Edgar Filing: COMMERCE BANCSHARES INC /MO/

10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

_________________________________________________________

For the quarterly period ended September 30, 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 November 2, 2015, the registrant had outstanding 92,822,618 shares of its $5 par value common stock, registrant’s only class of common stock.

Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q



			Page
INDEX
Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	3
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2015 and 2014 (unaudited)	6
		Consolidated Statements of Cash Flows for the Nine Months Ended September 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



	September 30, 2015			December 31, 2014
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	12,224,274		$	11,469,238
Allowance for loan losses	(151,532		)	(156,532		)
Net loans	12,072,742			11,312,706
Loans held for sale, including $2,173,000 of residential mortgage loans carried at fair value	4,143			—
Investment securities:
Available for sale ($364,097,000 pledged at September 30, 2015 and $467,143,000 at
December 31, 2014 to secure swap and repurchase agreements)	9,472,959			9,523,560
Trading	14,463			15,357
Non-marketable	116,634			106,875
Total investment securities	9,604,056			9,645,792
Federal funds sold and short-term securities purchased under agreements to resell	32,550			32,485
Long-term securities purchased under agreements to resell	975,000			1,050,000
Interest earning deposits with banks	42,078			600,744
Cash and due from banks	384,122			467,488
Land, buildings and equipment, net	351,946			357,871
Goodwill	138,921			138,921
Other intangible assets, net	6,826			7,450
Other assets	355,264			380,823
Total assets	$	23,967,648		$	23,994,280
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	6,699,873		$	6,811,959
Savings, interest checking and money market	10,295,260			10,541,601
Time open and C.D.'s of less than $100,000	808,210			878,433
Time open and C.D.'s of $100,000 and over	1,183,417			1,243,785
Total deposits	18,986,760			19,475,778
Federal funds purchased and securities sold under agreements to repurchase	2,193,197			1,862,518
Other borrowings	103,831			104,058
Other liabilities	312,817			217,680
Total liabilities	21,596,605			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	1,283,346			1,229,075
Retained earnings	555,877			426,648
Treasury stock of 3,827,141 shares at September 30, 2015
and 367,487 shares at December 31, 2014, at cost	(168,493		)	(16,562		)
Accumulated other comprehensive income	65,636			62,093
Total Commerce Bancshares, Inc. stockholders' equity	2,365,305			2,330,193
Non-controlling interest	5,738			4,053
Total equity	2,371,043			2,334,246
Total liabilities and equity	$	23,967,648		$	23,994,280

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME



	For the Three Months Ended September 30						For the Nine Months Ended September 30
(In thousands, except per share data)	2015			2014			2015			2014
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	114,954		$	112,688		$	339,707		$	334,886
Interest and fees on loans held for sale	48			—			108			—
Interest on investment securities	50,716			46,338			142,416			144,373
Interest on federal funds sold and short-term securities purchased under
agreements to resell	21			30			45			80
Interest on long-term securities purchased under agreements to resell	3,273			2,684			9,994			9,778
Interest on deposits with banks	103			71			404			259
Total interest income	169,115			161,811			492,674			489,376
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	3,356			3,400			9,951			10,064
Time open and C.D.'s of less than $100,000	786			1,010			2,484			3,193
Time open and C.D.'s of $100,000 and over	1,554			1,518			4,468			4,485
Interest on federal funds purchased and securities sold under
agreements to repurchase	483			287			1,271			753
Interest on other borrowings	898			880			2,667			2,606
Total interest expense	7,077			7,095			20,841			21,101
Net interest income	162,038			154,716			471,833			468,275
Provision for loan losses	8,364			7,652			19,541			24,867
Net interest income after provision for loan losses	153,674			147,064			452,292			443,408
NON-INTEREST INCOME
Bank card transaction fees	44,635			44,802			132,606			130,963
Trust fees	29,630			28,560			89,747			82,898
Deposit account charges and other fees	20,674			20,161			58,810			58,460
Capital market fees	2,620			2,783			8,360			9,899
Consumer brokerage services	3,547			3,098			10,099			8,817
Loan fees and sales	1,855			1,367			6,127			3,787
Other	8,187			11,515			25,917			28,852
Total non-interest income	111,148			112,286			331,666			323,676
INVESTMENT SECURITIES GAINS (LOSSES), NET
Change in fair value of other-than-temporarily impaired securities	(568		)	(770		)	(883		)	(1,618		)
Portion recognized in other comprehensive income	568			399			400			270
Net impairment losses recognized in earnings	—			(371		)	(483		)	(1,348		)
Realized gains (losses) on sales and fair value adjustments	(378		)	3,366			8,283			11,822
Investment securities gains (losses), net	(378		)	2,995			7,800			10,474
NON-INTEREST EXPENSE
Salaries and employee benefits	100,874			95,462			298,603			284,574
Net occupancy	11,247			11,585			33,807			34,352
Equipment	4,789			4,593			14,171			13,622
Supplies and communication	5,609			5,302			16,416			16,487
Data processing and software	21,119			19,968			61,670			58,633
Marketing	4,343			4,074			12,568			11,704
Deposit insurance	2,981			2,899			9,001			8,685
Other	20,300			17,957			54,043			58,298
Total non-interest expense	171,262			161,840			500,279			486,355
Income before income taxes	93,182			100,505			291,479			291,203
Less income taxes	27,969			31,484			88,929			92,161
Net income	65,213			69,021			202,550			199,042
Less non-controlling interest expense	601			836			2,530			13
Net income attributable to Commerce Bancshares, Inc.	64,612			68,185			200,020			199,029
Less preferred stock dividends	2,250			1,800			6,750			1,800
Net income available to common shareholders	$	62,362		$	66,385		$	193,270		$	197,229
Net income per common share — basic	$	.67		$	.69		$	2.03		$	2.00
Net income per common share — diluted	$	.66		$	.69		$	2.02		$	1.99

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	For the Three Months Ended September 30						For the Nine Months Ended September 30
(In thousands)	2015			2014			2015			2014
	(Unaudited)
Net income	$	65,213		$	69,021		$	202,550		$	199,042
Other comprehensive income (loss):
Net unrealized losses on securities for which a portion of an other-than-temporary impairment has been recorded in earnings	(327		)	(244		)	(306		)	(136		)
Net unrealized gains (losses) on other securities	16,891			(24,062		)	2,754			49,967
Pension loss amortization	283			223			1,095			669
Other comprehensive income (loss)	16,847			(24,083		)	3,543			50,500
Comprehensive income	82,060			44,938			206,093			249,542
Less non-controlling interest expense	601			836			2,530			13
Comprehensive income attributable to Commerce Bancshares, Inc.	$	81,459		$	44,102		$	203,563		$	249,529

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY



			Commerce Bancshares, Inc. Shareholders
(In thousands, except per share data)	Preferred Stock		Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Non-Controlling Interest			Total
	(Unaudited)
Balance January 1, 2015	$	144,784	$	484,155	$	1,229,075		$	426,648		$	(16,562	)	$	62,093	$	4,053		$	2,334,246
Net income								200,020								2,530			202,550
Other comprehensive income														3,543					3,543
Distributions to non-controlling interest																(845		)	(845		)
Purchases of treasury stock											(9,147		)						(9,147		)
Accelerated share repurchase agreement					(20,000		)				(80,000		)						(100,000		)
Settlements of accelerated share repurchase agreements					80,000						(80,000		)						—
Issuance of stock under purchase and equity compensation plans					(15,302		)				17,216								1,914
Excess tax benefit related to equity compensation plans					1,871														1,871
Stock-based compensation					7,702														7,702
Cash dividends on common stock ($.675 per share)								(64,041		)									(64,041		)
Cash dividends on preferred stock ($1.125 per depositary share)								(6,750		)									(6,750		)
Balance September 30, 2015	$	144,784	$	484,155	$	1,283,346		$	555,877		$	(168,493	)	$	65,636	$	5,738		$	2,371,043
Balance January 1, 2014	$	—	$	481,224	$	1,279,948		$	449,836		$	(10,097	)	$	9,731	$	3,755		$	2,214,397
Net income								199,029								13			199,042
Other comprehensive income														50,500					50,500
Distributions to non-controlling interest																(730		)	(730		)
Issuance of preferred stock	144,784																		144,784
Purchases of treasury stock											(69,040		)						(69,040		)
Accelerated share repurchase agreement					(60,000		)				(140,000		)						(200,000		)
Issuance of stock under purchase and equity compensation plans					(12,304		)				19,507								7,203
Excess tax benefit related to equity compensation plans					1,457														1,457
Stock-based compensation					6,631														6,631
Cash dividends on common stock ($.643 per share)								(63,575		)									(63,575		)
Cash dividends on preferred stock ($.30 per depositary share)								(1,800		)									(1,800		)
Balance September 30, 2014	$	144,784	$	481,224	$	1,215,732		$	583,490		$	(199,630	)	$	60,231	$	3,038		$	2,288,869

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Nine Months Ended September 30
(In thousands)	2015			2014
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	202,550		$	199,042
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	19,541			24,867
Provision for depreciation and amortization	32,100			31,561
Amortization of investment security premiums, net	23,249			14,473
Investment securities gains, net(A)	(7,800		)	(10,474		)
Net gains on sales of loans held for sale	(2,184		)	—
Originations of loans held for sale	(75,589		)	—
Proceeds from sales of loans held for sale	72,973			—
Net (increase) decrease in trading securities	(5,042		)	14,555
Stock-based compensation	7,702			6,631
Increase in interest receivable	(2,652		)	(2,215		)
Decrease in interest payable	(96		)	(277		)
Increase in income taxes payable	16,312			4,880
Excess tax benefit related to equity compensation plans	(1,871		)	(1,457		)
Other changes, net	(365		)	4,043
Net cash provided by operating activities	278,828			285,629
INVESTING ACTIVITIES:
Cash paid in sales of branches	—			(43,827		)
Proceeds from sales of investment securities(A)	684,893			64,041
Proceeds from maturities/pay downs of investment securities(A)	1,923,785			1,392,422
Purchases of investment securities(A)	(2,507,803		)	(1,314,248		)
Net increase in loans	(782,559		)	(527,528		)
Long-term securities purchased under agreements to resell	—			(250,000		)
Repayments of long-term securities purchased under agreements to resell	75,000			500,000
Purchases of land, buildings and equipment	(22,718		)	(34,205		)
Sales of land, buildings and equipment	4,752			2,983
Net cash used in investing activities	(624,650		)	(210,362		)
FINANCING ACTIVITIES:
Net decrease in non-interest bearing, savings, interest checking and money market deposits	(319,853		)	(470,427		)
Net decrease in time open and C.D.'s	(130,591		)	(17,295		)
Repayment of long-term securities sold under agreements to repurchase	—			(350,000		)
Net increase in federal funds purchased and short-term securities sold under agreements to repurchase	330,679			398,602
Repayment of other long-term borrowings	(227		)	(233		)
Net decrease in other short-term borrowings	—			(2,000		)
Proceeds from issuance of preferred stock	—			144,784
Purchases of treasury stock	(9,147		)	(69,040		)
Accelerated share repurchase agreements	(100,000		)	(200,000		)
Issuance of stock under equity compensation plans	1,914			7,203
Excess tax benefit related to equity compensation plans	1,871			1,457
Cash dividends paid on common stock	(64,041		)	(63,575		)
Cash dividends paid on preferred stock	(6,750		)	(1,800		)
Net cash used in financing activities	(296,145		)	(622,324		)
Decrease in cash and cash equivalents	(641,967		)	(547,057		)
Cash and cash equivalents at beginning of year	1,100,717			1,269,514
Cash and cash equivalents at September 30	$	458,750		$	722,457
(A) Available for sale and non-marketable securities
Income tax net payments	$	70,860		$	86,002
Interest paid on deposits and borrowings	$	20,937		$	21,278
Loans transferred to foreclosed real estate	$	2,459		$	4,421
Settlement of accelerated stock repurchase agreement and receipt of treasury stock	$	60,000		$	—

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 nine month periods ended September 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 nine months ended September 30, 2015 was $1.5 million. 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 $1.1 million for the nine months ended September 30, 2014.

2. Loans and Allowance for Loan Losses

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



(In thousands)	September 30, 2015		December 31, 2014
Commercial:
Business	$	4,406,854	$	3,969,952
Real estate – construction and land	534,425		403,507
Real estate – business	2,286,013		2,288,215
Personal Banking:
Real estate – personal	1,920,650		1,883,092
Consumer	1,886,806		1,705,134
Revolving home equity	428,940		430,873
Consumer credit card	756,093		782,370
Overdrafts	4,493		6,095
Total loans	$	12,224,274	$	11,469,238

At September 30, 2015, loans of $3.6 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 $1.4 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

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Allowance for loan losses

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



	For the Three Months Ended September 30							For the Nine Months Ended September 30
(In thousands)	Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	$	86,329		$	65,203	$	151,532	$	89,622		$	66,910	$	156,532
Provision	(1,976		)	10,340		8,364		(6,089		)	25,630		19,541
Deductions:
Loans charged off	903			11,321		12,224		3,035			34,194		37,229
Less recoveries on loans	1,167			2,693		3,860		4,119			8,569		12,688
Net loan charge-offs (recoveries)	(264		)	8,628		8,364		(1,084		)	25,625		24,541
Balance September 30, 2015	$	84,617		$	66,915	$	151,532	$	84,617		$	66,915	$	151,532
Balance at beginning of period	$	98,928		$	62,604	$	161,532	$	94,189		$	67,343	$	161,532
Provision	(717		)	8,369		7,652		3,836			21,031		24,867
Deductions:
Loans charged off	686			11,414		12,100		3,034			35,917		38,951
Less recoveries on loans	1,431			3,017		4,448		3,965			10,119		14,084
Net loan charge-offs (recoveries)	(745		)	8,397		7,652		(931		)	25,798		24,867
Balance September 30, 2014	$	98,956		$	62,576	$	161,532	$	98,956		$	62,576	$	161,532

The following table shows the balance in the allowance for loan losses and the related loan balance at September 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
September 30, 2015
Commercial	$	1,829	$	32,513	$	82,788	$	7,194,779
Personal Banking	1,667		22,868		65,248		4,974,114
Total	$	3,496	$	55,381	$	148,036	$	12,168,893
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 September 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)	Sept. 30, 2015		Dec. 31, 2014
Non-accrual loans	$	25,779	$	40,775
Restructured loans (accruing)	29,602		40,313
Total impaired loans	$	55,381	$	81,088

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The following table provides additional information about impaired loans held by the Company at September 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
September 30, 2015
With no related allowance recorded:
Business	$	9,692	$	11,866	$	—
Real estate – construction and land	2,072		7,679		—
Real estate – business	1,535		2,969		—
	$	13,299	$	22,514	$	—
With an allowance recorded:
Business	$	8,292	$	10,252	$	681
Real estate – construction and land	3,327		4,939		288
Real estate – business	7,595		11,084		860
Real estate – personal	8,652		11,835		1,015
Consumer	5,461		5,461		70
Revolving home equity	492		492		13
Consumer credit card	8,263		8,263		569
	$	42,082	$	52,326	$	3,496
Total	$	55,381	$	74,840	$	3,496
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

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Total average impaired loans for the three and nine month periods ended September 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 September 30, 2015
Non-accrual loans	$	21,119	$	5,179	$	26,298
Restructured loans (accruing)	13,399		18,221		31,620
Total	$	34,518	$	23,400	$	57,918
For the nine months ended September 30, 2015
Non-accrual loans	$	25,784	$	5,791	$	31,575
Restructured loans (accruing)	16,612		18,854		35,466
Total	$	42,396	$	24,645	$	67,041
For the three months ended September 30, 2014
Non-accrual loans	$	38,111	$	7,267	$	45,378
Restructured loans (accruing)	32,970		19,822		52,792
Total	$	71,081	$	27,089	$	98,170
For the nine months ended September 30, 2014
Non-accrual loans	$	38,099	$	7,320	$	45,419
Restructured loans (accruing)	37,157		20,660		57,817
Total	$	75,256	$	27,980	$	103,236

The table below shows interest income recognized during the three and nine month periods ended September 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 September 30				For the Nine Months Ended September 30
(In thousands)	2015		2014		2015		2014
Interest income recognized on impaired loans:
Business	$	63	$	146	$	188	$	438
Real estate – construction and land	22		97		66		290
Real estate – business	33		58		99		173
Real estate – personal	47		53		142		160
Consumer	87		72		261		215
Revolving home equity	6		7		17		20
Consumer credit card	186		236		558		707
Total	$	444	$	669	$	1,331	$	2,003

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Delinquent and non-accrual loans

The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at September 30, 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
September 30, 2015
Commercial:
Business	$	4,391,674	$	3,106	$	375	$	11,699	$	4,406,854
Real estate – construction and land	529,117		1,262		—		4,046		534,425
Real estate – business	2,277,384		3,575		—		5,054		2,286,013
Personal Banking:
Real estate – personal	1,904,280		8,695		2,695		4,980		1,920,650
Consumer	1,867,657		17,244		1,905		—		1,886,806
Revolving home equity	423,939		2,512		2,489		—		428,940
Consumer credit card	740,124		8,726		7,243		—		756,093
Overdrafts	4,204		289		—		—		4,493
Total	$	12,138,379	$	45,409	$	14,707	$	25,779	$	12,224,274
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.

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Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
September 30, 2015
Pass	$	4,304,836	$	527,590	$	2,211,387	$	7,043,813
Special mention	59,526		1,021		19,576		80,123
Substandard	30,793		1,768		49,996		82,557
Non-accrual	11,699		4,046		5,054		20,799
Total	$	4,406,854	$	534,425	$	2,286,013	$	7,227,292
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 September 30, 2015, these were comprised of $256.9 million in personal real estate loans, or 5.1% 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 September 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
September 30, 2015
FICO score:
Under 600	1.5	%	4.6	%	1.6	%	3.8	%
600 - 659	2.8		9.5		4.2		12.1
660 - 719	9.1		22.5		13.7		32.6
720 - 779	25.3		27.0		26.2		28.1
780 and over	61.3		36.4		54.3		23.4
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	%

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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 $46.7 million at September 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 $17.1 million at September 30, 2015. Other performing restructured loans totaled $29.6 million at September 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 $12.5 million at September 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 $8.3 million at September 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 September 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 September 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)	September 30, 2015		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	16,441	$	—
Real estate - construction and land	5,222		1,499
Real estate - business	5,502		—
Personal Banking:
Real estate - personal	5,276		—
Consumer	5,487		57
Revolving home equity	492		49
Consumer credit card	8,263		541
Total restructured loans	$	46,683	$	2,146

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.

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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 $1.6 million at September 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 September 30, 2015, the fair value of these loans was $2.2 million, and the unpaid principal balance was $2.1 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 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.

Beginning in the third quarter of 2015, the Company has designated certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans at various times while the student is attending school or shortly after graduation. At September 30, 2015, the balance of these loans was $2.0 million. These loans are carried at lower of cost or fair value, and none were on non-accrual status or past due.

Foreclosed real estate/repossessed assets

The Company’s holdings of foreclosed real estate totaled $3.1 million and $5.5 million at September 30, 2015 and December 31, 2014, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $3.1 million and $2.4 million at September 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 September 30, 2015 and December 31, 2014.



(In thousands)	Sept. 30, 2015		Dec. 31, 2014
Available for sale	$	9,472,959	$	9,523,560
Trading	14,463		15,357
Non-marketable	116,634		106,875
Total investment securities	$	9,604,056	$	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 $46.8 million at September 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 $69.5 million at September 30, 2015 and $60.2 million at December 31, 2014.

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A summary of the available for sale investment securities by maturity groupings as of September 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	$	59,884	$	60,116
After 1 but within 5 years	163,996		167,780
After 5 but within 10 years	143,940		144,161
After 10 years	52,882		48,342
Total U.S. government and federal agency obligations	420,702		420,399
Government-sponsored enterprise obligations:
Within 1 year	42,108		42,249
After 1 but within 5 years	477,115		482,232
After 5 but within 10 years	332,296		332,248
After 10 years	5,630		5,480
Total government-sponsored enterprise obligations	857,149		862,209
State and municipal obligations:
Within 1 year	99,618		99,985
After 1 but within 5 years	667,923		685,757
After 5 but within 10 years	912,614		924,070
After 10 years	140,081		137,347
Total state and municipal obligations	1,820,236		1,847,159
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,508,870		2,575,835
Non-agency mortgage-backed securities	805,560		817,197
Asset-backed securities	2,585,088		2,584,688
Total mortgage and asset-backed securities	5,899,518		5,977,720
Other debt securities:
Within 1 year	3,999		4,048
After 1 but within 5 years	83,398		83,613
After 5 but within 10 years	229,071		226,599
After 10 years	12,000		11,748
Total other debt securities	328,468		326,008
Equity securities	5,677		39,464
Total available for sale investment securities	$	9,331,750	$	9,472,959

Investments in U.S. government and federal agency obligations are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $420.3 million, at fair value, at September 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 $93.2 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 $39.4 million at September 30, 2015.

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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
September 30, 2015
U.S. government and federal agency obligations	$	420,702	$	5,930	$	(6,233	)	$	420,399
Government-sponsored enterprise obligations	857,149		7,809		(2,749		)	862,209
State and municipal obligations	1,820,236		33,416		(6,493		)	1,847,159
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,508,870		69,477		(2,512		)	2,575,835
Non-agency mortgage-backed securities	805,560		12,285		(648		)	817,197
Asset-backed securities	2,585,088		7,444		(7,844		)	2,584,688
Total mortgage and asset-backed securities	5,899,518		89,206		(11,004		)	5,977,720
Other debt securities	328,468		979		(3,439		)	326,008
Equity securities	5,677		33,787		—			39,464
Total	$	9,331,750	$	171,127	$	(29,918	)	$	9,472,959
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 September 30, 2015, the fair value of securities on this watch list was $102.8 million compared to $123.9 million at December 31, 2014.

As of September 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 $47.4 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.1 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

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



Significant Inputs	Range
Prepayment CPR	1%	-	25%
Projected cumulative default	17%	-	54%
Credit support	0%	-	22%
Loss severity	20%	-	63%

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



	For the Nine Months Ended September 30
(In thousands)	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			1,348
Increase in expected cash flows that are recognized over remaining life of security	(73		)	(97		)
Cumulative OTTI credit losses at September 30	$	14,144		$	13,750

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
September 30, 2015
U.S. government and federal agency obligations	$	158,390	$	1,701	$	31,479	$	4,532	$	189,869	$	6,233
Government-sponsored enterprise obligations	11,419		57		110,123		2,692		121,542		2,749
State and municipal obligations	120,098		703		110,550		5,790		230,648		6,493
Mortgage and asset-backed securities:
Agency mortgage-backed securities	64,863		259		305,767		2,253		370,630		2,512
Non-agency mortgage-backed securities	199,875		361		53,765		287		253,640		648
Asset-backed securities	998,031		5,542		152,502		2,302		1,150,533		7,844
Total mortgage and asset-backed securities	1,262,769		6,162		512,034		4,842		1,774,803		11,004
Other debt securities	179,566		2,490		25,565		949		205,131		3,439
Total	$	1,732,242	$	11,113	$	789,751	$	18,805	$	2,521,993	$	29,918
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