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, ~~2017~~2018



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

For the transition period from to

Commission File No. 0-2989



	COMMERCE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)



Missouri		43-0889454
(State of Incorporation)		(IRS Employer Identification No.)

1000 Walnut, Kansas City, MO		64106
(Address of principal executive offices)		(Zip Code)

(816) 234-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company £	Emerging growth company £

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 1, ~~2017,~~2018, the registrant had outstanding ~~101,625,940~~106,616,850 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, ~~2017~~2018 (unaudited) and December 31, ~~2016~~2017	3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3643
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5965
	Item 4.	Controls and Procedures	6066

Part II	Other Information
	Item 1.	Legal Proceedings	6167
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6167
	Item 6.	Exhibits	6167
Signatures			62
~~Index to Exhibits~~			6368

Table of contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


	June 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
	(Unaudited)						(Unaudited)
	(In thousands)						(In thousands)
ASSETS
Loans	$	13,626,592		$	13,412,736		$	13,954,111		$	13,983,674
Allowance for loan losses	(157,832		)	(155,932		)	(159,532		)	(159,532		)
Net loans	13,468,760			13,256,804			13,794,579			13,824,142
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
Loans held for sale (including $10,750,000 and $15,327,000 of residential mortgage loans carried at fair value at June 30, 2018 and December 31, 2017, respectively)							20,352			21,398
Investment securities:
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	22,291			22,225
Non-marketable	102,388			99,558
Available for sale debt ($557,698,000 and $662,515,000 pledged at June 30, 2018 and
December 31, 2017, respectively, to secure swap and repurchase agreements)							8,412,376			8,725,442
Trading debt							31,156			18,269
Equity							4,444			50,591
Other							112,309			99,005
Total investment securities	9,564,380			9,770,986			8,560,285			8,893,307
Federal funds sold and short-term securities purchased under agreements to resell	16,520			15,470			31,500			42,775
Long-term securities purchased under agreements to resell	625,000			725,000			700,000			700,000
Interest earning deposits with banks	80,860			272,275			114,947			30,631
Cash and due from banks	433,747			494,690			386,339			438,439
Land, buildings and equipment, net	334,586			337,705			331,782			335,110
Goodwill	138,921			138,921			138,921			138,921
Other intangible assets, net	7,002			6,709			8,083			7,618
Other assets	387,065			608,408			437,954			401,074
Total assets	$	25,078,843		$	25,641,424		$	24,524,742		$	24,833,415
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	7,314,506		$	7,429,398		$	6,876,756		$	7,158,962
Savings, interest checking and money market	11,427,615			11,430,789			11,761,832			11,499,620
Time open and C.D.'s of less than $100,000	679,668			713,075			603,629			634,646
Time open and C.D.'s of $100,000 and over	1,403,873			1,527,833			1,079,340			1,132,218
Total deposits	20,825,662			21,101,095			20,321,557			20,425,446
Federal funds purchased and securities sold under agreements to repurchase	1,256,444			1,723,905			1,166,759			1,507,138
Other borrowings	101,903			102,049			9,291			1,758
Other liabilities	266,627			213,243			255,752			180,889
Total liabilities	22,450,636			23,140,292			21,753,359			22,115,231
Commerce Bancshares, Inc. stockholders’ equity:
Preferred stock, $1 par value
Authorized 2,000,000 shares; issued 6,000 shares	144,784			144,784			144,784			144,784
Common stock, $5 par value
Authorized 120,000,000 shares;
issued 102,003,046 shares	510,015			510,015
issued 107,081,397 shares							535,407			535,407
Capital surplus	1,546,534			1,552,454			1,804,057			1,815,360
Retained earnings	390,853			292,849			408,374			221,374
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	42,070			10,975
Treasury stock of 275,577 shares at June 30, 2018
and 276,968 shares at December 31, 2017, at cost							(15,854		)	(14,473		)
Accumulated other comprehensive income (loss)							(108,781		)	14,108
Total Commerce Bancshares, Inc. stockholders' equity	2,623,883			2,495,783			2,767,987			2,716,560
Non-controlling interest	4,324			5,349			3,396			1,624
Total equity	2,628,207			2,501,132			2,771,383			2,718,184
Total liabilities and equity	$	25,078,843		$	25,641,424		$	24,524,742		$	24,833,415

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)	2017		2016			2017		2016			2018			2017		2018		2017
	(Unaudited)										(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	134,273	$	121,151		$	262,596	$	240,484		$	154,135		$	134,273	$	301,150	$	262,596
Interest and fees on loans held for sale	263		692			459		827			372			263		676		459
Interest on investment securities	54,975		54,698			110,240		103,589			65,564			54,975		118,806		110,240
Interest on federal funds sold and short-term securities purchased under
agreements to resell	37		19			60		43			177			37		357		60
Interest on long-term securities purchased under agreements to resell	3,684		3,354			7,477		6,829			3,785			3,684		7,899		7,477
Interest on deposits with banks	362		151			759		421			1,590			362		2,730		759
Total interest income	193,594		180,065			381,591		352,193			225,623			193,594		431,618		381,591
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	4,342		3,548			8,232		7,032			6,519			4,342		12,108		8,232
Time open and C.D.'s of less than $100,000	674		709			1,318		1,451			694			674		1,356		1,318
Time open and C.D.'s of $100,000 and over	2,822		2,347			5,585		4,333			3,483			2,822		6,322		5,585
Interest on federal funds purchased and securities sold under
agreements to repurchase	2,038		725			3,577		1,613			3,956			2,038		7,957		3,577
Interest on other borrowings	911		907			1,799		2,160			12			911		24		1,799
Total interest expense	10,787		8,236			20,511		16,589			14,664			10,787		27,767		20,511
Net interest income	182,807		171,829			361,080		335,604			210,959			182,807		403,851		361,080
Provision for loan losses	10,758		9,216			21,886		18,655			10,043			10,758		20,439		21,886
Net interest income after provision for loan losses	172,049		162,613			339,194		316,949			200,916			172,049		383,412		339,194
NON-INTEREST INCOME
Bank card transaction fees	44,999		45,065			88,203		89,535			43,215			37,295		84,668		73,046
Trust fees	33,120		30,241			65,134		59,484			37,036			33,120		73,098		65,134
Deposit account charges and other fees	22,861		21,328			44,803		42,019			23,893			22,861		46,875		44,803
Capital market fees	2,156		2,500			4,498		5,225			1,992			2,156		4,283		4,498
Consumer brokerage services	3,726		3,491			7,375		7,000			3,971			3,726		7,739		7,375
Loan fees and sales	4,091		3,196			7,259		5,706			3,229			4,091		6,091		7,259
Other	12,131		10,749			22,878		26,625			11,514			12,131		21,786		22,878
Total non-interest income	123,084		116,570			240,150		235,594			124,850			115,380		244,540		224,993
INVESTMENT SECURITIES GAINS (LOSSES), NET	1,651		(744		)	879		(1,739		)	(3,075		)	1,651		2,335		879
NON-INTEREST EXPENSE
Salaries and employee benefits	108,829		104,808			221,198		211,667			115,589			108,829		231,483		221,198
Net occupancy	11,430		11,092			22,873		22,395			11,118			11,430		22,702		22,873
Equipment	4,776		4,781			9,385		9,415			4,594			4,776		9,025		9,385
Supplies and communication	5,446		5,693			11,155		12,522			5,126			5,446		10,439		11,155
Data processing and software	23,356		22,770			46,453		45,669			21,016			20,035		41,706		39,940
Marketing	4,488		4,389			7,712		8,202			5,142			4,488		9,947		7,712
Deposit insurance	3,592		3,143			7,063		6,308			3,126			3,592		6,583		7,063
Community service											656			2,916		1,385		5,860
Other	22,677		20,413			45,585		38,384			15,493			15,378		30,867		31,081
Total non-interest expense	184,594		177,089			371,424		354,562			181,860			176,890		364,137		356,267
Income before income taxes	112,190		101,350			208,799		196,242			140,831			112,190		266,150		208,799
Less income taxes	33,201		31,542			58,108		60,912			29,507			33,201		52,765		58,108
Net income	78,989		69,808			150,691		135,330			111,324			78,989		213,385		150,691
Less non-controlling interest expense (income)	29		(85		)	227		63
Less non-controlling interest expense											994			29		2,071		227
Net income attributable to Commerce Bancshares, Inc.	78,960		69,893			150,464		135,267			110,330			78,960		211,314		150,464
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	$	76,710	$	67,643		$	145,964	$	130,767		$	108,080		$	76,710	$	206,814	$	145,964
Net income per common share — basic	$	.75	$	.67		$	1.43	$	1.29		$	1.02		$	.71	$	1.94	$	1.36
Net income per common share — diluted	$	.75	$	.66		$	1.43	$	1.28		$	1.01		$	.71	$	1.93	$	1.36

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)		2017		2016			2017		2016				2018			2017		2018			2017
		(Unaudited)											(Unaudited)
Net income		$	78,989	$	69,808		$	150,691	$	135,330			$	111,324		$	78,989	$	213,385		$	150,691
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		76		—			171		(398		)		(123		)	76		(78		)	171
Net unrealized gains on other securities		11,241		31,139			30,243		101,634
Net unrealized gains (losses) on other securities													(19,489		)	11,241		(93,210		)	30,243
Pension loss amortization		341		356			681		718				394			341		787			681
Other comprehensive income		11,658		31,495			31,095		101,954
Other comprehensive income (loss)													(19,218		)	11,658		(92,501		)	31,095
Comprehensive income		90,647		101,303			181,786		237,284				92,106			90,647		120,884			181,786
Less non-controlling interest expense (income)		29		(85		)	227		63
Less non-controlling interest expense													994			29		2,071			227
Comprehensive income attributable to Commerce Bancshares, Inc.	Comprehensive income attributable to Commerce Bancshares, Inc.	$	90,618	$	101,388		$	181,559	$	237,221		Comprehensive income attributable to Commerce Bancshares, Inc.	$	91,112		$	90,618	$	118,813		$	181,559

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 December 31, 2017																						$	144,784	$	535,407	$	1,815,360		$	221,374		$	(14,473	)	$	14,108		$	1,624		$	2,718,184
Adoption of ASU 2018-02																													(2,932		)				2,932						—
Adoption of ASU 2016-01																													33,320						(33,320		)				—
Net income																													211,314									2,071			213,385
Other comprehensive income (loss)																																			(92,501		)				(92,501		)
Distributions to non-controlling interest																																						(299		)	(299		)
Purchases of treasury stock																																(19,069		)							(19,069		)
Issuance of stock under purchase and equity compensation plans																										(17,697		)				17,688									(9		)
Stock-based compensation																										6,394															6,394
Cash dividends on common stock ($.470 per share)																													(50,202		)										(50,202		)
Cash dividends on preferred stock ($.750 per depositary share)																													(4,500		)										(4,500		)
Balance June 30, 2018																						$	144,784	$	535,407	$	1,804,057		$	408,374		$	(15,854	)	$	(108,781	)	$	3,396		$	2,771,383
Balance December 31, 2016	$	144,784	$	510,015	$	1,552,454		$	292,849		$	(15,294	)	$	10,975	$	5,349		$	2,501,132		$	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							3,441			(2,144		)										1,297
Net income								150,464								227			150,691										150,464									227			150,691
Other comprehensive income														31,095					31,095																31,095						31,095
Distributions to non-controlling interest																(1,252		)	(1,252		)																	(1,252		)	(1,252		)
Purchases of treasury stock											(10,628		)						(10,628		)											(10,628		)							(10,628		)
Issuance of stock under purchase and equity compensation plans					(15,556		)				15,549								(7		)					(15,556		)				15,549									(7		)
Stock-based compensation					6,195														6,195							6,195															6,195
Cash dividends on common stock ($.450 per share)								(45,816		)									(45,816		)
Cash dividends on common stock ($.429 per share)																													(45,816		)										(45,816		)
Cash dividends on preferred stock ($.750 per depositary share)								(4,500		)									(4,500		)								(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		$	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
Other comprehensive income														101,954					101,954
Distributions to non-controlling interest																(586		)	(586		)
Purchases of treasury stock											(37,462		)						(37,462		)
Issuance of stock under purchase and equity compensation plans					(11,873		)				11,871								(2		)
Excess tax benefit related to equity compensation plans					1,904														1,904
Stock-based compensation					6,287														6,287
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		)
Balance June 30, 2016	$	144,784	$	489,862	$	1,333,995		$	470,558		$	(51,707	)	$	134,424	$	4,905		$	2,526,821

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)	2017				2016			2018			2017
	(Unaudited)							(Unaudited)
OPERATING ACTIVITIES:
Net income	$	150,691			$	135,330		$	213,385		$	150,691
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	21,886				18,655			20,439			21,886
Provision for depreciation and amortization	19,890				20,689			19,180			19,890
Amortization of investment security premiums, net	17,827				16,014			11,679			17,827
Investment securities (gains) losses, net (A)	(879		)		1,739
Investment securities gains, net (A)								(2,335		)	(879		)
Net gains on sales of loans held for sale	(3,547		)		(2,880		)	(2,671		)	(3,547		)
Originations of loans held for sale	(96,943		)		(70,880		)	(89,183		)	(96,943		)
Proceeds from sales of loans held for sale	92,423				68,486			91,671			92,423
Net decrease in trading securities, excluding unsettled transactions	6,097				81,184
Net (increase) decrease in trading debt securities								(23,843		)	6,097
Stock-based compensation	6,195				6,287			6,394			6,195
(Increase) decrease in interest receivable	(428		)		60
Increase (decrease) in interest payable	(692		)		57
Increase in interest receivable								(1,717		)	(428		)
Decrease in interest payable								(601		)	(692		)
Increase in income taxes payable	1,483				73			25,721			1,483
Other changes, net	(1,985		)		(9,785		)	19,958			(6,939		)
Net cash provided by operating activities	212,018				265,029			288,077			207,064
INVESTING ACTIVITIES:
Proceeds from sales of investment securities (A)	6,552				2,071			192,522			6,552
Proceeds from maturities/pay downs of investment securities (A)	910,411				1,109,707			812,970			910,411
Purchases of investment securities (A)	(625,931		)		(414,154		)	(748,707		)	(625,931		)
Net increase in loans	(234,405		)		(693,522		)
Net (increase) decrease in loans								7,978			(234,405		)
Repayments of long-term securities purchased under agreements to resell	100,000				50,000			—			100,000
Purchases of land, buildings and equipment	(14,117		)		(13,649		)	(13,525		)	(14,117		)
Sales of land, buildings and equipment	2,527				5,399			1,667			2,527
Net cash provided by investing activities	145,037				45,852			252,905			145,037
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits	77,562				(38,985		)	(27,222		)	77,562
Net increase (decrease) in time open and C.D.'s	(157,367		)		267,339
Net decrease in federal funds purchased and short-term securities sold under agreements to repurchase	(467,461		)		(331,280		)
Net decrease in time open and C.D.'s								(83,895		)	(157,367		)
Net decrease in federal funds purchased and securities sold under agreements to repurchase								(340,379		)	(467,461		)
Repayment of long-term borrowings	(146		)		(840		)	(149		)	(146		)
Additional long-term borrowings	—			—	900
Net increase in short-term borrowings								7,682			—
Purchases of treasury stock	(10,628		)		(37,462		)	(19,069		)	(10,628		)
Issuance of stock under equity compensation plans	(7		)		(2		)	(9		)	(7		)
Cash dividends paid on common stock	(45,816		)		(43,522		)	(50,202		)	(45,816		)
Cash dividends paid on preferred stock	(4,500		)		(4,500		)	(4,500		)	(4,500		)
Net cash used in financing activities	(608,363		)		(188,352		)	(517,743		)	(608,363		)
Increase (decrease) in cash and cash equivalents	(251,308		)		122,529
Cash and cash equivalents at beginning of year	782,435				502,719
Cash and cash equivalents at June 30	$	531,127			$	625,248
(A) Available for sale and non-marketable securities
Increase (decrease) in cash, cash equivalents and restricted cash								23,239			(256,262		)
Cash, cash equivalents and restricted cash at beginning of year								524,352			801,641
Cash, cash equivalents and restricted cash at June 30								$	547,591		$	545,379
(A) Available for sale debt securities, equity securities and other securities
Income tax payments, net	$	54,621			$	59,886		$	24,969		$	54,621
Interest paid on deposits and borrowings	$	21,203			$	16,532		$	28,368		$	21,203
Loans transferred to foreclosed real estate	$	461			$	861		$	1,044		$	461
Loans transferred from held for investment to held for sale	$	—			$	50,360

See accompanying notes to consolidated financial statements.

Restricted cash is comprised of cash collateral posted by the Company to secure interest rate swap agreements. This balance is included in other assets in the consolidated balance sheets and totaled $14.8 million and $14.3 million at June 30, 2018 and 2017, respectively.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, ~~2017~~2018 (Unaudited)

1. Principles of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to ~~2016~~2017 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three and six month periods ended June 30, ~~2017~~2018 are not necessarily indicative of results to be attained for the full year or any other interim period.

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

These financial statements reflect the adoption of several FASB Accounting Standards Updates (ASUs) on January 1, 2018. In some cases, the adoption of these ASUs resulted in changes to former accounting policies as described in Note 1 to the financial statements in the 2017 Annual Report on Form 10-K. The ASUs which affected the Company's 2018 financial statements include:

ASU 2014-09, Revenue from Contracts with Customers, which is discussed further in Note 13.

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which is discussed further in Note 3 - Investment Securities, Note 8 - Accumulated Other Comprehensive Income, and Note 15 - Fair Value of Financial Instruments.

ASU 2016-18, Restricted Cash, which requires that the beginning and end of period amounts shown on the statement of cash flows include not only cash and cash equivalents, but also restricted cash and restricted cash equivalents, as considered such by the reporting entity.

ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which is discussed further in Note 6 - Pension.

ASU 2018-02, Reclassification for Certain Tax Effects from Accumulated Other Comprehensive Income, which is discussed further in Note 8 - Accumulated Other Comprehensive Income.

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2. Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 are as follows:


(In thousands)	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Commercial:
Business	$	4,852,408	$	4,776,365	$	4,990,298	$	4,958,554
Real estate – construction and land	848,152		791,236		967,151		968,820
Real estate – business	2,727,349		2,643,374		2,727,580		2,697,452
Personal Banking:
Real estate – personal	2,009,203		2,010,397		2,102,586		2,062,787
Consumer	2,038,514		1,990,801		2,012,644		2,104,487
Revolving home equity	403,387		413,634		374,557		400,587
Consumer credit card	740,865		776,465		775,214		783,864
Overdrafts	6,714		10,464		4,081		7,123
Total loans	$	13,626,592	$	13,412,736	$	13,954,111	$	13,983,674

At June 30, ~~2017,~~2018, loans of ~~$3.9~~$3.7 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of ~~$1.6~~$1.7 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

Allowance for loan losses

A summary of the activity in the allowance for loan losses during the three and six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, 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	$	92,951		$	64,881	$	157,832	$	91,361		$	64,571	$	155,932	Balance at beginning of period	$	93,065		$	66,467	$	159,532	$	93,704		$	65,828	$	159,532
Provision	Provision	(111		)	10,869		10,758		1,002			20,884		21,886		Provision	485			9,558		10,043		(409		)	20,848		20,439
Deductions:	Deductions:															Deductions:
Loans charged off	Loans charged off	531			13,415		13,946		1,077			25,745		26,822		Loans charged off	362			13,323		13,685		728			26,688		27,416
Less recoveries on loans	Less recoveries on loans	430			2,758		3,188		1,453			5,383		6,836		Less recoveries on loans	663			2,979		3,642		1,284			5,693		6,977
Net loan charge-offs (recoveries)	Net loan charge-offs (recoveries)	101			10,657		10,758		(376		)	20,362		19,986		Net loan charge-offs (recoveries)	(301		)	10,344		10,043		(556		)	20,995		20,439
Balance June 30, 2017		$	92,739		$	65,093	$	157,832	$	92,739		$	65,093	$	157,832
Balance June 30, 2018																Balance June 30, 2018	$	93,851		$	65,681	$	159,532	$	93,851		$	65,681	$	159,532
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

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The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ~~ASC~~Accounting Standards Codification (ASC) 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below, which are deemed to have similar risk characteristics and are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.


	Impaired Loans				All Other Loans				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, 2017
June 30, 2018
Commercial	$	1,454	$	44,937	$	91,285	$	8,382,972	$	2,631	$	90,724	$	91,220	$	8,594,305
Personal Banking	1,433		20,221		63,660		5,178,462		919		18,172		64,762		5,250,910
Total	$	2,887	$	65,158	$	154,945	$	13,561,434	$	3,550	$	108,896	$	155,982	$	13,845,215
December 31, 2016
December 31, 2017
Commercial	$	1,817	$	44,795	$	89,544	$	8,166,180	$	3,067	$	92,613	$	90,637	$	8,532,213
Personal Banking	1,292		19,737		63,279		5,182,024		1,176		22,182		64,652		5,336,666
Total	$	3,109	$	64,532	$	152,823	$	13,348,204	$	4,243	$	114,795	$	155,289	$	13,868,879

Impaired loans

The table below shows the Company’s investment in impaired loans at June 30, ~~2017~~2018 and December 31, ~~2016.~~2017. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page ~~14.~~15.


(In thousands)	June 30, 2017		Dec. 31, 2016		June 30, 2018		Dec. 31, 2017
Non-accrual loans	$	13,362	$	14,283	$	9,472	$	11,983
Restructured loans (accruing)	51,796		50,249		99,424		102,812
Total impaired loans	$	65,158	$	64,532	$	108,896	$	114,795

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The following table provides additional information about impaired loans held by the Company at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.


(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
June 30, 2017
June 30, 2018
With no related allowance recorded:
Business	$	5,566	$	9,000	$	—	$	4,946	$	8,936	$	—
Real estate – construction and land	537		752		—
Real estate – business							1,210		1,300		—
	$	6,103	$	9,752	$	—	$	6,156	$	10,236	$	—
With an allowance recorded:
Business	$	29,226	$	29,821	$	914	$	70,871	$	71,157	$	2,090
Real estate – construction and land	65		68		3		1,342		1,346		39
Real estate – business	9,543		10,961		537		12,355		12,928		502
Real estate – personal	6,286		9,258		570		5,707		8,134		295
Consumer	6,242		6,280		259		5,464		5,464		52
Revolving home equity	582		582		10		114		114		11
Consumer credit card	7,111		7,111		594		6,887		6,887		561
	$	59,055	$	64,081	$	2,887	$	102,740	$	106,030	$	3,550
Total	$	65,158	$	73,833	$	2,887	$	108,896	$	116,266	$	3,550
December 31, 2016
December 31, 2017
With no related allowance recorded:
Business	$	7,375	$	10,470	$	—	$	5,356	$	9,000	$	—
Real estate – construction and land	557		752		—
Real estate – business							1,299		1,303		—
Consumer							779		817		—
	$	7,932	$	11,222	$	—	$	7,434	$	11,120	$	—
With an allowance recorded:
Business	$	29,924	$	31,795	$	1,318	$	72,589	$	73,168	$	2,455
Real estate – construction and land	69		72		3		837		841		27
Real estate – business	6,870		8,072		496		12,532		13,071		585
Real estate – personal	6,394		9,199		642		9,126		11,914		532
Consumer	5,281		5,281		57		5,388		5,426		67
Revolving home equity	584		584		1		204		204		11
Consumer credit card	7,478		7,478		592		6,685		6,685		566
	$	56,600	$	62,481	$	3,109	$	107,361	$	111,309	$	4,243
Total	$	64,532	$	73,703	$	3,109	$	114,795	$	122,429	$	4,243

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Total average impaired loans for the three and six month periods ended June 30, ~~2017~~2018 and ~~2016,~~2017, 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, 2018
Non-accrual loans							$	7,676	$	2,005	$	9,681
Restructured loans (accruing)							81,832		17,122		98,954
Total							$	89,508	$	19,127	$	108,635
For the six months ended June 30, 2018
Non-accrual loans							$	8,097	$	2,464	$	10,561
Restructured loans (accruing)							80,552		17,943		98,495
Total							$	88,649	$	20,407	$	109,056
For the three months ended June 30, 2017
Non-accrual loans	$	9,867	$	4,539	$	14,406	$	9,867	$	4,539	$	14,406
Restructured loans (accruing)	34,765		15,780		50,545		34,765		15,780		50,545
Total	$	44,632	$	20,319	$	64,951	$	44,632	$	20,319	$	64,951
For the six months ended June 30, 2017
Non-accrual loans	$	10,238	$	4,027	$	14,265	$	10,238	$	4,027	$	14,265
Restructured loans (accruing)	33,333		15,991		49,324		33,333		15,991		49,324
Total	$	43,571	$	20,018	$	63,589	$	43,571	$	20,018	$	63,589
For the three months ended June 30, 2016
Non-accrual loans	$	22,098	$	4,461	$	26,559
Restructured loans (accruing)	28,775		17,297		46,072
Total	$	50,873	$	21,758	$	72,631
For the six months ended June 30, 2016
Non-accrual loans	$	21,551	$	4,542	$	26,093
Restructured loans (accruing)	27,977		17,499		45,476
Total	$	49,528	$	22,041	$	71,569

The table below shows interest income recognized during the three and six month periods ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, for impaired loans held at the end of each period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page ~~14.~~15.


	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)	2017		2016		2017		2016		2018		2017		2018		2017
Interest income recognized on impaired loans:
Business	$	319	$	236	$	637	$	472	$	821	$	319	$	1,641	$	637
Real estate – construction and land	1		3		2		5		22		1		44		2
Real estate – business	88		56		175		112		147		88		294		175
Real estate – personal	36		42		71		84		52		36		103		71
Consumer	80		89		159		177		82		80		164		159
Revolving home equity	6		4		12		7		1		6		2		12
Consumer credit card	145		159		289		318		159		145		317		289
Total	$	675	$	589	$	1,345	$	1,175	$	1,284	$	675	$	2,565	$	1,345

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Delinquent and non-accrual loans

The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.


(In thousands)	Current or Less Than 30 Days Past Due		30 – 89 Days Past Due		90 Days Past Due and Still Accruing		Non-accrual		Total		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, 2017
June 30, 2018
Commercial:
Business	$	4,842,945	$	2,761	$	372	$	6,330	$	4,852,408	$	4,983,337	$	1,404	$	443	$	5,114	$	4,990,298
Real estate – construction and land	843,289		4,319		—		544		848,152		963,654		3,492		—		5		967,151
Real estate – business	2,721,612		3,904		—		1,833		2,727,349		2,718,888		6,227		—		2,465		2,727,580
Personal Banking:
Real estate – personal	1,997,661		6,060		1,978		3,504		2,009,203		2,092,350		7,155		1,193		1,888		2,102,586
Consumer	2,012,634		22,526		2,203		1,151		2,038,514		1,985,195		25,096		2,353		—		2,012,644
Revolving home equity	400,306		2,154		927		—		403,387		372,865		708		984		—		374,557
Consumer credit card	722,604		9,111		9,150		—		740,865		758,230		8,504		8,480		—		775,214
Overdrafts	6,414		300		—		—		6,714		3,731		350		—		—		4,081
Total	$	13,547,465	$	51,135	$	14,630	$	13,362	$	13,626,592	$	13,878,250	$	52,936	$	13,453	$	9,472	$	13,954,111
December 31, 2016
December 31, 2017
Commercial:
Business	$	4,763,274	$	3,735	$	674	$	8,682	$	4,776,365	$	4,949,148	$	3,085	$	374	$	5,947	$	4,958,554
Real estate – construction and land	789,633		1,039		—		564		791,236		967,321		1,473		21		5		968,820
Real estate – business	2,639,586		2,154		—		1,634		2,643,374		2,694,234		482		—		2,736		2,697,452
Personal Banking:
Real estate – personal	1,995,724		9,162		2,108		3,403		2,010,397		2,050,787		6,218		3,321		2,461		2,062,787
Consumer	1,957,358		29,783		3,660		—		1,990,801		2,067,025		32,674		3,954		834		2,104,487
Revolving home equity	411,483		1,032		1,119		—		413,634		397,349		1,962		1,276		—		400,587
Consumer credit card	757,443		10,187		8,835		—		776,465		764,568		10,115		9,181		—		783,864
Overdrafts	10,014		450		—		—		10,464		6,840		283		—		—		7,123
Total	$	13,324,515	$	57,542	$	16,396	$	14,283	$	13,412,736	$	13,897,272	$	56,292	$	18,127	$	11,983	$	13,983,674

Credit quality

The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.

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																	Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total		Business		Real Estate-Construction		Real Estate- Business		Total
June 30, 2017
June 30, 2018
Pass	$	4,617,838	$	843,151	$	2,629,544	$	8,090,533	$	4,771,613	$	954,492	$	2,648,144	$	8,374,249
Special mention	180,380		1,754		44,279		226,413		58,771		10,501		33,791		103,063
Substandard	47,860		2,703		51,693		102,256		154,800		2,153		43,180		200,133
Non-accrual	6,330		544		1,833		8,707		5,114		5		2,465		7,584
Total	$	4,852,408	$	848,152	$	2,727,349	$	8,427,909	$	4,990,298	$	967,151	$	2,727,580	$	8,685,029
December 31, 2016
December 31, 2017
Pass	$	4,607,553	$	788,778	$	2,543,348	$	7,939,679	$	4,740,013	$	955,499	$	2,593,005	$	8,288,517
Special mention	116,642		722		45,479		162,843		59,177		10,614		50,577		120,368
Substandard	43,488		1,172		52,913		97,573		153,417		2,702		51,134		207,253
Non-accrual	8,682		564		1,634		10,880		5,947		5		2,736		8,688
Total	$	4,776,365	$	791,236	$	2,643,374	$	8,210,975	$	4,958,554	$	968,820	$	2,697,452	$	8,624,826

The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain ~~Personal Banking~~personal real estate loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. AtThese loans totaled $211.1 million at June 30, ~~2017, these were comprised of $227.4~~2018 and $219.2 million inat December 31, 2017. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $161.8 million at June 30, 2018 and $145.0 million at December 31, 2017. As the healthcare loans are guaranteed by the hospital, FICO scores are not considered relevant for this program. The personal real estate loans ~~or 4.4%~~and consumer loans excluded below totaled less than 8% of the Personal Banking ~~portfolio, compared to $237.2 million at December 31, 2016.~~portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 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, 2017
June 30, 2018
FICO score:
Under 600	1.2	%	3.2	%	1.0	%	4.9	%	1.1	%	3.2	%	.8	%	4.6	%
600 - 659	2.7		5.7		1.8		14.8		2.0		5.1		1.6		14.1
660 - 719	10.6		18.5		9.5		34.8		10.0		18.0		9.2		35.3
720 - 779	26.1		26.9		21.8		25.8		23.6		23.6		22.1		26.4
780 and over	59.4		45.7		65.9		19.7		63.3		50.1		66.3		19.6
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2016
December 31, 2017
FICO score:
Under 600	1.3	%	3.4	%	1.0	%	4.9	%	1.3	%	3.3	%	1.1	%	4.7	%
600 - 659	2.6		6.4		1.8		15.5		2.1		5.5		1.7		14.4
660 - 719	10.4		19.7		9.7		34.9		10.5		17.3		9.5		34.4
720 - 779	25.4		26.3		21.1		25.1		25.6		26.8		21.4		26.0
780 and over	60.3		44.2		66.4		19.6		60.5		47.1		66.3		20.5
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

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Troubled debt restructurings

As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt ~~restructurings. Total restructured loans amounted to $59.2 million at June 30, 2017.~~restructurings, as shown in the table below. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be ~~collected, and those non-accrual loans totaled $7.4 million at June 30, 2017.~~collected. Other performing restructured loans ~~totaled $51.8 million at June 30, 2017. These include~~are comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result ~~the loans~~ were classified as troubled debt restructurings. These ~~commercial loans totaled $36.8 million at June 30, 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 $7.1 million at June 30, 2017.~~programs. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company ~~has~~also classified ~~additional~~certain loans as troubled debt ~~restructurings~~restructings because they were not reaffirmed by the borrower in bankruptcy proceedings. ~~At June 30, 2017, these~~These loans ~~totaled $7.6 million in~~are comprised of personal real estate, revolving home equity and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make ~~payments under the terms of the loan agreements.~~payments.



(In thousands)		June 30, 2018		December 31, 2017
Accruing loans:
	Non-market interest rates	$	86,906	$	88,588
	Assistance programs	6,887		6,685
	Bankruptcy non-affirmation	5,335		7,283
	Other	296		256
Non-accrual loans		7,156		7,796
Total troubled debt restructurings		$	106,580	$	110,608

The ~~following~~ table below shows the ~~outstanding balances~~balance of ~~loans classified as~~ troubled debt restructurings by loan classification at June 30, ~~2017,~~2018, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.


(In thousands)	June 30, 2017		Balance 90 days past due at any time during previous 12 months		June 30, 2018		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	34,088	$	—	$	75,680	$	32
Real estate - construction and land	537		—		1,337		—
Real estate - business	7,710		—		12,311		—
Personal Banking:
Real estate - personal	3,995		353		4,787		303
Consumer	5,149		50		5,464		115
Revolving home equity	582		47		114		42
Consumer credit card	7,111		649		6,887		577
Total restructured loans	$	59,172	$	1,099
Total troubled debt restructurings					$	106,580	$	1,069

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 ~~$862~~$925 thousand on an annual, pre-tax basis, compared to amounts contractually owed.

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

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

If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for loan losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing troubled debt

restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for loan losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begun.

The Company had commitments of ~~$3.6~~$6.1 million at June 30, ~~2017~~2018 to lend additional funds to borrowers with restructured loans.

Loans held for sale

The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 10. The loans are primarily sold to FNMA, FHLMC, and GNMA. At June 30, ~~2017,~~2018, the fair value of these loans was ~~$14.1~~$10.8 million, and the unpaid principal balance was ~~$13.6~~$10.4 million.

The Company also designates student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which at June 30, ~~2017~~2018 totaled ~~$7.9~~$9.6 million.

At June 30, ~~2017,~~2018, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing.

Foreclosed real estate/repossessed assets

The Company’s holdings of foreclosed real estate totaled ~~$515 thousand~~$1.0 million and ~~$366~~$681 thousand at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled ~~$2.4~~$2.3 million and ~~$2.2~~$2.7 million at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.

3. Investment Securities

Investment securities as shown in this report reflect revised categories as required by the Company’s adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, on January 1, 2018. That new guidance refined the definition of equity securities and required their segregation from available for sale debt securities. For comparability purposes, prior period disclosures in this report have been revised to show the new categorization.



(In thousands)	June 30, 2018		December 31, 2017
Available for sale debt securities	$	8,412,376	$	8,725,442
Trading debt securities	31,156		18,269
Equity securities:
Readily determinable fair value	2,741		48,838
No readily determinable fair value	1,703		1,753
Other:
Federal Reserve Bank stock	33,369		33,253
Federal Home Loan Bank stock	10,000		10,000
Private equity investments	68,940		55,752
Total investment securities	$	8,560,285	$	8,893,307

~~Investment~~While changes in the fair value of available for sale debt securities continue to be recorded in the equity category of accumulated other comprehensive income, the new guidance requires changes in the fair value of equity securities to be recorded in current earnings. As required by the new guidance, the unrealized gain in fair value on equity securities (recorded in accumulated other

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comprehensive income at December 31, 2017) was reclassified to retained earnings on January 1, 2018. The amount of the reclassification was $33.3 million, net of tax.

Equity securities include common and preferred stock with readily determinable fair values that totaled $2.5 million at cost and $2.7 million at fair value ~~consisted of the following~~ at June 30, ~~2017 and December 31, 2016.~~2018. The decline in these balances from prior periods was due to a third party merger transaction in June 2018, in which the majority of these securities were redeemed for cash of $39.9 million. During the first six months of 2018, unrealized net losses of $176 thousand were recognized in current earnings on equity securities still held at June 30, 2018.

(In thousands)
June 30, 2017 December 31, 2016
Available for sale $ 9,439,701
$ 9,649,203
Trading 22,291
22,225
Non-marketable 102,388
99,558
Total investment securities $ 9,564,380
$ 9,770,986

~~Most~~Equity securities also include securities with a carrying value of $1.7 million that do not have readily determinable fair values. The Company has elected, under the ASU, to measure these at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the ~~Company’s~~same issuer. The Company did not record any impairment or other adjustments to the carrying amount of these investments during the period.

Other investment securities ~~are classified as available for sale, and this portfolio~~whose accounting is ~~discussed~~not addressed in ~~more detail below. The available for sale and~~ the ~~trading portfolios are carried at fair value. Securities which are classified as non-marketable~~ASU include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, and ~~Federal Reserve Bank~~investments in portfolio concerns held by the Company's private equity subsidiaries. FRB stock and FHLB stock are held for debt and regulatory ~~purposes, which totaled $47.1 million at June 30, 2017 and $46.9 million at December 31, 2016.~~purposes. Investment in ~~Federal Reserve Bank~~FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. These holdings are carried at cost. ~~Non-marketable securities also include~~The private equity investments, ~~which amounted to $55.0 million at June 30, 2017 and $52.3 million at December 31, 2016. In~~in the absence of readily ascertainable market values, ~~these securities~~ are carried at estimated fair value.

The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in accumulated other comprehensive income (AOCI). A summary of the available for sale ~~investment~~debt securities by maturity groupings as of June 30, ~~2017~~2018 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.

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(In thousands) Amortized Cost Fair Value
U.S. government and federal agency obligations:
Within 1 year $ 58,665
$ 58,829
After 1 but within 5 years 499,601
502,990
After 5 but within 10 years 318,318
318,212
After 10 years 35,444
32,524
Total U.S. government and federal agency obligations 912,028
912,555
Government-sponsored enterprise obligations:
Within 1 year 98,069
98,206
After 1 but within 5 years 336,302
335,723
After 10 years 12,493
12,356
Total government-sponsored enterprise obligations 446,864
446,285
State and municipal obligations:
Within 1 year 171,936
172,890
After 1 but within 5 years 643,200
654,145
After 5 but within 10 years 879,036
900,292
After 10 years 50,896
50,470
Total state and municipal obligations 1,745,068
1,777,797
Mortgage and asset-backed securities:
  Agency mortgage-backed securities 2,604,217
2,620,198
  Non-agency mortgage-backed securities 1,063,236
1,066,889
  Asset-backed securities 2,249,399
2,250,426
Total mortgage and asset-backed securities 5,916,852
5,937,513
Other debt securities:
Within 1 year 13,387
13,389
After 1 but within 5 years 176,199
177,812
After 5 but within 10 years 125,910
126,503
Total other debt securities 315,496
317,704
Equity securities 5,463
47,847
Total available for sale investment securities $ 9,341,771
$ 9,439,701



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	52,660	$	52,603
After 1 but within 5 years	645,431		634,819
After 5 but within 10 years	157,967		155,108
After 10 years	69,202		68,562
Total U.S. government and federal agency obligations	925,260		911,092
Government-sponsored enterprise obligations:
Within 1 year	117,562		117,444
After 1 but within 5 years	121,584		119,743
After 5 but within 10 years	34,984		33,946
After 10 years	42,852		40,228
Total government-sponsored enterprise obligations	316,982		311,361
State and municipal obligations:
Within 1 year	147,325		147,668
After 1 but within 5 years	598,663		600,688
After 5 but within 10 years	591,819		590,950
After 10 years	40,963		39,858
Total state and municipal obligations	1,378,770		1,379,164
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,194,764		3,131,025
Non-agency mortgage-backed securities	1,019,545		1,010,331
Asset-backed securities	1,351,461		1,338,542
Total mortgage and asset-backed securities	5,565,770		5,479,898
Other debt securities:
Within 1 year	9,003		8,971
After 1 but within 5 years	257,704		252,151
After 5 but within 10 years	73,283		69,739
Total other debt securities	339,990		330,861
Total available for sale debt securities	$	8,526,772	$	8,412,376

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled ~~$432.0~~$443.8 million, at fair value, at June 30, ~~2017.~~2018. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are ~~$16.8~~$15.1 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~~

Table of ~~$47.7 million at June 30, 2017.~~contents

For debt securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in ~~accumulated other comprehensive income,~~AOCI, 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, 2017
June 30, 2018
U.S. government and federal agency obligations	$	912,028	$	5,575	$	(5,048	)	$	912,555	$	925,260	$	503	$	(14,671	)	$	911,092
Government-sponsored enterprise obligations	446,864		892		(1,471		)	446,285		316,982		—		(5,621		)	311,361
State and municipal obligations	1,745,068		34,717		(1,988		)	1,777,797		1,378,770		8,105		(7,711		)	1,379,164
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,604,217		29,780		(13,799		)	2,620,198		3,194,764		5,995		(69,734		)	3,131,025
Non-agency mortgage-backed securities	1,063,236		8,063		(4,410		)	1,066,889		1,019,545		6,232		(15,446		)	1,010,331
Asset-backed securities	2,249,399		5,725		(4,698		)	2,250,426		1,351,461		2,343		(15,262		)	1,338,542
Total mortgage and asset-backed securities	5,916,852		43,568		(22,907		)	5,937,513		5,565,770		14,570		(100,442		)	5,479,898
Other debt securities	315,496		2,745		(537		)	317,704		339,990		—		(9,129		)	330,861
Equity securities	5,463		42,384		—			47,847
Total	$	9,341,771	$	129,881	$	(31,951	)	$	9,439,701	$	8,526,772	$	23,178	$	(137,574	)	$	8,412,376
December 31, 2016
December 31, 2017
U.S. government and federal agency obligations	$	919,904	$	7,312	$	(6,312	)	$	920,904	$	917,494	$	4,096	$	(4,443	)	$	917,147
Government-sponsored enterprise obligations	450,448		1,126		(1,576		)	449,998		408,266		26		(1,929		)	406,363
State and municipal obligations	1,778,684		12,223		(12,693		)	1,778,214		1,592,707		21,413		(2,754		)	1,611,366
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,674,964		31,610		(20,643		)	2,685,931		3,046,701		17,956		(23,744		)	3,040,913
Non-agency mortgage-backed securities	1,054,446		7,686		(6,493		)	1,055,639		903,920		6,710		(4,837		)	905,793
Asset-backed securities	2,389,176		3,338		(11,213		)	2,381,301		1,495,380		2,657		(5,237		)	1,492,800
Total mortgage and asset-backed securities	6,118,586		42,634		(38,349		)	6,122,871		5,446,001		27,323		(33,818		)	5,439,506
Other debt securities	327,030		935		(2,012		)	325,953		350,988		1,250		(1,178		)	351,060
Equity securities	5,678		45,585		—			51,263
Total	$	9,600,330	$	109,815	$	(60,942	)	$	9,649,203	$	8,715,456	$	54,108	$	(44,122	)	$	8,725,442

The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or who have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, cash flow analyses are prepared. For more complex analyses, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At June 30, ~~2017,~~2018, the fair value of securities on this watch list was ~~$68.9~~$57.3 million compared to ~~$79.6~~$68.0 million at December 31, ~~2016.~~2017.

As of June 30, ~~2017,~~2018, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of ~~$30.3~~$22.4 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled ~~$14.3~~$14.2 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at June 30, ~~2017~~2018 included the following:


Significant Inputs	Range			Range
Prepayment CPR	4%	-	25%	0%	-	25%
Projected cumulative default	14%	-	51%	13%	-	52%
Credit support	0%	-	38%	0%	-	20%
Loss severity	16%	-	63%	14%	-	63%

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


	For the Six Months Ended June 30						For the Six Months Ended June 30
(In thousands)	2017			2016			2018			2017
Cumulative OTTI credit losses at January 1	$	14,080		$	14,129		$	14,199		$	14,080
Credit losses on debt securities for which impairment was not previously recognized	46			—			58			46
Credit losses on debt securities for which impairment was previously recognized	274			270			10			274
Increase in expected cash flows that are recognized over remaining life of security	(146		)	(37		)	(104		)	(146		)
Cumulative OTTI credit losses at June 30	$	14,254		$	14,362		$	14,163		$	14,254

~~Securities~~Debt securities with unrealized losses recorded in ~~accumulated other comprehensive income~~AOCI 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, 2017
June 30, 2018
U.S. government and federal agency obligations	$	145,884	$	5,048	$	—	$	—	$	145,884	$	5,048	$	707,018	$	12,156	$	90,340	$	2,515	$	797,358	$	14,671
Government-sponsored enterprise obligations	181,682		1,471		—		—		181,682		1,471		261,378		5,605		49,983		16		311,361		5,621
State and municipal obligations	168,613		1,365		13,761		623		182,374		1,988		458,880		5,700		51,863		2,011		510,743		7,711
Mortgage and asset-backed securities:
Agency mortgage-backed securities	959,777		13,795		1,720		4		961,497		13,799		2,029,957		45,267		566,986		24,467		2,596,943		69,734
Non-agency mortgage-backed securities	503,709		4,165		47,189		245		550,898		4,410		773,890		12,076		134,679		3,370		908,569		15,446
Asset-backed securities	795,526		2,606		234,619		2,092		1,030,145		4,698		862,416		13,296		173,895		1,966		1,036,311		15,262
Total mortgage and asset-backed securities	2,259,012		20,566		283,528		2,341		2,542,540		22,907		3,666,263		70,639		875,560		29,803		4,541,823		100,442
Other debt securities	65,547		500		1,463		37		67,010		537		311,714		8,033		19,147		1,096		330,861		9,129
Total	$	2,820,738	$	28,950	$	298,752	$	3,001	$	3,119,490	$	31,951	$	5,405,253	$	102,133	$	1,086,893	$	35,441	$	6,492,146	$	137,574
December 31, 2016
December 31, 2017
U.S. government and federal agency obligations	$	349,538	$	2,823	$	32,208	$	3,489	$	381,746	$	6,312	$	618,617	$	4,443	$	—	$	—	$	618,617	$	4,443
Government-sponsored enterprise obligations	190,441		1,576		—		—		190,441		1,576		286,393		1,712		49,766		217		336,159		1,929
State and municipal obligations	700,779		12,164		15,195		529		715,974		12,693		282,843		1,752		49,339		1,002		332,182		2,754
Mortgage and asset-backed securities:
Agency mortgage-backed securities	1,147,416		20,638		2,150		5		1,149,566		20,643		1,320,689		9,433		619,300		14,311		1,939,989		23,744
Non-agency mortgage-backed securities	688,131		6,373		34,946		120		723,077		6,493		577,017		2,966		153,813		1,871		730,830		4,837
Asset-backed securities	780,209		5,277		358,778		5,936		1,138,987		11,213		786,048		3,168		264,295		2,069		1,050,343		5,237
Total mortgage and asset-backed securities	2,615,756		32,288		395,874		6,061		3,011,630		38,349		2,683,754		15,567		1,037,408		18,251		3,721,162		33,818
Other debt securities	179,639		1,986		975		26		180,614		2,012		144,090		727		20,202		451		164,292		1,178
Total	$	4,036,153	$	50,837	$	444,252	$	10,105	$	4,480,405	$	60,942	$	4,015,697	$	24,201	$	1,156,715	$	19,921	$	5,172,412	$	44,122

Theavailable for sale debt portfolio included $6.5 billion of securities that were in a loss position at June 30, 2018, compared to $5.2 billion at December 31, 2017. The ~~Company’s holdings~~total amount of ~~state and municipal obligations included gross~~ unrealized ~~losses of $2.0~~loss on these securities was $137.6 million at June 30, ~~2017,~~2018, an increase of ~~which $230 thousand related~~$93.5 million compared to ~~auction~~the loss at December 31, 2017. This increase in losses was mainly due to a rising rate securities. This portfolio totaled $1.8 billion at fair value, or 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.environment.

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


	For the Six Months Ended June 30						For the Six Months Ended June 30
(In thousands)	2017			2016			2018			2017
Proceeds from sales of securities:
Available for sale	$	4,972		$	—
Non-marketable	1,580			2,071
Available for sale debt securities							$	152,541		$	4,972
Equity securities							39,981			584
Other							—			996
Total proceeds	$	6,552		$	2,071		$	192,522		$	6,552

Investment securities gains (losses), net:
Available for sale:
Available for sale debt securities:
Losses realized on called bonds	$	(254	)	$	—		$	—		$	(254	)
Gains realized on sales							423			—
Losses realized on sales	(22		)	—			—			(22		)
Gains realized on donations	4,315			—
Other-than-temporary impairment recognized on debt securities	(320		)	(270		)	(68		)	(320		)
Non-marketable:
Equity securities:
Gains realized on donations of securities							—			4,315
Gains realized on sales	642			2,260			102			584
Losses realized on sales	(652		)	—			(8,917		)	—
Fair value adjustments, net	(2,830		)	(3,729		)	2,699			—
Total gains (losses), net	$	879		$	(1,739	)
Other:
Gains realized on sales							—			58
Losses realized on sales							—			(652		)
Fair value adjustments, net							8,096			(2,830		)
Total investment securities gains, net							$	2,335		$	879

Securities gains for the six months ended June 30, 2018 included gains in fair value of $8.1 million on private equity investments and $2.7 million on equity securities. These were offset by an $8.9 million adjustment to recognize dividend income on a equity security liquidated during the second quarter of 2018.

At June 30, ~~2017,~~2018, securities totaling ~~$3.9~~$3.8 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~~FRB and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated ~~$719.8~~$557.7 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.

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4. Goodwill and Other Intangible Assets

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


	June 30, 2017										December 31, 2016										June 30, 2018									December 31, 2017
(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	$	(27,914	)	$	—		$	3,356	$	31,270	$	(27,429	)	$	—		$	3,841	$	31,270	$	(28,650	)	$	—	$	2,620	$	31,270	$	(28,305	)	$	—		$	2,965
Mortgage servicing rights	6,637		(2,975		)	(16		)	3,646		5,672		(2,782		)	(22		)	2,868		8,996		(3,533		)	—		5,463		7,906		(3,244		)	(9		)	4,653
Total	$	37,907	$	(30,889	)	$	(16	)	$	7,002	$	36,942	$	(30,211	)	$	(22	)	$	6,709	$	40,266	$	(32,183	)	$	—	$	8,083	$	39,176	$	(31,549	)	$	(9	)	$	7,618

Aggregate amortization expense on intangible assets was ~~$330~~$313 thousand and ~~$399~~$330 thousand for the three month periods ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$678~~$634 thousand and ~~$794~~$678 thousand for the six month periods ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of June 30, ~~2017.~~2018. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.


(In thousands)
2017	$	1,141
2018	1,091		$	1,232
2019	917		1,094
2020	765		937
2021	651		816
2022			720

Changes in the carrying amount of goodwill and net other intangible assets for the six month period ended June 30, ~~2017 is~~2018 are as follows:


(In thousands)	Goodwill		Core Deposit Premium			Mortgage Servicing Rights			Goodwill		Core Deposit Premium			Mortgage Servicing Rights
Balance January 1, 2017	$	138,921	$	3,841		$	2,868
Balance January 1, 2018									$	138,921	$	2,965		$	4,653
Originations	—		—			965			—		—			1,090
Amortization	—		(485		)	(193		)	—		(345		)	(289		)
Impairment reversal	—		—			6			—		—			9
Balance June 30, 2017	$	138,921	$	3,356		$	3,646
Balance June 30, 2018									$	138,921	$	2,620		$	5,463

Goodwill allocated to the Company’s operating segments at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 is shown below.



(In thousands)
Consumer segment	$	70,721
Commercial segment	67,454
Wealth segment	746
Total goodwill	$	138,921

5. Guarantees

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

Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At June 30, ~~2017,~~2018, that net liability was ~~$2.1~~$2.2 million, which will be accreted into income over the remaining life of the respective commitments.

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The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was ~~$338.8~~$377.5 million at June 30, ~~2017.~~2018.

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, ~~2017,~~2018, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 32 to 11 years. At June 30, ~~2017,~~2018, the fair value of the Company's guarantee liabilities for RPAs was ~~$139~~$67 thousand, and the notional amount of the underlying swaps was ~~$75.3~~$103.2 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)	2017			2016			2017			2016			2018			2017			2018			2017
Service cost - benefits earned during the period	$	128		$	138		$	257		$	271		$	152		$	128		$	305		$	257
Interest cost on projected benefit obligation	973			1,005			1,946			1,972			951			973			1,901			1,946
Expected return on plan assets	(1,438		)	(1,439		)	(2,876		)	(2,876		)	(1,438		)	(1,438		)	(2,875		)	(2,876		)
Amortization of prior service cost	(68		)	(67		)	(136		)	(135		)	(67		)	(68		)	(135		)	(136		)
Amortization of unrecognized net loss	617			642			1,234			1,293			592			617			1,184			1,234
Net periodic pension cost	$	212		$	279		$	425		$	525		$	190		$	212		$	380		$	425

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 ~~2017,~~2018, the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets. ~~The Company has no plans to make any further contributions, other than those related to the CERP, during the remainder of 2017.~~

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

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7. Common Stock *

Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 12.


	For the Three Months Ended 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)	2017		2016		2017		2016		2018		2017		2018		2017
Basic income per common share:
Net income attributable to Commerce Bancshares, Inc.	$	78,960	$	69,893	$	150,464	$	135,267	$	110,330	$	78,960	$	211,314	$	150,464
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	$	76,710	$	67,643	145,964		130,767		108,080		76,710		206,814		145,964
Less income allocated to nonvested restricted stock	943		940		1,888		1,834		1,139		943		2,260		1,888
Net income allocated to common stock	$	75,767	$	66,703	$	144,076	$	128,933	$	106,941	$	75,767	$	204,554	$	144,076
Weighted average common shares outstanding	100,555		100,151		100,463		100,247		105,686		105,583		105,660		105,486
Basic income per common share	$	.75	$	.67	$	1.43	$	1.29	$	1.02	$	.71	$	1.94	$	1.36
Diluted income per common share:
Net income available to common shareholders	$	76,710	$	67,643	$	145,964	$	130,767	$	108,080	$	76,710	$	206,814	$	145,964
Less income allocated to nonvested restricted stock	941		938		1,883		1,831		1,136		941		2,254		1,883
Net income allocated to common stock	$	75,769	$	66,705	$	144,081	$	128,936	$	106,944	$	75,769	$	204,560	$	144,081
Weighted average common shares outstanding	100,555		100,151		100,463		100,247		105,686		105,583		105,660		105,486
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	344		261		370		245		343		360		338		389
Weighted average diluted common shares outstanding	100,899		100,412		100,833		100,492		106,029		105,943		105,998		105,875
Diluted income per common share	$	.75	$	.66	$	1.43	$	1.28	$	1.01	$	.71	$	1.93	$	1.36

Unexercised stock appreciation rights of ~~126~~295 thousand and ~~208~~132 thousand were excluded in the computation of diluted income per common share for the six month periods ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, because their inclusion would have been anti-dilutive.

* All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December ~~2016.~~2017.

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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 debt 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			Total Accumulated Other Comprehensive Income (Loss)
(In thousands)	OTTI			Other									OTTI			Other
Balance January 1, 2018													$	3,411		$	30,326		$	(19,629	)	$	14,108
ASU 2018-02 Reclassification of tax rate change													715			6,359			(4,142		)	2,932
ASU 2016-01 Reclassification of unrealized gain on equity securities													—			(33,320		)	—			(33,320		)
Other comprehensive loss before reclassifications to current earnings													(173		)	(123,854		)	—			(124,027		)
Amounts reclassified to current earnings from accumulated other comprehensive income													68			(424		)	1,049			693
Current period other comprehensive income (loss), before tax													(105		)	(124,278		)	1,049			(123,334		)
Income tax (expense) benefit													27			31,068			(262		)	30,833
Current period other comprehensive income (loss), net of tax													(78		)	(93,210		)	787			(92,501		)
Transfer of unrealized gain on securities for which impairment was not previously recognized													12			(12		)	—			—
Balance June 30, 2018													$	4,060		$	(89,857	)	$	(22,984	)	$	(108,781	)
Balance January 1, 2017	$	2,975		$	27,328		$	(19,328	)	$	10,975		$	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		)
Other comprehensive income (loss) before reclassifications to current earnings													(44		)	53,072			—			53,028
Amounts reclassified to current earnings 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			276			48,779			1,098			50,153
Income tax expense	(105		)	(18,536		)	(417		)	(19,058		)	(105		)	(18,536		)	(417		)	(19,058		)
Current period other comprehensive income, net of tax	171			30,243			681			31,095			171			30,243			681			31,095
Transfer of unrealized gain on securities for which impairment was not previously recognized	24			(24		)	—			—			24			(24		)	—			—
Balance June 30, 2017	$	3,170		$	57,547		$	(18,647	)	$	42,070		$	3,170		$	57,547		$	(18,647	)	$	42,070
Balance January 1, 2016	$	3,316		$	49,750		$	(20,596	)	$	32,470
Other comprehensive income (loss) before reclassifications	(911		)	163,925			—			163,014
Amounts reclassified from accumulated other comprehensive income	270			—			1,158			1,428
Current period other comprehensive income (loss), before tax	(641		)	163,925			1,158			164,442
Income tax (expense) benefit	243			(62,291		)	(440		)	(62,488		)
Current period other comprehensive income (loss), net of tax	(398		)	101,634			718			101,954
Balance June 30, 2016	$	2,918		$	151,384		$	(19,878	)	$	134,424

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

~~(2)~~

The ~~pre-tax amounts reclassified~~requirement to revalue deferred tax assets and liabilities in the period of enactment stranded the effects of the tax rate change, mandated by the Tax Cuts and Jobs Act, in accumulated other comprehensive income. In response, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which the Company adopted on January 1, 2018. This ASU allowed the reclassification of the stranded tax effects from accumulated other comprehensive income ~~are included~~(as shown in the ~~computation~~table above) to retained earnings.

As mentioned in Note 3, additional new accounting guidance, which was effective January 1, 2018, required the reclassification 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.~~

unrealized gains on equity securities from accumulated other comprehensive income to retained earnings (also shown above).

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 consists of various consumer loan and deposit products offered through its retail branch network of approximately 180 locations. This segment also includes indirect and other consumer loan financing businesses, along with debit and credit card loan and fee businesses. Residential mortgage origination, sales and servicing functions are included in this ~~consumer~~Consumer segment, but residential mortgage loans retained by the Company are not considered part of this segment. The Commercial segment provides corporate lending, leasing, and international services, along with business and governmental deposit products and commercial cash management services. This segment includes both merchant and commercial bank card products. It also includes the Capital Markets Group which sells fixed income securities and provides safekeeping and accounting services to its business and correspondent bank customers. The Wealth segment provides traditional trust and estate planning, advisory and discretionary investment management, and brokerage services. This segment also provides various loan and deposit related services to its private banking customers.

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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~~changes 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, 2018
Net interest income																			$	73,471		$	85,721		$	11,857		$	171,049		$	39,910		$	210,959
Provision for loan losses																			(10,409		)	308			16			(10,085		)	42			(10,043		)
Non-interest income																			32,116			51,651			42,896			126,663			(1,813		)	124,850
Investment securities losses, net																			—			—			—			—			(3,075		)	(3,075		)
Non-interest expense																			(72,095		)	(75,360		)	(30,254		)	(177,709		)	(4,151		)	(181,860		)
Income before income taxes																			$	23,083		$	62,320		$	24,515		$	109,918		$	30,913		$	140,831
Six Months Ended June 30, 2018
Net interest income																			$	144,908		$	167,816		$	23,302		$	336,026		$	67,825		$	403,851
Provision for loan losses																			(20,924		)	488			(48		)	(20,484		)	45			(20,439		)
Non-interest income																			62,332			100,862			84,997			248,191			(3,651		)	244,540
Investment securities gains, net																			—			—			—			—			2,335			2,335
Non-interest expense																			(142,266		)	(148,158		)	(62,113		)	(352,537		)	(11,600		)	(364,137		)
Income before income taxes																			$	44,050		$	121,008		$	46,138		$	211,196		$	54,954		$	266,150
Three Months Ended June 30, 2017
Net interest income	$	69,274		$	81,718		$	11,933		$	162,925		$	19,882		$	182,807		$	69,274		$	82,137		$	11,934		$	163,345		$	19,462		$	182,807
Provision for loan losses	(10,802		)	111			24			(10,667		)	(91		)	(10,758		)	(10,802		)	111			24			(10,667		)	(91		)	(10,758		)
Non-interest income	34,459			49,746			38,851			123,056			28			123,084			29,617			46,088			38,852			114,557			823			115,380
Investment securities gains, net	—			—			—			—			1,651			1,651			—			—			—			—			1,651			1,651
Non-interest expense	(73,603		)	(74,054		)	(29,446		)	(177,103		)	(7,491		)	(184,594		)	(68,374		)	(72,134		)	(29,494		)	(170,002		)	(6,888		)	(176,890		)
Income before income taxes	$	19,328		$	57,521		$	21,362		$	98,211		$	13,979		$	112,190		$	19,715		$	56,202		$	21,316		$	97,233		$	14,957		$	112,190
Six Months Ended June 30, 2017
Net interest income	$	136,628		$	161,505		$	23,771		$	321,904		$	39,176		$	361,080		$	136,628		$	162,007		$	23,778		$	322,413		$	38,667		$	361,080
Provision for loan losses	(20,464		)	624			1			(19,839		)	(2,047		)	(21,886		)	(20,464		)	624			1			(19,839		)	(2,047		)	(21,886		)
Non-interest income	66,017			96,879			76,557			239,453			697			240,150			56,780			90,998			76,558			224,336			657			224,993
Investment securities gains, net	—			—			—			—			879			879			—			—			—			—			879			879
Non-interest expense	(145,126		)	(147,839		)	(59,795		)	(352,760		)	(18,664		)	(371,424		)	(135,791		)	(142,499		)	(59,813		)	(338,103		)	(18,164		)	(356,267		)
Income before income taxes	$	37,055		$	111,169		$	40,534		$	188,758		$	20,041		$	208,799		$	37,153		$	111,130		$	40,524		$	188,807		$	19,992		$	208,799
Three Months Ended June 30, 2016
Net interest income	$	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		)
Non-interest income	33,038			48,289			36,618			117,945			(1,375		)	116,570
Investment securities losses, net	—			—			—			—			(744		)	(744		)
Non-interest expense	(70,522		)	(70,637		)	(28,356		)	(169,515		)	(7,574		)	(177,089		)
Income before income taxes	$	20,968		$	56,369		$	19,200		$	96,537		$	4,813		$	101,350
Six Months Ended June 30, 2016
Net interest income	$	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		)
Non-interest income	62,935			99,408			71,020			233,363			2,231			235,594
Investment securities losses, net	—			—			—			—			(1,739		)	(1,739		)
Non-interest expense	(139,526		)	(140,250		)	(56,944		)	(336,720		)	(17,842		)	(354,562		)
Income before income taxes	$	39,700		$	113,911		$	35,783		$	189,394		$	6,848		$	196,242

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.

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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~~At June 30, 2018, 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, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Interest rate swaps	$	1,693,637	$	1,685,099	$	1,891,877	$	1,741,412
Interest rate caps	32,890		59,379		31,483		31,776
Credit risk participation agreements	118,081		121,514		152,402		133,488
Foreign exchange contracts	5,556		4,046		8,737		11,826
Mortgage loan commitments	29,429		12,429		21,653		17,110
Mortgage loan forward sale contracts	1,026		6,626		2,848		2,566
Forward TBA contracts	43,000		15,000		25,000		25,000
Total notional amount	$	1,923,619	$	1,904,093	$	2,134,000	$	1,963,178

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

Under its program to sell residential mortgage loans in the secondary market, the Company designates certain newly-originated residential mortgage loans as held for sale. Derivative instruments arising from this activity include mortgage loan commitments and forward loan sale 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.

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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 1315 on Fair Value ~~Measurements.~~

Asset Derivatives Liability Derivatives
June 30, 2017 Dec. 31, 2016 June 30, 2017 Dec. 31, 2016
(In thousands)
  Fair Value   Fair Value
Derivative instruments:
   Interest rate swaps $ 10,887
$ 12,987
$ (5,987 ) $ (12,987 )
   Interest rate caps 34
78
(34 ) (78 )
   Credit risk participation agreements 58
65
(139 ) (156 )
   Foreign exchange contracts 39
66
(53 ) (4 )
   Mortgage loan commitments 872
355
—
(6 )
   Mortgage loan forward sale contracts —
—
—
(63 )
   Forward TBA contracts 137
15
(34 ) (45 )
Total $ 12,027
$ 13,566
$ (6,247 ) $ (13,339 )
Measurements in the 2017 Annual Report on Form 10-K.

~~Due~~The Company's policy is to ~~rule changes by the Company's clearing counterparty effective~~present its derivative assets and derivative liabilities on a gross basis in its consolidated balance sheets, and these are reported in other assets and other liabilities. However, in January 2017, a clearinghouse rule change required that variation margin on centrally cleared derivatives, formerly treated as collateral, ~~previously recorded in "other assets" has been reclassified and offset against~~be treated as settlements of derivative exposure. As a result, the fair values of ~~cleared swaps, such that~~the respective derivative contracts must be reduced by variation margin payments and reported as a single, net amount. Accordingly, at June 30, ~~2017,~~2018 in the table below, the positive fair values of cleared swaps were reduced by ~~$2.4~~$15.9 million and the negative fair values of cleared swaps were reduced by ~~$7.3~~$1.5 million. At December 31, 2017, the positive fair values of cleared swaps were reduced by $4.5 million ~~as reflected in~~and the ~~table above.~~negative fair values of cleared swaps were reduced by $4.3 million.



	Asset Derivatives				Liability Derivatives
	June 30, 2018		Dec. 31, 2017		June 30, 2018			Dec. 31, 2017
(In thousands)	Fair Value				Fair Value
Derivative instruments:
Interest rate swaps	$	5,265	$	7,674	$	(19,616	)	$	(7,857	)
Interest rate caps	20		16		(20		)	(16		)
Credit risk participation agreements	21		46		(67		)	(123		)
Foreign exchange contracts	194		21		(31		)	(40		)
Mortgage loan commitments	730		580		—			—
Mortgage loan forward sale contracts	8		8		(1		)	(7		)
Forward TBA contracts	1		4		(111		)	(31		)
Total	$	6,239	$	8,349	$	(19,846	)	$	(8,074	)

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)		2017			2016			2017			2016				2018			2017			2018		2017
Derivative instruments:
Interest rate swaps	Other non-interest income	$	456		$	769		$	599		$	2,995		Other non-interest income	$	1,727		$	456		$	2,232	$	599
Credit risk participation agreements	Other non-interest income	1			(23		)	11			(58		)	Other non-interest income	16			1			180		11
Foreign exchange contracts	Other non-interest income	(55		)	57			(75		)	8			Other non-interest income	173			(55		)	182		(75		)
Mortgage loan commitments	Loan fees and sales	(32		)	19			522			527			Loan fees and sales	148			(32		)	149		522
Mortgage loan forward sale contracts	Loan fees and sales	(4		)	1			62			—			Loan fees and sales	6			(4		)	6		62
Forward TBA contracts	Loan fees and sales	(160		)	(397		)	(258		)	(726		)	Loan fees and sales	(9		)	(160		)	533		(258		)
Total		$	206		$	426		$	861		$	2,746			$	2,061		$	206		$	3,282	$	861

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

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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.~~minimums, and usually consists of marketable securities. By contract, itthese 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~~or securities to its clearing agent. Collateral positions are valued daily, and adjustments to amounts received and pledged by the Company are made as appropriate to maintain proper collateralization for these transactions. Swap derivative transactions with customers are generally secured by rights to non-financial collateral, such as real and personal property, which is not shown in the table below.


							Gross Amounts Not Offset in the Balance Sheet														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, 2017
June 30, 2018
Assets:
Derivatives subject to master netting agreements	$	11,088	$	—	$	11,088	$	(514	)	$	—		$	10,574	$	5,338	$	—	$	5,338	$	(491	)	$	(2,114	)	$	2,733
Derivatives not subject to master netting agreements	939		—		939										901		—		901
Total derivatives	12,027		—		12,027										6,239		—		6,239
Liabilities:
Derivatives subject to master netting agreements	$	6,066	$	—	$	6,066	$	(514	)	$	(1,710	)	$	3,842	$	19,777	$	—	$	19,777	$	(491	)	$	(354	)	$	18,932
Derivatives not subject to master netting agreements	181		—		181										69		—		69
Total derivatives	6,247		—		6,247										19,846		—		19,846
December 31, 2016
December 31, 2017
Assets:
Derivatives subject to master netting agreements	$	13,111	$	—	$	13,111	$	(3,391	)	$	—		$	9,720	$	7,726	$	—	$	7,726	$	(233	)	$	(824	)	$	6,669
Derivatives not subject to master netting agreements	455		—		455										623		—		623
Total derivatives	13,566		—		13,566										8,349		—		8,349
Liabilities:
Derivatives subject to master netting agreements	$	13,124	$	—	$	13,124	$	(3,391	)	$	(5,292	)	$	4,441	$	7,935	$	—	$	7,935	$	(233	)	$	(1,570	)	$	6,132
Derivatives not subject to master netting agreements	215		—		215										139		—		139
Total derivatives	13,339		—		13,339										8,074		—		8,074

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.

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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~~$550.0 million at June 30, ~~2017~~2018 and ~~$550.0~~$650.0 million at December 31, ~~2016.~~2017. At June 30, ~~2017,~~2018, the Company had posted collateral of ~~$718.1~~$557.0 million in marketable securities, consisting of agency mortgage-backed bonds and treasuries, and had accepted ~~$724.4~~$556.0 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, 2017
June 30, 2018
Total resale agreements, subject to master netting arrangements	$	1,325,000	$	(700,000	)	$	625,000	$	—	$	(625,000	)	$	—	$	1,250,000	$	(550,000	)	$	700,000	$	—	$	(698,414	)	$	1,586
Total repurchase agreements, subject to master netting arrangements	1,702,934		(700,000		)	1,002,934		—		(1,002,934		)	—		1,585,074		(550,000		)	1,035,074		—		(1,035,074		)	—
December 31, 2016
December 31, 2017
Total resale agreements, subject to master netting arrangements	$	1,275,000	$	(550,000	)	$	725,000	$	—	$	(725,000	)	$	—	$	1,350,000	$	(650,000	)	$	700,000	$	—	$	(700,000	)	$	—
Total repurchase agreements, subject to master netting arrangements	2,221,065		(550,000		)	1,671,065		—		(1,671,065		)	—		1,954,768		(650,000		)	1,304,768		—		(1,304,768		)	—

The table below shows the remaining contractual maturities of repurchase agreements outstanding at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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, 2017
June 30, 2018
Repurchase agreements, secured by:
U.S. government and federal agency obligations									$	253,662	$	—	$	350,000	$	603,662
Government-sponsored enterprise obligations									63,916		—		—		63,916
Agency mortgage-backed securities									518,375		22,850		202,750		743,975
Non-agency mortgage-backed securities									10,591		—		—		10,591
Asset-backed securities									56,335		75,000		—		131,335
Other debt securities									31,595		—		—		31,595
Total repurchase agreements, gross amount recognized									$	934,474	$	97,850	$	552,750	$	1,585,074
December 31, 2017
Repurchase agreements, secured by:
U.S. government and federal agency obligations	$	330,173	$	1,728	$	450,000	$	781,901	$	271,820	$	1,731	$	450,000	$	723,551
Government-sponsored enterprise obligations	180,496		—		—		180,496		149,111		—		—		149,111
Agency mortgage-backed securities	379,441		70,325		200,000		649,766		737,975		9,750		200,000		947,725
Asset-backed securities	10,771		80,000		—		90,771		89,601		30,000		—		119,601
Other debt securities									14,780		—		—		14,780
Total repurchase agreements, gross amount recognized	$	900,881	$	152,053	$	650,000	$	1,702,934	$	1,263,287	$	41,481	$	650,000	$	1,954,768
December 31, 2016
Repurchase agreements, secured by:
U.S. government and federal agency obligations	$	294,600	$	—	$	300,000	$	594,600
Government-sponsored enterprise obligations	147,694		—		3,237		150,931
Agency mortgage-backed securities	693,851		24,380		252,473		970,704
Asset-backed securities	474,830		30,000		—		504,830
Total repurchase agreements, gross amount recognized	$	1,610,975	$	54,380	$	555,710	$	2,221,065

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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 $3.1 million ~~and $2.9 million~~ in both the three months ended June 30, 2018 and 2017, and ~~2016, respectively,~~$6.4 million and $6.2 ~~million and $6.3~~ million in the six months ended June 30, 2018 and 2017, ~~and 2016,~~ 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, ~~2017,~~2018, 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, 2017	1,392,451		$34.67
Nonvested at January 1, 2018				1,254,518		$38.67
Granted	233,520		57.32	225,764		59.23
Vested	(394,130	)	30.79	(344,830	)	32.27
Forfeited	(9,388	)	38.78	(15,049	)	45.88
Nonvested at June 30, 2017	1,222,453		$40.22
Nonvested at June 30, 2018				1,120,403		$44.69

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 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		$~~12.54~~12.44
Assumptions:
Dividend yield	1.6		%
Volatility	~~21.1~~20.6		%
Risk-free interest rate	~~2.4~~2.7		%
Expected term	~~7.0~~6.6 years

A summary of SAR activity during the first six months of ~~2017~~2018 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, 2017	1,324,954		$34.53
Outstanding at January 1, 2018							1,179,286		$37.13
Granted	165,592		57.53				168,716		58.42
Forfeited	(4,182	)	42.82				(8,856	)	46.86
Expired	(797	)	36.22				(276	)	43.52
Exercised	(263,503	)	30.58				(226,488	)	29.82
Outstanding at June 30, 2017	1,222,064		$38.47	6.5 years	$	22,583
Outstanding at June 30, 2018							1,112,382		$41.77	7.1 years	$	25,584

13. Revenue from Contracts with Customers

The Company adopted ASU 2014-09, "Revenue from Contracts with Customers", and its related amendments on January 1, 2018. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For the six months ended June 30, 2018, approximately 62% of the Company’s total revenue was comprised of net interest income, which is not within the scope of this guidance. Of the remaining revenue, those items that were subject to this guidance mainly included fees for bank card, trust, deposit account services and consumer brokerage services.

The Company has concluded that the new guidance did not require any significant change to its revenue recognition processes. However, application of the new guidance resulted in a reclassification of certain bank card related network and rewards costs, previously classified as non-interest expense, to a reduction to non-interest income in the Company’s consolidated statements of

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income. The reclassification had no effect on prior period net income or net income per share. The Company adopted ASU 2014-09 on a full retrospective basis, in which each prior reporting period has been presented in accordance with the new guidance.

The table below shows the effect of this reclassification on bank card fee income and non-interest expense for the three and six months ended June 30, 2017.



	Three Months Ended June 30, 2017							Six Months Ended June 30, 2017
(In thousands)	As Previously Reported		Adoption of ASU 2014-09			As Adjusted		As Previously Reported		Adoption of ASU 2014-09			As Adjusted
Non-interest income:
Bank card transaction fees	$	44,999	$	(7,704	)	$	37,295	$	88,203	$	(15,157	)	$	73,046
Total non-interest income	123,084		(7,704		)	115,380		240,150		(15,157		)	224,993
Non-interest expense:
Data processing and software	$	23,356	$	(3,321	)	$	20,035	$	46,453	$	(6,513	)	$	39,940
Other	19,761		(4,383		)	15,378		39,725		(8,644		)	31,081
Total non-interest expense	184,594		(7,704		)	176,890		371,424		(15,157		)	356,267

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



	Three Months Ended June 30				Six Months Ended June 30
(In thousands)	2018		2017		2018		2017
Bank card transaction fees	$	43,215	$	37,295	$	84,668	$	73,046
Trust fees	37,036		33,120		73,098		65,134
Deposit account charges and other fees	23,893		22,861		46,875		44,803
Consumer brokerage services	3,971		3,726		7,739		7,375
Other non-interest income	6,852		8,570		14,163		16,167
Total non-interest income from contracts with customers	114,967		105,572		226,543		206,525
Other non-interest income ^(a)	9,883		9,808		17,997		18,468
Total non-interest income	$	124,850	$	115,380	$	244,540	$	224,993

(a) This revenue is not within the scope of ASU 2014-09, and includes fees relating to capital market activities, loan fees and sales, derivative instruments, standby letters of credit and various other transactions.

The following table presents the opening and closing receivable balances for the six month periods ended June 30, 2018 and 2017 for the Company’s significant revenue categories subject to ASU 2014-09.



(In thousands)	June 30, 2018		December 31, 2017		June 30, 2017		December 31, 2016
Bank card transaction fees	$	11,104	$	13,315	$	10,878	$	14,686
Trust fees	2,893		2,802		3,227		2,681
Deposit account charges and other fees	5,773		5,597		5,471		5,735
Consumer brokerage services	924		380		345		309

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

A description of these revenue categories follows.

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Bank Card Transaction Fees

The following table presents the components of bank card fee income.



	Three Months Ended June 30						Six Months Ended June 30
(In thousands)	2018			2017			2018			2017
Debit card:
Fee income	$	10,582		$	10,325		$	20,344		$	19,966
Expense for network charges	(375		)	(1,921		)	(746		)	(3,571		)
Net debit card fees	10,207			8,404			19,598			16,395

Credit card:
Fee income	6,800			6,483			12,845			12,223
Expense for network charges and rewards	(3,304		)	(2,923		)	(6,248		)	(5,669		)
Net credit card fees	3,496			3,560			6,597			6,554

Corporate card:
Fee income	49,141			43,261			97,017			85,680
Expense for network charges and rewards	(24,521		)	(23,365		)	(48,229		)	(45,820		)
Net corporate card fees	24,620			19,896			48,788			39,860

Merchant:
Fee income	7,606			8,350			14,907			16,289
Fees to cardholder banks	(1,878		)	(2,080		)	(3,603		)	(4,169		)
Expense for network charges	(836		)	(835		)	(1,619		)	(1,883		)
Net merchant fees	4,892			5,435			9,685			10,237
Total bank card transaction fees	$	43,215		$	37,295		$	84,668		$	73,046

The majority of debit and credit card fees are reported in the Consumer segment, while corporate card and merchant fees are reported in the Commercial segment.

Debit and Credit Card Fees

The Company issues debit and credit cards to its retail and commercial banking customers who use the cards to purchase goods and services from merchants through an electronic payment system. As a card issuer, the Company earns fees, including interchange income, for processing the cardholder’s purchase transaction with a merchant through a settlement network. Purchases are charged directly to a customer’s checking account (in the case of a debit card), or are posted to a customer’s credit card account. The fees earned are established by the settlement network and are dependent on the type of transaction processed but are typically based on a per unit charge. Interchange income, the largest component of debit and credit card fees, is settled daily through the networks. The services provided to the cardholders include issuing and maintaining cards, settling purchases with merchants, and maintaining memberships in various card networks to facilitate processing. These services are considered one performance obligation as one of the services would not be performed without the others. The performance obligation is satisfied as services are rendered for each purchase transaction, and income is immediately recognized.

In order to participate in the settlement network process, the Company must pay various transaction-related costs, established by the networks, including membership fees and a per unit charge for each transaction. These expenses are recorded net of the card fees earned.

Consumer credit card products offer cardholders rewards that can be later redeemed for cash or goods or services to encourage card usage. Reward programs must meet network requirements based on the type of card issued. The expense associated with the rewards granted are recorded net of the credit card fees earned.

Commercial card products offer cash rewards to corporate cardholders to encourage card usage in facilitating corporate payments. The Company pays cash rewards based on contractually agreed upon amounts, normally as a percent of each sales transaction. The expense associated with the cash rewards program is recorded net of the corporate card fees earned.

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Merchant Fees

The Company offers merchant processing services to its business customers to enable them to accept credit and debit card payments. Merchant processing activities include gathering merchant sales information, authorizing sales transactions and collecting the funds from card issuers using the networks. The merchant is charged a merchant discount fee for the services based on agreed upon pricing between the merchant and the Company. Merchant fees are recorded net of outgoing interchange costs paid to the card issuing banks and net of other network costs as show in the table above.

Merchant services provided are considered one performance obligation as one of the services would not be performed without the others. The performance obligation is satisfied as services are rendered for each settlement transaction and income is immediately recognized. Income earned from merchant fees settles with the customer according to terms negotiated in individual customer contracts. The majority of customers settle with the Company at least monthly.

Trust Fees

The following table shows the components of revenue within trust fees.



	Three Months Ended June 30				Six Months Ended June 30
(In thousands)	2018		2017		2018		2017
Private client	$	27,987	$	24,701	$	54,855	$	48,463
Institutional	7,271		6,751		14,682		13,245
Other	1,778		1,668		3,561		3,426
Total trust fees	$	37,036	$	33,120	$	73,098	$	65,134

This revenue is reported in the Wealth segment.

The Company provides trust and asset management services to both private client and institutional trust customers including asset custody, investment advice, and reporting and administrative services. Other specialized services such as tax preparation, financial planning, representation and other related services are provided as needed. Trust fees are generally earned monthly and billed based on a rate multiplied by the fair value of the customer trust assets. The majority of customer trust accounts are billed monthly. However, some accounts are billed quarterly, and a small number of accounts are billed semi-annually or annually, in accordance with agreements in place with the customer. The Company accrues trust fees monthly based on an estimate of fees due and either directly charges the customer’s account the following month or invoices the customer for fees due.

The Company maintains written product pricing information which is used to bill each trust customer based on the services provided. Providing trust services is considered to be a single performance obligation that is satisfied on a monthly basis, involving the monthly custody of customer assets, statement rendering, periodic investment advice where applicable, and other specialized services as needed. As such, performance obligations are considered to be satisfied at the conclusion of each month while trust fee income is also recorded monthly.

Deposit Account Charges and Other Fees

The following table shows the components of revenue within deposit account charges and other fees.



	Three Months Ended June 30				Six Months Ended June 30
(In thousands)	2018		2017		2018		2017
Corporate cash management fees	$	10,095	$	9,477	$	19,492	$	18,388
Overdraft and return item fees	7,656		7,448		15,168		14,628
Other service charges on deposit accounts	6,142		5,936		12,215		11,787
Total deposit account charges and other fees	$	23,893	$	22,861	$	46,875	$	44,803

Approximately half of this revenue is reported in the Consumer segment, while the remainder is reported in the Commercial segment.

The Company provides corporate cash management services to its business and non-profit customers to meet their various transaction processing needs. Such services include deposit and check processing, lockbox, remote deposit, reconciliation, on-line banking and other similar transaction processing services. The Company maintains unit prices for each type of service, and the customer is billed based on transaction volumes processed monthly. The customer is usually billed either monthly or quarterly,

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however, some customers may be billed semi-annually or annually. The customer may pay for the cash management services provided either by paying in cash or using the value of deposit balances (formula provided to the customer) held at the Company. The Company’s performance obligation for corporate cash management services is the processing of items over a monthly term, and the obligations are satisfied at the conclusion of each month.

Overdraft fees are charged to customers when daily checks and other withdrawals to customers’ accounts exceed balances on hand. Fees are based on a unit price multiplied by the number of items processed whose total amounts exceed the available account balance. The daily overdraft charge is calculated and the fee is posted to the customer’s account each day. The Company’s performance obligations for overdraft transactions is based on the daily transaction processed and the obligation is satisfied as each day’s transaction processing is concluded.

Other deposit fees include numerous smaller fees such as monthly statement fees, foreign ATM processing fees, identification restoration fees, and stop payment fees. Such fees are mostly billed to customers directly on their monthly deposit account statements, or in the case of ATM fees, the fee is charged to the customer on the day that transactions are processed. Performance obligations for all of these various services are satisfied at the time that the service is rendered.

Consumer Brokerage Services

The following shows the components of revenue within consumer brokerage services.



	Three Months Ended June 30				Six Months Ended June 30
(In thousands)	2018		2017		2018		2017
Commission income	$	2,269	$	2,193	$	4,361	$	4,423
Managed account services	1,702		1,533		3,378		2,952
Total consumer brokerage services	$	3,971	$	3,726	$	7,739	$	7,375

Nearly all of this revenue is reported in the Company's Wealth segment.

Consumer brokerage services revenue is comprised of commissions received upon the execution of purchases and sales of mutual fund shares and equity securities, in addition to sales of annuities and certain limited insurance products in an agency capacity. Also, fees are earned on professionally managed advisory programs through arrangements with sub-advisors. Payment from the customer is due upon settlement date for purchases and sales of securities, at the purchase date for annuities and insurance products, and upon inception of the service period for advisory programs.

Most of the contracts (except advisory contracts) encompass two types of performance obligations. The first is an obligation to provide account maintenance, record keeping and custodial services throughout the contract term. The second is the obligation to provide trade execution services for the customers' purchases and sales of products mentioned above. The first obligation is satisfied over time as the service period elapses, while the second type of obligation is satisfied upon the execution of each purchase/sale transaction. Contracts for advisory services contain a single performance obligation comprised of providing the management services and related reporting/administrative services over the contract term.

The transaction price of the contracts (except advisory contracts) is a commission charged at the time of trade execution. The commission varies across different security types, insurance products and mutual funds. It is generally determined by standardized price lists published by the Company and its mutual fund and insurance vendors. Because the transaction price relates specifically to the trade execution, it has been allocated to that performance obligation and is recorded at the time of execution. The fee for advisory services is charged to the customer in advance of the quarterly service period, based on the account balance at the beginning of the period. Revenue is recognized ratably over the service period.

Other Non-Interest Income from Contracts with Customers

Other non-interest income consists mainly of various customer deposit related fees such as ATM fees and gains on sales of tax credits, foreclosed assets, and bank premises and equipment. Performance obligations for these services consist mainly of the execution of transactions for sales of various properties or providing specific deposit related transactions. Fees from these revenue sources are recognized when the performance obligation is completed, at which time cash is received by the Company.

~~13.~~

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14. 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~~debt securities, equity securities, trading debt securities, certain ~~non-marketable securities~~investments relating to private equity activities, and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as mortgage servicing rights and certain other investment securities. These nonrecurring fair value adjustments typically involve lower of cost or fair value accounting or write-downs of individual assets.

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

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

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

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

The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value Measurements note in the Company's ~~2016~~2017 Annual Report on Form 10-K. There have been no significant changes in these methodologies since ~~then, except for a change in the valuation~~then.

Table of ~~cleared interest rate swaps as discussed in Note 10.~~contents

Instruments Measured at Fair Value on a Recurring Basis

The table below presents the June 30, ~~2017~~2018 and December 31, ~~2016~~2017 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 ~~2017~~2018 or the year ended December 31, ~~2016.~~2017.


			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, 2017
June 30, 2018
Assets:
Residential mortgage loans held for sale	$	14,118	$	—	$	14,118	$	—	$	10,750	$	—	$	10,750	$	—
Available for sale securities:
Available for sale debt securities:
U.S. government and federal agency obligations	912,555		912,555		—		—		911,092		911,092		—		—
Government-sponsored enterprise obligations	446,285		—		446,285		—		311,361		—		311,361		—
State and municipal obligations	1,777,797		—		1,760,972		16,825		1,379,164		—		1,364,091		15,073
Agency mortgage-backed securities	2,620,198		—		2,620,198		—		3,131,025		—		3,131,025		—
Non-agency mortgage-backed securities	1,066,889		—		1,066,889		—		1,010,331		—		1,010,331		—
Asset-backed securities	2,250,426		—		2,250,426		—		1,338,542		—		1,338,542		—
Other debt securities	317,704		—		317,704		—		330,861		—		330,861		—
Trading debt securities									31,156		—		31,156		—
Equity securities	47,847		21,156		26,691		—		2,741		2,741		—		—
Trading securities	22,291		—		22,291		—
Private equity investments	53,557		—		—		53,557		68,940		—		—		68,940
Derivatives *	12,027		—		11,097		930		6,239		—		5,488		751
Assets held in trust for deferred compensation plan	11,893		11,893		—		—		13,790		13,790		—		—
Total assets	9,553,587		945,604		8,536,671		71,312		8,545,992		927,623		7,533,605		84,764
Liabilities:
Derivatives *	6,247		—		6,108		139		19,846		—		19,779		67
Liabilities held in trust for deferred compensation plan	11,893		11,893		—		—		13,790		13,790		—		—
Total liabilities	$	18,140	$	11,893	$	6,108	$	139	$	33,636	$	13,790	$	19,779	$	67
December 31, 2016
December 31, 2017
Assets:
Residential mortgage loans held for sale	$	9,263	$	—	$	9,263	$	—	$	15,327	$	—	$	15,327	$	—
Available for sale securities:
Available for sale debt securities:
U.S. government and federal agency obligations	920,904		920,904		—		—		917,147		917,147		—		—
Government-sponsored enterprise obligations	449,998		—		449,998		—		406,363		—		406,363		—
State and municipal obligations	1,778,214		—		1,761,532		16,682		1,611,366		—		1,594,350		17,016
Agency mortgage-backed securities	2,685,931		—		2,685,931		—		3,040,913		—		3,040,913		—
Non-agency mortgage-backed securities	1,055,639		—		1,055,639		—		905,793		—		905,793		—
Asset-backed securities	2,381,301		—		2,381,301		—		1,492,800		—		1,492,800		—
Other debt securities	325,953		—		325,953		—		351,060		—		351,060		—
Trading debt securities									18,269		—		18,269		—
Equity securities	51,263		24,967		26,296		—		48,838		19,864		28,974		—
Trading securities	22,225		—		22,225		—
Private equity investments	50,820		—		—		50,820		55,752		—		—		55,752
Derivatives *	13,566		—		13,146		420		8,349		—		7,723		626
Assets held in trust for deferred compensation plan	10,261		10,261		—		—		12,843		12,843		—		—
Total assets	9,755,338		956,132		8,731,284		67,922		8,884,820		949,854		7,861,572		73,394
Liabilities:
Derivatives *	13,339		—		13,177		162		8,074		—		7,951		123
Liabilities held in trust for deferred compensation plan	10,261		10,261		—		—		12,843		12,843		—		—
Total liabilities	$	23,600	$	10,261	$	13,177	$	162	$	20,917	$	12,843	$	7,951	$	123

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

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


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)												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, 2018
Balance March 31, 2018													$	17,158		$	64,951		$	520		$	82,629
Total gains or losses (realized/unrealized):
Included in earnings													—			3,791			164			3,955
Included in other comprehensive income *													(379		)	—			—			(379		)
Investment securities sold													(1,715		)	—			—			(1,715		)
Discount accretion													9			—			—			9
Purchases of private equity investments													—			364			—			364
Sale/pay down of private equity investments													—			(166		)	—			(166		)
Balance June 30, 2018													$	15,073		$	68,940		$	684		$	84,697
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, 2018													$	—		$	3,791		$	747		$	4,538
For the six months ended June 30, 2018
Balance January 1, 2018													$	17,016		$	55,752		$	503		$	73,271
Total gains or losses (realized/unrealized):
Included in earnings													—			8,096			329			8,425
Included in other comprehensive income *													(246		)	—			—			(246		)
Investment securities sold													(1,715		)	—			—			(1,715		)
Discount accretion													18			—			—			18
Purchases of private equity investments													—			5,243			—			5,243
Sale/pay down of private equity investments													—			(186		)	—			(186		)
Capitalized interest/dividends													—			35			—			35
Sale of risk participation agreement													—			—			(148		)	(148		)
Balance June 30, 2018													$	15,073		$	68,940		$	684		$	84,697
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, 2018													$	—		$	8,096		$	910		$	9,006
For the three months ended June 30, 2017
Balance March 31, 2017	$	17,083		$	52,800		$	822		$	70,705		$	17,083		$	52,800		$	822		$	70,705
Total gains or losses (realized/unrealized):
Included in earnings	—			48			(31		)	17			—			48			(31		)	17
Included in other comprehensive income *	319			—			—			319			319			—			—			319
Investment securities called	(600		)	—			—			(600		)	(600		)	—			—			(600		)
Discount accretion	23			—			—			23			23			—			—			23
Purchases of private equity investments	—			2,259			—			2,259			—			2,259			—			2,259
Sale/pay down of private equity investments	—			(1,550		)	—			(1,550		)	—			(1,550		)	—			(1,550		)
Balance June 30, 2017	$	16,825		$	53,557		$	791		$	71,173		$	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		$	—		$	48		$	872		$	920
For the six months ended June 30, 2017
Balance January 1, 2017	$	16,682		$	50,820		$	258		$	67,760		$	16,682		$	50,820		$	258		$	67,760
Total gains or losses (realized/unrealized):
Included in earnings	—			(2,830		)	533			(2,297		)	—			(2,830		)	533			(2,297		)
Included in other comprehensive income *	710			—			—			710			710			—			—			710
Investment securities called	(600		)	—			—			(600		)	(600		)	—			—			(600		)
Discount accretion	33			—			—			33			33			—			—			33
Purchases of private equity investments	—			7,084			—			7,084			—			7,084			—			7,084
Sale/pay down of private equity investments	—			(1,550		)	—			(1,550		)	—			(1,550		)	—			(1,550		)
Capitalized interest/dividends	—			33			—			33			—			33			—			33
Balance June 30, 2017	$	16,825		$	53,557		$	791		$	71,173		$	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	)	$	—		$	(2,655	)	$	882		$	(1,773	)
For the three months ended June 30, 2016
Balance March 31, 2016	$	17,209		$	67,432		$	506		$	85,147
Total gains or losses (realized/unrealized):
Included in earnings	—			(2,810		)	(4		)	(2,814		)
Included in other comprehensive income *	401			—			—			401
Discount accretion	69			—			—			69
Purchases of private equity investments	—			575			—			575
Sale/pay down of private equity investments	—			(2,398		)	—			(2,398		)
Capitalized interest/dividends	—			14			—			14
Balance June 30, 2016	$	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	)
For the six months ended June 30, 2016
Balance January 1, 2016	$	17,195		$	63,032		$	69		$	80,296
Total gains or losses (realized/unrealized):
Included in earnings	—			(3,724		)	469			(3,255		)
Included in other comprehensive income *	502			—			—			502
Investment securities called	(100		)	—			—			(100		)
Discount accretion	82			—			—			82
Purchases of private equity investments	—			5,841			—			5,841
Sale/pay down of private equity investments	—			(2,398		)	—			(2,398		)
Capitalized interest/dividends	—			62			—			62
Sale of risk participation agreement	—			—			(36		)	(36		)
Balance June 30, 2016	$	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	)

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

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


(In thousands)	Loan Fees and 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, 2018
Total gains or losses included in earnings													$	147		$	17	$	3,791		$	3,955
Change in unrealized gains or losses relating to assets still held at June 30, 2018													$	730		$	17	$	3,791		$	4,538
For the six months ended June 30, 2018
Total gains or losses included in earnings													$	149		$	180	$	8,096		$	8,425
Change in unrealized gains or losses relating to assets still held at June 30, 2018													$	730		$	180	$	8,096		$	9,006
For the three months ended June 30, 2017
Total gains or losses included in earnings	$	(32	)	$	1		$	48		$	17		$	(32	)	$	1	$	48		$	17
Change in unrealized gains or losses relating to assets still held at June 30, 2017	$	871		$	1		$	48		$	920		$	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	)	$	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	)	$	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	)
Change in unrealized gains or losses relating to assets still held at June 30, 2016	$	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	)
Change in unrealized gains or losses relating to assets still held at June 30, 2016	$	790		$	(58	)	$	(3,724	)	$	(2,992	)

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 ~~$16.8~~$15.1 million at June 30, ~~2017,~~2018, while private equity investments, included in ~~non-marketable~~other securities, totaled ~~$53.6~~$68.9 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	2.8%	-	3.1%			Estimated market rate	3.7%	-	5.9%
Private equity investments	Market comparable companies	EBITDA multiple	4.0	-	5.8		Market comparable companies	EBITDA multiple	4.0	-	6.0
Mortgage loan commitments	Discounted cash flow	Probability of funding	53.0%	-	99.3%	80.2%	Discounted cash flow	Probability of funding	50.5%	-	98.8%	80.4%
		Embedded servicing value	(.2)%	-	2.2%	1.0%		Embedded servicing value	.5%	-	2.4%	1.3%

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Instruments Measured at Fair Value on a Nonrecurring Basis

For assets measured at fair value on a nonrecurring basis during the first six months of ~~2017~~2018 and ~~2016,~~2017, and still held as of June 30, ~~2017~~2018 and ~~2016,~~2017, 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, ~~2017~~2018 and ~~2016.~~2017.


			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			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, 2018
Collateral dependent impaired loans												$	175	$	—	$	—	$	175	$	(118	)
Mortgage servicing rights												5,463		—		—		5,463		9
Foreclosed assets												47		—		—		47		(47		)
Long-lived assets												914		—		—		914		(552		)

June 30, 2017
Collateral dependent impaired loans	$	2,044	$	—	$	—	$	2,044	$	(550	)	$	2,044	$	—	$	—	$	2,044	$	(550	)
Mortgage servicing rights	3,646		—		—		3,646		6			3,646		—		—		3,646		6
Foreclosed assets	75		—		—		75		(58		)	75		—		—		75		(58		)
Long-lived assets	1,834		—		—		1,834		(343		)	1,834		—		—		1,834		(343		)

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

~~14.~~15. 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 2016 Annual Report on Form 10-K. There have been no significant changes in these methods and inputs since December 31, 2016, except asAs mentioned in Note 103, the Company prospectively adopted ASU 2016-01 on ~~Derivatives.~~January 1, 2018. In accordance with its requirements, the fair value of loans as of June 30, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.

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The estimated fair values of the Company’s financial instruments and the classification of their fair value measurement within the valuation hierarchy are as ~~follows:~~follows at June 30, 2018 and December 31, 2017:


	Fair Value Hierarchy Level	June 30, 2017				December 31, 2016				Carrying Amount		Estimated Fair Value at June 30, 2018
(In thousands)		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value				Level 1		Level 2		Level 3		Total
Financial Assets
Loans:
Business	Level 3	$	4,852,408	$	4,866,125	$	4,776,365	$	4,787,469	$	4,990,298	$	—	$	—	$	4,890,517	$	4,890,517
Real estate - construction and land	Level 3	848,152		859,171		791,236		800,426		967,151		—		—		962,276		962,276
Real estate - business	Level 3	2,727,349		2,740,841		2,643,374		2,658,093		2,727,580		—		—		2,689,312		2,689,312
Real estate - personal	Level 3	2,009,203		2,022,671		2,010,397		2,005,227		2,102,586		—		—		2,038,381		2,038,381
Consumer	Level 3	2,038,514		2,021,537		1,990,801		1,974,784		2,012,644		—		—		1,976,911		1,976,911
Revolving home equity	Level 3	403,387		404,177		413,634		414,499		374,557		—		—		367,886		367,886
Consumer credit card	Level 3	740,865		754,763		776,465		794,856		775,214		—		—		720,044		720,044
Overdrafts	Level 3	6,714		6,714		10,464		10,464		4,081		—		—		3,018		3,018
Total loans										13,954,111		—		—		13,648,345		13,648,345
Loans held for sale	Level 2	22,002		22,002		14,456		14,456		20,352		—		20,352		—		20,352
Investment securities:
Available for sale	Level 1	933,711		933,711		945,871		945,871
Available for sale	Level 2	8,489,165		8,489,165		8,686,650		8,686,650
Available for sale	Level 3	16,825		16,825		16,682		16,682
Trading	Level 2	22,291		22,291		22,225		22,225
Non-marketable	Level 3	102,388		102,388		99,558		99,558
Investment securities										8,560,285		913,833		7,517,367		129,085		8,560,285
Federal funds sold	Level 1	16,520		16,520		15,470		15,470		31,500		31,500		—		—		31,500
Securities purchased under agreements to resell	Level 3	625,000		628,148		725,000		728,179		700,000		—		—		680,830		680,830
Interest earning deposits with banks	Level 1	80,860		80,860		272,275		272,275		114,947		114,947		—		—		114,947
Cash and due from banks	Level 1	433,747		433,747		494,690		494,690		386,339		386,339		—		—		386,339
Derivative instruments	Level 2	11,097		11,097		13,146		13,146		6,239		—		5,488		751		6,239
Derivative instruments	Level 3	930		930		420		420
Assets held in trust for deferred compensation plan	Level 1	11,893		11,893		10,261		10,261		13,790		13,790		—		—		13,790
Total										$	23,787,563	$	1,460,409	$	7,543,207	$	14,459,011	$	23,462,627
Financial Liabilities
Non-interest bearing deposits	Level 1	$	7,314,506	$	7,314,506	$	7,429,398	$	7,429,398	$	6,876,756	$	6,876,756	$	—	$	—	$	6,876,756
Savings, interest checking and money market deposits	Level 1	11,427,615		11,427,615		11,430,789				11,761,832		11,761,832		—		—		11,761,832
Time open and certificates of deposit	Level 3	2,083,541		2,075,563		2,240,908		2,235,218		1,682,969		—		—		1,682,894		1,682,894
Federal funds purchased	Level 1	253,510		253,510		52,840		52,840		131,685		131,685		—		—		131,685
Securities sold under agreements to repurchase	Level 3	1,002,934		1,003,183		1,671,065		1,671,227		1,035,074		—		—		1,035,558		1,035,558
Other borrowings	Level 3	101,903		102,907		102,049		104,298		9,291		—		7,682		1,609		9,291
Derivative instruments	Level 2	6,108		6,108		13,177		13,177		19,846		—		19,779		67		19,846
Derivative instruments	Level 3	139		139		162		162
Liabilities held in trust for deferred compensation plan	Level 1	11,893		11,893		10,261		10,261		13,790		13,790		—		—		13,790
Total										$	21,531,243	$	18,784,063	$	27,461	$	2,720,128	$	21,531,652

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	Carrying Amount		Estimated Fair Value at December 31, 2017
(In thousands)			Level 1		Level 2		Level 3		Total
Financial Assets
Loans:
Business	$	4,958,554	$	—	$	—	$	4,971,401	$	4,971,401
Real estate - construction and land	968,820		—		—		979,389		979,389
Real estate - business	2,697,452		—		—		2,702,598		2,702,598
Real estate - personal	2,062,787		—		—		2,060,443		2,060,443
Consumer	2,104,487		—		—		2,074,129		2,074,129
Revolving home equity	400,587		—		—		400,333		400,333
Consumer credit card	783,864		—		—		798,093		798,093
Overdrafts	7,123		—		—		7,123		7,123
Total loans	13,983,674		—		—		13,993,509		13,993,509
Loans held for sale	21,398		—		21,398		—		21,398
Investment securities	8,893,307		937,011		7,838,522		117,774		8,893,307
Federal funds sold	42,775		42,775		—		—		42,775
Securities purchased under agreements to resell	700,000		—		—		695,194		695,194
Interest earning deposits with banks	30,631		30,631		—		—		30,631
Cash and due from banks	438,439		438,439		—		—		438,439
Derivative instruments	8,349		—		7,723		626		8,349
Assets held in trust for deferred compensation plan	12,843		12,843		—		—		12,843
Total	$	24,131,416	$	1,461,699	$	7,867,643	$	14,807,103	$	24,136,445
Financial Liabilities
Non-interest bearing deposits	$	7,158,962	$	7,158,962	$	—	$	—	$	7,158,962
Savings, interest checking and money market deposits	11,499,620		11,499,620		—		—		11,499,620
Time open and certificates of deposit	1,766,864		—		—		1,768,780		1,768,780
Federal funds purchased	202,370		202,370		—		—		202,370
Securities sold under agreements to repurchase	1,304,768		—		—		1,305,375		1,305,375
Other borrowings	1,758		—		—		1,758		1,758
Derivative instruments	8,074		—		7,951		123		8,074
Liabilities held in trust for deferred compensation plan	12,843		12,843		—		—		12,843
Total	$	21,955,259	$	18,873,795	$	7,951	$	3,076,036	$	21,957,782

~~15.~~16. 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, ~~2017,~~2018, 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 deems a loss is probable and can be reasonably estimated. Some matters, which are in the early stages, have not yet progressed to the point where a loss amount can be determined to be probable and estimable.

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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 ~~2016~~2017 Annual Report on Form 10-K. Results of operations for the three and six month periods ended June 30, ~~2017~~2018 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, cybersecurity threats, and such other factors as discussed in Part I Item 1A - "Risk Factors" and Part II Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's ~~2016~~2017 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 ~~2016~~2017 Annual Report on Form 10-K. There have been no changes in the Company's application of critical accounting policies since December 31, ~~2016.~~2017.

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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
	2017			2016			2017			2016			2018			2017			2018			2017
Per Share Data
Net income per common share — basic	$	.75		$	.67	*	$	1.43		$	1.29	*	$	1.02		$	.71	*	$	1.94		$	1.36	*
Net income per common share — diluted	.75			.66		*	1.43			1.28		*	1.01			.71		*	1.93			1.36		*
Cash dividends on common stock	.225			.214		*	.450			.429		*	.235			.214		*	.470			.429		*
Book value per common share							24.44			23.49		*							24.64			23.28		*
Market price							56.83			45.62		*							64.71			54.12		*
Selected Ratios
(Based on average balance sheets)
Loans to deposits ⁽¹⁾	65.25		%	63.45		%	64.82		%	63.13		%	68.85		%	65.25		%	68.97		%	64.82		%
Non-interest bearing deposits to total deposits	34.03			33.83			34.25			34.13			33.37			34.03			33.61			34.25
Equity to loans ⁽¹⁾	19.26			19.15			19.00			19.15			19.59			19.26			19.54			19.00
Equity to deposits	12.57			12.15			12.32			12.09			13.49			12.57			13.48			12.32
Equity to total assets	10.42			10.13			10.23			9.99			11.12			10.42			11.07			10.23
Return on total assets	1.26			1.15			1.21			1.11			1.80			1.26			1.73			1.21
Return on common equity	12.48			11.69			12.12			11.44			16.78			12.48			16.19			12.12
(Based on end-of-period data)
Non-interest income to revenue ⁽²⁾	40.24			40.42			39.94			41.25			37.18			38.69			37.71			38.39
Efficiency ratio ⁽³⁾	60.24			61.27			61.67			61.93			54.06			59.21			56.06			60.67
Tier I common risk-based capital ratio							12.28			11.50									13.71			12.28
Tier I risk-based capital ratio							13.05			12.29									14.48			13.05
Total risk-based capital ratio							14.00			13.23									15.33			14.00
Tangible common equity to tangible assets ratio ⁽⁴⁾							9.37			9.09									10.18			9.37
Tier I leverage ratio							9.87			9.36									11.18			9.87

* Restated for the 5% stock dividend distributed in December ~~2016.~~2017.

(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						June 30
(Dollars in thousands)	2017			2016			2018			2017
Total equity	$	2,628,207		$	2,526,821		$	2,771,383		$	2,628,207
Less non-controlling interest	4,324			4,905			3,396			4,324
Less preferred stock	144,784			144,784			144,784			144,784
Less goodwill	138,921			138,921			138,921			138,921
Less core deposit premium	3,356			4,370			2,620			3,356
Total tangible common equity (a)	$	2,336,822		$	2,233,841		$	2,481,662		$	2,336,822
Total assets	$	25,078,843		$	24,709,693		$	24,524,742		$	25,078,843
Less goodwill	138,921			138,921			138,921			138,921
Less core deposit premium	3,356			4,370			2,620			3,356
Total tangible assets (b)	$	24,936,566		$	24,566,402		$	24,383,201		$	24,936,566
Tangible common equity to tangible assets ratio (a)/(b)	9.37		%	9.09		%	10.18		%	9.37		%

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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)	2017			2016			% change		2017			2016			% change		2018			2017			% change		2018			2017			% change
Net interest income	$	182,807		$	171,829		6.4	%	$	361,080		$	335,604		7.6	%	$	210,959		$	182,807		15.4	%	$	403,851		$	361,080		11.8	%
Provision for loan losses	(10,758		)	(9,216		)	16.7		(21,886		)	(18,655		)	17.3		(10,043		)	(10,758		)	(6.6	)	(20,439		)	(21,886		)	(6.6	)
Non-interest income	123,084			116,570			5.6		240,150			235,594			1.9		124,850			115,380			8.2		244,540			224,993			8.7
Investment securities gains (losses), net	1,651			(744		)	N.M.		879			(1,739		)	N.M.		(3,075		)	1,651			N.M.		2,335			879			N.M.
Non-interest expense	(184,594		)	(177,089		)	4.2		(371,424		)	(354,562		)	4.8		(181,860		)	(176,890		)	2.8		(364,137		)	(356,267		)	2.2
Income taxes	(33,201		)	(31,542		)	5.3		(58,108		)	(60,912		)	(4.6	)	(29,507		)	(33,201		)	(11.1	)	(52,765		)	(58,108		)	(9.2	)
Non-controlling interest (expense) income	(29		)	85			N.M.		(227		)	(63		)	N.M.
Non-controlling interest expense																	(994		)	(29		)	N.M.		(2,071		)	(227		)	N.M.
Net income attributable to Commerce Bancshares, Inc.	78,960			69,893			13.0		150,464			135,267			11.2		110,330			78,960			39.7		211,314			150,464			40.4
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	$	76,710		$	67,643		13.4	%	$	145,964		$	130,767		11.6	%	$	108,080		$	76,710		40.9	%	$	206,814		$	145,964		41.7	%

N.M. - Not meaningful.

For the quarter ended June 30, ~~2017,~~2018, net income attributable to Commerce Bancshares, Inc. (net income) amounted to ~~$79.0~~$110.3 million, an increase of ~~$9.1~~$31.4 million, or ~~13.0%~~39.7%, compared to the second quarter of the previous year. For the current quarter, the annualized return on average assets was ~~1.26%~~1.80%, the annualized return on average common equity was ~~12.48%~~16.78% and the efficiency ratio was ~~60.24%~~54.06%. Diluted earnings per common share was ~~$.75,~~$1.01, an increase of ~~13.6%~~42.3% compared to ~~$.66~~$.71 per share in the second quarter of ~~2016~~2017 and an increase of ~~10.3%~~9.8% compared to ~~$.68~~$.92 per share in the previous quarter.

Compared to the second quarter of last year, net interest income increased ~~$11.0~~$28.2 million, or ~~6.4%~~15.4%, mainly due to growth of ~~$13.1~~$20.0 million in interest income on loans coupled with an increase of $10.6 million in interest income on investment securities, partly offset by an increase of ~~$2.6~~$3.9 million in interest expense on deposits and ~~borrowings interest expense.~~borrowings. The provision for loan losses totaled ~~$10.8~~$10.0 million for the current quarter, representing ~~an increase~~a decrease of ~~$1.5 million over~~$715 thousand from the second quarter of ~~2016.~~2017. Non-interest income increased ~~$6.5~~$9.5 million, or ~~5.6%~~8.2%, compared to the second quarter of ~~2016,~~2017, mainly due to combined growth of ~~$5.3~~$10.9 million in trust, deposit and ~~loan~~bank card fee ~~income, in addition to current quarter gains of $1.7 million on sales of branch properties and equipment leased by customers.~~income. Non-interest expense increased ~~$7.5~~$5.0 million, or ~~4.2%~~2.8%, over the second quarter of ~~2016~~2017 primarily due to increases in salaries and employee benefits, data processing, and marketing expense. Although taxable income was higher in the ~~contribution~~second quarter 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 contribution2018 compared to the ~~foundation~~prior year, income tax expense declined due to new tax legislation lowering the corporate tax rate in ~~the first quarter of 2017 and intends to make similar contributions in subsequent quarters this year.~~2018.

Net investment securities ~~gains~~losses totaled ~~$1.7~~$3.1 million in the current quarter ~~and $879 thousand~~compared to gains of $1.7 million in the ~~first six months~~same quarter last year. Current quarter losses were primarily comprised of ~~2017. Gains resulting from the securities donations were $2.2~~an adjustment of $8.9 million ~~in both the first and second quarters of 2017,~~to recognize dividend income on a liquidated equity security, partly offset by ~~losses~~unrealized gains in fair value on the Company’s holdings of private equity ~~securities of $2.8 million in the six month period.~~investments. The dividend income adjustment was entirely offset this quarter by a comparable adjustment increasing interest on investment securities.

Net income for the first six months of ~~2017~~2018 was ~~$150.5~~$211.3 million, an increase of ~~$15.2~~$60.9 million, or ~~11.2%~~40.4%, over the same period last year. Diluted earnings per common share was ~~$1.43,~~$1.93, an increase of ~~11.7%~~41.9% compared to ~~$1.28~~$1.36 per share in the same period last year. For the first six months of ~~2017,~~2018, the annualized return on average assets was ~~1.21%~~1.73%, the annualized return on average common equity was ~~12.12%~~16.19%, and the efficiency ratio was ~~61.67%~~56.06%. Net interest income increased ~~$25.5~~$42.8 million, or ~~7.6%~~11.8%, over the same period last year. This growth was largely due to increases of ~~$22.1~~$38.8 million in loan interest income and ~~$6.7~~$8.6 million in investment securities interest income, offset by a ~~$3.9~~$7.3 million increase in interest expense on deposits and ~~borrowings interest expense.~~borrowings. The provision for loan losses was ~~$21.9~~$20.4 million for the first six months of ~~2017, up $3.2~~2018, down $1.4 million ~~over~~from the same period last year. Non-interest income increased ~~$4.6~~$19.5 million, or ~~1.9%~~8.7%, over the first six months of last year due to growth in bank card, trust, ~~deposit~~ and ~~loan~~deposit fees. Non-interest expense increased ~~$16.9~~$7.9 million, or ~~4.8%~~2.2%, due to higher salaries and benefits expense of ~~$9.5~~$10.3 million, ~~in addition to securities contributions of~~partly offset by a $4.5 million ~~as mentioned above.~~decrease in community service expense.

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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, 2017 vs. 2016									Six Months Ended June 30, 2017 vs. 2016									Three Months Ended June 30, 2018 vs. 2017									Six Months Ended June 30, 2018 vs. 2017
	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	$	978		$	3,766		$	4,744		$	3,934		$	5,303		$	9,237		$	1,099		$	5,909		$	7,008		$	1,284		$	11,433		$	12,717
Real estate - construction and land	631			1,836			2,467			1,888			2,488			4,376			1,173			1,825			2,998			2,365			3,777			6,142
Real estate - business	2,870			415			3,285			5,282			(242		)	5,040			238			3,249			3,487			1,038			6,137			7,175
Real estate - personal	919			(144		)	775			1,878			(431		)	1,447			695			619			1,314			1,154			929			2,083
Consumer	662			735			1,397			1,047			689			1,736			273			2,294			2,567			1,209			4,159			5,368
Revolving home equity	(121		)	256			135			(332		)	348			16			(205		)	635			430			(316		)	1,223			907
Consumer credit card	(192		)	713			521			(315		)	984			669			674			282			956			955			1,037			1,992
Overdrafts	—			—			—			—			—			—			—			—			—			—			—			—
Total interest on loans	5,747			7,577			13,324			13,382			9,139			22,521			3,947			14,813			18,760			7,689			28,695			36,384
Loans held for sale	(442		)	13			(429		)	(388		)	20			(368		)	7			102			109			93			124			217
Investment securities:
U.S. government and federal agency securities	1,843			(2,159		)	(316		)	2,023			1,682			3,705			78			1,519			1,597			89			1,582			1,671
Government-sponsored enterprise obligations	(1,632		)	(1,601		)	(3,233		)	(3,279		)	(1,916		)	(5,195		)	(381		)	260			(121		)	(557		)	513			(44		)
State and municipal obligations	70			50			120			651			(106		)	545			(3,388		)	(1,902		)	(5,290		)	(5,826		)	(4,125		)	(9,951		)
Mortgage-backed securities	1,846			(36		)	1,810			3,862			(790		)	3,072			2,103			2,580			4,683			3,089			4,891			7,980
Asset-backed securities	(153		)	1,596			1,443			(776		)	2,904			2,128			(3,980		)	2,077			(1,903		)	(7,575		)	3,835			(3,740		)
Other securities	(360		)	906			546			(835		)	4,516			3,681			334			9,149			9,483			556			5,719			6,275
Total interest on investment securities	1,614			(1,244		)	370			1,646			6,290			7,936			(5,234		)	13,683			8,449			(10,224		)	12,415			2,191
Federal funds sold and short-term securities purchased under
agreements to resell	2			16			18			(9		)	26			17			67			73			140			150			147			297
Long-term securities purchased under agreements to resell	(648		)	978			330			(1,159		)	1,807			648			190			(89		)	101			52			370			422
Interest earning deposits with banks	17			194			211			2			336			338			556			672			1,228			614			1,357			1,971
Total interest income	6,290			7,534			13,824			13,474			17,618			31,092			(467		)	29,254			28,787			(1,626		)	43,108			41,482
Interest expense:
Deposits:
Savings	12			4			16			23			11			34			15			(16		)	(1		)	28			(30		)	(2		)
Interest checking and money market	109			669			778			258			908			1,166			43			2,135			2,178			28			3,850			3,878
Time open & C.D.'s of less than $100,000	(66		)	31			(35		)	(132		)	(1		)	(133		)	(73		)	93			20			(144		)	182			38
Time open & C.D.'s of $100,000 and over	(184		)	659			475			76			1,176			1,252			(738		)	1,399			661			(1,648		)	2,385			737
Total interest on deposits	(129		)	1,363			1,234			225			2,094			2,319			(753		)	3,611			2,858			(1,736		)	6,387			4,651
Federal funds purchased and securities sold under
agreements to repurchase	89			1,224			1,313			67			1,897			1,964			(232		)	2,150			1,918			(32		)	4,412			4,380
Other borrowings	(17		)	21			4			(1,254		)	893			(361		)	(900		)	1			(899		)	(1,776		)	1			(1,775		)
Total interest expense	(57		)	2,608			2,551			(962		)	4,884			3,922			(1,885		)	5,762			3,877			(3,544		)	10,800			7,256
Net interest income, tax equivalent basis	$	6,347		$	4,926		$	11,273		$	14,436		$	12,734		$	27,170		$	1,418		$	23,492		$	24,910		$	1,918		$	32,308		$	34,226

Net interest income in the second quarter of ~~2017~~2018 was ~~$182.8~~$211.0 million, an increase of ~~$11.0~~$28.2 million over the second quarter of ~~2016.~~2017. On a tax equivalent (T/E) basis, net interest income totaled ~~$190.9~~$215.8 million in the second quarter of ~~2017,~~2018, up ~~$11.3~~$24.9 million over the same period last year and up ~~$3.5~~$19.1 million over the previous quarter. The increase in net interest income compared to the second quarter of ~~2016~~2017 was mainly due to higher interest income on loans (T/E) of ~~$13.3~~$18.9 million. The increase in interest on loans was a result of higher ~~loan~~ yields on ~~nearly~~ all loan products, especially commercial loans, many of which have variable rates. Total interest

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~~Interest~~ income on investment securities (T/E) increased ~~$370 thousand~~$8.4 million over the second quarter of ~~2016, mainly due~~2017, which included dividend income of $8.9 million related to ~~higher interest~~a liquidated equity security which was carried at fair value. Also, inflation income ~~earned on mortgage-backed and asset-backed securities. Securities interest also includes inflation-related interest~~ on the Company's ~~holdings of U.S. Treasury~~treasury inflation-protected securities (TIPS)~~, which is tied to the Consumer Price Index. Interest income related to TIPS~~ increased ~~$2.5~~$1.7 million ~~in the first six months of 2017 compared to~~over the same period last year. This increase was partly offset by a $1.0 billion decrease in ~~2016, and totaled $2.9 million~~average investment securities balances, resulting in a decline in interest income of $5.2 million. Excluding the ~~current quarter and $3.7 million in~~dividend mentioned above, the ~~second quarter of 2016. The~~ Company's net yield on earning assets (T/E) was ~~3.19%~~3.50% in the current quarter compared to ~~3.11%~~3.18% in the second quarter of ~~2016.~~2017.

Total interest income (T/E) increased ~~$13.8~~$28.8 million over the second quarter of ~~2016.~~2017. Interest income on loans (T/E) was ~~$136.8~~$156.0 million during the second quarter of ~~2017,~~2018, and increased ~~$13.3~~$18.9 million, or ~~10.8%~~13.8%, over the same quarter last year. The increase was due to growth of ~~$669.4~~$377.7 million, or ~~5.2%~~2.8%, in average loan balances, and an increase of 2043 basis points in average rates earned. Most of the increase in interest income occurred in the business, construction and business real estate loan categories. The largest increase to interest income occurred in business loan interest, which grew ~~$4.7~~$7.0 million due to ~~higher average balances of $136.0 million, or 2.9%, coupled with~~ a 3148 basis point increase in the average rate ~~earned.~~earned, coupled with higher average balances of $134.7 million. Construction loan interest grew ~~$2.5~~$3.0 million, as average balances increased ~~$73.2~~$109.4 million, or ~~9.3%~~12.7%, and the average rate earned increased 8476 basis points. Business real estate loan interest increased ~~$3.3~~$3.5 million due to an increase of 48 basis points in the average rate earned and an increase in average balances of ~~$312.0~~$25.6 million. Personal real estate loan interest increased $1.3 million ~~or 13.1%, with~~due to an increase of ~~five~~$75.0 million in average balances, or 3.7%, and an increase of 12 basis points in the average rate earned. Interest on consumer loans increased ~~$1.4~~$2.6 million over the same period last year as the average rate increased 1445 basis points, coupled with a ~~$69.8~~$27.8 million increase in average balances. This increase was mainly due to growth of $57.2 million in patient health care loans. During the quarter, auto loans totaling $25.9 million were sold to another financial institution, and contributed to an average decline of $6.7 million in auto loan balances, while average marine and recreational vehicle (RV) loans declined $26.1 million from the same quarter last year. In addition, interest on consumer credit card loans grew $956 thousand over the same period last year, as average balances increased $22.7 million and the average rate earned increased 15 basis points.

Interest income on investment securities (T/E) was ~~$60.5~~$68.9 million during the second quarter of ~~2017,~~2018, which was an increase of ~~$370 thousand~~$8.4 million over the same quarter last year. The increase ~~resulted~~was mainly ~~from increased earnings~~due to the receipt of $8.9 million in dividend income on ~~mortgage-backed and asset-backed securities, partly offset by lower TIPS~~the equity security mentioned above. In addition, interest ~~of $869 thousand and lower interest~~income earned ~~on government-sponsored enterprise obligations. Higher interest~~ on mortgage-backed securities ~~of $1.8~~grew $4.7 million and resulted from an increase of ~~$313.7~~$359.0 million in average ~~balances. Interest income on asset-backed securities grew $1.4 million mainly due to~~balances and a 2725 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, which was partly the result of early maturity calls on certain securities in the second quarter of 2016. The average balance of government-sponsored enterprise obligations decreased $216.0 million and the average rate earned decreased 144 basis points. During the current quarter and the same quarter last year, adjustmentsAdjustments to premium amortization expense, due to ~~changes in~~slowing prepayment speeds on various ~~mortgage~~mortgage-backed and asset-backed securities, ~~were not significant.~~increased interest income $1.5 million in the current quarter, compared to minor adjustments in the same quarter last year. Interest income related to TIPS increased $1.7 million in the second quarter of 2018 compared to the same period in 2017 and totaled $4.5 million in the current quarter and $2.9 million in the second quarter of 2017. The largest decline in interest income occurred in state and municipal obligations, which declined $5.3 million and was impacted by a decline in average balances of $376.9 million and a lower tax equivalent adjustment. Interest income on asset-backed securities declined $1.9 million due to lower average balances of $928.0 million, partly offset by an increase in the average rate earned of 60 basis points. The average balance of the total investment portfolio (excluding unrealized fair value ~~adjustments)~~adjustments on available for sale debt securities) was ~~$9.6~~$8.7 billion in the second quarter of ~~2017,~~2018, compared to ~~$9.4~~$9.7 billion in the second quarter of ~~2016.~~2017.

Interest income on ~~long-term securities purchased under agreements to resell~~balances at the Federal Reserve increased ~~$330 thousand over the second quarter of 2016,~~$1.2 million due to ana 76 basis point increase in the average rate earned ~~of 58 basis points, partly offset by lower balances invested of $159.3 million.~~and a $214.5 million increase in the average balance invested.

The average tax equivalent yield on total interest earning assets was ~~3.37%~~3.90% in the second quarter of ~~2017,~~2018, up from ~~3.25%~~3.36% in the second quarter of ~~2016.~~2017.

Total interest expense increased ~~$2.6~~$3.9 million compared to the second quarter of ~~2016,~~2017 due to a ~~$1.2~~$2.9 million increase in interest expense on interest bearing deposits and a ~~$1.3~~$1.0 million increase in interest expense on borrowings. The increase in deposit expense resulted mainly from ana nine basis point increase ~~of three basis points~~ in the overall average rate paid on deposits. Interest expense on C.D.'s of $100,000 and over rose $475 thousand due to a 17 basis point increase in average rates paid, but was partly offset by lower average balances of $125.9 million. In addition, interest expense on interest checking and money market accounts increased ~~$778~~$2.2 million due to higher rates paid. Interest expense on certificates of deposit rose $681 thousand, as ~~average balances increased $379.1 million and average~~the effect of higher rates paid ~~rose slightly.~~was mostly offset by lower average balances. Interest expense on borrowings increased due to higher rates paid on customer repurchase agreements, ~~and overnight federal funds purchased.~~partly offset by lower average FHLB borrowings. The overall average rate incurred on all interest bearing liabilities was ~~.29%~~.40% and ~~.22%~~.29% in the second quarters of ~~2017~~2018 and ~~2016,~~2017, respectively.

Net interest income (T/E) for the first six months of ~~2017~~2018 was ~~$378.2~~$412.4 million compared to ~~$351.0~~$378.2 million for the same period in ~~2016.~~2017. For the first six months of ~~2017,~~2018, the net interest margin was ~~3.16%~~3.51% compared to ~~3.03%~~3.16% for the first six months of ~~2016.~~2017.

Total interest income (T/E) for the first six months of ~~2017~~2018 increased ~~$31.1~~$41.5 million over the same period last year mainly due to higher interest income on ~~loans and investment securities.~~loans. Loan interest income (T/E) rose ~~$22.5~~$36.6 million due to ~~an $803.8~~a $384.7 million, or ~~6.3%~~2.8%, increase in total average loan balances and a 1242 basis point increase in the average rate earned. Most of the increase in loan interest occurred in ~~the~~ business, business real estate, construction and ~~construction~~consumer loan categories. ~~The growth in interest~~Interest income ~~of $7.9 million~~ on investment securities (T/E) ~~was~~grew

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$2.2 million mainly due to a ~~$163.4 million increase in average balances coupled with a 13~~34 basis point increase in the average rate ~~earned.~~earned, partly offset by a $1.0 billion decrease in average balances. Increased earnings were recorded for ~~U.S.~~equity securities due to the receipt of $8.9 million in dividend income mentioned previously, while interest earned on mortgage-backed securities grew $8.0 million on higher average rates earned and higher average balances. Interest earned on U.S government and federal agency securities rose due to higher TIPS interest of $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 securities, which grew $3.1 million and $2.1 million, respectively.$1.8 million. These increases were partly offset by lower interest earned on ~~government-sponsored enterprise~~state and municipal obligations of ~~$5.2~~$10.0 million, which saw

declines in average balances and rates earned. ~~Interest~~Also, interest income on ~~long-term resell agreements grew $648 thousand~~asset-backed securities declined $3.7 million due to ~~higher~~lower average ~~rates earned,~~balances, partly offset by ~~lower average balances.~~higher rates earned.

Total interest expense for the first six months of ~~2017~~2018 increased ~~$3.9~~$7.3 million compared to last year. Interest expense on interest bearing deposits increased ~~$2.3~~$4.7 million, mainly due to ~~a three~~an eight 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 rates paid~~Interest expense on interest checking and money market account balances increased $3.9 million due to a seven basis point increase in the rates paid. Interest expense on certificates of deposit rose $775 thousand and as noted above, the effect of higher rates paid were largely offset by a decline in average balances. Interest expense on borrowings ~~also~~ increased ~~$1.6~~$2.6 million, mainly due to higher rates paid on ~~federal funds purchased and~~customer repurchase ~~agreements. Interest expense on FHLB borrowings declined $404 thousand, mainly due to lower average balances,~~agreements, which were partly offset by ~~higher rates paid.~~lower FHLB borrowings. The overall cost of total interest bearing liabilities increased to ~~.27%~~.38% compared to ~~.22%~~.27% in the same period last year.

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

Non-Interest Income


	Three Months Ended June 30								Six Months Ended June 30								Three Months Ended June 30								Six Months Ended June 30
(Dollars in thousands)	2017			2016			% change		2017			2016			% change		2018			2017			% change		2018			2017			% change
Bank card transaction fees	$	44,999		$	45,065		(.1	)%	$	88,203		$	89,535		(1.5	)%	$	43,215		$	37,295		15.9	%	$	84,668		$	73,046		15.9	%
Trust fees	33,120			30,241			9.5		65,134			59,484			9.5		37,036			33,120			11.8		73,098			65,134			12.2
Deposit account charges and other fees	22,861			21,328			7.2		44,803			42,019			6.6		23,893			22,861			4.5		46,875			44,803			4.6
Capital market fees	2,156			2,500			(13.8	)	4,498			5,225			(13.9	)	1,992			2,156			(7.6	)	4,283			4,498			(4.8	)
Consumer brokerage services	3,726			3,491			6.7		7,375			7,000			5.4		3,971			3,726			6.6		7,739			7,375			4.9
Loan fees and sales	4,091			3,196			28.0		7,259			5,706			27.2		3,229			4,091			(21.1	)	6,091			7,259			(16.1	)
Other	12,131			10,749			12.9		22,878			26,625			(14.1	)	11,514			12,131			(5.1	)	21,786			22,878			(4.8	)
Total non-interest income	$	123,084		$	116,570		5.6	%	$	240,150		$	235,594		1.9	%	$	124,850		$	115,380		8.2	%	$	244,540		$	224,993		8.7	%
Non-interest income as a % of total revenue*	40.2		%	40.4		%			39.9		%	41.2		%			37.2		%	38.7		%			37.7		%	38.4		%

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

For the second quarter of ~~2017,~~2018, total non-interest income amounted to ~~$123.1~~$124.9 million compared with ~~$116.6~~$115.4 million in the same quarter last year, which was an increase of ~~$6.5~~$9.5 million, or ~~5.6%~~8.2%. The increase was mainly due to growth in bank card, trust, deposit and ~~loan~~swap fee income, ~~coupled with gains on sales of several branch properties~~partly offset by lower loan fees and ~~equipment leased to customers.~~sales.

Bank card transaction fees for the current quarter ~~decreased slightly from~~increased $5.9 million, or 15.9%, over the same quarter last year ~~mainly due to a decline in~~and were comprised of fees on corporate card ($24.6 million), debit card ($10.2 million), merchant ~~fees of $614 thousand, offset by growth of 2.9% in both debit~~($4.9 million) and credit card ~~fees. Commercial~~($3.5 million) transactions. Corporate card fees ~~increased slightly~~grew $4.7 million over the same ~~quarter~~period last ~~year. The table below is a summary~~year due to growth in interchange income of ~~bank~~14.2%, coupled with lower network costs, but higher rewards costs. Debit card ~~transaction~~ fees ~~for~~grew $1.8 million mostly because of lower network processing costs, which declined $1.5 million. Overall merchant income was down 10.0% compared to the ~~three~~same period last year due to lower merchant fees, while credit card fees declined 1.8% on higher rewards expense, partly offset by higher interchange income and ~~six month periods ended June 30, 2017 and 2016.~~

Three Months Ended June 30 Six Months Ended June 30
(Dollars in thousands) 2017 2016 % change 2017 2016 % change
Debit card fees $ 10,326
$ 10,032
2.9 % $ 19,967
$19,417 2.8 %
Credit card fees 6,482
6,302
2.9
12,223
11,947
2.3
Merchant fees 6,297
6,911
(8.9 ) 12,139
14,029
(13.5 )
Corporate card fees 21,894
21,820
.3
43,874
44,142
(.6 )
Total bank card transaction fees $ 44,999
$ 45,065
(.1 )% $ 88,203
$ 89,535
(1.5 )%
lower network costs.

Trust fees for the quarter increased ~~$2.9~~$3.9 million, or ~~9.5%~~11.8%, over the same quarter last year, resulting mainly from ~~continued~~ growth in private client trust fees, which were up ~~$2.0~~$3.3 million, or ~~9.0%~~13.3%, and institutional trust fees, which were up $520 thousand, or 7.7%. Deposit account fees increased ~~$1.5~~$1.0 million, or ~~7.2%~~4.5%, over the same quarter last year, as corporate cash management fees increased $618 thousand, or 6.5%, overdraft and return item fees increased $208 thousand, or 2.8%, and deposit account service charges increased ~~$895~~$206 thousand, or ~~17.8%, while overdraft and return item fees and corporate cash management fees increased 4.8% and 3.3%, respectively.~~3.5%. Consumer brokerage fees grew ~~$235~~$245 thousand, or 6.6%, on higher fixed annuity and advisory fees, while capital market fees declined ~~$344 thousand on lower sales demand.~~$164 thousand. Loan fees and sales ~~increased $895~~decreased $862 thousand, or ~~28.0%~~21.1%, this quarter mainly due to ~~higher~~lower mortgage banking revenue related to the Company's fixed rate residential mortgage sale program. Other non-interest income ~~increased $1.4 million~~decreased $617 thousand compared to the same quarter of last ~~year. This increase was~~year, mainly ~~the result of current quarter~~due to lower gains ~~of $860 thousand~~ on sales of ~~several branch properties, in addition to gains of $824 thousand recorded on sales of several~~ leased assets to customers upon lease ~~termination. Fees from the~~termination, write downs on software costs, and lower gains on sales of ~~tax credits grew $521 thousand this quarter compared with the same quarter last year, while letter of credit fees were higher by $294 thousand.~~branch properties. These ~~increases~~decreases were partly offset by ~~a decline~~higher fees from sales of ~~$289 thousand in fees on~~ interest rate ~~swap sales,~~swaps and ~~income of $897 thousand recorded in the second quarter of last year for a trust-related settlement, which did not reoccur in the current period.~~tax credits.

Non-interest income for the first six ~~months~~month of ~~2017~~2018 was ~~$240.2~~$244.5 million compared to ~~$235.6~~$225.0 million in the first six months of ~~2016,~~

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2017, resulting in an increase of ~~$4.6~~$19.5 million, or ~~1.9%~~8.7%. Bank card fees ~~decreased $1.3~~increased $11.6 million, or ~~1.5%~~15.9%, as a result of ~~a decline~~growth in ~~merchant~~corporate card fees of ~~$1.9~~$8.9 million, or ~~13.5%~~22.4%, and debit card fees of $3.2 million, or 19.5%, partly offset by ~~increases~~a decline of ~~$550~~$552 thousand, or 5.4%, in ~~debit card fees and $276 thousand in credit card~~merchant fees. Trust fee income increased ~~$5.7~~$8.0 million, or ~~9.5%~~12.2%, as a result of growth in private client and institutional trust fees. Deposit account fees increased ~~$2.8~~$2.1 million, or ~~6.6%~~4.6%, mainly due to growth of ~~$1.6~~$1.1 million in ~~deposit account service charges and $766~~corporate cash management fees, $540 thousand in overdraft and return item ~~fees.~~fees and $428 thousand in deposit account service charges. Loan fees and sales ~~increased $1.6~~decreased $1.2 million, or ~~27.2%~~16.1%, due to ~~higher~~lower mortgage banking revenue. Consumer brokerage fees rose ~~$375~~$364 thousand due to higher ~~mutual fund~~annuity and advisory fee income, while capital market fees decreased ~~$727~~$215 thousand, or ~~13.9%, due to continued lower sales volume.~~4.8%. Other non-interest income decreased ~~$3.7~~$1.1 million, or ~~14.1%~~4.8%, mainly due to lower gains on sales of branch properties, lower gains on sales of leased assets, and software write downs. These declines were partly offset by higher fees from ~~sales of~~ interest rate ~~swaps,~~swap sales and ~~the prior year trust settlement mentioned above.~~cash sweep commissions.

Investment Securities Gains (Losses), Net


	Three Months Ended June 30						Six Months Ended June 30						Three Months Ended June 30						Six Months Ended June 30
(In thousands)	2017			2016			2017			2016			2018			2017			2018			2017
Available for sale	$	1,671		$	(147	)	$	3,719		$	(270	)
Non-marketable	(20		)	(597		)	(2,840		)	(1,469		)
Net gains (losses) on sales and fair value adjustments of private equity investments													$	3,791		$	(604	)	$	8,096		$	(3,424	)
Adjustment for dividend income on a liquidated equity investment													(8,917		)	—			(8,917		)	—
Donations of equity securities													—			2,158			—			4,315
Fair value adjustments on equity securities													1,752			—			2,699			—
Other													299			97			457			(12		)
Total investment securities gains (losses), net	$	1,651		$	(744	)	$	879		$	(1,739	)	$	(3,075	)	$	1,651		$	2,335		$	879

Net gains and losses on investment securities which were recognized in earnings during the three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 are shown in the table above. Net securities ~~gains amounted to $1.7~~losses of $3.1 million were reported in the second quarter of ~~2017 and $879 thousand~~2018, compared to net gains of $1.7 million in the ~~first six months~~same period last year. The net losses in the second quarter of ~~2017.~~ 2018 were mainly comprised of an adjustment to recognize dividend income on a liquidated equity security, partly offset by unrealized gains in fair value on the Company’s holdings of private equity investments. The net gains for the same quarter last year resulted from a gain recorded on the donation of appreciated equity securities to a charitable foundation, offset by losses on the disposition of certain private equity securities.

Included in ~~these~~ 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~~Impairment losses on these securities ~~had a total fair value of $30.3 million at June 30, 2017. During~~totaled $68 thousand in the first six months of ~~2017, credit-related impairment losses of $320 thousand were recorded,~~2018, compared to ~~$270~~$320 thousand in the same period last year. ~~The current period also included~~Private equity investment activity generated net gains ~~on donations~~ of ~~appreciated common stock to a related charitable foundation, which were $2.2~~$8.1 million in ~~both~~ the first ~~and~~six months of 2018 compared to net losses of $3.4 million in the ~~second quarters of~~same period in 2017.

~~Gains and losses on non-marketable investment securities include those relating to private equity investments, which are primarily held by the Parent's majority-owned private equity subsidiaries.~~ These ~~gains and losses include~~included fair value adjustments, ~~and~~in addition to gains and losses realized upon disposition. During the first six months of 2017, net losses in fair value of $2.8 million were recorded, compared to similar losses of $3.7 million in the same period in 2016. A gain of $1.8 million 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 expense of $1.6 million during the first six months of 2018 and income of $654 thousand during the first six months of ~~2017 and $379 thousand during the first six months of 2016.~~2017.

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)	2017		2016		% change		2017		2016		% change		2018		2017		% change		2018		2017		% change
Salaries and employee benefits	$	108,829	$	104,808	3.8	%	$	221,198	$	211,667	4.5	%	$	115,589	$	108,829	6.2	%	$	231,483	$	221,198	4.6	%
Net occupancy	11,430		11,092		3.0		22,873		22,395		2.1		11,118		11,430		(2.7	)	22,702		22,873		(.7	)
Equipment	4,776		4,781		(.1	)	9,385		9,415		(.3	)	4,594		4,776		(3.8	)	9,025		9,385		(3.8	)
Supplies and communication	5,446		5,693		(4.3	)	11,155		12,522		(10.9	)	5,126		5,446		(5.9	)	10,439		11,155		(6.4	)
Data processing and software	23,356		22,770		2.6		46,453		45,669		1.7		21,016		20,035		4.9		41,706		39,940		4.4
Marketing	4,488		4,389		2.3		7,712		8,202		(6.0	)	5,142		4,488		14.6		9,947		7,712		29.0
Deposit insurance	3,592		3,143		14.3		7,063		6,308		12.0		3,126		3,592		(13.0	)	6,583		7,063		(6.8	)
Community service													656		2,916		(77.5	)	1,385		5,860		(76.4	)
Other	22,677		20,413		11.1		45,585		38,384		18.8		15,493		15,378		.7		30,867		31,081		(.7	)
Total non-interest expense	$	184,594	$	177,089	4.2	%	$	371,424	$	354,562	4.8	%	$	181,860	$	176,890	2.8	%	$	364,137	$	356,267	2.2	%

Non-interest expense for the second quarter of ~~2017~~2018 amounted to ~~$184.6~~$181.9 million, an increase of ~~$7.5~~$5.0 million, or ~~4.2%~~2.8%, compared with ~~$177.1~~$176.9 million in the second quarter of last year. The increase in expense over the same period last year was mainly due to

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higher costs for salaries, employee benefits, data processing and marketing, partly offset by lower occupancy, supplies and communication, community service, and deposit insurance expense. Salaries expense increased ~~$4.0~~$5.8 million, or ~~4.5%~~6.2%, mainly due to higher full-time ~~salaries~~salary costs and incentive ~~compensation costs.~~compensation. Employee benefits expense totaled ~~$15.8~~$16.8 million, ~~slightly~~reflecting growth of $1.0 million, or 6.4%, as a result 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 and information technology business units. Full-time equivalent employees totaled 4,797 at June 30, 2018 compared to 4,805 at June 30, ~~2017~~

~~compared to 4,779 at June 30, 2016.~~2017. Occupancy costs ~~increased $338~~decreased $312 thousand, or ~~3.0%~~2.7%, ~~mostly~~partly due to ~~higher branch~~lower repair and maintenance costs, while ~~supplies~~equipment expense declined $182 thousand, or 3.8%, due to lower depreciation expense. Supplies and communication ~~marketing and equipment costs were well controlled.~~expense declined $320 thousand, or 5.9%, mainly due to lower data network expense. Data processing expense increased ~~$586~~$981 thousand, or ~~2.6%~~4.9%, mainly due to higher ~~online subscription service expense. FDIC~~processing and software costs, while marketing expense increased $654 thousand partly due to new bank card initiatives which are being funded by reduced bank card network costs. Deposit insurance ~~costs increased $449~~expense decreased $466 thousand, or ~~14.3%~~13.0%, from the second quarter of last year due to ~~higher insurance rates that were effective July 1, 2016. Other non-interest~~decreases in average assets and the assessment rate. Community service expense ~~increased~~declined $2.3 million ~~or 11.1%, compared to the same period in the previous year. This increase was mainly~~ due to the donation of $2.3 million in appreciated securities to a ~~related~~ charitable foundation ~~as previously mentioned. In addition, lower deferred loan origination costs and higher professional fees expense were recorded. Excluding~~in the ~~donation expense, total non-interest expense grew 3.0% over the same period in 2016.~~previous year.

For the first six months of ~~2017,~~2018, non-interest expense amounted to ~~$371.4~~$364.1 million, an increase of ~~$16.9~~$7.9 million, or ~~4.8%~~2.2%, compared with ~~$354.6~~$356.3 million in the same period last year. Salaries and benefits increased ~~$9.5~~$10.3 million, or ~~4.5%~~4.6%, mainly due to higher full-time salaries, incentives and ~~incentives~~medical expense. ~~Supplies~~Equipment expense declined $360 thousand, or 3.8%, while supplies and communication expense ~~decreased $1.4~~was down $716 thousand, or 6.4%, both due to the trends mentioned above. Data processing and software expense increased $1.8 million, or ~~10.9%. This decrease was~~4.4%, mostly due to higher processing costs. Marketing expense increased $2.2 million, or 29.0%, mainly ~~the result of higher chip~~due to new bank card ~~reissue costs last year that have now declined. Marketing costs were down$490 thousand, or 6.0%, due to~~initiatives in 2018 and 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~~2017. Community service expense decreased due to the ~~trends mentioned above. Other non-interest expense increased $7.2 million, or 18.8%, mainly due to donations~~donation of $4.5 million in appreciated securities in the ~~current period. Higher costs were also recorded in professional fees,~~previous year, while deposit insurance expense decreased $480 thousand, or 6.8%. Other non-interest expense decreased $214 thousand mainly due to lower operating and bank card ~~rewards and royalty fees expense,~~fraud losses in addition to lower ~~deferred loan origination costs. Excluding the donation expense, total non-interest expense grew 3.5% over the prior year.~~professional fees, partly offset by higher directors fees and employee education expense.

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, 2017			Mar. 31, 2017			June 30, 2016			2017			2016			June 30, 2018			Mar. 31, 2018			June 30, 2017			2018			2017
Provision for loan losses	$	10,758		$	11,128		$	9,216		$	21,886		$	18,655		$	10,043		$	10,396		$	10,758		$	20,439		$	21,886
Net loan charge-offs (recoveries):
Commercial:
Business	318			97			(65		)	415			398			36			(14		)	318			22			415
Real estate-construction and land	(207		)	(535		)	(507		)	(742		)	(518		)	(297		)	(36		)	(207		)	(333		)	(742		)
Real estate-business	(10		)	(39		)	(1,030		)	(49		)	(1,272		)	(40		)	(205		)	(10		)	(245		)	(49		)
Commercial net loan charge-offs (recoveries)	101			(477		)	(1,602		)	(376		)	(1,392		)	(301		)	(255		)	101			(556		)	(376		)
Personal Banking:
Real estate-personal	(131		)	19			305			(112		)	110			(95		)	57			(131		)	(38		)	(112		)
Consumer	2,642			2,096			1,781			4,738			4,380			1,862			2,528			2,642			4,390			4,738
Revolving home equity	104			7			75			111			163			—			56			104			56			111
Consumer credit card	7,750			7,148			6,650			14,898			12,568			8,251			7,566			7,750			15,817			14,898
Overdrafts	292			435			307			727			526			326			444			292			770			727
Personal banking net loan charge-offs	10,657			9,705			9,118			20,362			17,747			10,344			10,651			10,657			20,995			20,362
Total net loan charge-offs	$	10,758		$	9,228		$	7,516		$	19,986		$	16,355		$	10,043		$	10,396		$	10,758		$	20,439		$	19,986

Table of contents


	Three Months Ended						Six Months Ended June 30				Three Months Ended						Six Months Ended June 30
	June 30, 2017		Mar. 31, 2017		June 30, 2016		2017		2016		June 30, 2018		Mar. 31, 2018		June 30, 2017		2018		2017
Annualized net loan charge-offs (recoveries)*:
Commercial:
Business	.03	%	.01	%	(.01	)%	.02	%	.02	%	—	%	—	%	.03	%	—	%	.02	%
Real estate-construction and land	(.10	)	(.26	)	(.26	)	(.18	)	(.14	)	(.12	)	(.02	)	(.10	)	(.07	)	(.18	)
Real estate-business	—		(.01	)	(.17	)	—		(.11	)	(.01	)	(.03	)	—		(.02	)	—
Commercial net loan charge-offs (recoveries)	—		(.02	)	(.08	)	(.01	)	(.04	)	(.01	)	(.01	)	—		(.01	)	(.01	)
Personal Banking:
Real estate-personal	(.03	)	—		.06		(.01	)	.01		(.02	)	.01		(.03	)	—		(.01	)
Consumer	.53		.43		.37		.48		.46		.37		.49		.53		.43		.48
Revolving home equity	.10		.01		.07		.06		.08		—		.06		.10		.03		.06
Consumer credit card	4.25		3.88		3.62		4.06		3.39		4.39		4.05		4.25		4.22		4.06
Overdrafts	26.00		42.15		31.53		33.73		24.35		29.08		38.91		26.00		34.04		33.73
Personal banking net loan charge-offs	.83		.77		.74		.80		.71		.79		.82		.83		.80		.80
Total annualized net loan charge-offs	.32	%	.28	%	.24	%	.30	%	.26	%	.29	%	.30	%	.32	%	.30	%	.30	%

* 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. The Company's policies and processes for determining the allowance for loan losses are discussed in Note 1 to the consolidated financial statements and in the Allowance for Loan Losses discussion in Item 7 of the ~~2016~~2017 Annual Report on Form 10-K.

Net loan charge-offs in the second quarter of ~~2017~~2018 amounted to ~~$10.8~~$10.0 million, compared with ~~$9.2~~$10.4 million in the prior quarter and ~~$7.5~~$10.8 million in the second quarter of last year. ~~The increase in current~~During the second quarter ~~net charge-offs over~~of 2018, the previous quarter was mainly 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 lowerCompany recorded net recoveries on construction loans ~~which totaled $207~~of $297 thousand, compared to net recoveries of $36 thousand in the prior quarter. Additionally, net loan charge-offs on consumer loans declined $666 thousand in the second quarter of ~~2017,~~2018 compared to ~~net recoveries of $535 thousand in~~ the prior ~~quarter.~~quarter, and the Company also recorded lower net charge-offs on personal real estate, overdraft, and revolving home equity loans. These ~~increases~~decreases in net loan charge-offs were partially offset by ~~decreases~~$685 thousand of ~~$150 thousand and $143 thousand in~~higher net charge-offs on ~~personal real estate~~consumer credit card loans ~~and overdrafts, respectively.~~in the second quarter of 2018 compared to the prior quarter, as well as higher net charge-offs on business real-estate loans.

For the three months ended June 30, ~~2017,~~2018, annualized net ~~loan~~ charge-offs on average consumer credit card loans totaled ~~4.25%~~4.39%, compared ~~with 3.88%~~to 4.05% in the previous quarter and ~~3.62%~~4.25% in the same period last year. Consumer loan annualized net charge-offs in the current quarter amounted to ~~.53%~~.37%, compared to ~~.43%~~.49% in the prior quarter and ~~.37%~~.53% in the same period last year. Annualized net charge-offs on personal real estate loans also remained low this quarter. In the second quarter of ~~2017,~~2018, total annualized net loan charge-offs were ~~.32%~~.29%, compared to ~~.28%~~.30% in the previous quarter and ~~.24%~~.32% in the same period last year.

In the current quarter, the provision for loan losses totaled $10.0 million, a decrease of $353 thousand from $10.4 million in the prior quarter. The provision for loan losses in both the current and prior quarters matched net loan charge-offs. During the second quarter of 2017, the provision for loan losses totaled $10.8 million and matched net loan ~~charge-offs. In~~charge-offs for 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. The provision for loan losses in the current quarter decreased by $370 thousand compared to the previous quarter. period.

For the six months ended June 30, ~~2017,~~2018, net loan charge-offs ~~totaled $20.0~~amounted to $20.4 million, compared to ~~$16.4~~$20.0 million in ~~2016. The increase~~the same period last year. During the first six months of 2018, the Company recorded net recoveries of $556 thousand on commercial loans, compared to net recoveries of $376 thousand in the first six months of 2017. Additionally, consumer loan net ~~loan~~ charge-offs ~~resulted mainly from an increase~~declined $348 thousand in the first six months of 2018 compared to the first six months of the prior year, but the decrease was offset by $919 thousand of higher net charge-offs on consumer credit card loans. The provision expense for the first six months of 2018 was $20.4 million and matched net loan ~~charge-offs, which increased $2.3 million, and fewer recoveries on business real estate loans, which declined $1.2 million.~~charge-offs. The provision ~~for loan losses~~expense for the first six months of 2017 was $21.9 million and ~~increased $3.2 million compared to the previous year. The increase in provision expense was the result of higher~~exceeded net loan ~~losses during~~charge-offs for the ~~six months ended June 30, 2017 compared to the same~~ period ~~in the prior year.~~by $1.9 million.

At June 30, ~~2017,~~2018, the allowance for loan losses amounted to ~~$157.8~~$159.5 million, unchanged from December 31, 2017, and was ~~1.16%~~1.14% of total ~~loans and more than ten times total non-accrual~~ loans. ~~At December 31, 2016,~~The Company considers the allowance for loan losses ~~amounted~~adequate to ~~$155.9 million and was 1.16%~~cover losses inherent in the loan portfolio at June 30, 2018.

Table of ~~total loans and over ten times total non-accrual loans.~~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, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Non-accrual loans	$	13,362		$	14,283		$	9,472		$	11,983
Foreclosed real estate	515			366			1,039			681
Total non-performing assets	$	13,877		$	14,649		$	10,511		$	12,664
Non-performing assets as a percentage of total loans	.10		%	.11		%	.08		%	.09		%
Non-performing assets as a percentage of total assets	.06		%	.06		%	.04		%	.05		%
Total loans past due 90 days and still accruing interest	$	14,630		$	16,396		$	13,453		$	18,127

Non-accrual loans, which are also classified as impaired, totaled ~~$13.4~~$9.5 million at June 30, ~~2017,~~2018, and decreased ~~$921 thousand~~$2.5 million from balances at December 31, ~~2016.~~2017. The decrease occurred mainly in consumer and business loans, which decreased ~~$2.4 million, partly offset by an increase of $1.2 million in consumer loans.~~$834 thousand and $833 thousand, respectively. At June 30, ~~2017,~~2018, non-accrual loans were comprised mainly of business ~~(47.4%~~(54.0%), business real estate (26.0%), and personal real estate ~~(26.2%), and business real estate (13.7%~~(19.9%) loans. Foreclosed real estate totaled ~~$515 thousand~~$1.0 million at June 30, ~~2017,~~2018, an increase of ~~$149~~$358 thousand when compared to December 31, ~~2016.~~2017. Total loans past due 90 days or more and still accruing interest were ~~$14.6~~$13.5 million as of June 30, ~~2017,~~2018, a decrease of ~~$1.8~~$4.7 million when compared to December 31, ~~2016.~~2017. 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 ~~$107.8~~$202.4 million at June 30, ~~2017~~2018 compared with ~~$99.5~~$213.4 million at December 31, ~~2016,~~2017, resulting in ~~an increase~~a decrease of ~~$8.3~~$11.0 million, or ~~8.3%~~5.1%.


(In thousands)	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Potential problem loans:
Business	$	47,860	$	43,438	$	154,797	$	153,417
Real estate – construction and land	2,703		1,172		2,153		2,702
Real estate – business	51,693		52,913		43,180		51,134
Real estate – personal	5,507		1,955		2,280		6,121
Total potential problem loans	$	107,763	$	99,478	$	202,410	$	213,374

At June 30, ~~2017,~~2018, the Company had ~~$59.2~~$106.6 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 ~~$36.8~~$86.9 million which are classified as substandard and included in the table above because of this classification.

Loans with Special Risk Characteristics

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

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Real Estate – Construction and Land Loans

The Company's portfolio of construction and land loans, as shown in the table below, amounted to ~~6.2%~~6.9% of total loans outstanding at June 30, ~~2017.~~2018. The largest component of construction and land loans was commercial construction, which ~~grew $77.7~~decreased $2.2 million during the six months ended June 30, ~~2017.~~2018. At June 30, ~~2017,~~2018, multi-family residential construction loans totaled approximately ~~$218.6~~$226.2 million, or ~~37.6%,~~31.6% of the commercial construction loan ~~portfolio.~~portfolio, compared to $252.8 million, or 35.2%, at December 31, 2017.


(Dollars in thousands)	June 30, 2017		% of Total		% of Total Loans		December 31, 2016		% of Total		% of Total Loans		June 30, 2018		% of Total		% of Total Loans		December 31, 2017		% of Total		% of Total Loans
Residential land and land development	$	79,120	9.3	%	.6	%	$	86,373	10.9	%	.6	%	$	78,899	8.2	%	.6	%	$	81,859	8.5	%	.6	%
Residential construction	130,231		15.4		.9		132,334		16.8		1.0		124,394		12.9		.9		121,138		12.5		.9
Commercial land and land development	57,637		6.8		.4		69,057		8.7		.5		48,756		5.0		.3		48,474		5.0		.3
Commercial construction	581,164		68.5		4.3		503,472		63.6		3.8		715,102		73.9		5.1		717,349		74.0		5.1
Total real estate - construction and land loans	$	848,152	100.0	%	6.2	%	$	791,236	100.0	%	5.9	%	$	967,151	100.0	%	6.9	%	$	968,820	100.0	%	6.9	%

Real Estate – Business Loans

Total business real estate loans were $2.7 billion at June 30, ~~2017~~2018 and comprised ~~20.0%~~19.5% 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, ~~2017, 36.8%~~2018, 37.6% of business real estate loans were for owner-occupied real estate properties, which present lower risk profiles.


(Dollars in thousands)	June 30, 2017		% of Total		% of Total Loans		December 31, 2016		% of Total		% of Total Loans		June 30, 2018		% of Total		% of Total Loans		December 31, 2017		% of Total		% of Total Loans
Owner-occupied	$	1,002,503	36.8	%	7.4	%	$	1,004,238	38.0	%	7.5	%	$	1,024,291	37.6	%	7.3	%	$	1,010,786	37.5	%	7.2	%
Multi-family													356,044		13.1		2.6		298,605		11.1		2.1
Office	349,017		12.8		2.6		319,638		12.1		2.4		354,704		13.0		2.5		373,301		13.8		2.7
Retail	353,936		13.0		2.6		344,221		13.0		2.5		298,277		10.9		2.0		338,937		12.6		2.4
Multi-family	305,019		11.2		2.2		255,369		9.7		1.9
Hotels	155,979		5.7		1.1		174,207		6.6		1.3		202,488		7.4		1.5		181,704		6.7		1.3
Farm	162,952		6.0		1.2		173,210		6.6		1.3		163,273		6.0		1.2		161,972		6.0		1.2
Industrial	123,537		4.4		.9		122,940		4.6		.9		69,056		2.5		.5		73,078		2.7		.5
Other	274,406		10.1		2.0		249,551		9.4		1.9		259,447		9.5		1.9		259,069		9.6		1.9
Total real estate - business loans	$	2,727,349	100.0	%	20.0	%	$	2,643,374	100.0	%	19.7	%	$	2,727,580	100.0	%	19.5	%	$	2,697,452	100.0	%	19.3	%

Real Estate – Personal Loans

The Company's ~~$2.0~~$2.1 billion personal real estate loan portfolio is composed mainly of residential first mortgage real estate loans. As shown on page ~~44,~~51, recent loss rates have remained ~~low, and at~~low. At June 30, ~~2017,~~2018, loans past due over 30 days decreased ~~$3.2 million; however,~~$1.2 million, and non-accrual loans ~~increased $101~~decreased $573 thousand compared to December 31, ~~2016.~~2017. Also, as shown in Note 2, only ~~3.9%~~3.1% of this portfolio has FICO scores of less than 660. Approximately ~~$21.9~~$30.8 million, or ~~1.1%~~1.5%, 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, ~~2017,~~2018, loans with no mortgage insurance and an original LTV higher than 80% totaled ~~$165.6~~$182.9 million compared to ~~$158.8~~$183.6 million at December 31, ~~2016.~~2017.

Revolving Home Equity Loans

The Company had ~~$403.4~~$374.6 million in revolving home equity loans at June 30, ~~2017~~2018 that were generally collateralized by residential real estate. Most of these loans ~~(92.9%~~(92.2%) 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, ~~2017,~~2018, the outstanding principal of loans with an original LTV higher than 80% was ~~$54.0~~$46.3 million, or ~~13.4%~~12.4% of the portfolio, compared to ~~$55.1~~$51.3 million as of December 31, ~~2016.~~2017. Total revolving home equity loan balances over 30 days past due or on non-accrual status were ~~$3.1~~$1.7 million at June 30, ~~2017~~2018 compared to ~~$2.2~~$3.2 million at December 31, ~~2016.~~2017. The weighted average FICO score for the total current portfolio balance is ~~793.~~794. At maturity, the accounts are re-underwritten, and if they qualify under the Company's credit, collateral and capacity policies, the borrower is given the option to renew the line of credit or convert the outstanding balance to an amortizing loan. If criteria are not met, amortization is required, or the borrower may pay off the loan. During the remainder of ~~2017~~2018 through ~~2019,~~2020, approximately ~~18%~~10% of the Company's current outstanding balances are expected to mature. Of these balances, approximately

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~~81%~~94% have a FICO score of 700 or higher. The Company does not expect a significant increase in losses as these loans mature, due to their high FICO scores, low LTVs, and low historical loss levels.

Other Consumer Loans

Within the consumer loan portfolio are several direct and indirect product lines, which include loans for the purchase of automobiles, motorcycles, marine and RVs. Outstanding balances for auto loans were ~~$993.3~~$952.1 million and ~~$972.5 million~~$1.0 billion at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The balances over 30 days past due amounted to ~~$12.7~~$13.1 million at June 30, ~~2017~~2018 compared to ~~$13.8~~$18.4 million at the end of ~~2016,~~2017, and comprised ~~1.3%~~1.4% and ~~1.4%~~1.8% of the outstanding balances of these loans at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. For the six months ended June 30, ~~2017, $239.7~~2018, $199.1 million of new auto loans were originated, compared to ~~$431.0~~$239.7 million during the ~~full year~~first six months of ~~2016.~~2017. At June 30, ~~2017,~~2018, the automobile loan portfolio had a weighted average FICO score of ~~747.~~756.

Outstanding balances for motorcycle loans were $110.3 million at June 30, 2018, compared to $129.5 million at December 31, 2017. The balances over 30 days past due amounted to $1.6 million and $2.5 million at June 30, 2018 and December 31, 2017, respectively, and comprised 1.5% of the outstanding balance of these loans at June 30, 2018, compared to 1.9% at December 31, 2017. During the first six months of 2018, new motorcycle loan originations totaled $10.0 million compared to $55.3 million during the full year of 2017.

The Company's balance of marine and RV loans totaled ~~$85.2~~$60.9 million at June 30, ~~2017,~~2018, compared to ~~$102.4~~$71.8 million at December 31, ~~2016,~~2017, and the balances over 30 days past due amounted to ~~$2.8~~$2.6 million at both June 30, ~~2017 compared to $4.3 million at the end of 2016.~~2018 and December 31, 2017. The net charge-offs on marine and RV loans ~~increased slightly~~decreased from ~~$691~~$741 thousand in the first six months of ~~2016~~2017 to ~~$741~~$198 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, ~~2017~~2018 of ~~$740.9~~$775.2 million in consumer credit card loans outstanding, approximately ~~$155.1~~$177.1 million, or ~~20.9%~~23%, carried a low promotional rate. Within the next six months, ~~$43.7~~$57.4 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~~is comprised of lending to the petroleum and natural gas sectors and totaled ~~$140.8~~$134.3 million at June 30, ~~2017,~~2018, as shown in the table below. As of June 30, 2017, there were $6.9 million of energy loans, or 4.9%, of the energy portfolio, with a "substandard" rating or on non-accrual status, 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 at June 30, 2017 or December 31, 2016.


(In thousands)	June 30, 2017		December 31, 2016		Unfunded commitments at June 30, 2017		June 30, 2018		December 31, 2017		Unfunded commitments at June 30, 2018
Extraction	$	87,935	$	103,011	$	38,761	$	97,049	$	86,040	$	47,442
Mid-stream shipping and storage	7,904		22,985		61,800		4,796		9,310		50,700
Downstream distribution and refining	30,900		30,231		18,033		19,415		25,329		20,976
Support activities	14,028		15,296		21,832		13,021		13,811		13,953
Total energy lending portfolio	$	140,767	$	171,523	$	140,426	$	134,281	$	134,490	$	133,071

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~~$100 million that are shared by three or more financial institutions. The Company typically participates in these loans when business operations are maintained in the local communities or regional markets and opportunities to provide other banking services are present. The balance of SNC loans totaled ~~$892.4~~$870.3 million at June 30, ~~2017,~~2018, compared to ~~$836.1 million~~$1.1 billion at December 31, ~~2016.~~2017. Additional unfunded commitments at June 30, ~~2017~~2018 totaled ~~$1.3~~$1.1 billion.

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Income Taxes

Income tax expense was $29.5 million in the second quarter of 2018, compared to $23.3 million in the first quarter of 2018 and $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.~~2017. The Company's effective tax rate, including the effect of non-controlling interest, was 21.1% in the second quarter of 2018, compared to 18.7% in the first quarter of 2018 and 29.6% in the second quarter of ~~2017,~~2017. For the six months ended June 30, 2018, income tax expense was $52.8 million, compared to ~~25.8%~~$58.1 million in the first six months ended June 30 2017. The Company's effective tax rate, including the effect of non-controlling interest, was 20.0% in the first six months of 2018, compared to 27.9% in the first six months of the prior year. Beginning in 2018, new tax reform legislation lowered the federal tax rate from 35% to 21%, which resulted in the lower effective tax rate in the first and second quarters of 2018. The effective tax rate in the first quarter ~~of 2017 and 31.1%~~is also typically lower than in ~~the second quarter of 2016. The lower effective tax rate for the first quarter of 2017 was primarily~~other quarters due to the ~~adoption~~recognition of ~~ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" on January 1, 2017. The ASU requires all~~share-based 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~~expense. These benefits result from transactions relating to equity award vesting, most of ~~2017 and $1.6 million in the second quarter of 2017. These tax benefits are expected to be seasonally higher~~which occur 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.year.

Financial Condition

Balance Sheet

Total assets of the Company were ~~$25.1~~$24.5 billion at June 30, ~~2017~~2018 and ~~$25.6~~$24.8 billion at December 31, ~~2016.~~2017. Earning assets (excluding the allowance for loan losses and fair value adjustments on ~~investment~~debt securities) amounted to ~~$23.8~~$23.5 billion at June 30, ~~2017~~2018 and ~~$24.2~~$23.7 billion at December 31, ~~2016,~~2017, and consisted of ~~57%~~59% in loans and ~~40%~~37% in investment securities.

At June 30, ~~2017,~~2018, total loans ~~increased $213.9~~decreased $30.6 million, or ~~1.6%~~.2%, compared with balances at December 31, ~~2016. On an overall basis, the largest contributions~~2017. This decrease was mainly due to ~~loan growth occurred~~decline in ~~business loans and business real estate~~consumer loans, which increased $76.0 million and $84.0 million, respectively, over year end balances. The increase in business loans primarily resulted from growth in commercial and industrial loans, commercial credit card loans, and tax-free loans. Business real estate loans increased largely because of growth in multi-family residential loans.decreased $91.8 million. Consumer loans, which includes automobile, marine and RV, fixed rate home equity, and other consumer loans, ~~increased $47.7 million during the first six months~~decreased largely because of ~~the year. Higher~~declines in automobile lending activity. Lower demand for ~~automobile and other consumer~~auto loans, ~~grew~~coupled with the sale of $25.9 million of loans to another financial institution in the second quarter of 2018, decreased auto loan balances ~~$71.0 million. However, fixed rate home equity loans decreased by $6.1~~$57.7 million ~~and marine~~at June 30, 2018 compared to balances at December 31, 2017. Marine and RV loans continued to run off during the period, ~~by $17.2~~decreasing $11.0 million, and lower demand for fixed home equity loans decreased balances $15.5 million. ~~Construction~~However, patient health care loans increased ~~$56.9~~$16.9 million. Business loans increased $31.7 million during the first six months of the year, primarily due to higher commercial ~~construction projects. Personal~~and industrial lending activity, partly offset by lower tax-free lending. Business real estate loans grew by $30.1 million over year end balances due to growth in multi-family residential projects, while personal real estate loan balances ~~were largely unchanged from year end balances; however,~~increased $39.8 million during the first six months of 2018. The Company ~~originated and~~ sold $87.7 million of longer-term fixed rate loans during the first six months of ~~2017 compared to $64.5 million in the same period of 2016. Declines in consumer~~both 2018 and 2017. Consumer credit card ~~(down $35.6 million)~~loans and revolving home equity loans ~~(down $10.2 million) partially offset growth throughout the year.~~declined $8.7 million and $26.0 million, respectively.

Available for sale investment securities, excluding fair value adjustments, decreased ~~by $258.6~~$188.7 million at June 30, ~~2017~~2018 compared to December 31, ~~2016.~~2017. Purchases of securities during this period totaled ~~$672.4~~$787.9 million, offset by sales, maturities, and pay downs of ~~$912.0~~$964.8 million. The largest decreases in outstanding balances occurred in asset-backed securities, ~~agency mortgage-backed securities, and~~ state and municipal obligations, and government-sponsored enterprise obligations, which decreased ~~$139.8~~$143.9 million, ~~$70.7~~$213.9 million, and ~~$33.6~~$91.3 million, respectively. These decreases were partially offset by increases in agency mortgage-backed and non-agency mortgage-backed securities of $148.1 million and $115.6 million, respectively. At June 30, ~~2017,~~2018, the duration of the investment portfolio was ~~2.8~~3.2 years, and maturities and pay downs of approximately ~~$1.6~~$1.2 billion are expected to occur during the next 12 months.

Equity securities decreased $46.1 million at June 30, 2018 compared to December 31, 2017. The decline in equity securities during the first six months of 2018 was due to a third party merger transaction in June 2018, in which the majority of these securities were redeemed for cash of $39.9 million.

Total deposits at June 30, ~~2017~~2018 amounted to ~~$20.8~~$20.3 billion and decreased ~~$275.4~~$103.9 million compared to ~~deposit~~December 31, 2017. The decrease in deposits resulted mainly from a decline in business demand (decrease of $262.8 million), but was partly offset by growth in savings, interest checking, and money market accounts (increase of $262.2 million). The Company’s borrowings totaled $1.2 billion at June 30, 2018, a decline of $332.8 million from balances at December 31, 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 of $42.6 million, or .5%, and savings accounts of $60.6 million, or 7.8%. Non-interest bearing deposits also declined $114.9 million, or 1.5%,2017, mainly due to ~~a reduction of $164.4 million in business accounts, partially offset by an increase of $66.3 million in personal accounts.~~fewer customer repurchase agreements.

~~Total borrowings were $1.4 billion at June 30, 2017 compared to $1.8 billion at December 31, 2016. Short-term borrowings~~

Table of federal funds purchased and customer repurchase agreements totaled $1.3 billion at June 30, 2017, a decrease of $467.5 million from balances of $1.7 billion at December 31, 2016. The overall decrease in these balances was due to a decrease of $668.1 million in customer repurchase agreements, offset by an increase of $200.7 million in federal funds purchased.contents

Liquidity and Capital Resources

Liquidity Management

The Company’s most liquid assets are comprised of available for sale ~~investment~~debt 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, 2017		March 31, 2017		December 31, 2016		June 30, 2018		March 31, 2018		December 31, 2017
Liquid assets:
Available for sale investment securities	$	9,439,701	$	9,671,975	$	9,649,203
Available for sale debt securities							$	8,412,376	$	8,432,180	$	8,725,442
Federal funds sold	16,520		2,205		15,470		31,500		17,000		42,775
Long-term securities purchased under agreements to resell	625,000		725,000		725,000		700,000		700,000		700,000
Balances at the Federal Reserve Bank	80,860		120,234		272,275		114,947		134,697		30,631
Total	$	10,162,081	$	10,519,414	$	10,661,948	$	9,258,823	$	9,283,877	$	9,498,848

Federal funds sold, which are funds lent to the Company's correspondent bank customers with overnight maturities, totaled ~~$16.5~~$31.5 million as of June 30, ~~2017.~~2018. Long-term resale agreements, maturing through ~~2018,~~2021, totaled ~~$625.0~~$700.0 million at June 30, ~~2017.~~2018. Under these agreements, the Company lends funds to upstream financial institutions and holds marketable securities, safe-kept by a third-party custodian, as collateral. This collateral totaled ~~$653.4~~$713.1 million in fair value at June 30, ~~2017.~~2018. Interest earning balances at the Federal Reserve Bank, which have overnight maturities and are used for general liquidity purposes, totaled ~~$80.9~~$114.9 million at June 30, ~~2017.~~2018. The fair value of the available for sale ~~investment~~debt portfolio was ~~$9.4~~$8.4 billion at June 30, ~~2017~~2018 and included an unrealized net ~~gain~~loss in fair value of ~~$97.9~~$114.4 million. The total net unrealized ~~gain~~loss included net ~~gains~~losses of ~~$19.6~~$85.9 million on mortgage-backed and asset-backed securities, ~~$32.7~~$14.2 million on ~~state~~U.S. government and ~~municipal~~federal agency obligations, $5.6 million on government-sponsored enterprise obligations, and ~~$42.3~~$9.1 million on ~~common and preferred stock held by the Parent.~~other debt securities.

Approximately ~~$1.6~~$1.2 billion of the available for sale ~~investment~~debt portfolio is expected to mature or pay down during the next 12 months, and these funds offer substantial resources to meet new loan demand or help offset 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, 2017		March 31, 2017		December 31, 2016		June 30, 2018		March 31, 2018		December 31, 2017
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	99,541	$	108,240	$	115,858	$	75,583	$	81,419	$	84,946
FHLB borrowings and letters of credit	15,560		16,743		17,781		11,360		12,247		13,332
Securities sold under agreements to repurchase *	1,747,101		1,726,909		2,447,835		1,623,193		1,719,583		2,001,401
Other deposits and swaps	2,032,334		1,956,791		1,773,017		2,043,502		1,856,778		1,679,024
Total pledged securities	3,894,536		3,808,683		4,354,491		3,753,638		3,670,027		3,778,703
Unpledged and available for pledging	3,718,231		4,071,649		3,516,648		3,249,559		3,332,768		3,346,826
Ineligible for pledging	1,826,934		1,791,643		1,778,064		1,409,179		1,429,385		1,599,913
Total available for sale securities, at fair value	$	9,439,701	$	9,671,975	$	9,649,203
Total available for sale debt securities, at fair value							$	8,412,376	$	8,432,180	$	8,725,442

* 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, ~~2017,~~2018, such deposits totaled ~~$18.7~~$18.6 billion and represented ~~90.0%~~91.7% 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 ~~$1.4~~$1.1 billion at June 30, ~~2017.~~2018. These accounts are normally considered more volatile and higher costing and comprised ~~6.7%~~5.3% of total deposits at June 30, ~~2017.~~2018.


(In thousands)	June 30, 2017		March 31, 2017		December 31, 2016		June 30, 2018		March 31, 2018		December 31, 2017
Core deposit base:
Non-interest bearing	$	7,314,506	$	7,237,815	$	7,429,398	$	6,876,756	$	6,953,430	$	7,158,962
Interest checking	1,169,605		1,146,600		1,275,899		1,592,848		1,447,556		1,533,904
Savings and money market	10,258,010		10,292,478		10,154,890		10,168,984		10,380,582		9,965,716
Total	$	18,742,121	$	18,676,893	$	18,860,187	$	18,638,588	$	18,781,568	$	18,658,582

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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, 2017		March 31, 2017		December 31, 2016		June 30, 2018		March 31, 2018		December 31, 2017
Borrowings:
Federal funds purchased	$	253,510	$	340,195	$	52,840	$	131,685	$	104,940	$	202,370
Securities sold under agreements to repurchase	1,002,934		980,954		1,671,065		1,035,074		1,027,389		1,304,768
FHLB advances	100,000		100,000		100,000		—		—		—
Other debt	1,903		1,975		2,049		9,291		9,214		1,758
Total	$	1,358,347	$	1,423,124	$	1,825,954	$	1,176,050	$	1,141,543	$	1,508,896

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 ~~$1.0~~$1.2 billion, which generally mature overnight. The Company also borrows on a secured basis through advances from the FHLB, which totaled $100.0 million at June 30, 2017. These advances have fixed interest rates and mature in the fourth quarter of 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, ~~2017.~~2018.


	June 30, 2017								June 30, 2018
(In thousands)	FHLB			Federal Reserve		Total			FHLB			Federal Reserve		Total
Collateral value pledged	$	2,734,323		$	1,272,837	$	4,007,160		$	2,454,301		$	1,318,514	$	3,772,815
Advances outstanding	(100,000		)	—		(100,000		)	—			—		—
Letters of credit issued	(555,957		)	—		(555,957		)	(215,423		)	—		(215,423		)
Available for future advances	$	2,078,366		$	1,272,837	$	3,351,203		$	2,238,878		$	1,318,514	$	3,557,392

In addition to those mentioned above, several other sources of liquidity are available. No commercial paper has been issued or outstanding during the past ten years. The Company has no subordinated debt or hybrid instruments which could affect future borrowing capacity. Because of its lack of significant long-term debt, the Company believes that it could generate additional liquidity through its Capital Markets Group from sources such as jumbo certificates of deposit or privately placed corporate debt. The Company receives strong outside rankings from both Standard & Poor's and Moody's on both the consolidated company level and ~~it's~~its 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 ~~decrease~~increase in cash and cash equivalents of ~~$251.3~~$23.2 million during the first six months of ~~2017,~~2018, 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

~~$212.0~~ $288.1 million and has historically been a stable source of funds. Investing activities, which occur mainly in the loan and investment

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securities portfolios, provided cash of ~~$145.0~~$252.9 million. Activity in the investment securities portfolio provided cash of ~~$291.0~~$256.8 million from sales, maturities and pay downs (net of purchases)~~, and repayments of long-term securities purchased under agreements to resell provided cash of $100.0 million. These cash inflows were partly offset by a net increase in loans of $234.4 million.~~. Financing activities used cash of ~~$608.4~~$517.7 million, largely resulting from a ~~net~~ decrease of $340.4 million in ~~borrowings of~~ federal funds purchased and securities sold under agreements to repurchase and dividend payments of ~~$467.5 million. In addition, deposits decreased $79.8~~$54.7 million ~~and cash was used to fund dividends paid~~ on common and preferred ~~stock~~stock. A net decrease in deposit balances resulted in a cash outflow of ~~$50.3~~$111.1 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.

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, ~~2017~~2018 and December 31, ~~2016,~~2017, as shown in the following table.


(Dollars in thousands)	June 30, 2017			December 31, 2016			Minimum Ratios under Capital Adequacy Guidelines *		Minimum Ratios for Well-Capitalized Banks **		June 30, 2018			December 31, 2017			Minimum Ratios under Capital Adequacy Guidelines *		Minimum Ratios for Well-Capitalized Banks **
Risk-adjusted assets	$	18,766,184		$	18,994,730						$	18,932,765		$	19,149,949
Tier I common risk-based capital	2,304,532			2,207,370							2,596,487			2,422,480
Tier I risk-based capital	2,449,316			2,352,154							2,741,271			2,567,264
Total risk-based capital	2,627,297			2,529,675							2,901,878			2,747,863
Tier I common risk-based capital ratio	12.28		%	11.62		%	7.00	%	6.50	%	13.71		%	12.65		%	7.00	%	6.50	%
Tier I risk-based capital ratio	13.05		%	12.38		%	8.50	%	8.00	%	14.48		%	13.41		%	8.50	%	8.00	%
Total risk-based capital ratio	14.00		%	13.32		%	10.50	%	10.00	%	15.33		%	14.35		%	10.50	%	10.00	%
Tier I leverage ratio	9.87		%	9.55		%	4.00	%	5.00	%	11.18		%	10.39		%	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 ~~188,348~~322,448 shares at an average price of ~~$56.43~~$59.14 during the six months ended June 30, ~~2017,~~2018, which ~~was~~were related to both open market purchases and stock-based compensation transactions. At June 30, ~~2017, 3,570,327~~2018, 3,121,075 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 ~~$.225~~$.235 per share cash dividend on its common stock in both the first and second quarters of ~~2017,~~2018, which was a 5%9.8% increase compared to its ~~2016~~2017 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, ~~2017~~2018 totaled ~~$10.4~~$10.8 billion (including approximately ~~$5.0~~$5.2 billion in unused approved credit card lines). In addition, the Company enters into standby and commercial letters of credit. These contracts totaled ~~$338.8~~$377.5 million and ~~$13.3~~$4.3 million, respectively, at June 30, ~~2017.~~2018. 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 ~~$2.1~~$2.2 million at June 30, ~~2017.~~2018.

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 ~~2017,~~2018, purchases and sales of tax credits amounted to ~~$42.0~~$37.6 million and ~~$31.7~~$41.2 million, respectively. Fees from sales of tax credits were ~~$1.9~~$2.3 million for ~~the~~ six months ended June 30, ~~2017,~~2018, compared to ~~$1.7~~$1.9 million in the same period last year. At June 30, ~~2017,~~2018, the Company expected to fund outstanding purchase commitments of ~~$79.2~~$87.7 million during the remainder of ~~2017.~~2018.

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Segment Results

The table below is a summary of segment pre-tax income results for the first six months of ~~2017~~2018 and ~~2016.~~2017.


(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, 2018
Net interest income																			$	144,908		$	167,816		$	23,302		$	336,026		$	67,825		$	403,851
Provision for loan losses																			(20,924		)	488			(48		)	(20,484		)	45			(20,439		)
Non-interest income																			62,332			100,862			84,997			248,191			(3,651		)	244,540
Investment securities gains, net																			—			—			—			—			2,335			2,335
Non-interest expense																			(142,266		)	(148,158		)	(62,113		)	(352,537		)	(11,600		)	(364,137		)
Income before income taxes																			$	44,050		$	121,008		$	46,138		$	211,196		$	54,954		$	266,150
Six Months Ended June 30, 2017
Net interest income	$	136,628		$	161,505		$	23,771		$	321,904		$	39,176		$	361,080		$	136,628		$	162,007		$	23,778		$	322,413		$	38,667		$	361,080
Provision for loan losses	(20,464		)	624			1			(19,839		)	(2,047		)	(21,886		)	(20,464		)	624			1			(19,839		)	(2,047		)	(21,886		)
Non-interest income	66,017			96,879			76,557			239,453			697			240,150			56,780			90,998			76,558			224,336			657			224,993
Investment securities gains, net	—			—			—			—			879			879			—			—			—			—			879			879
Non-interest expense	(145,126		)	(147,839		)	(59,795		)	(352,760		)	(18,664		)	(371,424		)	(135,791		)	(142,499		)	(59,813		)	(338,103		)	(18,164		)	(356,267		)
Income before income taxes	$	37,055		$	111,169		$	40,534		$	188,758		$	20,041		$	208,799		$	37,153		$	111,130		$	40,524		$	188,807		$	19,992		$	208,799
Six Months Ended June 30, 2016
Net interest income	$	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		)
Non-interest income	62,935			99,408			71,020			233,363			2,231			235,594
Investment securities losses, net	—			—			—			—			(1,739		)	(1,739		)
Non-interest expense	(139,526		)	(140,250		)	(56,944		)	(336,720		)	(17,842		)	(354,562		)
Income before income taxes	$	39,700		$	113,911		$	35,783		$	189,394		$	6,848		$	196,242
Increase (decrease) in income before income taxes:
Increase in income before income taxes:
Amount	$	(2,645	)	$	(2,742	)	$	4,751		$	(636	)	$	13,193		$	12,557		$	6,897		$	9,878		$	5,614		$	22,389		$	34,962		$	57,351
Percent	(6.7		)%	(2.4		)%	13.3		%	(.3		)%	192.7		%	6.4		%	18.6		%	8.9		%	13.9		%	11.9		%	174.9		%	27.5		%

Consumer

For the six months ended June 30, ~~2017,~~2018, income before income taxes for the Consumer segment ~~decreased $2.6~~increased $6.9 million, or ~~6.7%~~18.6%, compared to the first six months of ~~2016.~~2017. This ~~decrease~~increase in income before taxes was mainly due to growth in net interest income of $8.3 million, or 6.1%, and non-interest income of $5.6 million, or 9.8%. These increases to income were partly offset by higher non-interest expense of ~~$5.6~~$6.5 million, or ~~4.0%~~4.8%, and an increase in the provision for loan losses of ~~$3.0 million,~~$460 thousand, or ~~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%~~2.2%. Net interest income increased due to a ~~$4.3~~$6.0 million increase in net allocated funding credits assigned to the Consumer segment's loan and deposit portfolios ~~partly offset by a decline~~and growth of ~~$1.5~~$2.6 million in loan interest income. Non-interest income increased mainly due to growth in debit card fees and deposit fees (mainly deposit account service fees and overdraft and return item fees)~~, bank card fees, and mortgage banking revenue.~~. Non-interest expense increased over the same period in the previous year due to higher allocated servicing and support costs, mainly ~~administrative,~~marketing, online banking and information technology. In addition, salaries, bank card rewards, and royalty fees expense increased over the previous year, while supplies and communication expense decreased due to higher chip card reissue costs last year that have now declined. The provision for loan losses totaled ~~$20.5~~$20.9 million, a ~~$3.0 million~~$460 thousand increase over the first six months of ~~2016,~~2017, which was mainly due to higher consumer credit card loan and personal loan net charge-offs, partly offset by lower marine and RV loan net charge-offs.

Commercial

For the six months ended June 30, ~~2017,~~2018, income before income taxes for the Commercial segment ~~decreased $2.7~~increased $9.9 million, or ~~2.4%~~8.9%, compared to the same period in the previous year. This ~~decrease~~increase was mainly due to ~~lower~~higher net interest income and non-interest income. These increases to income were partly offset by higher non-interest ~~expense and an increase in the provision for loan losses and was partially offset by growth in net interest income.~~expense. Net interest income increased ~~$8.2~~$5.8 million, or ~~5.4%~~3.6%, due to ana $32.6 million increase in loan interest income, partly offset by a decline of $17.6 million in net allocated funding credits and higher ~~deposit~~ interest ~~expense.~~expense of $9.2 million on deposits and customer repurchase agreements. Non-interest income ~~decreased $2.5~~increased $9.9 million, or ~~2.5%~~10.8%, ~~from~~over the previous year due to ~~lower~~higher corporate card fees, swap fees, ~~bank card~~and deposit account fees ~~and capital market fees.~~(mainly corporate cash management fees). These ~~decreases~~increases were partly offset by ~~growth in deposit account fees.~~lower gains on sales of leased assets to customers upon lease termination. Non-interest expense increased ~~$7.6~~$5.7 million, or ~~5.4%~~4.0%, mainly due to increases in ~~salaries and benefits expense and~~ allocated service and support ~~costs.~~costs (mainly deposit operations, information technology, and commercial sales and product support fees). In addition, salaries expense and data processing expense increased over the prior year. The provision for loan losses increased ~~$863~~$136 thousand over the same period last year, due to lower net recoveries on construction loans. This increase was partly offset by lower net charge-offs on commercial card loans and higher net recoveries on business real estate loans.

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Wealth

Wealth segment pre-tax profitability for the six months ended June 30, ~~2017~~2018 increased ~~$4.8~~$5.6 million, or ~~13.3%~~13.9%, over the same period in the previous year. Net interest income ~~increased $1.9 million,~~decreased $476 thousand, or ~~8.9%~~2.0%, mainly due to a decline in net allocated funding credits, partly offset by an increase in loan interest income. Non-interest income increased ~~$5.5~~$8.4 million, or ~~7.8%~~11.0%, over the prior year largely due to higher private client and institutional trust fees ~~brokerage fees~~ and cash sweep ~~fees.~~commissions. These increases were partly offset by ~~a trust related settlement received in the second quarter of 2016.~~write downs on software costs. Non-interest expense increased ~~$2.9~~$2.3 million, or ~~5.0%~~3.8%, mainly due to higher salary and benefit costs, ~~professional fees~~trust losses, and allocated support ~~costs.~~and corporate management fee costs, partly offset by lower professional fees expense. The provision for loan losses ~~decreased $116~~increased $49 thousand, mainly due to ~~lower revolving home equity~~higher personal real estate 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 higher than in the same period last year by ~~$13.2~~$35.0 million. This increase was mainly due to higher unallocated net interest income of ~~$12.5~~$29.2 million and lower non-interest expense of $6.6 million, partly offset by lower non-interest income of ~~$1.5 million and higher non-interest expense of $822 thousand.~~$4.3 million. Unallocated securities gains were ~~$879 thousand~~$2.3 million in the first six months of ~~2017~~2018 compared to ~~losses~~gains of ~~$1.7 million~~$879 thousand in ~~2016.~~2017. Also, the unallocated loan loss provision decreased ~~$480 thousand,~~$2.1 million, as the provision was $1.9 million in excess of charge-offs in the first six months of 2017, ~~compared to $2.3 million in excess of~~while the provision equaled charge-offs induring 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 2017, the Company submitted its stress test report to the Federal Reserve in July and 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. In 2016, the Company withdrew from a private equity fund investment to comply with the Volcker Rule requirement and holds no other significant investments requiring disposal.2018.

Impact of Recently Issued Accounting Standards

Derivatives ~~In March 2016, the~~The FASB issued ASU ~~2016-05, "Effect~~2017-12, "Targeted Improvements to Accounting for Hedging Activities", in August 2017. The ASU improves the financial reporting of ~~Derivative Contract Novations~~hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. These improvements allow the hedging of risk components, ease restrictions on ~~Existing Hedge Accounting Relationships", which clarifies that a~~the measurement of the change in fair value of the ~~counterparty to a derivative instrument that has been designated as~~hedged item, aligns the recognition and presentation of the effects of the hedging instrument ~~does not, in~~ and ~~of itself, require dedesignation of that hedging relationship provided that all other~~the hedged item, and otherwise simplify hedge accounting ~~criteria continue to be met.~~guidance. The amendments ~~were~~are effective January 1, ~~2017 and~~2019 but may be adopted early in any interim period. The Company adopted the ASU on January 1, 2018, but as the Company did not ~~have a significant effect~~utilize hedge accounting on that date, 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~~statements were not affected by 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 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.adoption.

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 ASUwas adopted on January 1, 2018 under the full retrospective method with a ~~cumulative effect adjustment~~restatement of prior periods. The impact of the adoption and required disclosures are discussed in Note 13 to ~~opening retained earnings, if such adjustment is deemed to be significant.~~the consolidated financial statements.

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~~were 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~~2018 and did not have a significant effect 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~~were effective for reporting periods beginning January 1, 2018 and ~~are~~did not ~~expected to~~ 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

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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~~were adopted on January 1, ~~2018. The Company has formed a working group~~2018 and are further discussed in Notes 3 and 15 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.~~consolidated financial statements.

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 Statement of 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 predominance principle. The amendments ~~are~~were effective January 1, 2018 and ~~are~~did not ~~expected to~~ have a significant effect on the Company's consolidated financial statements.

The FASB issued ASU 2016-18, "Restricted Cash", in November 2016. ~~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 amounts reported as restricted and the nature of the 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~~which were applied on a retrospective basis, were effective January 1, 2018 and ~~are~~did not ~~expected to~~ have a significant effect on the 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 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 presented separately from the servicing cost component. Only service cost is eligible for capitalization when applicable. The amendments ~~are~~were effective January 1, 2018 and ~~are~~as noted in Note 6 to the consolidated financial statements, did not ~~expected to~~ have a significant effect on the 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.~~agreements. At December 31, 2017, future minimum lease payments for operating leases totaled $34 million. The Company ~~has formed a working group to assess~~is in the ~~changes required and is actively working with its current~~process of installing new lease accounting software ~~vendor to acquire a new module designed~~ to comply with the new accounting ~~requirements.~~requirements and has reviewed all existing lease agreements for which the new accounting standard is to be applied. Also, the Company is developing methodologies and processes to estimate and account for right-of-use assets and lease liabilities, which are based on the present value of future lease payments.

Premium Amortization The FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities", in March 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 earnings. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium to the earliest call date, and more closely align the amortization period to expectations incorporated in market pricing of the instrument. The amendments are effective January 1, 2019 and are not expected to have a significant effect on the Company's consolidated financial statements.

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 formed a working group and contracted with a software supplier to assist in the data collection and calculation of the allowance for loan losses under the new model. Historical loan data has been collected in this software system and a CECL working group is actively working with outside professionals to select various model toinputs such as loans segments, modeling methods and other data as required under the CECL model, which would allow for ~~pro-forma~~proforma calculations to ~~begin by mid-2018.~~occur later this year.

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Intangible Assets The FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", in January 2017. Under current guidance, a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with

the carrying amount of that goodwill by following procedures that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the new amendments, the goodwill impairment test compares the fair value of a reporting unit with its carrying amount and an impairment charge is measured as the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments are effective for impairment tests beginning January 1, 2020 and are not expected to have a significant effect on the Company's consolidated financial statements.

Comprehensive Income The FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income", in February 2018. The guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments are effective for all entities effective January 1, 2019, but early adoption is permitted in certain circumstances. The Company adopted the ASU effective January 1, 2018 and recorded a reclassification which increased accumulated other comprehensive income and reduced retained earnings by $2.9 million. As these are both categories within equity, total equity was unchanged. The adoption did not 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, ~~2017~~2018 and ~~2016~~2017


	Second Quarter 2017							Second Quarter 2016							Second Quarter 2018							Second Quarter 2017
(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)	$	4,827,439		$	38,606	3.21	%	$	4,691,476		$	33,862	2.90	%	$	4,962,171		$	45,614	3.69	%	$	4,827,439		$	38,606	3.21	%
Real estate — construction and land	862,479			9,256		4.30		789,329			6,789		3.46		971,854			12,254		5.06		862,479			9,256		4.30
Real estate — business	2,701,144			25,219		3.74		2,389,170			21,934		3.69		2,726,697			28,706		4.22		2,701,144			25,219		3.74
Real estate — personal	2,003,997			18,602		3.72		1,905,968			17,827		3.76		2,078,972			19,916		3.84		2,003,997			18,602		3.72
Consumer	1,997,761			19,614		3.94		1,927,925			18,217		3.80		2,025,585			22,181		4.39		1,997,761			19,614		3.94
Revolving home equity	399,730			3,822		3.84		413,198			3,687		3.59		378,366			4,252		4.51		399,730			3,822		3.84
Consumer credit card	731,471			21,705		11.90		738,130			21,184		11.54		754,199			22,661		12.05		731,471			21,705		11.90
Overdrafts	4,505			—		—		3,916			—		—		4,497			—		—		4,505			—		—
Total loans	13,528,526			136,824		4.06		12,859,112			123,500		3.86		13,902,341			155,584		4.49		13,528,526			136,824		4.06
Loans held for sale	18,341			263		5.75		56,272			692		4.95		22,202			372		6.72		18,341			263		5.75
Investment securities:
U.S. government and federal agency obligations	910,821			5,731		2.52		698,374			6,047		3.48		923,183			7,328		3.18		910,821			5,731		2.52
Government-sponsored enterprise obligations	450,362			1,782		1.59		666,354			5,015		3.03		354,156			1,661		1.88		450,362			1,782		1.59
State and municipal obligations^(A)	1,771,674			15,924		3.61		1,763,849			15,804		3.60		1,394,766			10,634		3.06		1,771,674			15,924		3.61
Mortgage-backed securities	3,708,124			21,702		2.35		3,394,466			19,892		2.36		4,067,152			26,385		2.60		3,708,124			21,702		2.35
Asset-backed securities	2,335,344			10,037		1.72		2,377,708			8,594		1.45		1,407,300			8,134		2.32		2,335,344			10,037		1.72
Other marketable securities^(A)	326,398			2,249		2.76		337,572			2,325		2.77
Trading securities^(A)	21,062			142		2.70		20,540			116		2.27
Non-marketable securities^(A)	101,790			2,915		11.49		116,103			2,319		8.03
Other debt securities															340,246			2,229		2.63		320,869			2,033		2.54
Trading debt securities^(A)															26,101			205		3.15		21,062			142		2.70
Equity securities^(A)															47,179			10,548		89.68		53,162			526		3.97
Other securities^(A)															108,563			1,807		6.68		99,545			2,605		10.50
Total investment securities	9,625,575			60,482		2.52		9,374,966			60,112		2.58		8,668,646			68,931		3.19		9,670,963			60,482		2.50
Federal funds sold and short-term securities
purchased under agreements to resell	13,115			37		1.13		11,916			19		.64		36,791			177		1.93		13,115			37		1.13
Long-term securities purchased
under agreements to resell	665,655			3,684		2.22		824,999			3,354		1.64		700,000			3,785		2.17		665,655			3,684		2.22
Interest earning deposits with banks	139,061			362		1.04		125,024			151		.49		353,607			1,590		1.80		139,061			362		1.04
Total interest earning assets	23,990,273			201,652		3.37		23,252,289			187,828		3.25		23,683,587			230,439		3.90		24,035,661			201,652		3.36
Allowance for loan losses	(157,003		)					(151,622		)					(158,664		)					(157,003		)
Unrealized gain on investment securities	102,935							191,565
Unrealized gain (loss) on debt securities															(122,114		)					57,547
Cash and due from banks	349,132							372,275							357,074							349,132
Land, buildings and equipment, net	344,310							351,095							342,778							344,310
Other assets	413,086							389,844							419,602							413,086
Total assets	$	25,042,733						$	24,405,446						$	24,522,263						$	25,042,733
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	$	831,038		240		.12		$	787,478		224		.11		$	881,045		239		.11		$	831,038		240		.12
Interest checking and money market	10,667,042			4,102		.15		10,287,923			3,324		.13		10,850,123			6,280		.23		10,667,042			4,102		.15
Time open & C.D.'s of less than $100,000	688,047			674		.39		758,703			709		.38		609,011			694		.46		688,047			674		.39
Time open & C.D.'s of $100,000 and over	1,510,001			2,822		.75		1,635,892			2,347		.58		1,134,900			3,483		1.23		1,510,001			2,822		.75
Total interest bearing deposits	13,696,128			7,838		.23		13,469,996			6,604		.20		13,475,079			10,696		.32		13,696,128			7,838		.23
Borrowings:
Federal funds purchased and securities sold
under agreements to repurchase	1,363,031			2,038		.60		1,211,892			725		.24		1,339,278			3,956		1.18		1,363,031			2,038		.60
Other borrowings	105,311			911		3.47		104,649			907		3.49		1,913			12		2.52		105,311			911		3.47
Total borrowings	1,468,342			2,949		.81		1,316,541			1,632		.50		1,341,191			3,968		1.19		1,468,342			2,949		.81
Total interest bearing liabilities	15,164,470			10,787		.29	%	14,786,537			8,236		.22	%	14,816,270			14,664		.40	%	15,164,470			10,787		.29	%
Non-interest bearing deposits	7,065,849							6,885,889							6,749,104							7,065,849
Other liabilities	203,139							260,179							229,080							203,139
Equity	2,609,275							2,472,841							2,727,809							2,609,275
Total liabilities and equity	$	25,042,733						$	24,405,446						$	24,522,263						$	25,042,733
Net interest margin (T/E)				$	190,865						$	179,592						$	215,775						$	190,865
Net yield on interest earning assets						3.19	%						3.11	%						3.65	%						3.18	%

(A) Stated on a tax equivalent basis using a federal income tax rate of 21% in 2018 and 35%. in prior periods.

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AVERAGE BALANCE SHEETS — AVERAGE RATES AND YIELDS

Six Months Ended June 30, ~~2017~~2018 and 2017


	Six Months 2017							Six Months 2016							Six Months 2018							Six Months 2017
(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)	$	4,866,837		$	75,192	3.12	%	$	4,591,516		$	65,955	2.89	%	$	4,948,472		$	87,909	3.58	%	$	4,866,837		$	75,192	3.12	%
Real estate — construction and land	845,343			17,126		4.09		735,943			12,750		3.48		961,947			23,268		4.88		845,343			17,126		4.09
Real estate — business	2,673,491			48,915		3.69		2,385,632			43,875		3.70		2,730,235			56,090		4.14		2,673,491			48,915		3.69
Real estate — personal	2,008,203			37,175		3.73		1,907,750			35,728		3.77		2,070,574			39,258		3.82		2,008,203			37,175		3.73
Consumer	1,986,391			38,545		3.91		1,931,251			36,809		3.83		2,048,748			43,913		4.32		1,986,391			38,545		3.91
Revolving home equity	402,565			7,464		3.74		421,440			7,448		3.55		385,507			8,371		4.38		402,565			7,464		3.74
Consumer credit card	739,582			43,208		11.78		745,114			42,539		11.48		755,936			45,200		12.06		739,582			43,208		11.78
Overdrafts	4,346			—		—		4,344			—		—		4,562			—		—		4,346			—		—
Total loans	13,526,758			267,625		3.99		12,722,990			245,104		3.87		13,905,981			304,009		4.41		13,526,758			267,625		3.99
Loans held for sale	15,174			459		6.10		32,816			827		5.07		20,667			676		6.60		15,174			459		6.10
Investment securities:
U.S. government and federal agency obligations	912,140			10,445		2.31		700,793			6,740		1.93		919,937			12,116		2.66		912,140			10,445		2.31
Government-sponsored enterprise obligations	450,425			3,541		1.59		721,421			8,736		2.44		379,776			3,497		1.86		450,425			3,541		1.59
State and municipal obligations^(A)	1,777,357			31,991		3.63		1,741,218			31,446		3.63		1,453,677			22,040		3.06		1,777,357			31,991		3.63
Mortgage-backed securities	3,734,065			43,800		2.37		3,409,591			40,728		2.40		3,996,918			51,780		2.61		3,734,065			43,800		2.37
Asset-backed securities	2,347,427			19,517		1.68		2,457,590			17,389		1.42		1,438,222			15,777		2.21		2,347,427			19,517		1.68
Other marketable securities^(A)	329,503			4,559		2.79		339,977			4,701		2.78
Trading securities^(A)	23,102			314		2.74		19,365			246		2.55
Non-marketable securities^(A)	101,268			8,151		16.23		121,936			4,396		7.25
Other debt securities															341,029			4,461		2.64		323,921			4,099		2.55
Trading debt securities^(A)															24,045			353		2.96		23,102			314		2.74
Equity securities^(A)															48,834			11,002		45.43		54,634			1,078		3.98
Other securities^(A)															104,799			3,483		6.70		99,004			7,533		15.34
Total investment securities	9,675,287			122,318		2.55		9,511,891			114,382		2.42		8,707,237			124,509		2.88		9,722,075			122,318		2.54
Federal funds sold and short-term securities
purchased under agreements to resell	11,510			60		1.05		14,647			43		.59		40,544			357		1.78		11,510			60		1.05
Long-term securities purchased
under agreements to resell	695,164			7,477		2.17		837,637			6,829		1.64		700,000			7,899		2.28		695,164			7,477		2.17
Interest earning deposits with banks	173,263			759		.88		172,330			421		.49		314,012			2,730		1.75		173,263			759		.88
Total interest earning assets	24,097,156			398,698		3.34		23,292,311			367,606		3.17		23,688,441			440,180		3.75		24,143,944			398,698		3.33
Allowance for loan losses	(156,170		)					(151,465		)					(158,721		)					(156,170		)
Unrealized gain on investment securities	83,071							170,442
Unrealized gain (loss) on debt securities															(82,894		)					36,283
Cash and due from banks	362,723							396,538							360,279							362,723
Land, buildings and equipment, net	345,115							354,042							343,859							345,115
Other assets	415,036							392,485							428,118							415,036
Total assets	$	25,146,931						$	24,454,353						$	24,579,082						$	25,146,931
LIABILITIES AND EQUITY:
Interest bearing deposits:
Savings	$	813,464		486		.12		$	774,249		452		.12		$	860,089		484		.11		$	813,464		486		.12
Interest checking and money market	10,635,689			7,746		.15		10,208,233			6,580		.13		10,794,286			11,624		.22		10,635,689			7,746		.15
Time open & C.D.'s of less than $100,000	696,544			1,318		.38		766,962			1,451		.38		617,120			1,356		.44		696,544			1,318		.38
Time open & C.D.'s of $100,000 and over	1,590,118			5,585		.71		1,559,796			4,333		.56		1,134,549			6,322		1.12		1,590,118			5,585		.71
Total interest bearing deposits	13,735,815			15,135		.22		13,309,240			12,816		.19		13,406,044			19,786		.30		13,735,815			15,135		.22
Borrowings:
Federal funds purchased and securities sold
under agreements to repurchase	1,359,692			3,577		.53		1,308,323			1,613		.25		1,449,314			7,957		1.11		1,359,692			3,577		.53
Other borrowings	103,670			1,799		3.50		241,180			2,160		1.80		1,913			24		2.53		103,670			1,799		3.50
Total borrowings	1,463,362			5,376		.74		1,549,503			3,773		.49		1,451,227			7,981		1.11		1,463,362			5,376		.74
Total interest bearing liabilities	15,199,177			20,511		.27	%	14,858,743			16,589		.22	%	14,857,271			27,767		.38	%	15,199,177			20,511		.27	%
Non-interest bearing deposits	7,155,774							6,895,781							6,786,693							7,155,774
Other liabilities	218,556							257,308							213,824							218,556
Equity	2,573,424							2,442,521							2,721,294							2,573,424
Total liabilities and equity	$	25,146,931						$	24,454,353						$	24,579,082						$	25,146,931
Net interest margin (T/E)				$	378,187						$	351,017						$	412,413						$	378,187
Net yield on interest earning assets						3.16	%						3.03	%						3.51	%						3.16	%

(A) Stated on a tax equivalent basis using a federal income tax rate of 21% in 2018 and 35%. in prior periods.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Company primarily uses earnings simulation models to analyze net interest income sensitivity to movement in interest rates. The Company performs monthly simulations 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 ~~2016~~2017 Annual Report on Form 10-K.

The tables below compute the effects of gradual ~~rising~~shifts in 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 and one falling rates scenario 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 or decreased 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 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, 2017							March 31, 2017							June 30, 2018								March 31, 2018
(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	$	15.1	2.09	%	$	(368.0	)	$	18.1	2.54	%	$	(379.4	)	$	(.2	)	(.02	)%	$	(339.6	)	$	(2.3	)	(.30	)%	$	(329.7	)
200 basis points rising	14.3		1.99		(256.2		)	16.6		2.33		(266.7		)	2.0			.24		(234.1		)	1.9			.23		(230.4		)
100 basis points rising	9.1		1.26		(131.4		)	10.8		1.52		(140.0		)	2.5			.31		(120.3		)	3.0			.38		(121.5		)
100 basis points falling															(18.7		)	(2.32	)	131.8			(28.5		)	(3.96	)	122.7


Simulation B	June 30, 2017								March 31, 2017								June 30, 2018								March 31, 2018
(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	$	(5.6	)	(.78	)%	$	(1,181.4	)	$	(3.3	)	(.45	)%	$	(1,269.4	)	$	(21.4	)	(2.65	)%	$	(933.9	)	$	(23.3	)	(3.01	)%	$	(966.1	)
200 basis points rising	(3.2		)	(.44	)	(1,072.5		)	(1.3		)	(.19	)	(1,161.5		)	(16.8		)	(2.09	)	(830.0		)	(16.7		)	(2.15	)	(867.1		)
100 basis points rising	(5.1		)	(.71	)	(952.4		)	(3.6		)	(.51	)	(1,042.3		)	(13.9		)	(1.72	)	(717.9		)	(13.0		)	(1.68	)	(759.1		)

The difference in these two simulations is the degree in which deposits are modeled to decline in a rising rate environment, 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. Simulation B assumes a much larger deposit attrition factor with deposits declining $933.9 million in the 300 basis points scenario compared with a decline of $339.6 million in deposits under Simulation A. The 100 basis points falling rate scenario is used in both Simulation A and B and the scenario assumes that deposits would increase by $131.8 million due to greater customer deposit liquidity.

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 ~~$9.1~~$2.5 million, while a gradual increase in rates of 200 basis points would increase net interest income by ~~$14.3~~$2.0 million. An increase in rates of 300 basis points would result in ~~an increase~~a decrease in net interest income of ~~$15.1~~$197 thousand, while a decrease in rates of 100 basis points would result in a decrease in net interest income of $18.7 million. The change in net interest income from the base calculation at June 30, ~~2017~~2018 was ~~lower~~higher than projections made ~~at March 31, 2017 largely~~in the prior quarter for both the 200 and 300 basis points rising scenarios mainly due to lower deposits and borrowings balances in the current quarter, which kept funding costs

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lower in a ~~Federal Reserve~~rising rate ~~increase during~~environment than in previous projections. Under the ~~second quarter of 2017~~100 basis point rising rate scenario, deposit attrition was lower, and higher rates ~~paid~~ on ~~certificates of~~deposits provided a greater increase in funding costs than in the prior quarter’s projection. As a result, increased deposit ~~partly offset lower balances. Higher rates and balances of repurchase agreements, as well as higher balances of interest checking and money market deposits, also increased interest~~ expense ~~this quarter, lowering~~resulted in a smaller increase in net interest income ~~projections~~this quarter than the previous quarter for the ~~second quarter of 2017 compared~~100 basis point rising rate scenario. Under the 100 basis point falling rate scenario, net income is reduced by $18.7 million mainly due to the ~~prior quarter.~~fact that rates on loans declined faster than rates paid on deposits. Furthermore, under this scenario, deposits are projected to grow $131.8 million, with these proceeds invested in lower-earning assets.

~~Under~~

Simulation B ~~the same~~utilizes similar assumptions ~~utilized in~~to Simulation A ~~were applied. However,~~but assumes greater deposit attrition under rising rate scenarios. Doing so provides greater stress on projected net interest income to enable better analysis on interest rate risk. Under the rising rate scenarios 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~~declines more

~~rate sensitive. As shown in the table, under these assumptions, net interest income in Simulation B was significantly lower~~ than in Simulation A ~~reflecting~~as more expensive short-term borrowings are assumed to replace the declining deposit balances. The results under Simulation B were only slightly different than in the prior quarter mainly due to higher ~~costs for short-term borrowings.~~loan balances and lower deposit balances in the current quarter. The falling rate scenario in Simulation B would approximate the results in Simulation A, as the same assumptions are utilized in both simulations.

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

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, ~~2017.~~2018. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The information required by this item is set forth in Part I, Item 1 under Note ~~15,~~16, 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, 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



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, 2018	28,515		$	62.79	28,515	3,124,324
May 1 — 31, 2018	2,144		$	64.25	2,144	3,122,180
June 1 — 30, 2018	1,105		$	66.53	1,105	3,121,075
Total	31,764		$	63.02	31,764	3,121,075

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, ~~3,570,327~~3,121,075 shares remained available for purchase at June 30, ~~2017.~~2018.

Item 6. EXHIBITS

~~See Index~~31.1 — Certification of CEO pursuant to ~~Exhibits.~~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

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SIGNATURES

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



COMMERCE BANCSHARES, INC.

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

Date: August ~~7, 2017~~6, 2018



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

Date: August ~~7, 2017~~6, 2018

~~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~~