabilities and the corresponding average rates earned/paid appear on the last page of this discussion.

Non-Interest Income


	Three Months Ended June 30								Six Months Ended June 30								Three Months Ended June 30								Six Months Ended June 30
(Dollars in thousands)	2016			2015			% change		2016			2015			% change		2017			2016			% change		2017			2016			% change
Bank card transaction fees	$	45,065		$	45,672		(1.3	)%	$	89,535		$	87,971		1.8	%	$	44,999		$	45,065		(.1	)%	$	88,203		$	89,535		(1.5	)%
Trust fees	31,464			30,531			3.1		61,834			60,117			2.9		33,120			30,241			9.5		65,134			59,484			9.5
Deposit account charges and other fees	21,328			19,637			8.6		42,019			38,136			10.2		22,861			21,328			7.2		44,803			42,019			6.6
Capital market fees	2,500			2,738			(8.7	)	5,225			5,740			(9.0	)	2,156			2,500			(13.8	)	4,498			5,225			(13.9	)
Consumer brokerage services	3,491			3,507			(.5	)	7,000			6,843			2.3		3,726			3,491			6.7		7,375			7,000			5.4
Loan fees and sales	3,196			2,183			46.4		5,706			4,272			33.6		4,091			3,196			28.0		7,259			5,706			27.2
Other	9,526			9,967			(4.4	)	24,275			17,730			36.9		12,131			10,749			12.9		22,878			26,625			(14.1	)
Total non-interest income	$	116,570		$	114,235		2.0	%	$	235,594		$	220,809		6.7	%	$	123,084		$	116,570		5.6	%	$	240,150		$	235,594		1.9	%
Non-interest income as a % of total revenue*	40.4		%	41.1		%			41.2		%	41.6		%			40.2		%	40.4		%			39.9		%	41.2		%

* Total revenue includes net interest income and non-interest income.

For the ~~the~~ second quarter of ~~2016,~~2017, total non-interest income amounted to ~~$116.6~~$123.1 million compared with ~~$114.2~~$116.6 million in the same quarter last year, which was an increase of ~~$2.3~~$6.5 million, or ~~2.0%~~5.6%. ~~This~~The increase was mainly due to growth in ~~deposit,~~ trust, ~~sweep~~deposit and loan ~~fees, partly offset by lower bank card, lease, capital market, swap~~fee income, coupled with gains on sales of several branch properties and ~~tax credit fee income.~~equipment leased to customers.

Bank card transaction fees for the current quarter decreased ~~$607 thousand, or 1.3%,~~slightly from the same ~~period~~quarter last ~~year. The decrease was~~year, mainly ~~the result of~~due to a decline in ~~commercial card~~merchant fees of ~~$1.2 million, or 5.4%, but was~~$614 thousand, offset by growth of 2.9% in ~~credit,~~both debit and ~~merchant~~credit card ~~interchange~~fees. Commercial card fees ~~of 3.4%, 3.0% and 2.1%, respectively.~~increased slightly over the same quarter last year. The table below is a summary of bank card transaction fees for the three and six month periods ended June 30, ~~2016~~2017 and ~~2015.~~2016.


	Three Months Ended June 30						Six Months Ended June 30						Three Months Ended June 30						Six Months Ended June 30
(Dollars in thousands)	2016		2015		% change		2016		2015		% change		2017		2016		% change		2017		2016		% change
Debit card fees	$	10,032	$	9,738	3.0	%	$	19,417	$18,653		4.1	%	$	10,326	$	10,032	2.9	%	$	19,967	$19,417		2.8	%
Credit card fees	6,302		6,096		3.4		11,947		11,508		3.8		6,482		6,302		2.9		12,223		11,947		2.3
Merchant fees	6,911		6,771		2.1		14,029		12,863		9.1		6,297		6,911		(8.9	)	12,139		14,029		(13.5	)
Corporate card fees	21,820		23,067		(5.4	)	44,142		44,947		(1.8	)	21,894		21,820		.3		43,874		44,142		(.6	)
Total bank card transaction fees	$	45,065	$	45,672	(1.3	)%	$	89,535	$	87,971	1.8	%	$	44,999	$	45,065	(.1	)%	$	88,203	$	89,535	(1.5	)%

Trust fees for the quarter increased ~~$933 thousand,~~$2.9 million, or ~~3.1%~~9.5%, over the same quarter last year, resulting mainly from continued growth in ~~personal (up 2.0%), institutional (up 3.5%), and corporate (up 57.1%)~~private client trust ~~fees.~~fees, which were up $2.0 million, or 9.0%. Deposit account fees increased ~~$1.7~~$1.5 million, or ~~8.6%~~7.2%, over the same ~~period~~quarter last year, as deposit account service charges increased ~~$1.3 million,~~$895 thousand, or ~~36.0%~~17.8%, while overdraft and return item fees and corporate cash management fees increased ~~$412~~4.8% and 3.3%, respectively. Consumer brokerage fees grew $235 thousand, ~~or 4.7%. Capital~~while capital market fees declined ~~$238~~$344 thousand ~~to $2.5 million in the current quarter as a result of continued~~on lower sales demand. Loan fees and sales increased ~~$1.0 million~~$895 thousand, or 28.0%, this quarter mainly due to higher mortgage banking revenue ~~which resulted from higher sales of newly originated residential mortgages under~~related to the Company's fixed rate residential mortgage sale ~~program that began in 2015.~~program. Other non-interest income ~~decreased $441 thousand~~increased $1.4 million compared to the same quarter last year. This ~~decline~~increase was ~~partly due to a decline~~mainly the result of ~~$956~~current quarter gains of $860 thousand ~~in fees from the~~on sales of ~~interest rate swaps as a result~~several branch properties, in addition to gains of ~~lower~~$824 thousand recorded on sales ~~volumes in the current quarter; however, higher first quarter volumes resulted in 2016 six month results that were slightly~~

~~Table~~ of ~~Contents~~

~~higher than in the first six months of 2015. In addition, fees~~several leased assets to customers upon lease termination. Fees from the sales of tax credits ~~decreased $280~~grew $521 thousand ~~and leasing revenue declined $396 thousand from~~this quarter compared with the ~~previous year.~~same quarter last year, while letter of credit fees were higher by $294 thousand. These ~~declines~~increases were partly offset by ~~an accrual for~~ a ~~trust related settlement~~decline of $289 thousand in fees on interest rate swap sales, and income of $897 thousand ~~and an increase~~recorded in ~~sweep commissions~~the second quarter of ~~$443 thousand.~~last year for a trust-related settlement, which did not reoccur in the current period.

Non-interest income for the first six months of ~~2016~~2017 was ~~$235.6~~$240.2 million compared to ~~$220.8~~$235.6 million in the first six months of ~~2015,~~2016, resulting in an increase of ~~$14.8~~$4.6 million, or ~~6.7%~~1.9%. Bank card fees ~~increased $1.6~~decreased $1.3 million, or ~~1.8%~~1.5%, as a result of a decline in merchant fees of $1.9 million, or 13.5%, partly offset by increases of $550 thousand in debit card fees and $276 thousand in credit card fees. Trust fee income increased $5.7 million, or 9.5%, as a result of growth in ~~merchant fees of $1.2 million, or 9.1%, debit card fees of $764 thousand, or 4.1%,~~private client and credit card fees of $439 thousand, or 3.8%, as all three saw increases in sales volumes. These increases were partly offset by a decline in corporate card fees of $805 thousand, or 1.8%. Trust fee income increased $1.7 million, or 2.9%, as a result of growth in personal, institutional ~~and corporate~~ trust fees. Deposit account fees increased ~~$3.9~~$2.8 million, or ~~10.2%~~6.6%, mainly due to growth of $1.6 million in deposit account service charges and ~~corporate cash management~~$766 thousand in overdraft and return item fees. Loan fees and sales increased ~~$1.4~~$1.6 million, or ~~33.6%~~27.2%, due to higher mortgage banking ~~revenue,~~revenue. Consumer brokerage fees rose $375 thousand due to higher mutual fund and advisory fee income, while capital market fees decreased ~~$515~~$727 thousand, or ~~9.0%~~13.9%, due to continued lower sales volume. Other non-interest income ~~increased $6.5~~decreased $3.7 million, or ~~36.9%~~14.1%, mainly due to ~~a $3.3 million gain~~lower gains on ~~the sale~~sales of ~~a former branch property recorded in the first quarter of 2016, while net losses on other~~ branch properties, ~~sold or held for sale declined $1.2 million. In addition to~~lower fees from sales of interest rate swaps, and the prior year trust settlement mentioned ~~above, fees from sweep commissions increased $835 thousand. These increases in current income were partly offset by lower leasing revenue of $699 thousand.~~above.

Investment Securities Gains (Losses), Net

Three Months Ended June 30 Six Months Ended June 30
(In thousands) 2016 2015 2016 2015
Available for sale:
U.S. government bonds $ —
$ —
$ —
$ 1,263
Municipal securities —
2
—
1,262
Corporate bonds —
6
—
6
Agency mortgage-backed bonds —
—
—
—
Asset-backed securities —
279
—
282
OTTI losses on non-agency mortgage-backed bonds (147 ) (466 ) (270 ) (483 )
Non-marketable:
Common stock —
—
23
—
Private equity investments (597 ) 2,322
(1,492 ) 5,848
Total investment securities gains (losses), net $ (744 ) $ 2,143
$ (1,739 ) $ 8,178



	Three Months Ended June 30						Six Months Ended June 30
(In thousands)	2017			2016			2017			2016
Available for sale	$	1,671		$	(147	)	$	3,719		$	(270	)
Non-marketable	(20		)	(597		)	(2,840		)	(1,469		)
Total investment securities gains (losses), net	$	1,651		$	(744	)	$	879		$	(1,739	)

Net gains and losses on investment securities which were recognized in earnings during the three and six months ended June 30, ~~2016~~2017 and ~~2015~~2016 are shown in the table above. Net securities ~~losses~~gains amounted to ~~$744 thousand~~$1.7 million in the second quarter of ~~2016~~2017 and ~~$1.7 million~~$879 thousand in the first six months of ~~2016.~~2017. Included in these ~~net~~ gains and losses are credit-related impairment losses on certain non-agency guaranteed mortgage-backed securities which have been identified as other-than-temporarily impaired. These identified securities had a total fair value of ~~$37.1~~$30.3 million at June 30, ~~2016.~~2017. During ~~the current quarter, additional credit-related impairment losses of $147 thousand were recorded, bringing the total losses for~~ the first six months of ~~2016~~2017, credit-related impairment losses of $320 thousand were recorded, compared to $270 ~~thousand.~~thousand in the same period last year. The current period also included gains on donations of appreciated common stock to a related charitable foundation, which were $2.2 million in both the first and the second quarters of 2017.

~~Also shown above are net gains~~Gains and losses on non-marketable investment securities include those relating to ~~non-marketable~~ private equity investments, which are primarily held by the Parent's majority-owned private equity subsidiaries. These gains and losses include fair value adjustments and gains and losses realized upon disposition. During the first six months of 2017, net losses in ~~addition~~fair value of $2.8 million were recorded, compared to asimilar losses of $3.7 million in the same period in 2016. A gain of $1.8 million ~~realized upon~~was also recorded in 2016 resulting from the Parent's withdrawal from a private equity fund, as required under the Volcker Rule investment prohibitions. The portion of the private equity activity attributable to minority interests is reported as non-controlling interest in the consolidated statements of income and resulted in income of $654 thousand during the first six months of 2017 and $379 thousand during the first six months of ~~2016 and expense of $1.5 million during the first six months of 2015.~~2016.

During the first six months of 2015, the Company sold $114.6 million of municipal bonds, $48.1 million of U.S. Treasury inflation-protected bonds and $506.4 million of asset-backed bonds, realizing gains of $2.8 million. Most of these sales were part of plan to extend the duration of the securities portfolio and improve net interest margins.

~~Table of Contents~~

Non-Interest Expense


	Three Months Ended June 30						Six Months Ended June 30						Three Months Ended June 30						Six Months Ended June 30
(Dollars in thousands)	2016		2015		% change		2016		2015		% change		2017		2016		% change		2017		2016		% change
Salaries and employee benefits	$	104,808	$	99,655	5.2	%	$	211,667	$	197,729	7.0	%	$	108,829	$	104,808	3.8	%	$	221,198	$	211,667	4.5	%
Net occupancy	11,092		10,999		.8		22,395		22,560		(.7	)	11,430		11,092		3.0		22,873		22,395		2.1
Equipment	4,781		4,679		2.2		9,415		9,382		.4		4,776		4,781		(.1	)	9,385		9,415		(.3	)
Supplies and communication	5,693		5,226		8.9		12,522		10,807		15.9		5,446		5,693		(4.3	)	11,155		12,522		(10.9	)
Data processing and software	22,770		21,045		8.2		45,669		40,551		12.6		23,356		22,770		2.6		46,453		45,669		1.7
Marketing	4,389		4,307		1.9		8,202		8,225		(.3	)	4,488		4,389		2.3		7,712		8,202		(6.0	)
Deposit insurance	3,143		3,019		4.1		6,308		6,020		4.8		3,592		3,143		14.3		7,063		6,308		12.0
Other	20,413		16,533		23.5		38,384		34,034		12.8		22,677		20,413		11.1		45,585		38,384		18.8
Total non-interest expense	$	177,089	$	165,463	7.0	%	$	354,562	$	329,308	7.7	%	$	184,594	$	177,089	4.2	%	$	371,424	$	354,562	4.8	%

Non-interest expense for the second quarter of ~~2016~~2017 amounted to ~~$177.1~~$184.6 million, an increase of ~~$11.6~~$7.5 million, or ~~7.0%~~4.2%, compared with ~~$165.5~~$177.1 million in the second quarter of last year. Salaries expense increased ~~$3.8~~$4.0 million, or ~~4.4%~~4.5%, mainly due to higher full-time salaries and ~~incentives expense.~~incentive compensation costs. Employee benefits expense ~~also increased $1.4~~totaled $15.8 million, ~~or 9.8%, mostly due to~~slightly higher than in the same period last year as increases in payroll taxes and 401(k) expense were offset by lower medical costs. Growth in salaries expense resulted partly from higher staffing costs, mainly in the areas of commercial and consumer banking, commercial payments, residential lending ~~commercial card, trust,~~and information technology ~~and other supporting units, partially offset by lower staffing in branches and deposit operations.~~business units. Full-time equivalent employees totaled 4,805 at June 30, 2017

compared to 4,779 at June 30, ~~2016 compared~~2016. Occupancy costs increased $338 thousand, or 3.0%, mostly due to ~~4,765 at June 30, 2015. Compared to the second quarter of last year, occupancy expense increased .8%, equipment expense grew 2.2%, and~~higher branch maintenance costs, while supplies and communication, marketing and equipment costs were well controlled. Data processing expense increased ~~$467~~$586 thousand, or ~~8.9%~~2.6%, mainly due to higher ~~reissuance costs for new chip cards distributed to customers. Data processing and software~~online subscription service expense. FDIC insurance costs increased ~~by $1.7 million,~~$449 thousand, or ~~8.2%~~14.3%, ~~mainly~~ due to higher ~~bank card processing costs, software expense and fees paid to outsourced data providers.~~insurance rates that were effective July 1, 2016. Other non-interest expense increased ~~$3.9~~$2.3 million, or ~~23.5%~~11.1%, compared to the same period in the previous year. This increase was mainly due to ~~a recovery~~the donation of ~~$2.8~~$2.3 million in ~~2015 related~~appreciated securities to a ~~letter of credit exposure which had been drawn upon and subsequently paid off.~~related charitable foundation, as previously mentioned. In addition, ~~bank card rewards~~lower deferred loan origination costs and higher professional fees expense were recorded. Excluding the donation expense, total non-interest expense grew ~~$1.4 million this quarter compared to~~3.0% over the ~~second quarter of last year; however, part of this growth was due to reductions of $923 thousand~~same period in rewards expense estimates during the second quarter of 2015 that did not reoccur in the current quarter. These increases were partly offset by a decline of $732 thousand in operating losses, mainly due to lower bank card related fraud losses, partly offset by operating loss accruals this quarter of $700 thousand.2016.

For the first six months of ~~2016,~~2017, non-interest expense amounted to ~~$354.6~~$371.4 million, an increase of ~~$25.3~~$16.9 million, or ~~7.7%~~4.8%, compared with ~~$329.3~~$354.6 million in the same period last year. Salaries and benefits increased ~~$13.9~~$9.5 million, or ~~7.0%~~4.5%, mainly due to higher full-time salaries ~~incentives~~ and ~~medical~~incentives expense. Supplies and communication expense ~~increased $1.7~~decreased $1.4 million, or ~~15.9%~~10.9%. This decrease was mainly the result of higher chip card reissue costs last year that have now declined. Marketing costs were down$490 thousand, or 6.0%, due to lower spending in the first quarter of 2017, but are expected to increase in subsequent quarters this year. FDIC insurance costs grew $755 thousand while data processing costs grew $784 thousand, both due to the trends mentioned above. Other non-interest expense increased $7.2 million, or 18.8%, mainly due to donations of $4.5 million in appreciated securities in the higher chip card reissuance costs mentioned above and higher data network expense. Data processing and software expense increased $5.1 million, or 12.6%, mainly due to higher bank card processing costs and outsourced data provider fees. Other expense increased $4.4 million, or 12.8%, mainly due to the 2015 letter of credit exposure recovery mentioned above. In addition, highercurrent period. Higher costs were also recorded ~~for~~in professional fees, bank card rewards and royalty fees expense, ~~(up $2.0 million) and charitable contribution~~in addition to lower deferred loan origination costs. Excluding the donation expense, ~~(up $730 thousand). These increases were partly offset by lower depreciation on operating lease assets, which declined $734 thousand.~~total non-interest expense grew 3.5% over the prior year.

~~Table of Contents~~

Provision and Allowance for Loan Losses


	Three Months Ended									Six Months Ended June 30						Three Months Ended									Six Months Ended June 30
(In thousands)	June 30, 2016			Mar. 31, 2016			June 30, 2015			2016			2015			June 30, 2017			Mar. 31, 2017			June 30, 2016			2017			2016
Provision for loan losses	$	9,216		$	9,439		$	6,757		$	18,655		$	11,177		$	10,758		$	11,128		$	9,216		$	21,886		$	18,655
Net loan charge-offs (recoveries):
Commercial:
Business	(65		)	463			(239		)	398			(80		)	318			97			(65		)	415			398
Real estate-construction and land	(507		)	(11		)	(309		)	(518		)	(1,255		)	(207		)	(535		)	(507		)	(742		)	(518		)
Real estate-business	(1,030		)	(242		)	764			(1,272		)	515			(10		)	(39		)	(1,030		)	(49		)	(1,272		)
	(1,602		)	210			216			(1,392		)	(820		)
Commercial net loan charge-offs (recoveries)																101			(477		)	(1,602		)	(376		)	(1,392		)
Personal Banking:
Real estate-personal	305			(195		)	(47		)	110			52			(131		)	19			305			(112		)	110
Consumer	1,781			2,599			1,849			4,380			3,592			2,642			2,096			1,781			4,738			4,380
Revolving home equity	75			88			103			163			143			104			7			75			111			163
Consumer credit card	6,650			5,918			6,424			12,568			12,776			7,750			7,148			6,650			14,898			12,568
Overdrafts	307			219			212			526			434			292			435			307			727			526
	9,118			8,629			8,541			17,747			16,997
Personal banking net loan charge-offs																10,657			9,705			9,118			20,362			17,747
Total net loan charge-offs	$	7,516		$	8,839		$	8,757		$	16,355		$	16,177		$	10,758		$	9,228		$	7,516		$	19,986		$	16,355


	Three Months Ended						Six Months Ended June 30				Three Months Ended						Six Months Ended June 30
	June 30, 2016		Mar. 31, 2016		June 30, 2015		2016		2015		June 30, 2017		Mar. 31, 2017		June 30, 2016		2017		2016
Annualized net loan charge-offs (recoveries)*:
Commercial:
Business	(.01	)%	.04	%	(.02	)%	.02	%	—	%	.03	%	.01	%	(.01	)%	.02	%	.02	%
Real estate-construction and land	(.26	)	(.01	)	(.29	)	(.14	)	(.60	)	(.10	)	(.26	)	(.26	)	(.18	)	(.14	)
Real estate-business	(.17	)	(.04	)	.13		(.11	)	.05		—		(.01	)	(.17	)	—		(.11	)
	(.08	)	.01		.01		(.04	)	(.02	)
Commercial net loan charge-offs (recoveries)											—		(.02	)	(.08	)	(.01	)	(.04	)
Personal Banking:
Real estate-personal	.06		(.04	)	(.01	)	.01		.01		(.03	)	—		.06		(.01	)	.01
Consumer	.37		.54		.41		.46		.41		.53		.43		.37		.48		.46
Revolving home equity	.07		.08		.10		.08		.07		.10		.01		.07		.06		.08
Consumer credit card	3.62		3.16		3.51		3.39		3.47		4.25		3.88		3.62		4.06		3.39
Overdrafts	31.53		18.46		18.85		24.35		17.30		26.00		42.15		31.53		33.73		24.35
	.74		.69		.70		.71		.71
Personal banking net loan charge-offs											.83		.77		.74		.80		.71
Total annualized net loan charge-offs	.24	%	.28	%	.30	%	.26	%	.28	%	.32	%	.28	%	.24	%	.30	%	.26	%

* as a percentage of average loans (excluding loans held for sale)

The Company has an established process to determine the amount of the allowance for loan losses, which assesses the risks and losses inherent in its portfolio. This process provides an allowance consisting of a specific allowance component based on certain individually evaluated loans and a general component based on estimates of allowances for pools of loans.

~~Loans subject to individual evaluation generally consist of business, construction, business real estate~~ The Company's policies and ~~personal real estate loans on non-accrual status, and include troubled debt restructurings that are on non-accrual status. These non-accrual loans are evaluated individually~~processes for impairment based on factors such as payment history, borrower financial condition and collateral. For collateral dependent loans, appraisals of collateral (including exit costs) are normally obtained annually but discounted based on date last received and market conditions. From these evaluations of expected cash flows and collateral values, specific allowances are determined.

~~Table of Contents~~

Loans which are not individually evaluated are segregated by loan type and sub-type and are collectively evaluated. These loans include commercial loans (business, construction and business real estate) which have been graded pass, special mention or substandard, and all personal banking loans except personal real estate loans on non-accrual status. Collectively-evaluated loans include certain troubled debt restructurings with similar risk characteristics. Allowances for both personal banking and commercial loans use methods which consider historical and current loss trends, loss emergence periods, delinquencies, industry concentrations and unique risks. Economic conditions throughout the Company's market place, as monitored by Company credit officers, are also considered in the allowance determination process.

~~The Company’s estimate of~~determining the allowance for loan losses ~~and the corresponding provision for loan losses rest upon various judgments and assumptions made by management. In addition to past loan loss experience, various qualitative factors~~ are ~~considered, such as current loan portfolio composition and characteristics, trends~~discussed in delinquencies, portfolio risk ratings, levels of non-performing assets, credit concentrations, collateral values, and prevailing regional and national economic conditions. The Company has internal credit administration and loan review staffs that continuously review loan quality and report the results of their reviews and examinationsNote 1 to the ~~Company’s senior management~~consolidated financial statements and ~~Board of Directors. Such reviews also assist management~~ in ~~establishing~~ the ~~level~~Allowance for Loan Losses discussion in Item 7 of the allowance. In using this process and the information available, management must consider various assumptions and exercise considerable judgment to determine the overall level of the allowance for loan losses. Because of these subjective factors, actual outcomes of inherent losses can differ from original estimates. The Company’s subsidiary bank continues to be subject to examination by several regulatory agencies, and examinations are conducted throughout the year, targeting various segments of the loan portfolio for review. Note 1 in the 20152016 Annual Report on Form ~~10-K contains additional discussion on the allowance and charge-off policies.~~10-K.

Net loan charge-offs in the second quarter of ~~2016~~2017 amounted to ~~$7.5~~$10.8 million, compared with ~~$8.8~~$9.2 million in ~~both~~ the prior quarter and $7.5 million in the second quarter of last year. The ~~decrease~~increase in current quarter net ~~loan~~ charge-offs ~~compared to~~over the previous quarter was mainly ~~the result of higher construction and business real estate loan recoveries and lower consumer loan charge-offs recorded this quarter, offset by higher~~due to increases in consumer credit card, consumer, and business net loan charge-offs of $602 thousand, $546 thousand, and $221 thousand, respectively. The increase in net loan charge-offs was also driven by lower net recoveries on construction loans, which totaled $207 thousand in the second quarter of 2017, compared to net recoveries of $535 thousand in the prior quarter. These increases in net loan charge-offs were partially offset by decreases of $150 thousand and $143 thousand in net charge-offs on personal real estate ~~net loan charge-offs. In the current quarter, commercial loan net recoveries of $1.6 million were recorded on business, construction~~loans and ~~business real estate loans.~~ overdrafts, respectively.

For the three months ended June 30, ~~2016,~~2017, annualized net loan charge-offs on average consumer credit card loans totaled ~~3.62%~~4.25%, compared with ~~3.16%~~3.88% in the previous quarter and ~~3.51%~~3.62% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to .53%, compared to .43% in the prior quarter and .37% in the same period last year. Annualized net charge-offs on personal real estate loans ~~totaled .06% and~~also remained ~~low. Consumer loan annualized net charge-offs in the current quarter amounted to .37%, compared to .54% in the prior quarter and .41% in the same period last year.~~low this quarter. In the second quarter of ~~2016,~~2017, total annualized net loan charge-offs were ~~.24%~~.32%, compared to .28% in the previous quarter and ~~.30%~~.24% in the same period last year.

In the current quarter, the provision for loan losses totaled $10.8 million and matched net loan charge-offs. In the prior quarter, the provision for loan losses totaled $11.1 million and exceeded net loan charge-offs by $1.9 million, and in the same period last year, the provision for loan losses totaled $9.2 million and exceeded net loan charge-offs by $1.7 ~~million, growing the allowance for loan losses by $1.7~~ million. ~~In the same period last year, the provision for loan losses totaled $6.8 million and was $2.0 million less than net loan charge-offs.~~ The provision for loan losses in the current quarter decreased by ~~$223~~$370 thousand compared to the previous quarter.

For the six months ended June 30, ~~2016,~~2017, net loan charge-offs totaled ~~$16.4~~$20.0 million, compared to ~~$16.2~~$16.4 million in ~~2015.~~2016. The ~~slight~~ increase in net loan charge-offs resulted mainly from an increase in consumer credit card net loan charge-offs, which increased ~~by $788 thousand, offset by a $572 thousand net increase in commercial loan recoveries.~~$2.3 million, and fewer recoveries on business real estate loans, which declined $1.2 million. The provision for loan losses for the first six months of ~~2016~~2017 was ~~$18.7~~$21.9 million and increased ~~by $7.5~~$3.2 million compared to the previous year. The increase in provision expense was the result of ~~slightly~~ higher net loan losses ~~coupled with a $2.3 million increase~~during the six months ended June 30, 2017 compared to the same period in the ~~loan loss reserve this year, whereas the provision for loan losses in the previous year was $5.0 million less than net loan charge-offs, accordingly reducing the allowance for loan losses.~~prior year.

At June 30, 2017, the allowance for loan losses amounted to $157.8 million and was 1.16% of total loans and more than ten times total non-accrual loans. At December 31, 2016, the allowance for loan losses amounted to ~~$153.8~~$155.9 million and was ~~1.18%~~1.16% of total loans and ~~627% of total non-accrual loans. At December 31, 2015, the allowance for loan losses amounted to $151.5 million and was 1.22% of total loans and 570% of~~over ten times total non-accrual loans.

~~Table of Contents~~

Risk Elements of Loan Portfolio

The following table presents non-performing assets and loans which are past due 90 days and still accruing interest. Non-performing assets include non-accruing loans and foreclosed real estate. Loans are placed on non-accrual status when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. Loans that are 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection, or they are personal banking loans that are exempt under regulatory rules from being classified as non-accrual.


(Dollars in thousands)	June 30, 2016			December 31, 2015			June 30, 2017			December 31, 2016
Non-accrual loans	$	24,524		$	26,575		$	13,362		$	14,283
Foreclosed real estate	1,609			2,819			515			366
Total non-performing assets	$	26,133		$	29,394		$	13,877		$	14,649
Non-performing assets as a percentage of total loans	.20		%	.24		%	.10		%	.11		%
Non-performing assets as a percentage of total assets	.11		%	.12		%	.06		%	.06		%
Total loans past due 90 days and still accruing interest	$	15,892		$	16,467		$	14,630		$	16,396

Non-accrual loans, which are also classified as impaired, totaled ~~$24.5~~$13.4 million at June 30, ~~2016,~~2017, and decreased ~~$2.1 million~~$921 thousand from balances at December 31, ~~2015.~~2016. The decrease occurred mainly in business ~~real estate loans and construction real estate~~ loans, which decreased ~~$2.6~~$2.4 million, ~~and $920 thousand, respectively. These decreases were partially~~partly offset by an increase of $1.2 million in ~~business loans of $1.8 million.~~consumer loans. At June 30, ~~2016,~~2017, non-accrual loans were comprised mainly of business ~~(51.9%~~(47.4%), personal real estate (26.2%), and business real estate ~~(21.4%), and personal real estate (17.5%~~(13.7%) loans. Foreclosed real estate totaled ~~$1.6 million~~$515 thousand at June 30, ~~2016, a decrease~~2017, an increase of ~~$1.2 million~~$149 thousand when compared to December 31, ~~2015.~~2016. Total loans past due 90 days or more and still accruing interest were ~~$15.9~~$14.6 million as of June 30, ~~2016,~~2017, a decrease of ~~$575 thousand~~$1.8 million when compared to December 31, ~~2015.~~2016. Balances by class for non-accrual loans and loans past due 90 days and still accruing interest are shown in the "Delinquent and non-accrual loans" section in Note 2 to the consolidated financial statements.

In addition to the non-performing and past due loans mentioned above, the Company also has identified loans for which management has concerns about the ability of the borrowers to meet existing repayment terms. They are classified as substandard under the Company's internal rating system. The loans are generally secured by either real estate or other borrower assets, reducing the potential for loss should they become non-performing. Although these loans are generally identified as potential problem loans, they may never become non-performing. Such loans totaled ~~$111.5~~$107.8 million at June 30, ~~2016~~2017 compared with ~~$113.1~~$99.5 million at December 31, ~~2015,~~2016, resulting in ~~a decrease~~an increase of ~~$1.6~~$8.3 million, or ~~1.4%~~8.3%.


(In thousands)	June 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Potential problem loans:
Business	$	58,400	$	58,860	$	47,860	$	43,438
Real estate – construction and land	350		1,159		2,703		1,172
Real estate – business	51,159		51,107		51,693		52,913
Real estate – personal	1,626		1,755		5,507		1,955
Consumer	—		262
Total potential problem loans	$	111,535	$	113,143	$	107,763	$	99,478

At June 30, ~~2016,~~2017, the Company had ~~$61.5~~$59.2 million of loans whose terms have been modified or restructured under a troubled debt restructuring. These loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession, as defined by accounting guidance, and are further discussed in the "Troubled debt restructurings" section in Note 2 to the consolidated financial statements. This balance includes certain commercial loans totaling ~~$30.3~~$36.8 million which are classified as substandard and included in the table above because of this classification.

Loans with Special Risk Characteristics

Management relies primarily on an internal risk rating system, in addition to delinquency status, to assess risk in the loan portfolio, and these statistics are presented in Note 2 to the consolidated financial statements. However, certain types of loans are considered at high risk of loss due to their terms, location, or special conditions. Additional information about the major types of loans in these categories and their risk features are provided below. Information based on loan-to-value (LTV) ratios was generally calculated with valuations at loan origination date. The Company normally obtains an updated appraisal or valuation at the time a loan is renewed or modified, or if the loan becomes significantly delinquent or is in the process of being foreclosed upon.

~~Table of Contents~~

Real Estate – Construction and Land Loans

The Company's portfolio of construction and land loans, as shown in the table below, amounted to ~~6.3%~~6.2% of total loans outstanding at June 30, ~~2016.~~2017. The largest component of construction and land loans was commercial construction, which grew ~~$169.0~~$77.7 million during the six months ended June 30, ~~2016.~~2017. At June 30, ~~2016,~~2017, multi-family residential construction loans totaled approximately ~~$208.1~~$218.6 million, or ~~39%~~37.6%, of the commercial construction loan portfolio.


(Dollars in thousands)	June 30, 2016		% of Total		% of Total Loans		December 31, 2015		% of Total		% of Total Loans		June 30, 2017		% of Total		% of Total Loans		December 31, 2016		% of Total		% of Total Loans
Residential land and land development	$	81,131	9.9	%	.6	%	$	72,622	11.6	%	.6	%	$	79,120	9.3	%	.6	%	$	86,373	10.9	%	.6	%
Residential construction	144,282		17.6		1.1		131,943		21.2		1.1		130,231		15.4		.9		132,334		16.8		1.0
Commercial land and land development	60,187		7.3		.5		54,176		8.7		.4		57,637		6.8		.4		69,057		8.7		.5
Commercial construction	534,296		65.2		4.1		365,329		58.5		2.9		581,164		68.5		4.3		503,472		63.6		3.8
Total real estate - construction and land loans	$	819,896	100.0	%	6.3	%	$	624,070	100.0	%	5.0	%	$	848,152	100.0	%	6.2	%	$	791,236	100.0	%	5.9	%

Real Estate – Business Loans

Total business real estate loans were ~~$2.4~~$2.7 billion at June 30, ~~2016~~2017 and comprised ~~18.3%~~20.0% of the Company's total loan portfolio. These loans include properties such as manufacturing and warehouse buildings, small office and medical buildings, churches, hotels and motels, shopping centers, and other commercial properties. At June 30, ~~2016, 41.4%~~2017, 36.8% of business real estate loans were for owner-occupied real estate properties, which present lower risk profiles.


(Dollars in thousands)	June 30, 2016		% of Total		% of Total Loans		December 31, 2015		% of Total		% of Total Loans		June 30, 2017		% of Total		% of Total Loans		December 31, 2016		% of Total		% of Total Loans
Owner-occupied	$	992,894	41.4	%	7.6	%	$	983,844	41.8	%	7.9	%	$	1,002,503	36.8	%	7.4	%	$	1,004,238	38.0	%	7.5	%
Office													349,017		12.8		2.6		319,638		12.1		2.4
Retail	323,706		13.5		2.5		322,644		13.7		2.6		353,936		13.0		2.6		344,221		13.0		2.5
Multi-family	223,792		9.3		1.7		196,212		8.3		1.6		305,019		11.2		2.2		255,369		9.7		1.9
Office	221,785		9.2		1.7		218,018		9.3		1.8
Hotels													155,979		5.7		1.1		174,207		6.6		1.3
Farm	169,175		7.1		1.3		167,344		7.1		1.3		162,952		6.0		1.2		173,210		6.6		1.3
Hotels	161,114		6.7		1.2		157,317		6.7		1.2
Industrial	122,614		5.1		.9		112,261		4.7		.9		123,537		4.4		.9		122,940		4.6		.9
Other	184,191		7.7		1.4		197,904		8.4		1.6		274,406		10.1		2.0		249,551		9.4		1.9
Total real estate - business loans	$	2,399,271	100.0	%	18.3	%	$	2,355,544	100.0	%	18.9	%	$	2,727,349	100.0	%	20.0	%	$	2,643,374	100.0	%	19.7	%

Real Estate – Personal Loans

The Company's ~~$1.9~~$2.0 billion personal real estate loan portfolio is composed mainly of residential first mortgage real estate loans. As shown on page 44, recent loss rates have remained low, and at June 30, ~~2016,~~2017, loans past due over 30 days decreased ~~$620 thousand and~~$3.2 million; however, non-accrual loans ~~decreased $132~~increased $101 thousand compared to December 31, ~~2015.~~2016. Also, as shown in Note 2, only ~~4.3%~~3.9% of this portfolio has FICO scores of less than 660. Approximately ~~$18.5~~$21.9 million, or ~~1.0%~~1.1%, of personal real estate loans were structured with interest only payments. These loans are typically made to high net-worth borrowers and generally have low LTV ratios at origination or have additional collateral pledged to secure the loan. Therefore, they are not perceived to represent above normal credit risk. Loans originated with interest only payments were not made to "qualify" the borrower for a lower payment amount. At June 30, ~~2016,~~2017, loans with no mortgage insurance and an original LTV higher than 80% totaled ~~$151.5~~$165.6 million compared to ~~$146.8~~$158.8 million at December 31, ~~2015.~~2016.

Revolving Home Equity Loans

The Company had ~~$408.3~~$403.4 million in revolving home equity loans at June 30, ~~2016~~2017 that were generally collateralized by residential real estate. Most of these loans ~~(93.5%~~(92.9%) are written with terms requiring interest only monthly payments. These loans are offered in three main product lines: LTV up to 80%, 80% to 90%, and 90% to 100%. As of June 30, ~~2016,~~2017, the outstanding principal of loans with an original LTV higher than 80% was ~~$54.8~~$54.0 million, or 13.4% of the portfolio, compared to ~~$68.1~~$55.1 million as of December 31, ~~2015.~~2016. Total revolving home equity loan balances over 30 days past due or on non-accrual status were ~~$4.5~~$3.1 million at June 30, ~~2016~~2017 compared to ~~$5.0~~$2.2 million at December 31, ~~2015.~~2016. The weighted average FICO score for the total current portfolio balance is ~~773.~~793. At maturity, the accounts are re-underwritten, and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of ~~2016~~2017 through ~~2018,~~2019, approximately ~~25%~~18% of the Company's current outstanding balances are expected to mature. Of these balances, approximately

~~Table of Contents~~

~~84%~~81% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels.

Other Consumer Loans

Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, marine and RVs. Outstanding balances for auto loans were ~~$975.5~~$993.3 million and ~~$996.0~~$972.5 million at June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. The balances over 30 days past due amounted to ~~$10.2~~$12.7 million at June 30, ~~2016~~2017 compared to ~~$10.8~~$13.8 million at the end of ~~2015,~~2016, and comprised ~~1.0%~~1.3% and ~~1.1%~~1.4% of the outstanding balances of these loans at June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. For the six months ended June 30, ~~2016, $239.0~~2017, $239.7 million of new auto loans were originated, compared to ~~$497.2~~$431.0 million during the full year of ~~2015.~~2016. At June 30, ~~2016,~~2017, the automobile loan portfolio had a weighted average FICO score of ~~732.~~747.

The Company's balance of marine and RV loans totaled ~~$120.4~~$85.2 million at June 30, ~~2016,~~2017, compared to ~~$143.1~~$102.4 million at December 31, ~~2015,~~2016, and the balances over 30 days past due amounted to ~~$2.9~~$2.8 million at June 30, ~~2016~~2017 compared to ~~$5.1~~$4.3 million at the end of ~~2015.~~2016. The net charge-offs on marine and RV loans ~~declined~~increased slightly from ~~$755~~$691 thousand in the first six months of ~~2015,~~2016 to ~~$691~~$741 thousand in the first six months of the current year.

Additionally, the Company offers low promotional rates on selected consumer credit card products. Out of a portfolio at June 30, ~~2016~~2017 of ~~$753.2~~$740.9 million in consumer credit card loans outstanding, approximately ~~$172.4~~$155.1 million, or ~~22.9%~~20.9%, carried a low promotional rate. Within the next six months, ~~$49.9~~$43.7 million of these loans are scheduled to convert to the ongoing higher contractual rate. To mitigate some of the risk involved with this credit card product, the Company performs credit checks and detailed analysis of the customer borrowing profile before approving the loan application. Management believes that the risks in the consumer loan portfolio are reasonable and the anticipated loss ratios are within acceptable parameters.

Energy Lending

The Company's energy lending portfolio was comprised of lending to the petroleum and natural gas sectors and totaled ~~$148.0~~$140.8 million at June 30, ~~2016,~~2017, as shown in the table below. As of June 30, ~~2016,~~2017, there were ~~$24.4~~$6.9 million of energy loans, or ~~16.5%~~4.9%, of the energy portfolio, with a "substandard" rating or on non-accrual status, ~~and there~~compared to $8.0 million, or 4.6% of the energy portfolio, at December 31, 2016. Included in these amounts were non-accrual loans of zero at June 30, 2017, compared to $847 thousand at December 31, 2016. There were no energy loans 90 days past due and still accruing ~~interest.~~interest at June 30, 2017 or December 31, 2016.


(In thousands)	June 30, 2016		December 31, 2015		Unfunded commitments at June 30, 2016		June 30, 2017		December 31, 2016		Unfunded commitments at June 30, 2017
Extraction	$	90,410	$	65,649	$	22,578	$	87,935	$	103,011	$	38,761
Mid-stream shipping and storage							7,904		22,985		61,800
Downstream distribution and refining	23,992		27,246		24,497		30,900		30,231		18,033
Mid-stream shipping and storage	17,947		28,678		55,415
Support activities	15,652		14,946		4,956		14,028		15,296		21,832
Total energy lending portfolio	$	148,001	$	136,519	$	107,446	$	140,767	$	171,523	$	140,426

Shared National Credits

The Company participates in credits of large, publicly traded companies which are defined by regulation as shared national credits, or SNCs. Regulations define SNCs as loans exceeding $20 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled ~~$809.6~~$892.4 million at June 30, ~~2016,~~2017, compared to ~~$656.0~~$836.1 million at December 31, ~~2015.~~2016. Additional unfunded commitments at June 30, ~~2016~~2017 totaled $1.3 billion.

Income Taxes

Income tax expense was $33.2 million in the second quarter of 2017, compared to $24.9 million in the first quarter of 2017 and $31.5 million in the second quarter of ~~2016, compared to $29.4 million in the first quarter of 2016 and $32.5 million in the second quarter of 2015.~~2016. The Company's effective tax rate, including the effect of non-controlling interest, was 29.6% in the second quarter of 2017, compared to 25.8% in the first quarter of 2017 and 31.1% in the second quarter of ~~2016, compared~~2016. The lower effective tax rate for the first quarter of 2017 was primarily due to ~~31.0%~~the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" on January 1, 2017. The ASU requires all excess tax benefits and tax deficiencies arising from share-based award payments to be recognized as income tax expense or benefit in the income statement, while in previous periods these benefits and deficiencies were recognized in equity. The amount of excess tax benefits (net of tax deficiencies) recognized as a reduction to income tax expense was $4.5 million in the first quarter of ~~2016~~2017 and ~~30.4%~~$1.6 million in the second quarter of ~~2015.~~2017. These tax benefits are expected to be seasonally higher in the first quarter of each year when the majority of the Company’s equity compensation vests.

The decrease in the Company's effective tax rate for the three months ended June 30, 2017 compared to the same period in the prior year was due to tax benefits related to the donation of appreciated securities to a charitable foundation lowering the effective tax rate in the current quarter, as mentioned previously.

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Financial Condition

Balance Sheet

Total assets of the Company were ~~$24.7~~$25.1 billion at June 30, ~~2016~~2017 and ~~$24.6~~$25.6 billion at December 31, ~~2015~~.2016. Earning assets (excluding the allowance for loan losses and fair value adjustments on investment securities) amounted to ~~$23.3~~$23.8 billion at June 30, ~~2016~~2017 and ~~$23.2~~$24.2 billion at December 31, ~~2015,~~2016, and consisted of ~~56%~~57% in loans and ~~39%~~40% in investment securities.

At June 30, ~~2016,~~2017, total loans ~~including those held for sale,~~ increased ~~$680.8~~$213.9 million, or ~~5.5%~~1.6%, compared with balances at December 31, ~~2015.~~2016. On an overall basis, the largest contributions to loan growth occurred in business loans and ~~construction~~business real estate loans, which increased ~~$442.4~~$76.0 million and ~~$195.8~~$84.0 million, respectively, over year end balances. The increase in business loans ~~mainly~~primarily resulted from growth in commercial and industrial loans, commercial credit card loans, and tax-free loans. ~~Commercial construction projects contributed to the~~Business real estate loans increased largely because of growth in ~~construction~~multi-family residential loans. ~~The~~Consumer loans, which includes automobile, marine and RV, fixed rate home equity, and other consumer ~~loan portfolio, including the balance of held for sale automobile~~ loans, increased ~~$36.0~~$47.7 million during the first six months of the year. ~~In order to limit risk in the auto sector of the loan portfolio, the Company sold $21.8 million of these loans in June 2016 and an additional $20.8 million remain held~~Higher demand for ~~sale at June 30, 2016. Outstanding balances of~~ automobile and other consumer loans grew ~~by $52.1 million in the first six months of 2016, compared to growth of $156.6 million in the first six months of 2015. Fixed~~loan balances $71.0 million. However, fixed rate home equity loans ~~also grew~~decreased by ~~$6.5 million. However,~~$6.1 million and marine and RV loans ~~also included in the consumer loan portfolio,~~ continued to run off during the period by ~~$22.7~~$17.2 million. ~~Personal real estate~~Construction loans ~~grew $11.4~~increased $56.9 million during the first six months of ~~2016;~~the year primarily due to commercial construction projects. Personal real estate loan balances were largely unchanged from year end balances; however, the Company originated and sold ~~an additional $64.5~~$87.7 million of longer-term fixed rate loans during ~~this period. Business real estate loans grew $43.7~~the first six months of 2017 compared to $64.5 million ~~over year end, while declines~~in the same period of 2016. Declines in consumer credit card (down ~~$26.6~~$35.6 million) and revolving home equity loans (down ~~$24.7~~$10.2 million) partially offset ~~this growth.~~growth throughout the year.

Available for sale investment securities, excluding fair value adjustments, decreased by ~~$718.9~~$258.6 million at June 30, ~~2016~~2017 compared to December 31, ~~2015.~~2016. Purchases of securities during this period totaled ~~$389.7~~$672.4 million, offset by sales, maturities, and pay downs of ~~$1.1 billion.~~$912.0 million. The largest decreases in outstanding balances occurred in asset-backed securities, ~~which decreased by $366.4 million,~~agency mortgage-backed securities, and ~~government-sponsored enterprise~~state and municipal obligations, which decreased ~~by $240.9 million.~~$139.8 million, $70.7 million, and $33.6 million, respectively. At June 30, ~~2016,~~2017, the duration of the investment portfolio was ~~2.6~~2.8 years, and maturities and pay downs of approximately $1.6 billion are expected to occur during the next 12 months.

Total deposits at June 30, ~~2016 totaled $20.2~~2017 amounted to $20.8 billion and ~~increased $171.2~~decreased $275.4 million compared to deposit balances at December 31, ~~2015. Money~~2016. The decline in deposits was driven by decreases in certificates of deposit of $157.4 million, or 7.0%, mainly in jumbo accounts, and interest checking deposits of $106.3 million, or 8.3%. These decreases were offset by growth in money market deposits ~~increased $276.7~~of $42.6 million, or ~~3.1%~~.5%, and savings accounts ~~increased $46.5~~of $60.6 million, or ~~6.3%~~7.8%. ~~C.D. accounts increased $267.3~~Non-interest bearing deposits also declined $114.9 million, or ~~13.4%~~1.5%, mainly ~~in jumbo accounts. These increases were partially offset by decreases in interest checking deposits~~due to a reduction of ~~$179.2 million, or 14.1%, and non-interest bearing deposits of $240.1 million, or 3.4%. The decline in non-interest bearing deposits included reductions of $181.6~~$164.4 million in business accounts, ~~and $82.2~~partially offset by an increase of $66.3 million in personal accounts.

Total borrowings were ~~$1.7~~$1.4 billion at June 30, ~~2016~~2017 compared to ~~$2.1~~$1.8 billion at December 31, ~~2015.~~2016. Short-term borrowings of federal funds purchased and customer repurchase agreements totaled ~~$1.6~~$1.3 billion at June 30, ~~2016,~~2017, a decrease of ~~$331.3~~$467.5 million from balances of ~~$2.0~~$1.7 billion at December 31, ~~2015.~~2016. The overall decrease in these balances was due to a decrease of ~~$525.2~~$668.1 million in customer repurchase agreements, offset by an increase of $200.7 million in federal funds ~~purchased, offset by an increase $193.9 million in customer repurchase agreements.~~purchased.

Liquidity and Capital Resources

Liquidity Management

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


(In thousands)	June 30, 2016		March 31, 2016		December 31, 2015		June 30, 2017		March 31, 2017		December 31, 2016
Liquid assets:
Available for sale investment securities	$	9,221,346	$	9,552,179	$	9,777,004	$	9,439,701	$	9,671,975	$	9,649,203
Federal funds sold	13,725		9,075		14,505		16,520		2,205		15,470
Long-term securities purchased under agreements to resell	825,000		825,000		875,000		625,000		725,000		725,000
Balances at the Federal Reserve Bank	183,223		171,651		23,803		80,860		120,234		272,275
Total	$	10,243,294	$	10,557,905	$	10,690,312	$	10,162,081	$	10,519,414	$	10,661,948

Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled ~~$13.7~~$16.5 million as of June 30, ~~2016.~~2017. Long-term resale agreements, maturing ~~in 2016~~ through 2018, totaled ~~$825.0~~$625.0 million at June 30, ~~2016~~.2017. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, ~~safe-~~

~~Table of Contents~~

~~kept~~safe-kept by a third-party custodian, as collateral. This collateral totaled ~~$870.4~~$653.4 million in fair value at June 30, ~~2016.~~2017. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled ~~$183.2~~$80.9 million at June 30, ~~2016.~~2017. The fair value of the available for sale investment portfolio was ~~$9.2~~$9.4 billion at June 30, ~~2016~~2017 and included an unrealized net gain in fair value of ~~$248.9~~$97.9 million. The total net unrealized gain included net gains of ~~$101.5~~$19.6 million on ~~mortgage and asset-backed~~mortgage-backed securities, ~~$69.7~~$32.7 million on state and municipal obligations, and ~~$39.2~~$42.3 million on common and preferred stock held by the Parent.

Approximately $1.6 billion of the available for sale investment portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet new loan demand or help offset reductions in the Company's deposit funding base. The Company pledges portions of its investment securities portfolio to secure public fund deposits, securities sold under agreements to repurchase, trust funds, letters of credit issued by the FHLB, and borrowing capacity at the Federal Reserve Bank. Total investment securities pledged for these purposes were as follows:


(In thousands)	June 30, 2016		March 31, 2016		December 31, 2015		June 30, 2017		March 31, 2017		December 31, 2016
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	138,547	$	150,544	$	166,153	$	99,541	$	108,240	$	115,858
FHLB borrowings and letters of credit	25,757		28,822		31,095		15,560		16,743		17,781
Securities sold under agreements to repurchase	2,332,313		1,632,978		2,116,537
Securities sold under agreements to repurchase *							1,747,101		1,726,909		2,447,835
Other deposits and swaps	2,055,453		2,124,074		1,827,195		2,032,334		1,956,791		1,773,017
Total pledged securities	4,552,070		3,936,418		4,140,980		3,894,536		3,808,683		4,354,491
Unpledged and available for pledging	2,833,345		3,800,391		3,886,219		3,718,231		4,071,649		3,516,648
Ineligible for pledging	1,835,931		1,815,370		1,749,805		1,826,934		1,791,643		1,778,064
Total available for sale securities, at fair value	$	9,221,346	$	9,552,179	$	9,777,004	$	9,439,701	$	9,671,975	$	9,649,203

* Includes securities pledged for collateral swaps, as discussed in Note 11 to the consolidated financial statements.

Liquidity is also available from the Company's large base of core customer deposits, defined as non-interest bearing, interest checking, savings, and money market deposit accounts. At June 30, ~~2016,~~2017, such deposits totaled ~~$17.9~~$18.7 billion and represented ~~88.8%~~90.0% of total deposits. These core deposits are normally less volatile, as they are often with customer relationships tied to other products offered by the Company, promoting long lasting relationships and stable funding sources. Time open and certificates of deposit of $100,000 and over totaled ~~$1.5~~$1.4 billion at June 30, ~~2016.~~2017. These accounts are normally considered more volatile and higher costing and comprised ~~7.5%~~6.7% of total deposits at June 30, ~~2016.~~2017.


(In thousands)	June 30, 2016		March 31, 2016		December 31, 2015		June 30, 2017		March 31, 2017		December 31, 2016
Core deposit base:
Non-interest bearing	$	6,906,265	$	7,065,066	$	7,146,398	$	7,314,506	$	7,237,815	$	7,429,398
Interest checking	1,088,540		1,064,499		1,267,757		1,169,605		1,146,600		1,275,899
Savings and money market	9,890,194		10,140,858		9,566,989		10,258,010		10,292,478		10,154,890
Total	$	17,884,999	$	18,270,423	$	17,981,144	$	18,742,121	$	18,676,893	$	18,860,187

Other important components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company's outside borrowings are mainly comprised of federal funds purchased, securities sold under agreements to repurchase, and advances from the FHLB, as follows:


(In thousands)	June 30, 2016		March 31, 2016		December 31, 2015		June 30, 2017		March 31, 2017		December 31, 2016
Borrowings:
Federal funds purchased	$	31,810	$	3,885	$	556,970	$	253,510	$	340,195	$	52,840
Securities sold under agreements to repurchase	1,600,462		953,503		1,406,582		1,002,934		980,954		1,671,065
FHLB advances	103,000		103,806		103,818		100,000		100,000		100,000
Other debt	878		—		—		1,903		1,975		2,049
Total	$	1,736,150	$	1,061,194	$	2,067,370	$	1,358,347	$	1,423,124	$	1,825,954

Federal funds purchased are unsecured overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved lines of credit. Securities sold under agreements to repurchase are secured by a portion of the Company's investment portfolio and are comprised of non-insured customer funds totaling ~~$1.6~~$1.0 billion, which generally mature overnight. The Company also borrows on a secured basis through advances from the FHLB, which totaled ~~$103.0~~$100.0 million at June 30, ~~2016.~~2017. These advances have fixed interest rates and ~~nearly all~~ mature in ~~2017.~~

~~Table~~the fourth quarter of ~~Contents~~

2017.

The Company pledges certain assets, including loans and investment securities, to both the Federal Reserve Bank and the FHLB as security to establish lines of credit and borrow from these entities. Based on the amount and type of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against the collateral. Also, this collateral is used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged to support borrowings from the discount window. The following table reflects the collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company at June 30, ~~2016.~~2017.


	June 30, 2016								June 30, 2017
(In thousands)	FHLB			Federal Reserve		Total			FHLB			Federal Reserve		Total
Collateral value pledged	$	2,446,777		$	1,291,933	$	3,738,710		$	2,734,323		$	1,272,837	$	4,007,160
Advances outstanding	(103,000		)	—		(103,000		)	(100,000		)	—		(100,000		)
Letters of credit issued	(194,210		)	—		(194,210		)	(555,957		)	—		(555,957		)
Available for future advances	$	2,149,567		$	1,291,933	$	3,441,500		$	2,078,366		$	1,272,837	$	3,351,203

In addition to those mentioned above, several other sources of liquidity are available. The Bank has strong issuer ratings of A from Standard & Poor's and A2 from Moody's. Additionally, the Parent's sound commercial paper rating of P-1 from Moody's would help ensure the ready marketability of its commercial paper, should the need arise. No commercial paper has been issued or outstanding during the past ten years. The Company has no subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that it could generate additional liquidity through its Capital Markets Group from sources such as jumbo certificates of deposit or privately placed corporate debt. The Company receives strong outside rankings from both Standard & Poor's and Moody's on both the consolidated company level and it's subsidiary bank, Commerce Bank, which would support future financing efforts, should the need arise. These ratings are as follows:



	Standard & Poor’s	Moody’s
Commerce Bancshares, Inc.
Issuer rating	A-
Rating outlook	Stable	Stable
Preferred stock	BBB-	Baa1
Commerce Bank
Issuer rating	A	A2
Rating outlook	Stable	Stable
Baseline credit assessment		a1
Short-term rating	A-1	P-1

The cash flows from the operating, investing and financing activities of the Company resulted in a net ~~increase~~decrease in cash and cash equivalents of ~~$122.5~~$251.3 million during the first six months of ~~2016,~~2017, as reported in the consolidated statements of cash flows in this report. Operating activities, consisting mainly of net income adjusted for certain non-cash items, provided cash flow of ~~$290.9~~

$212.0 million and has historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment securities portfolios, provided cash of ~~$18.1~~$145.0 million. ~~These activities included $1.1 billion~~Activity in the investment securities portfolio provided cash of $291.0 million from sales, maturities and pay downs (net of ~~investment securities, offset by purchases of $414.2 million,~~purchases), and ~~a net increase in loans of $721.3 million. Additionally,~~ repayments of long-term securities purchased under agreements to resell provided cash of ~~$50.0~~$100.0 million. These cash inflows were partly offset by a net increase in loans of $234.4 million. Financing activities used cash of ~~$186.4~~$608.4 million, largely resulting from a net decrease in borrowings of federal funds purchased and securities sold under agreements to repurchase of ~~$331.3~~$467.5 million. In addition, deposits decreased $79.8 million, and cash was used to fund dividends paid on common and preferred stock of ~~$48.0 million, and $37.5 million was used to purchase treasury stock. These cash outlays were partially offset by a net increase of $228.4 million in deposits.~~$50.3 million. Future short-term liquidity needs arising from daily operations are not expected to vary significantly, and the Company believes it will be able to meet these cash flow needs.

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Capital Management

The Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions at June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, as shown in the following table.


(Dollars in thousands)	June 30, 2016			December 31, 2015			Minimum Ratios under Capital Adequacy Guidelines *		Minimum Ratios for Well-Capitalized Banks **		June 30, 2017			December 31, 2016			Minimum Ratios under Capital Adequacy Guidelines *		Minimum Ratios for Well-Capitalized Banks **
Risk-adjusted assets	$	18,343,814		$	17,809,554						$	18,766,184		$	18,994,730
Tier I common risk-based capital	2,109,460			2,051,474							2,304,532			2,207,370
Tier I risk-based capital	2,254,244			2,196,258							2,449,316			2,352,154
Total risk-based capital	2,426,787			2,364,761							2,627,297			2,529,675
Tier I common risk-based capital ratio	11.50		%	11.52		%	7.00	%	6.50	%	12.28		%	11.62		%	7.00	%	6.50	%
Tier I risk-based capital ratio	12.29		%	12.33		%	8.50	%	8.00	%	13.05		%	12.38		%	8.50	%	8.00	%
Total risk-based capital ratio	13.23		%	13.28		%	10.50	%	10.00	%	14.00		%	13.32		%	10.50	%	10.00	%
Tier I leverage ratio	9.36		%	9.23		%	4.00	%	5.00	%	9.87		%	9.55		%	4.00	%	5.00	%

* as of the fully phased-in date of Jan. 1, 2019, including capital conservation buffer

**under Prompt Corrective Action requirements

The Company maintains a treasury stock buyback program under authorizations by its Board of Directors and normally purchases stock in the open market. The Company purchased ~~922,698~~188,348 shares at an average price of ~~$40.60~~$56.43 during the six months ended June 30, 2016, including 21,769 shares at an average price of $47.33 during the second quarter of 2016. Additionally, the Company purchased 6.7 million shares through accelerated share repurchase agreements during 2015 and 2014.2017, which was related to stock-based compensation transactions. At June 30, ~~2016, 3.8 million~~2017, 3,570,327 shares remained available for purchase under the current Board authorization.

The Company's common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital and liquidity levels, and alternative investment options. The Company paid a $.225 per share cash dividend on its common stock in both the first and second quarters of ~~2016,~~2017, which was a 5% increase compared to its ~~2015~~2016 quarterly dividend.

Commitments, Off-Balance Sheet Arrangements and Contingencies

In the normal course of business, various commitments and contingent liabilities arise which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, which at June 30, ~~2016~~2017 totaled ~~$10.1~~$10.4 billion (including approximately ~~$4.9~~$5.0 billion in unused approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled ~~$359.0~~$338.8 million and ~~$5.2~~$13.3 million, respectively, at June 30, ~~2016~~.2017. As many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. The carrying value of the guarantee obligations associated with the standby letters of credit, which has been recorded as a liability on the consolidated balance sheet, amounted to ~~$2.6~~$2.1 million at June 30, ~~2016~~.2017.

The Company regularly purchases various state tax credits arising from third-party property redevelopment. These credits are either resold to third parties at a profit or retained for use by the Company. During the first six months of ~~2016~~,2017, purchases and sales of tax credits amounted to ~~$21.6~~$42.0 million and ~~$13.3~~$31.7 million, respectively. Fees from sales of tax credits were ~~$1.7~~$1.9 million for the six months ended June 30, ~~2016,~~2017, compared to ~~$1.3~~$1.7 million in the same period last year. At June 30, ~~2016~~,2017, the Company expected to fund outstanding purchase commitments of ~~$62.7~~$79.2 million during the remainder of ~~2016.~~2017.

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Segment Results

The table below is a summary of segment pre-tax income results for the first six months of ~~2016~~2017 and ~~2015~~.2016.


(Dollars in thousands)	Consumer			Commercial			Wealth			Segment Totals			Other/ Elimination			Consolidated Totals			Consumer			Commercial			Wealth			Segment Totals			Other/ Elimination			Consolidated Totals
Six Months Ended June 30, 2017
Net interest income																			$	136,628		$	161,505		$	23,771		$	321,904		$	39,176		$	361,080
Provision for loan losses																			(20,464		)	624			1			(19,839		)	(2,047		)	(21,886		)
Non-interest income																			66,017			96,879			76,557			239,453			697			240,150
Investment securities gains, net																			—			—			—			—			879			879
Non-interest expense																			(145,126		)	(147,839		)	(59,795		)	(352,760		)	(18,664		)	(371,424		)
Income before income taxes																			$	37,055		$	111,169		$	40,534		$	188,758		$	20,041		$	208,799
Six Months Ended June 30, 2016
Net interest income	$	133,791		$	153,015		$	21,822		$	308,628		$	26,976		$	335,604		$	133,791		$	153,266		$	21,822		$	308,879		$	26,725		$	335,604
Provision for loan losses	(17,500		)	1,487			(115		)	(16,128		)	(2,527		)	(18,655		)	(17,500		)	1,487			(115		)	(16,128		)	(2,527		)	(18,655		)
Non-interest income	62,936			99,408			71,021			233,365			2,229			235,594			62,935			99,408			71,020			233,363			2,231			235,594
Investment securities losses, net	—			—			—			—			(1,739		)	(1,739		)	—			—			—			—			(1,739		)	(1,739		)
Non-interest expense	(139,536		)	(140,536		)	(56,840		)	(336,912		)	(17,650		)	(354,562		)	(139,526		)	(140,250		)	(56,944		)	(336,720		)	(17,842		)	(354,562		)
Income before income taxes	$	39,691		$	113,374		$	35,888		$	188,953		$	7,289		$	196,242		$	39,700		$	113,911		$	35,783		$	189,394		$	6,848		$	196,242
Six Months Ended June 30, 2015
Net interest income	$	132,180		$	144,223		$	21,494		$	297,897		$	11,898		$	309,795
Provision for loan losses	(16,895		)	676			8			(16,211		)	5,034			(11,177		)
Non-interest income	56,363			97,199			68,537			222,099			(1,290		)	220,809
Investment securities gains, net	—			—			—			—			8,178			8,178
Non-interest expense	(134,282		)	(130,384		)	(54,250		)	(318,916		)	(10,392		)	(329,308		)
Income before income taxes	$	37,366		$	111,714		$	35,789		$	184,869		$	13,428		$	198,297
Increase (decrease) in income before income taxes:
Amount	$	2,325		$	1,660		$	99		$	4,084		$	(6,139	)	$	(2,055	)	$	(2,645	)	$	(2,742	)	$	4,751		$	(636	)	$	13,193		$	12,557
Percent	6.2		%	1.5		%	.3		%	2.2		%	(45.7		)%	(1.0		)%	(6.7		)%	(2.4		)%	13.3		%	(.3		)%	192.7		%	6.4		%

Consumer

For the six months ended June 30, ~~2016,~~2017, income before income taxes for the Consumer segment ~~increased $2.3~~decreased $2.6 million, or ~~6.2%~~6.7%, compared to the first six months of ~~2015.~~2016. This ~~increase~~decrease in income before taxes was mainly due to ~~growth in non-interest income of $6.6 million, or 11.7%, and net interest income of $1.6 million, or 1.2%. These increases were partly offset by~~ higher non-interest expense of ~~$5.3~~$5.6 million, or ~~3.9%~~4.0%, and an increase in the provision for loan losses of ~~$605 thousand,~~$3.0 million, or ~~3.6%~~16.9%. These increases in expense were partly offset by growth in non-interest income of $3.1 million, or 4.9%, and net interest income of $2.8 million, or 2.1%. Net interest income increased due to a ~~$2.2~~$4.3 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios, partly offset by a decline of ~~$714 thousand~~$1.5 million in loan interest income. Non-interest income increased mainly due to growth in deposit fees (mainly deposit account service fees and overdraft and return item fees), bank card fees, and mortgage banking ~~revenue and bank card fees.~~revenue. Non-interest expense increased over the same period in the previous year due to higher ~~bank card processing~~allocated support costs, mainly administrative, online banking and information technology. In addition, salaries, bank card rewards, ~~expense,~~ and ~~supplies and communication expense. Supplies and communication~~royalty fees expense increased over the ~~prior~~previous year, ~~largely~~while supplies and communication expense decreased due to higher ~~reissuance~~chip card reissue costs ~~for new chip cards distributed to customers. In addition, higher costs were incurred for allocated support services, while bank card fraud losses declined from the prior year.~~last year that have now declined. The provision for loan losses totaled ~~$17.5~~$20.5 million, a ~~$605 thousand~~$3.0 million increase over the first six months of ~~2015,~~2016, which was mainly due to higher ~~personal loan net charge-offs resulting from growth in the auto loan portfolio, partly offset by lower consumer~~ credit card loan net charge-offs.

Commercial

For the six months ended June 30, ~~2016~~,2017, income before income taxes for the Commercial segment ~~increased $1.7~~decreased $2.7 million, or ~~1.5%~~2.4%, compared to the same period in the previous year. This ~~increase~~decrease was mainly due to ~~growth in net interest income and~~lower non-interest income, ~~along with a decline~~higher non-interest expense and an increase in the provision for loan losses and was ~~partly~~partially offset by ~~higher non-interest expense.~~growth in net interest income. Net interest income increased ~~$8.8~~$8.2 million, or ~~6.1%~~5.4%, due to an increase in loan interest income, partly offset by a decline in net allocated funding credits and higher deposit interest expense. Non-interest income ~~increased by $2.2~~decreased $2.5 million, or ~~2.3%~~2.5%, ~~over~~from the previous year due to ~~growth in merchant~~lower swap fees, bank card fees, ~~corporate cash management fees, sweep commissions~~ and ~~tax credit sales~~capital market fees. These ~~increases~~decreases were partly offset by ~~declines~~growth in ~~corporate bank card fees and leasing revenue.~~deposit account fees. Non-interest expense increased ~~$10.2~~$7.6 million, or ~~7.8%~~5.4%, mainly due to increases in salaries and benefits expense ~~bank card processing costs,~~ and allocated service and support ~~and corporate~~ costs. ~~Also contributing to higher non-interest expense was a recovery of $2.8 million in 2015 related to a letter of credit exposure which had been drawn upon and subsequently paid off.~~ The provision for loan losses ~~declined $811~~increased $863 thousand ~~from~~over the same period last year, due to ~~higher~~lower net recoveries on business real estate ~~and personal real estate loans, partly offset by lower construction and business loan net recoveries.~~loans.

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Wealth

Wealth segment pre-tax profitability for the six months ended June 30, ~~2016~~2017 increased ~~$99 thousand,~~$4.8 million, or ~~.3%~~13.3%, over the same period in the previous year. Net interest income increased ~~$328 thousand,~~$1.9 million, or 8.9%, mainly due to an increase in loan interest ~~income, offset by lower net allocated funding credits.~~income. Non-interest income increased ~~$2.5~~$5.5 million, or ~~3.6%~~7.8%, over the prior year largely due to higher ~~personal,~~private client and institutional trust fees, brokerage fees and ~~corporate trust~~cash sweep fees. ~~and~~These increases were partly offset by a trust related ~~settlement.~~settlement received in the second quarter of 2016. Non-interest expense increased ~~$2.6~~$2.9 million, or ~~4.8%~~5.0%, mainly due to higher ~~full-time~~ salary and benefit costs, professional fees and ~~incentive compensation.~~allocated support costs. The provision for loan losses ~~increased $123~~decreased $116 thousand, mainly due to ~~higher~~lower revolving home equity loan net charge-offs.

The Other/Elimination category in the preceding table includes the activity of various support and overhead operating units of the Company, in addition to the investment securities portfolio and other items not allocated to the segments. In accordance with the Company’s transfer pricing procedures, the difference between the total provision and total net charge-offs/recoveries is not allocated to a business segment and is included in this category. The pre-tax profitability of this category was ~~lower~~higher than in the same period last year by ~~$6.1~~$13.2 million. This ~~decrease~~increase was ~~partly~~mainly due to higher unallocated ~~non-interest expense of $7.3 million, offset by higher~~ net interest income of ~~$15.1~~$12.5 million, ~~and~~offset by lower non-interest income of ~~$3.5 million.~~$1.5 million and higher non-interest expense of $822 thousand. Unallocated securities ~~losses~~gains were ~~$1.7 million~~$879 thousand in the first six months of ~~2016~~2017 compared to ~~gains~~losses of ~~$8.2~~$1.7 million in ~~2015.~~2016. Also, the unallocated loan loss provision ~~increased $7.6 million,~~decreased $480 thousand, as the provision was ~~$5.0~~$1.9 million ~~less than~~in excess of charge-offs in the first six months of ~~2015~~2017 compared to $2.3 million in excess of charge-offs in the first six months of 2016.

Regulatory Changes Affecting the Banking Industry

In accordance with the Dodd-Frank Act, the Company began submitting its stress test results to the Federal Reserve in March 2014 and publicly disclosed the results of its stress testing for the first time in June 2015. In ~~2016,~~2017, the Company ~~expects to submit~~submitted its stress test report to the Federal Reserve in July and ~~will~~expects to publicly disclose the results in October.

The Volcker Rule of the Dodd-Frank Act, effective on April 1, 2014, places trading restrictions on financial institutions and separates investment banking, private equity and proprietary trading (hedge fund) sections of financial institutions from their consumer lending arms. Key provisions restrict banks from simultaneously entering into advisory and creditor roles with their clients, such as with private equity firms. The Volcker Rule also restricts financial institutions from investing in and sponsoring certain types of investments, which must be divested by July 21, 2017. ~~The~~In 2016, the Company withdrew from a private equity fund investment to comply with the Volcker Rule requirement ~~this quarter~~ and ~~realized a gain of $1.8 million upon divestiture. The Company does not hold~~holds no other significant investments requiring disposal. ~~The Company does not believe it will be significantly affected by the Volcker Rule provisions.~~

Impact of Recently Issued Accounting Standards

~~Revenue from Contracts with Customers~~ ~~The FASB issued ASU 2014-09, "Revenue from Contracts with Customers", in May 2014. The ASU supersedes revenue recognition requirements in Topic 605,~~ ~~Revenue Recognition~~, including most industry-specific revenue recognition guidance in the FASB Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies specific steps that entities should apply in order to achieve this principle. The FASB continues to issue additional ASU's clarifying the revenue recognition guidance for certain implementation issues. Under the ASU and related amendments, the guidance is effective for interim and annual periods beginning January 1, 2018 and must be applied retrospectively. The Company formed a working group to address the new requirements and develop a project plan for evaluating the impact of the ASU's adoption on the Company's consolidated financial statements, including potential changes to the Company's accounting for brokerage commissions, investment and trust fees, real-estate sales, and credit card loyalty programs.

Derivatives The FASB issued ASU 2014-16, "Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity", in November 2014. The ASU provides guidance relating to certain hybrid financial instruments when determining whether the characteristics of the embedded derivative feature are clearly and closely related to the host contract. In making that evaluation, the characteristics of the entire hybrid instrument should be considered, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. The amendments were effective January 1, 2016, and the adoption did not have a significant effect on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-05, "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships", which clarifies that a change in the counterparty to a derivative ~~instruments~~instrument that has been designated as the hedging

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instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments ~~are~~were effective January 1, 2017 and ~~are~~did not ~~expected to~~ have a significant effect on the Company's consolidated financial statements.

The FASB issued ASU 2016-06, "Contingent Put and Call Options in Debt Instruments", in March 2016. The ASU clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. Under the new guidance, the embedded options should be assessed solely in accordance with a four-step decision sequence, with no additional assessment of whether the triggering event is indexed to interest rates or credit risk. The amendments ~~are~~were effective January 1, 2017 and did not have a significant effect on the Company's consolidated financial statements.

Investments The FASB issued ASU 2016-07, "Equity Method and Joint Ventures", in March 2016, which eliminates the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in ownership or influence. Instead, the cost of acquiring the additional interest should be added to the current basis of the previously held interest, and equity method accounting applied prospectively. The amendments were effective January 1, 2017 and did not have a significant effect on the Company's consolidated financial statements.

Stock Compensation The FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting", in March 2016, in order to reduce complexity in this area and improve the usefulness of information provided to users. Amendments which will affect public companies include the recognition of excess tax benefits and deficiencies in income tax expense or benefit in the income statement, guidance as to the classification of excess tax benefits on the statement of cash flows, an election to

account for award forfeitures as they occur, and the ability to withhold taxes up to the maximum statutory rate in the applicable jurisdictions without triggering liability classification of the award. The amendments were effective January 1, 2017. As further discussed in Note 12 to the consolidated financial statements, the Company elected to account for forfeitures as they occur.

Consolidation The FASB issued ASU 2016-17, "Interests Held through Related Parties That Are under Common Control", in October 2016. The ASU amends current guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. Current GAAP requires a single decision maker to attribute indirect interests held by certain of its related parties entirely to itself, while the amendments require inclusion of those interests on a proportionate basis consistent with indirect interests held through other related parties. The amendments were effective January 1, 2017 and did not have a significant effect on the Company's consolidated financial statements.

Revenue from Contracts with Customers The FASB issued ASU 2014-09, "Revenue from Contracts with Customers", in May 2014, which has been followed by additional clarifying guidance on specified implementation issues. The ASU supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most industry specific revenue recognition guidance in the FASB Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies specific steps that entities should apply in order to achieve this principle. Under the ASU and related amendments, the guidance is effective for interim and annual periods beginning January 1, 2018 and must be applied retrospectively, whether through a full restatement of prior periods or a cumulative adjustment upon adoption of the ASU.

Approximately 60% of the Company’s revenue is comprised of net interest income on financial assets and financial liabilities, and is explicitly out of scope of the guidance. The Company has identified the primary contracts in scope as those relating to brokerage commissions, trust fees, deposit account fees, real estate sales, and credit card revenues. Over the last twelve months, significant discussions have been held with representatives of the business lines associated with the revenues described above and documentation has been accumulated and reviewed. The Company is currently in the process of contract sampling, which should be completed early in the fourth quarter. The Company’s analysis to date suggests that adoption of this ASU should not alter the way in which revenue for these significant areas is determined currently, but could possibly net certain revenues against expense or certain expenses against revenue. Final conclusions are anticipated to be reached later this year. The Company plans to adopt this ASU on January 1, 2018 with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

Liabilities The FASB issued ASU 2016-04, "Recognition of Breakage for Certain Prepaid Stored-Value Products", in March 2016, in order to address current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. Such products include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid telecommunication cards, and traveler's checks. The amendments require that the portion of the dollar value of prepaid stored-value products that is ultimately unredeemed (that is, the breakage) be accounted for consistent with the breakage guidance for stored-value product transactions provided in ASC Topic 606 - Revenue from Contracts with Customers. These amendments are effective for interim and annual periods beginning January 1, 2018. The Company is in the process of evaluating the impact of the ASU's adoption on the Company's consolidated financial statements.

Income Taxes The FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory", in October 2016. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The amendments require the recognition of income tax consequences of an intra-entity transfer of an asset (other than inventory) when the transfer occurs. This change removes the current exception to the principal of comprehensive recognition of current and deferred income taxes in GAAP (except for inventory). These amendments are effective for reporting periods beginning January 1, 2018 and are not expected to have a significant effect on the Company's consolidated financial statements.

~~Consolidation~~ The FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis", in February 2015. The amendments require an evaluation of whether certain legal entities should be consolidated and modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities. The amendments were effective for interim and annual periods beginning January 1, 2016. The adoption did not have a significant effect on the Company's consolidated financial statements.

~~Intangible Assets~~ The FASB issued ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement", in April 2015. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license. Arrangements containing a license should be recorded as consistent with the acquisition of software licenses, whereas arrangements that do not include a software license should be recorded as consistent with the accounting for service contracts. These amendments were effective for interim and annual periods beginning January 1, 2016. The adoption did not have a significant effect on the Company's consolidated financial statements.

Financial Instruments The FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities", in January 2016. The amendments require all equity investments to be measured at fair value with changes in the fair value recognized through net income, other than those accounted for under the equity method of accounting or those that result in the consolidation of the investee. Additionally, these amendments require presentation in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk for those liabilities measured at fair value. The amendments also require use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. These amendments are effective for interim and annual periods beginning January 1, 2018. The Company ishas formed a working group to evaluate the changes required as a result of the adoption of this ASU and

has also engaged outside consultants to assist with data collection and calculation of fair value information, particularly for fair value disclosures of the Company's loan portfolio.

Statement of Cash Flows The FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments", in August 2016. The ASU addresses the presentation and classification in the ~~process~~Statement of ~~evaluating the impact~~Cash Flows of several specific cash flow issues. These include cash payments for debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, distributions received from equity method investees, and separately identifiable cash flows and application of the ~~ASU's adoption~~predominance principle. The amendments are effective January 1, 2018 and are not expected to have a significant effect on the Company's consolidated financial ~~statements, including potential changes to the Company's note disclosure of the fair value of its loan portfolio.~~statements.

The FASB issued ASU ~~2016-13, "Measurement of Credit Losses on Financial Instruments"~~2016-18, "Restricted Cash", ~~was issued~~ in ~~June~~November 2016. ~~Its implementation will result in a new loan loss accounting framework, also known as~~The ASU addresses the current diversity in the classification and presentation of changes in restricted cash on the statement of cash flows. The ASU requires that amounts described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning and end of period amounts shown on the statement of cash flows. Disclosures are to be provided on the nature of restrictions on cash and cash equivalents. When presented in more than one line item within the statement of financial position, the entity shall disclose the amounts, disaggregated by line item, of cash, cash equivalents, restricted cash, and restricted cash equivalents reported within the statement of financial position. The amendments are effective January 1, 2018 and are not expected ~~credit loss (CECL) model. CECL requires credit losses expected throughout~~to have a significant effect on the ~~life~~Company's consolidated financial statements.

Retirement Benefits The FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost", in March 2017. Under current guidance, the different components comprising net benefit cost are aggregated for reporting in the financial statements. Because these components are heterogeneous, the current presentation reduces the transparency and usefulness of the ~~asset portfolio on loans and held-to-maturity securities~~financial statements. The ASU requires that an employer report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered during the period. The other components of net benefit cost are required to be ~~recorded at~~presented separately from the ~~time of origination. Under the current incurred loss model, losses~~servicing cost component. Only service cost is eligible for capitalization when applicable. The amendments are ~~recorded when it is probable that a loss event has occurred. The new standard will require significant operational changes, especially in data collection and analysis. The ASU is~~ effective ~~for interim and annual periods beginning~~ January 1, ~~2020,~~2018 and isare not expected to ~~increase~~have a significant effect on the ~~allowance upon adoption. The Company is in the process of reviewing the capability of its systems and processes to support the data collection and retention required to implement the new standard.~~Company's consolidated financial statements.

Leases In February 2016, the FASB issued ASU 2016-02, "Leases", in order to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU primarily affects lessee accounting, which requires the lessee to recognize a right-of-use asset and a liability to make lease payments for those leases classified as operating leases under previous GAAP. For leases with a term of 12 months or less, an election by class of underlying asset not to recognize lease assets and lease liabilities is permitted. The ASU also provides additional guidance as to the definition of a lease, identification of lease components, and sale and leaseback transactions. The amendments in the ASU are effective for interim and annual periods beginning January 1, 2019. The Company is the lessee in approximately 200 lease agreements that are subject to this ASU. The Company has formed a working group to assess the ~~process of evaluating~~changes required and is actively working with its current software vendor to acquire a new module designed to comply with the ~~impact of the ASU's adoption on the Company's consolidated financial statements.~~new accounting requirements.

~~Liabilities~~Premium Amortization The FASB issued ASU ~~2016-04, "Recognition of Breakage for Certain Prepaid Store-Value Products"~~2017-08, "Premium Amortization on Purchased Callable Debt Securities", in March ~~2016,~~2017. Under current guidance, many entities amortize the premium on purchased callable debt securities over the contractual life of the instrument. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in ~~order to address current and potential future diversity~~earnings. The amendments in ~~practice related~~this ASU shorten the amortization period for certain callable debt securities held at a premium to the ~~derecognition of a prepaid store-value product liability. Such products include prepaid gift cards issued on a specific payment network~~earliest call date, and ~~redeemable at network-accepting merchant locations, prepaid telecommunication cards, and traveler's checks. The amendments require that~~more closely align the ~~portion~~amortization period to expectations incorporated in market pricing of the dollar value of prepaid stored-value products that is ultimately unredeemed (that is, the breakage) be accounted for consistent with the breakage guidance for stored-value product transactions provided in ASC Topic 606 - Revenue from Contracts with

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Customers. These amendments are effective for interim and annual periods beginning January 1, 2018. The Company is in the process of evaluating the impact of the ASU's adoption on the Company's consolidated financial statements.

~~Investments~~ The FASB issued ASU 2016-07, "Equity Method and Joint Ventures", in March 2016, which eliminates the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in ownership or influence. Instead, the cost of acquiring the additional interest should be added to the current basis of the previously held interest, and equity method accounting applied prospectively.instrument. The amendments are effective January 1, ~~2017~~2019 and are not expected to have a significant effect on the Company's consolidated financial statements.

~~Stock Compensation~~Financial Instruments ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", was issued in June 2016. Its implementation will result in a new loan loss accounting framework, also known as the current expected credit loss (CECL) model. CECL requires credit losses expected throughout the life of the asset portfolio on loans and held-to-maturity securities to be recorded at the time of origination. Under the current incurred loss model, losses are recorded when it is probable that a loss event has occurred. The new standard will require significant operational changes, especially in data collection and analysis. The ASU is effective for interim and annual periods beginning January 1, 2020, and is expected to increase the allowance upon adoption. The Company has formed a working group to assess the standard and has begun assessing the data needs required. In the second quarter of 2017, the Company contracted with a software supplier to assist in the data collection and calculation of the allowance for loan losses under the new model, to allow for pro-forma calculations to begin by mid-2018.

Intangible Assets The FASB issued ASU ~~2016-09, "Improvements to Employee Share-Based Payment Accounting"~~2017-04, "Simplifying the Test for Goodwill Impairment", in ~~March 2016,~~January 2017. Under current guidance, a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with

the carrying amount of that goodwill by following procedures that would be required in ~~order to reduce complexity~~determining the fair value of assets acquired and liabilities assumed in ~~this area~~a business combination. Under the new amendments, the goodwill impairment test compares the fair value of a reporting unit with its carrying amount and ~~improve~~an impairment charge is measured as the ~~usefulness of information provided to users. Amendments~~amount by which ~~will affect public companies include~~ the ~~recognition of excess tax benefits and deficiencies in income tax expense or benefit in~~carrying amount exceeds the income statement, guidance as to the classification of excess tax benefits on the the statement of cash flows, an election to account for award forfeitures as they occur, and the ability to withhold taxes up to the maximum statutory rate in the applicable jurisdictions without triggering liability classification of the award.reporting unit's fair value. The amendments are effective for impairment tests beginning January 1, ~~2017. The Company is in the process of evaluating the impact of the ASU's adoption~~2020 and are not expected to have a significant effect on the Company's consolidated financial statements.

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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Three Months Ended June 30, ~~2016~~2017 and ~~2015~~2016


	Second quarter 2016							Second quarter 2015							Second Quarter 2017							Second Quarter 2016
(Dollars in thousands)	Average Balance			Interest Income/Expense		Avg. Rates Earned/Paid		Average Balance			Interest Income/Expense		Avg. Rates Earned/Paid		Average Balance			Interest Income/Expense		Avg. Rates Earned/Paid		Average Balance			Interest Income/Expense		Avg. Rates Earned/Paid
ASSETS:
Loans:
Business^(A)	$	4,691,476		$	33,862	2.90	%	$	4,135,362		$	28,812	2.79	%	$	4,827,439		$	38,606	3.21	%	$	4,691,476		$	33,862	2.90	%
Real estate — construction and land	789,329			6,789		3.46		432,008			3,928		3.65		862,479			9,256		4.30		789,329			6,789		3.46
Real estate — business	2,389,170			21,934		3.69		2,287,885			21,870		3.83		2,701,144			25,219		3.74		2,389,170			21,934		3.69
Real estate — personal	1,905,968			17,827		3.76		1,891,109			17,793		3.77		2,003,997			18,602		3.72		1,905,968			17,827		3.76
Consumer	1,927,925			18,217		3.80		1,815,699			17,741		3.92		1,997,761			19,614		3.94		1,927,925			18,217		3.80
Revolving home equity	413,198			3,687		3.59		429,644			3,851		3.60		399,730			3,822		3.84		413,198			3,687		3.59
Consumer credit card	738,130			21,184		11.54		734,289			21,495		11.74		731,471			21,705		11.90		738,130			21,184		11.54
Overdrafts	3,916			—		—		4,510			—		—		4,505			—		—		3,916			—		—
Total loans	12,859,112			123,500		3.86		11,730,506			115,490		3.95		13,528,526			136,824		4.06		12,859,112			123,500		3.86
Loans held for sale	56,272			692		4.95		3,969			39		3.94		18,341			263		5.75		56,272			692		4.95
Investment securities:
U.S. government and federal agency obligations	698,374			6,047		3.48		424,823			6,452		6.09		910,821			5,731		2.52		698,374			6,047		3.48
Government-sponsored enterprise obligations	666,354			5,015		3.03		988,120			4,493		1.82		450,362			1,782		1.59		666,354			5,015		3.03
State and municipal obligations^(A)	1,763,849			15,804		3.60		1,799,355			15,665		3.49		1,771,674			15,924		3.61		1,763,849			15,804		3.60
Mortgage-backed securities	3,394,466			19,892		2.36		3,161,050			20,557		2.61		3,708,124			21,702		2.35		3,394,466			19,892		2.36
Asset-backed securities	2,377,708			8,594		1.45		2,839,483			7,266		1.03		2,335,344			10,037		1.72		2,377,708			8,594		1.45
Other marketable securities^(A)	337,572			2,325		2.77		249,075			1,618		2.61		326,398			2,249		2.76		337,572			2,325		2.77
Trading securities^(A)	20,540			116		2.27		19,758			141		2.86		21,062			142		2.70		20,540			116		2.27
Non-marketable securities^(A)	116,103			2,319		8.03		109,522			2,429		8.90		101,790			2,915		11.49		116,103			2,319		8.03
Total investment securities	9,374,966			60,112		2.58		9,591,186			58,621		2.45		9,625,575			60,482		2.52		9,374,966			60,112		2.58
Federal funds sold and short-term securities
purchased under agreements to resell	11,916			19		.64		12,812			15		.47		13,115			37		1.13		11,916			19		.64
Long-term securities purchased
under agreements to resell	824,999			3,354		1.64		1,049,999			3,670		1.40		665,655			3,684		2.22		824,999			3,354		1.64
Interest earning deposits with banks	125,024			151		.49		198,407			122		.25		139,061			362		1.04		125,024			151		.49
Total interest earning assets	23,252,289			187,828		3.25		22,586,879			177,957		3.16		23,990,273			201,652		3.37		23,252,289			187,828		3.25
Allowance for loan losses	(151,622		)					(152,994		)					(157,003		)					(151,622		)
Unrealized gain on investment securities	191,565							170,039							102,935							191,565
Cash and due from banks	372,275							380,993							349,132							372,275
Land, buildings and equipment, net	351,095							360,508							344,310							351,095
Other assets	389,844							394,100							413,086							389,844
Total assets	$	24,405,446						$	23,739,525						$	25,042,733						$	24,405,446
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	$	787,478		224		.11		$	738,769		208		.11		$	831,038		240		.12		$	787,478		224		.11
Interest checking and money market	10,287,923			3,324		.13		9,759,608			3,079		.13		10,667,042			4,102		.15		10,287,923			3,324		.13
Time open & C.D.'s of less than $100,000	758,703			709		.38		844,675			818		.39		688,047			674		.39		758,703			709		.38
Time open & C.D.'s of $100,000 and over	1,635,892			2,347		.58		1,227,322			1,504		.49		1,510,001			2,822		.75		1,635,892			2,347		.58
Total interest bearing deposits	13,469,996			6,604		.20		12,570,374			5,609		.18		13,696,128			7,838		.23		13,469,996			6,604		.20
Borrowings:
Federal funds purchased and securities sold
under agreements to repurchase	1,211,892			725		.24		1,674,682			421		.10		1,363,031			2,038		.60		1,211,892			725		.24
Other borrowings	104,649			907		3.49		103,846			890		3.44		105,311			911		3.47		104,649			907		3.49
Total borrowings	1,316,541			1,632		.50		1,778,528			1,311		.30		1,468,342			2,949		.81		1,316,541			1,632		.50
Total interest bearing liabilities	14,786,537			8,236		.22	%	14,348,902			6,920		.19	%	15,164,470			10,787		.29	%	14,786,537			8,236		.22	%
Non-interest bearing deposits	6,885,889							6,744,536							7,065,849							6,885,889
Other liabilities	260,179							260,945							203,139							260,179
Equity	2,472,841							2,385,142							2,609,275							2,472,841
Total liabilities and equity	$	24,405,446						$	23,739,525						$	25,042,733						$	24,405,446
Net interest margin (T/E)				$	179,592						$	171,037						$	190,865						$	179,592
Net yield on interest earning assets						3.11	%						3.04	%						3.19	%						3.11	%

(A) Stated on a tax equivalent basis using a federal income tax rate of 35%.

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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Six Months Ended June 30, ~~2016~~2017 and ~~2015~~2017


	Six months 2016							Six months 2015							Six Months 2017							Six Months 2016
(Dollars in thousands)	Average Balance			Interest Income/Expense		Avg. Rates Earned/Paid		Average Balance			Interest Income/Expense		Avg. Rates Earned/Paid		Average Balance			Interest Income/Expense		Avg. Rates Earned/Paid		Average Balance			Interest Income/Expense		Avg. Rates Earned/Paid
ASSETS:
Loans:
Business^(A)	$	4,591,516		$	65,955	2.89	%	$	4,083,919		$	56,863	2.81	%	$	4,866,837		$	75,192	3.12	%	$	4,591,516		$	65,955	2.89	%
Real estate — construction and land	735,943			12,750		3.48		423,505			7,821		3.72		845,343			17,126		4.09		735,943			12,750		3.48
Real estate — business	2,385,632			43,875		3.70		2,284,848			42,872		3.78		2,673,491			48,915		3.69		2,385,632			43,875		3.70
Real estate — personal	1,907,750			35,728		3.77		1,884,382			35,532		3.80		2,008,203			37,175		3.73		1,907,750			35,728		3.77
Consumer	1,931,251			36,809		3.83		1,773,656			35,029		3.98		1,986,391			38,545		3.91		1,931,251			36,809		3.83
Revolving home equity	421,440			7,448		3.55		430,082			7,707		3.61		402,565			7,464		3.74		421,440			7,448		3.55
Consumer credit card	745,114			42,539		11.48		741,520			42,950		11.68		739,582			43,208		11.78		745,114			42,539		11.48
Overdrafts	4,344			—		—		5,058			—		—		4,346			—		—		4,344			—		—
Total loans	12,722,990			245,104		3.87		11,626,970			228,774		3.97		13,526,758			267,625		3.99		12,722,990			245,104		3.87
Loans held for sale	32,816			827		5.07		2,916			60		4.15		15,174			459		6.10		32,816			827		5.07
Investment securities:
U.S. government and federal agency obligations	700,793			6,740		1.93		440,143			475		.22		912,140			10,445		2.31		700,793			6,740		1.93
Government-sponsored enterprise obligations	721,421			8,736		2.44		1,022,701			9,454		1.86		450,425			3,541		1.59		721,421			8,736		2.44
State and municipal obligations^(A)	1,741,218			31,446		3.63		1,779,543			31,059		3.52		1,777,357			31,991		3.63		1,741,218			31,446		3.63
Mortgage-backed securities	3,409,591			40,728		2.40		3,050,427			39,534		2.61		3,734,065			43,800		2.37		3,409,591			40,728		2.40
Asset-backed securities	2,457,590			17,389		1.42		2,988,954			14,086		.95		2,347,427			19,517		1.68		2,457,590			17,389		1.42
Other marketable securities^(A)	339,977			4,701		2.78		205,099			2,607		2.56		329,503			4,559		2.79		339,977			4,701		2.78
Trading securities^(A)	19,365			246		2.55		18,247			254		2.81		23,102			314		2.74		19,365			246		2.55
Non-marketable securities^(A)	121,936			4,396		7.25		108,522			4,800		8.92		101,268			8,151		16.23		121,936			4,396		7.25
Total investment securities	9,511,891			114,382		2.42		9,613,636			102,269		2.15		9,675,287			122,318		2.55		9,511,891			114,382		2.42
Federal funds sold and short-term securities
purchased under agreements to resell	14,647			43		.59		12,454			24		.39		11,510			60		1.05		14,647			43		.59
Long-term securities purchased
under agreements to resell	837,637			6,829		1.64		1,049,998			6,721		1.29		695,164			7,477		2.17		837,637			6,829		1.64
Interest earning deposits with banks	172,330			421		.49		243,249			301		.25		173,263			759		.88		172,330			421		.49
Total interest earning assets	23,292,311			367,606		3.17		22,549,223			338,149		3.02		24,097,156			398,698		3.34		23,292,311			367,606		3.17
Allowance for loan losses	(151,465		)					(154,537		)					(156,170		)					(151,465		)
Unrealized gain on investment securities	170,442							169,764							83,071							170,442
Cash and due from banks	396,538							384,784							362,723							396,538
Land, buildings and equipment, net	354,042							361,074							345,115							354,042
Other assets	392,485							385,896							415,036							392,485
Total assets	$	24,454,353						$	23,696,204						$	25,146,931						$	24,454,353
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	$	774,249		452		.12		$	720,480		411		.12		$	813,464		486		.12		$	774,249		452		.12
Interest checking and money market	10,208,233			6,580		.13		9,793,716			6,184		.13		10,635,689			7,746		.15		10,208,233			6,580		.13
Time open & C.D.'s of less than $100,000	766,962			1,451		.38		856,362			1,698		.40		696,544			1,318		.38		766,962			1,451		.38
Time open & C.D.'s of $100,000 and over	1,559,796			4,333		.56		1,253,570			2,914		.47		1,590,118			5,585		.71		1,559,796			4,333		.56
Total interest bearing deposits	13,309,240			12,816		.19		12,624,128			11,207		.18		13,735,815			15,135		.22		13,309,240			12,816		.19
Borrowings:
Federal funds purchased and securities sold
under agreements to repurchase	1,308,323			1,613		.25		1,616,722			788		.10		1,359,692			3,577		.53		1,308,323			1,613		.25
Other borrowings	241,180			2,160		1.80		103,922			1,769		3.43		103,670			1,799		3.50		241,180			2,160		1.80
Total borrowings	1,549,503			3,773		.49		1,720,644			2,557		.30		1,463,362			5,376		.74		1,549,503			3,773		.49
Total interest bearing liabilities	14,858,743			16,589		.22	%	14,344,772			13,764		.19	%	15,199,177			20,511		.27	%	14,858,743			16,589		.22	%
Non-interest bearing deposits	6,895,781							6,683,164							7,155,774							6,895,781
Other liabilities	257,308							287,407							218,556							257,308
Equity	2,442,521							2,380,861							2,573,424							2,442,521
Total liabilities and equity	$	24,454,353						$	23,696,204						$	25,146,931						$	24,454,353
Net interest margin (T/E)				$	351,017						$	324,385						$	378,187						$	351,017
Net yield on interest earning assets						3.03	%						2.90	%						3.16	%						3.03	%

(A) Stated on a tax equivalent basis using a federal income tax rate of 35%.

~~Table of Contents~~

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest sensitivity to movement in interest rates. The Company performs monthly simulations which model interest rate movements and risk in accordance with changes to its balance sheet composition. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s ~~2015~~2016 Annual Report on Form 10-K.

The tables below compute the effects of gradual rising interest rates over a twelve month period on the Company’s net interest income, assuming a static balance sheet with the exception of deposit attrition. The difference between the two simulations is the amount of deposit attrition incorporated, which is shown in the tables below. In both simulations, three rising rate scenarios were selected as shown in the tables, and net interest income was calculated and compared to a base scenario in which assets, liabilities and rates remained constant over a twelve month period. For each of the simulations, interest rates applicable to each interest earning asset or interest bearing liability were ratably increased during the year (by either 100, 200 or 300 basis points). The balances contained in the balance sheet were assumed not to change over the twelve month period, except that as presented in the tables below, it was assumed certain non-maturity type deposit attrition would occur, as a result of higher interest rates, and would be replaced with short-term federal funds borrowings.

The simulations reflect two different assumptions related to deposit attrition. The Company utilizes these simulations both for monitoring interest rate risk and for liquidity planning purposes. While the future effects of rising rates on deposit balances cannot be known, the Company maintains a practice of running multiple rate scenarios to better understand interest rate risk and ~~their~~its effect on the Company’s performance. The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising rates and falling rates and has adopted strategies which minimize impacts to overall interest rate risk.


Simulation A	June 30, 2016							March 31, 2016							June 30, 2017							March 31, 2017
(Dollars in millions)	$ Change in Net Interest Income		% Change in Net Interest Income		Assumed Deposit Attrition			$ Change in Net Interest Income		% Change in Net Interest Income		Assumed Deposit Attrition			$ Change in Net Interest Income		% Change in Net Interest Income		Assumed Deposit Attrition			$ Change in Net Interest Income		% Change in Net Interest Income		Assumed Deposit Attrition
300 basis points rising	$	27.1	4.11	%	$	(387.2	)	$	20.7	3.04	%	$	(382.6	)	$	15.1	2.09	%	$	(368.0	)	$	18.1	2.54	%	$	(379.4	)
200 basis points rising	23.2		3.52		(274.1		)	18.5		2.73		(270.4		)	14.3		1.99		(256.2		)	16.6		2.33		(266.7		)
100 basis points rising	15.1		2.30		(148.6		)	11.9		1.75		(144.1		)	9.1		1.26		(131.4		)	10.8		1.52		(140.0		)


Simulation B	June 30, 2016							March 31, 2016								June 30, 2017								March 31, 2017
(Dollars in millions)	$ Change in Net Interest Income		% Change in Net Interest Income		Assumed Deposit Attrition			$ Change in Net Interest Income			% Change in Net Interest Income		Assumed Deposit Attrition			$ Change in Net Interest Income			% Change in Net Interest Income		Assumed Deposit Attrition			$ Change in Net Interest Income			% Change in Net Interest Income		Assumed Deposit Attrition
300 basis points rising	$	4.8	.72	%	$	(1,605.2	)	$	(5.3	)	(.80	)%	$	(1,644.6	)	$	(5.6	)	(.78	)%	$	(1,181.4	)	$	(3.3	)	(.45	)%	$	(1,269.4	)
200 basis points rising	5.5		.83		(1,497.3		)	(2.3		)	(.35	)	(1,538.0		)	(3.2		)	(.44	)	(1,072.5		)	(1.3		)	(.19	)	(1,161.5		)
100 basis points rising	2.2		.34		(1,379.0		)	(3.8		)	(.58	)	(1,420.2		)	(5.1		)	(.71	)	(952.4		)	(3.6		)	(.51	)	(1,042.3		)

The difference in these two simulations is the degree in which deposits are modeled to decline as noted in the above table. Both simulations assume that a decline in deposits would be offset by increased short-term borrowings, which are more rate sensitive and can result in higher interest costs in a rising rate environment. Under Simulation A, a gradual increase in interest rates of 100 basis points is expected to increase net interest income from the base calculation by ~~$15.1~~$9.1 million, while a gradual increase in rates of 200 basis points would increase net interest income by ~~$23.2~~$14.3 million. An increase in rates of 300 basis points would result in an increase in net interest income of ~~$27.1~~$15.1 million. The change in net interest income from the base calculation at June 30, ~~2016~~2017 was ~~higher~~lower than projections made at March 31, ~~2016~~2017 largely due to ~~growth in loans and deposits~~a Federal Reserve rate increase during the second quarter of ~~2016~~2017 and ~~decreased short-term borrowings at~~ higher rates. Also, the Company's investment securities portfolio had fewer variable rate securities at June 30, 2016 than at March 31, 2016, which results in the portfolio being less rate sensitive in a rising rate environmentrates paid on certificates of deposit, partly offset lower balances. Higher rates and ~~partially offset~~balances of repurchase agreements, as well as higher balances of interest checking and money market deposits, also increased interest expense this quarter, lowering net interest income ~~increases from loan growth.~~projections for the second quarter of 2017 compared to the prior quarter.

Under Simulation B, the same assumptions utilized in Simulation A were applied. However, in Simulation B, deposit attrition was accelerated to consider the effects that large deposit outflows might have on net interest income and liquidity planning purposes. The effect of higher deposit attrition was that greater reliance was placed on short-term borrowings at higher rates, which are more

~~Table of Contents~~

rate sensitive. As shown in the table, under these assumptions, net interest income in Simulation B was significantly lower than in Simulation A, reflecting higher costs for short-term borrowings.

Projecting deposit activity in a historically low interest rate environment is difficult, and the Company cannot predict how deposits will react to rising rates. The comparison provided above provides insight into potential effects of changes in rates and deposit levels on net interest income.

Item 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, ~~2016~~.2017. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

~~Table of Contents~~

PART II: OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The information required by this item is set forth in Part I, Item 1 under Note 15, Legal and Regulatory Proceedings.

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

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

Period
Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as part of Publicly Announced Program Maximum Number that May Yet Be Purchased Under the Program
April 1 — 30, 2016 5,492
$ 46.77
5,492
3,811,523
May 1 — 31, 2016 14,311
$ 47.60
14,311
3,797,212
June 1 — 30, 2016 1,966
$ 46.92
1,966
3,795,246
Total 21,769
$ 47.33
21,769
3,795,246



Period	Total Number of Shares Purchased	Average Price Paid per Share			Total Number of Shares Purchased as part of Publicly Announced Program	Maximum Number that May Yet Be Purchased Under the Program
April 1 — 30, 2017	53,468		$	54.05	53,468	3,578,470
May 1 — 31, 2017	5,501		$	55.19	5,501	3,572,969
June 1 — 30, 2017	2,642		$	56.91	2,642	3,570,327
Total	61,611		$	54.27	61,611	3,570,327

The Company's stock purchases shown above were made under authorizations by the Board of Directors. Under the most recent authorization in October 2015 of 5,000,000 shares, ~~3,795,246~~3,570,327 shares remained available for purchase at June 30, ~~2016.~~2017.

Item 6. EXHIBITS

See Index to Exhibits.

~~Table of Contents~~

SIGNATURES

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



COMMERCE BANCSHARES, INC.

By	/s/ THOMAS J. NOACK
	Thomas J. Noack
	Vice President & Secretary

Date: August ~~5, 2016~~7, 2017



By	/s/ JEFFERY D. ABERDEEN
	Jeffery D. Aberdeen
	Controller
	(Chief Accounting Officer)

Date: August ~~5, 2016~~7, 2017

~~Table of Contents~~

INDEX TO EXHIBITS

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

31.2 — Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

101 — Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail