Edgar Filing: COMMERCE BANCSHARES INC /MO/

CBSH 06.30.2015 10Q

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, 2015



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

____________________________________________________________

For the transition period from to

Commission File No. 0-2989



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



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

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

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

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

Yes þ No o

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

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of July 31, 2015, the registrant had outstanding 93,335,596 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, 2015 (unaudited) and December 31, 2014	3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2015 and 2014 (unaudited)	6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited)	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	40
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	63
	Item 4.	Controls and Procedures	64

Part II	Other Information
	Item 1.	Legal Proceedings	65
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
	Item 6.	Exhibits	65
Signatures			66
Index to Exhibits			67

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	June 30, 2015			December 31, 2014
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	11,928,481		$	11,469,238
Allowance for loan losses	(151,532		)	(156,532		)
Net loans	11,776,949			11,312,706
Loans held for sale, at fair value	7,852			—
Investment securities:
Available for sale ($465,491,000 pledged at June 30, 2015 and $467,143,000 at
December 31, 2014 to secure swap and repurchase agreements)	9,221,821			9,523,560
Trading	18,971			15,357
Non-marketable	108,346			106,875
Total investment securities	9,349,138			9,645,792
Federal funds sold and short-term securities purchased under agreements to resell	26,875			32,485
Long-term securities purchased under agreements to resell	1,050,000			1,050,000
Interest earning deposits with banks	264,683			600,744
Cash and due from banks	409,791			467,488
Land, buildings and equipment, net	353,366			357,871
Goodwill	138,921			138,921
Other intangible assets, net	6,978			7,450
Other assets	321,382			380,823
Total assets	$	23,705,935		$	23,994,280
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	6,886,509		$	6,811,959
Savings, interest checking and money market	10,369,031			10,541,601
Time open and C.D.'s of less than $100,000	833,161			878,433
Time open and C.D.'s of $100,000 and over	1,200,008			1,243,785
Total deposits	19,288,709			19,475,778
Federal funds purchased and securities sold under agreements to repurchase	1,666,043			1,862,518
Other borrowings	103,843			104,058
Other liabilities	331,980			217,680
Total liabilities	21,390,575			21,660,034
Commerce Bancshares, Inc. stockholders’ equity:
Preferred stock, $1 par value
Authorized 2,000,000 shares; issued 6,000 shares	144,784			144,784
Common stock, $5 par value
Authorized 120,000,000 shares;
issued 96,830,977 shares	484,155			484,155
Capital surplus	1,261,307			1,229,075
Retained earnings	514,451			426,648
Treasury stock of 3,362,811 shares at June 30, 2015
and 367,487 shares at December 31, 2014, at cost	(143,565		)	(16,562		)
Accumulated other comprehensive income	48,789			62,093
Total Commerce Bancshares, Inc. stockholders' equity	2,309,921			2,330,193
Non-controlling interest	5,439			4,053
Total equity	2,315,360			2,334,246
Total liabilities and equity	$	23,705,935		$	23,994,280

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
(In thousands, except per share data)	2015			2014			2015			2014
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	113,467		$	111,496		$	224,753		$	222,198
Interest and fees on loans held for sale	39			—			60			—
Interest on investment securities	53,264			53,016			91,700			98,035
Interest on federal funds sold and short-term securities purchased under
agreements to resell	15			24			24			50
Interest on long-term securities purchased under agreements to resell	3,670			2,943			6,721			7,094
Interest on deposits with banks	122			88			301			188
Total interest income	170,577			167,567			323,559			327,565
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	3,287			3,358			6,595			6,664
Time open and C.D.'s of less than $100,000	818			1,063			1,698			2,183
Time open and C.D.'s of $100,000 and over	1,504			1,515			2,914			2,967
Interest on federal funds purchased and securities sold under
agreements to repurchase	421			263			788			466
Interest on other borrowings	890			875			1,769			1,726
Total interest expense	6,920			7,074			13,764			14,006
Net interest income	163,657			160,493			309,795			313,559
Provision for loan losses	6,757			7,555			11,177			17,215
Net interest income after provision for loan losses	156,900			152,938			298,618			296,344
NON-INTEREST INCOME
Bank card transaction fees	45,672			44,444			87,971			86,161
Trust fees	30,531			27,765			60,117			54,338
Deposit account charges and other fees	19,637			19,709			38,136			38,299
Capital market fees	2,738			3,246			5,740			7,116
Consumer brokerage services	3,364			2,972			6,552			5,719
Loan fees and sales	2,183			1,211			4,272			2,420
Other	9,967			9,416			17,730			17,337
Total non-interest income	114,092			108,763			220,518			211,390
INVESTMENT SECURITIES GAINS (LOSSES), NET
Change in fair value of other-than-temporarily impaired securities	(88		)	(785		)	(315		)	(848		)
Portion recognized in other comprehensive income	(378		)	154			(168		)	(129		)
Net impairment losses recognized in earnings	(466		)	(631		)	(483		)	(977		)
Realized gains (losses) on sales and fair value adjustments	2,609			(1,927		)	8,661			8,456
Investment securities gains (losses), net	2,143			(2,558		)	8,178			7,479
NON-INTEREST EXPENSE
Salaries and employee benefits	99,655			94,849			197,729			189,112
Net occupancy	10,999			11,151			22,560			22,767
Equipment	4,679			4,525			9,382			9,029
Supplies and communication	5,226			5,486			10,807			11,185
Data processing and software	21,045			19,578			40,551			38,665
Marketing	4,307			3,949			8,225			7,630
Deposit insurance	3,019			2,892			6,020			5,786
Other	16,390			20,123			33,743			40,341
Total non-interest expense	165,320			162,553			329,017			324,515
Income before income taxes	107,815			96,590			198,297			190,698
Less income taxes	32,492			30,690			60,960			60,677
Net income	75,323			65,900			137,337			130,021
Less non-controlling interest expense (income)	970			(631		)	1,929			(823		)
Net income attributable to Commerce Bancshares, Inc.	74,353			66,531			135,408			130,844
Less preferred stock dividends	2,250			—			4,500			—
Net income available to common shareholders	$	72,103		$	66,531		$	130,908		$	130,844
Net income per common share — basic	$	.75		$	.67		$	1.36		$	1.31
Net income per common share — diluted	$	.75		$	.66		$	1.36		$	1.30

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
(In thousands)	2015			2014			2015			2014
	(Unaudited)
Net income	$	75,323		$	65,900		$	137,337		$	130,021
Other comprehensive income (loss):
Net unrealized gains (losses) on securities for which a portion of an other-than-temporary impairment has been recorded in earnings	149			(58		)	21			108
Net unrealized gains (losses) on other securities	(43,483		)	43,650			(14,137		)	74,029
Pension loss amortization	406			223			812			446
Other comprehensive income (loss)	(42,928		)	43,815			(13,304		)	74,583
Comprehensive income	32,395			109,715			124,033			204,604
Less non-controlling interest expense (income)	970			(631		)	1,929			(823		)
Comprehensive income attributable to Commerce Bancshares, Inc.	$	31,425		$	110,346		$	122,104		$	205,427

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
(In thousands, except per share data)	Preferred Stock		Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Non-Controlling Interest			Total
	(Unaudited)
Balance January 1, 2015	$	144,784	$	484,155	$	1,229,075		$	426,648		$	(16,562	)	$	62,093		$	4,053		$	2,334,246
Net income								135,408									1,929			137,337
Other comprehensive loss														(13,304		)				(13,304		)
Distributions to non-controlling interest																	(543		)	(543		)
Purchases of treasury stock											(143,575		)							(143,575		)
Accelerated share repurchase forward contract					(20,000		)													(20,000		)
Settlement of accelerated share repurchase forward contract					60,000															60,000
Issuance of stock under purchase and equity compensation plans					(14,682		)				16,572									1,890
Excess tax benefit related to equity compensation plans					1,662															1,662
Stock-based compensation					5,252															5,252
Cash dividends on common stock ($.450 per share)								(43,105		)										(43,105		)
Cash dividends on preferred stock ($.750 per share)								(4,500		)										(4,500		)
Balance June 30, 2015	$	144,784	$	484,155	$	1,261,307		$	514,451		$	(143,565	)	$	48,789		$	5,439		$	2,315,360
Balance January 1, 2014	$	—	$	481,224	$	1,279,948		$	449,836		$	(10,097	)	$	9,731		$	3,755		$	2,214,397
Net income								130,844									(823		)	130,021
Other comprehensive income														74,583						74,583
Distributions to non-controlling interest																	(554		)	(554		)
Issuance of preferred stock	144,816																			144,816
Purchases of treasury stock											(208,989		)							(208,989		)
Accelerated share repurchase forward contract					(60,000		)													(60,000		)
Issuance of stock under purchase and equity compensation plans					(10,671		)				15,912									5,241
Excess tax benefit related to equity compensation plans					1,091															1,091
Stock-based compensation					4,468															4,468
Cash dividends on common stock ($.429 per share)								(42,921		)										(42,921		)
Balance June 30, 2014	$	144,816	$	481,224	$	1,214,836		$	537,759		$	(203,174	)	$	84,314		$	2,378		$	2,262,153

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
(In thousands)	2015			2014
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	137,337		$	130,021
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	11,177			17,215
Provision for depreciation and amortization	21,287			21,033
Amortization of investment security premiums, net	17,797			8,323
Investment securities gains, net(A)	(8,178		)	(7,479		)
Net gains on sales of loans held for sale	(1,234		)	—
Originations of loans held for sale	(50,143		)	—
Proceeds from sales of loans held for sale	43,593			—
Net (increase) decrease in trading securities	(1,310		)	16,845
Stock-based compensation	5,252			4,468
(Increase) decrease in interest receivable	(618		)	104
Decrease in interest payable	(201		)	(11		)
Increase in income taxes payable	17,622			14,719
Excess tax benefit related to equity compensation plans	(1,662		)	(1,091		)
Other changes, net	2,842			4,705
Net cash provided by operating activities	193,561			208,852
INVESTING ACTIVITIES:
Proceeds from sales of investment securities(A)	683,202			63,899
Proceeds from maturities/pay downs of investment securities(A)	1,323,921			928,075
Purchases of investment securities(A)	(1,710,977		)	(1,196,956		)
Net increase in loans	(477,902		)	(520,767		)
Long-term securities purchased under agreements to resell	—			(250,000		)
Repayments of long-term securities purchased under agreements to resell	—			450,000
Purchases of land, buildings and equipment	(15,523		)	(14,583		)
Sales of land, buildings and equipment	3,430			2,074
Net cash used in investing activities	(193,849		)	(538,258		)
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits	34,287			(272,723		)
Net increase (decrease) in time open and C.D.'s	(89,049		)	252,702
Repayment of long-term securities sold under agreements to repurchase	—			(150,000		)
Net decrease in federal funds purchased and short-term securities sold under agreements to repurchase	(196,475		)	(42,235		)
Repayment of other long-term borrowings	(215		)	(214		)
Net decrease in other short-term borrowings	—			(2,000		)
Proceeds from issuance of preferred stock	—			144,816
Purchases of treasury stock	(83,575		)	(208,989		)
Accelerated stock repurchase agreements	(20,000		)	(60,000		)
Issuance of stock under equity compensation plans	1,890			5,241
Excess tax benefit related to equity compensation plans	1,662			1,091
Cash dividends paid on common stock	(43,105		)	(42,921		)
Cash dividends paid on preferred stock	(4,500		)	—
Net cash used in financing activities	(399,080		)	(375,232		)
Decrease in cash and cash equivalents	(399,368		)	(704,638		)
Cash and cash equivalents at beginning of year	1,100,717			1,269,514
Cash and cash equivalents at June 30	$	701,349		$	564,876
(A) Available for sale and non-marketable securities
Income tax net payments	$	42,077		$	45,154
Interest paid on deposits and borrowings	$	13,964		$	13,942
Loans transferred to foreclosed real estate	$	2,133		$	3,769
Settlement of accelerated stock repurchase agreement and receipt of treasury stock	$	60,000		$	—

See accompanying notes to consolidated financial statements.

Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015 (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 2014 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, 2015 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.

The Company invests in low-income housing partnerships which supply funds for the construction and operation of apartment complexes that provide affordable housing to lower income families. As permitted by ASU 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects," issued by the Financial Accounting Standards Board, the Company adopted a new method of accounting for these investments on January 1, 2015. The new method is the practical expedient to the proportional amortization method, which allows the Company to record the amortization of its investments in income tax expense, rather than in non-interest expense. The Company made this change because it believes that presenting the investment performance net of taxes more fairly represents the economics and returns on such investments. The amortization recognized as a component of income tax expense for the six months ended June 30, 2015 was $995 thousand. As required by the ASU, all prior period information in this report has been revised to reflect the adoption, resulting in a decrease to non-interest expense and an increase to income tax expense (as originally reported) of $756 thousand for the six months ended June 30, 2014.

2. Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at June 30, 2015 and December 31, 2014 are as follows:



(In thousands)	June 30, 2015		December 31, 2014
Commercial:
Business	$	4,267,997	$	3,969,952
Real estate – construction and land	448,887		403,507
Real estate – business	2,276,231		2,288,215
Personal Banking:
Real estate – personal	1,901,671		1,883,092
Consumer	1,848,457		1,705,134
Revolving home equity	430,880		430,873
Consumer credit card	750,731		782,370
Overdrafts	3,627		6,095
Total loans	$	11,928,481	$	11,469,238

At June 30, 2015, loans of $3.5 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 $1.3 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

Table of Contents

Allowance for loan losses

A summary of the activity in the allowance for loan losses during the three and six months ended June 30, 2015 and 2014, respectively, follows:



	For the Three Months Ended June 30							For the Six Months Ended June 30
(In thousands)	Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	$	88,906		$	64,626	$	153,532	$	89,622		$	66,910	$	156,532
Provision	(2,361		)	9,118		6,757		(4,113		)	15,290		11,177
Deductions:
Loans charged off	1,408			11,297		12,705		2,132			22,873		25,005
Less recoveries on loans	1,192			2,756		3,948		2,952			5,876		8,828
Net loan charge-offs (recoveries)	216			8,541		8,757		(820		)	16,997		16,177
Balance June 30, 2015	$	86,329		$	65,203	$	151,532	$	86,329		$	65,203	$	151,532
Balance at beginning of period	$	97,881		$	63,651	$	161,532	$	94,189		$	67,343	$	161,532
Provision	486			7,069		7,555		4,553			12,662		17,215
Deductions:
Loans charged off	1,218			11,752		12,970		2,348			24,503		26,851
Less recoveries on loans	1,779			3,636		5,415		2,534			7,102		9,636
Net loan charge-offs (recoveries)	(561		)	8,116		7,555		(186		)	17,401		17,215
Balance June 30, 2014	$	98,928		$	62,604	$	161,532	$	98,928		$	62,604	$	161,532

The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, 2015 and December 31, 2014, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below, which are deemed to have similar risk characteristics and are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.



	Impaired Loans				All Other Loans
(In thousands)	Allowance for Loan Losses		Loans Outstanding		Allowance for Loan Losses		Loans Outstanding
June 30, 2015
Commercial	$	1,943	$	31,276	$	84,386	$	6,961,839
Personal Banking	1,813		24,300		63,390		4,911,066
Total	$	3,756	$	55,576	$	147,776	$	11,872,905
December 31, 2014
Commercial	$	4,527	$	55,551	$	85,095	$	6,606,123
Personal Banking	2,314		25,537		64,596		4,782,027
Total	$	6,841	$	81,088	$	149,691	$	11,388,150

Impaired loans

The table below shows the Company’s investment in impaired loans at June 30, 2015 and December 31, 2014. 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 under ASC 310-40. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 14.



(In thousands)	June 30, 2015		Dec. 31, 2014
Non-accrual loans	$	26,645	$	40,775
Restructured loans (accruing)	28,931		40,313
Total impaired loans	$	55,576	$	81,088

Table of Contents

The following table provides additional information about impaired loans held by the Company at June 30, 2015 and December 31, 2014, 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
June 30, 2015
With no related allowance recorded:
Business	$	9,779	$	11,911	$	—
Real estate – construction and land	3,102		8,554		—
Real estate – business	2,213		3,629		—
Real estate – personal	618		815		—
	$	15,712	$	24,909	$	—
With an allowance recorded:
Business	$	7,303	$	9,408	$	836
Real estate – construction and land	3,658		5,129		321
Real estate – business	5,221		9,299		786
Real estate – personal	8,710		11,832		1,030
Consumer	5,378		5,492		91
Revolving home equity	523		523		21
Consumer credit card	9,071		9,071		671
	$	39,864	$	50,754	$	3,756
Total	$	55,576	$	75,663	$	3,756
December 31, 2014
With no related allowance recorded:
Business	$	9,237	$	11,532	$	—
Real estate – construction and land	4,552		8,493		—
Real estate – business	13,453		17,258		—
Revolving home equity	1,227		1,384		—
	$	28,469	$	38,667	$	—
With an allowance recorded:
Business	$	12,326	$	13,846	$	1,844
Real estate – construction and land	8,148		9,610		1,081
Real estate – business	7,835		15,025		1,602
Real estate – personal	9,096		12,465		1,441
Consumer	4,244		4,244		50
Revolving home equity	529		529		9
Consumer credit card	10,441		10,441		814
	$	52,619	$	66,160	$	6,841
Total	$	81,088	$	104,827	$	6,841

Table of Contents

Total average impaired loans for the three and six month periods ended June 30, 2015 and 2014, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended June 30, 2015
Non-accrual loans	$	25,063	$	5,948	$	31,011
Restructured loans (accruing)	14,254		18,968		33,222
Total	$	39,317	$	24,916	$	64,233
For the six months ended June 30, 2015
Non-accrual loans	$	28,155	$	6,102	$	34,257
Restructured loans (accruing)	18,245		19,176		37,421
Total	$	46,400	$	25,278	$	71,678
For the three months ended June 30, 2014
Non-accrual loans	$	35,908	$	7,131	$	43,039
Restructured loans (accruing)	40,167		20,745		60,912
Total	$	76,075	$	27,876	$	103,951
For the six months ended June 30, 2014
Non-accrual loans	$	38,093	$	7,347	$	45,440
Restructured loans (accruing)	39,285		21,086		60,371
Total	$	77,378	$	28,433	$	105,811

The table below shows interest income recognized during the three and six month periods ended June 30, 2015 and 2014, respectively, for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 14.



	For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands)	2015		2014		2015		2014
Interest income recognized on impaired loans:
Business	$	42	$	181	$	84	$	361
Real estate – construction and land	42		142		84		283
Real estate – business	15		46		30		91
Real estate – personal	48		58		96		115
Consumer	85		71		169		142
Revolving home equity	6		7		11		14
Consumer credit card	179		228		357		456
Total	$	417	$	733	$	831	$	1,462

Table of Contents

Delinquent and non-accrual loans

The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at June 30, 2015 and December 31, 2014.



(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
June 30, 2015
Commercial:
Business	$	4,252,087	$	3,643	$	411	$	11,856	$	4,267,997
Real estate – construction and land	438,905		4,903		1,479		3,600		448,887
Real estate – business	2,264,297		6,291		—		5,643		2,276,231
Personal Banking:
Real estate – personal	1,885,544		8,480		2,201		5,446		1,901,671
Consumer	1,832,142		14,179		2,036		100		1,848,457
Revolving home equity	427,644		1,912		1,324		—		430,880
Consumer credit card	736,213		7,751		6,767		—		750,731
Overdrafts	3,345		282		—		—		3,627
Total	$	11,840,177	$	47,441	$	14,218	$	26,645	$	11,928,481
December 31, 2014
Commercial:
Business	$	3,946,144	$	11,152	$	1,096	$	11,560	$	3,969,952
Real estate – construction and land	397,488		827		35		5,157		403,507
Real estate – business	2,266,688		3,661		—		17,866		2,288,215
Personal Banking:
Real estate – personal	1,868,606		6,618		1,676		6,192		1,883,092
Consumer	1,687,285		16,053		1,796		—		1,705,134
Revolving home equity	428,478		1,552		843		—		430,873
Consumer credit card	764,599		9,559		8,212		—		782,370
Overdrafts	5,721		374		—		—		6,095
Total	$	11,365,009	$	49,796	$	13,658	$	40,775	$	11,469,238

Credit quality

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

Table of Contents



Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
June 30, 2015
Pass	$	4,179,038	$	439,769	$	2,210,059	$	6,828,866
Special mention	46,321		1,111		15,842		63,274
Substandard	30,782		4,407		44,687		79,876
Non-accrual	11,856		3,600		5,643		21,099
Total	$	4,267,997	$	448,887	$	2,276,231	$	6,993,115
December 31, 2014
Pass	$	3,871,569	$	385,831	$	2,184,541	$	6,441,941
Special mention	62,904		3,865		40,668		107,437
Substandard	23,919		8,654		45,140		77,713
Non-accrual	11,560		5,157		17,866		34,583
Total	$	3,969,952	$	403,507	$	2,288,215	$	6,661,674

The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain Personal Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At June 30, 2015, these were comprised of $246.3 million in personal real estate loans, or 5.0% of the Personal Banking portfolio, compared to $244.3 million at December 31, 2014. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at June 30, 2015 and December 31, 2014 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
June 30, 2015
FICO score:
Under 600	1.6	%	4.8	%	1.8	%	3.9	%
600 - 659	3.2		9.7		3.9		11.7
660 - 719	9.7		22.5		13.3		32.4
720 - 779	26.8		26.9		25.7		28.0
780 and over	58.7		36.1		55.3		24.0
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2014
FICO score:
Under 600	1.4	%	5.2	%	1.8	%	4.1	%
600 - 659	3.1		10.2		4.4		11.8
660 - 719	9.9		22.9		13.7		32.4
720 - 779	26.7		28.0		32.8		27.8
780 and over	58.9		33.7		47.3		23.9
Total	100.0	%	100.0	%	100.0	%	100.0	%

Table of Contents

Troubled debt restructurings

As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $45.4 million at June 30, 2015. 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 $16.4 million at June 30, 2015. Other performing restructured loans totaled $28.9 million at June 30, 2015. These include certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result the loans were classified as troubled debt restructurings. These commercial loans totaled $10.9 million at June 30, 2015. 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 $9.1 million at June 30, 2015. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At June 30, 2015, these loans totaled $8.5 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.

The following table shows the outstanding balances of loans classified as troubled debt restructurings at June 30, 2015, 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, 2015		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	14,945	$	—
Real estate - construction and land	6,418		181
Real estate - business	3,495		—
Personal Banking:
Real estate - personal	5,606		192
Consumer	5,303		84
Revolving home equity	523		91
Consumer credit card	9,071		693
Total restructured loans	$	45,361	$	1,241

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 $1.0 million on an annual, pre-tax basis, compared to amounts contractually owed.

The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms. Performing commercial loans have had no other concessions granted other than being renewed at an interest rate judged not to be market. As such, they have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.

Table of Contents

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 $2.2 million at June 30, 2015 to lend additional funds to borrowers with restructured loans.

Loans held for sale

Beginning January 1, 2015, certain long-term fixed rate personal real estate loan originations have been designated 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. At June 30, 2015, the fair value of these loans was $7.9 million, and the unpaid principal balance was $7.8 million. The unrealized gain in fair value was recognized in loan fees and sales in the consolidated statement of income. None of these loans were on non-accrual status or 90 days or more past due. Interest income with respect to loans held for sale is accrued based on the principal amount outstanding and the loan's contractual interest rate.

Foreclosed real estate/repossessed assets

The Company’s holdings of foreclosed real estate totaled $4.2 million and $5.5 million at June 30, 2015 and December 31, 2014, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.8 million and $2.4 million at June 30, 2015 and December 31, 2014, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.

3. Investment Securities

Investment securities, at fair value, consisted of the following at June 30, 2015 and December 31, 2014.



(In thousands)	June 30, 2015		Dec. 31, 2014
Available for sale	$	9,221,821	$	9,523,560
Trading	18,971		15,357
Non-marketable	108,346		106,875
Total investment securities	$	9,349,138	$	9,645,792

Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $46.7 million at June 30, 2015 and $46.6 million at December 31, 2014. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $61.3 million at June 30, 2015 and $60.2 million at December 31, 2014.

Table of Contents

A summary of the available for sale investment securities by maturity groupings as of June 30, 2015 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. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	90,775	$	91,331
After 1 but within 5 years	167,145		174,685
After 5 but within 10 years	117,077		119,760
After 10 years	52,624		49,090
Total U.S. government and federal agency obligations	427,621		434,866
Government-sponsored enterprise obligations:
Within 1 year	43,033		43,300
After 1 but within 5 years	481,824		484,932
After 5 but within 10 years	357,783		352,912
After 10 years	5,630		5,357
Total government-sponsored enterprise obligations	888,270		886,501
State and municipal obligations:
Within 1 year	139,111		139,708
After 1 but within 5 years	657,544		673,868
After 5 but within 10 years	851,707		848,846
After 10 years	159,222		154,679
Total state and municipal obligations	1,807,584		1,817,101
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,531,365		2,587,693
Non-agency mortgage-backed securities	682,114		690,938
Asset-backed securities	2,494,905		2,498,506
Total mortgage and asset-backed securities	5,708,384		5,777,137
Other debt securities:
Within 1 year	3,999		4,063
After 1 but within 5 years	62,023		62,069
After 5 but within 10 years	191,771		187,374
After 10 years	12,000		11,601
Total other debt securities	269,793		265,107
Equity securities	5,678		41,109
Total available for sale investment securities	$	9,107,330	$	9,221,821

Investments in U.S. government and federal agency obligations are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $434.8 million, at fair value, at June 30, 2015. 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 $92.9 million, at fair value, of auction rate securities, which were previously purchased from bank customers. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $41.1 million at June 30, 2015.

Table of Contents

For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.



(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2015
U.S. government and federal agency obligations	$	427,621	$	11,597	$	(4,352	)	$	434,866
Government-sponsored enterprise obligations	888,270		4,462		(6,231		)	886,501
State and municipal obligations	1,807,584		22,700		(13,183		)	1,817,101
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,531,365		63,083		(6,755		)	2,587,693
Non-agency mortgage-backed securities	682,114		11,079		(2,255		)	690,938
Asset-backed securities	2,494,905		7,410		(3,809		)	2,498,506
Total mortgage and asset-backed securities	5,708,384		81,572		(12,819		)	5,777,137
Other debt securities	269,793		416		(5,102		)	265,107
Equity securities	5,678		35,431		—			41,109
Total	$	9,107,330	$	156,178	$	(41,687	)	$	9,221,821
December 31, 2014
U.S. government and federal agency obligations	$	497,336	$	9,095	$	(5,024	)	$	501,407
Government-sponsored enterprise obligations	968,574		2,593		(8,040		)	963,127
State and municipal obligations	1,789,215		32,340		(8,354		)	1,813,201
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,523,377		75,923		(5,592		)	2,593,708
Non-agency mortgage-backed securities	372,911		11,061		(1,228		)	382,744
Asset-backed securities	3,090,174		6,922		(5,103		)	3,091,993
Total mortgage and asset-backed securities	5,986,462		93,906		(11,923		)	6,068,445
Other debt securities	140,784		420		(2,043		)	139,161
Equity securities	3,931		34,288		—			38,219
Total	$	9,386,302	$	172,642	$	(35,384	)	$	9,523,560

The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, 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, 2015, the fair value of securities on this watch list was $109.2 million compared to $123.9 million at December 31, 2014.

As of June 30, 2015, 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 $50.7 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.2 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at June 30, 2015 included the following:



Significant Inputs	Range
Prepayment CPR	1%	-	25%
Projected cumulative default	18%	-	54%
Credit support	0%	-	20%
Loss severity	21%	-	63%

Table of Contents

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



	For the Six Months Ended June 30
(In thousands)	2015			2014
Cumulative OTTI credit losses at January 1	$	13,734		$	12,499
Credit losses on debt securities for which impairment was not previously recognized	76			—
Credit losses on debt securities for which impairment was previously recognized	407			977
Increase in expected cash flows that are recognized over remaining life of security	(51		)	(66		)
Cumulative OTTI credit losses at June 30	$	14,166		$	13,410

Securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period.



	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2015
U.S. government and federal agency obligations	$	24,495	$	482	$	31,984	$	3,870	$	56,479	$	4,352
Government-sponsored enterprise obligations	193,644		882		157,187		5,349		350,831		6,231
State and municipal obligations	515,521		5,907		124,227		7,276		639,748		13,183
Mortgage and asset-backed securities:
Agency mortgage-backed securities	214,715		1,417		315,002		5,338		529,717		6,755
Non-agency mortgage-backed securities	369,784		1,861		54,265		394		424,049		2,255
Asset-backed securities	806,300		1,259		144,478		2,550		950,778		3,809
Total mortgage and asset-backed securities	1,390,799		4,537		513,745		8,282		1,904,544		12,819
Other debt securities	202,489		3,998		25,411		1,104		227,900		5,102
Total	$	2,326,948	$	15,806	$	852,554	$	25,881	$	3,179,502	$	41,687
December 31, 2014
U.S. government and federal agency obligations	$	90,261	$	818	$	32,077	$	4,206	$	122,338	$	5,024
Government-sponsored enterprise obligations	224,808		922		224,779		7,118		449,587		8,040
State and municipal obligations	172,980		646		215,702		7,708		388,682		8,354
Mortgage and asset-backed securities:
Agency mortgage-backed securities	55,128		429		381,617		5,163		436,745		5,592
Non-agency mortgage-backed securities	141,655		609		43,659		619		185,314		1,228
Asset-backed securities	1,424,457		2,009		159,098		3,094		1,583,555		5,103
Total mortgage and asset-backed securities	1,621,240		3,047		584,374		8,876		2,205,614		11,923
Other debt securities	16,434