Edgar Filing: COMMERCE BANCSHARES INC /MO/

For the Nine Months Ended September 30

(In thousands)

Proceeds from sales of available for sale securities

Proceeds from sales of non-marketable securities

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

_________________________________________________________

For the quarterly period ended September 30, 2016



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, 2016, the registrant had outstanding 96,592,152 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, 2016 (unaudited) and December 31, 2015	3
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	6
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59
	Item 4.	Controls and Procedures	60

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

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	September 30, 2016			December 31, 2015
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	13,230,241		$	12,436,692
Allowance for loan losses	(154,532		)	(151,532		)
Net loans	13,075,709			12,285,160
Loans held for sale (including $4,447,000 of residential mortgage loans carried at fair value at September 30, 2016 and $4,981,000 at December 31, 2015)	9,511			7,607
Investment securities:
Available for sale ($578,090,000 pledged at September 30, 2016 and $568,257,000 at
December 31, 2015 to secure swap and repurchase agreements)	9,438,871			9,777,004
Trading	28,586			11,890
Non-marketable	108,224			112,786
Total investment securities	9,575,681			9,901,680
Federal funds sold and short-term securities purchased under agreements to resell	13,415			14,505
Long-term securities purchased under agreements to resell	725,000			875,000
Interest earning deposits with banks	56,767			23,803
Cash and due from banks	396,938			464,411
Land, buildings and equipment, net	339,196			352,581
Goodwill	138,921			138,921
Other intangible assets, net	6,621			6,669
Other assets	396,709			534,625
Total assets	$	24,734,468		$	24,604,962
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	7,130,415		$	7,146,398
Savings, interest checking and money market	11,023,526			10,834,746
Time open and C.D.'s of less than $100,000	732,575			785,191
Time open and C.D.'s of $100,000 and over	1,279,644			1,212,518
Total deposits	20,166,160			19,978,853
Federal funds purchased and securities sold under agreements to repurchase	1,489,891			1,963,552
Other borrowings	101,415			103,818
Other liabilities	416,189			191,321
Total liabilities	22,173,655			22,237,544
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 97,972,433 shares	489,862			489,862
Capital surplus	1,335,150			1,337,677
Retained earnings	515,081			383,313
Treasury stock of 1,212,837 shares at September 30, 2016
and 603,003 shares at December 31, 2015, at cost	(50,538		)	(26,116		)
Accumulated other comprehensive income	121,082			32,470
Total Commerce Bancshares, Inc. stockholders' equity	2,555,421			2,361,990
Non-controlling interest	5,392			5,428
Total equity	2,560,813			2,367,418
Total liabilities and equity	$	24,734,468		$	24,604,962

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)	2016			2015			2016			2015
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	123,750		$	114,954		$	364,234		$	339,707
Interest and fees on loans held for sale	334			48			1,161			108
Interest on investment securities	51,661			50,716			155,250			142,416
Interest on federal funds sold and short-term securities purchased under
agreements to resell	20			21			63			45
Interest on long-term securities purchased under agreements to resell	3,328			3,273			10,157			9,994
Interest on deposits with banks	268			103			689			404
Total interest income	179,361			169,115			531,554			492,674
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	3,619			3,356			10,651			9,951
Time open and C.D.'s of less than $100,000	683			786			2,134			2,484
Time open and C.D.'s of $100,000 and over	2,186			1,554			6,519			4,468
Interest on federal funds purchased and securities sold under
agreements to repurchase	724			483			2,337			1,271
Interest on other borrowings	906			898			3,066			2,667
Total interest expense	8,118			7,077			24,707			20,841
Net interest income	171,243			162,038			506,847			471,833
Provision for loan losses	7,263			8,364			25,918			19,541
Net interest income after provision for loan losses	163,980			153,674			480,929			452,292
NON-INTEREST INCOME
Bank card transaction fees	47,006			44,635			136,541			132,606
Trust fees	30,951			29,302			90,435			88,815
Deposit account charges and other fees	22,241			20,674			64,260			58,810
Capital market fees	2,751			2,620			7,976			8,360
Consumer brokerage services	3,375			3,687			10,375			10,530
Loan fees and sales	3,123			1,855			8,829			6,127
Other	9,872			8,515			36,497			26,849
Total non-interest income	119,319			111,288			354,913			332,097
INVESTMENT SECURITIES GAINS (LOSSES), NET	(1,965		)	(378		)	(3,704		)	7,800
NON-INTEREST EXPENSE
Salaries and employee benefits	107,004			100,874			318,671			298,603
Net occupancy	12,366			11,247			34,761			33,807
Equipment	4,842			4,789			14,257			14,171
Supplies and communication	5,968			5,609			18,490			16,416
Data processing and software	23,663			21,119			69,332			61,670
Marketing	4,399			4,343			12,601			12,568
Deposit insurance	3,576			2,981			9,884			9,001
Other	19,424			20,440			57,808			54,474
Total non-interest expense	181,242			171,402			535,804			500,710
Income before income taxes	100,092			93,182			296,334			291,479
Less income taxes	30,942			27,969			91,854			88,929
Net income	69,150			65,213			204,480			202,550
Less non-controlling interest expense	605			601			668			2,530
Net income attributable to Commerce Bancshares, Inc.	68,545			64,612			203,812			200,020
Less preferred stock dividends	2,250			2,250			6,750			6,750
Net income available to common shareholders	$	66,295		$	62,362		$	197,062		$	193,270
Net income per common share — basic	$	.69		$	.63		$	2.04		$	1.93
Net income per common share — diluted	$	.68		$	.63		$	2.03		$	1.93

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)	2016			2015			2016			2015
	(Unaudited)
Net income	$	69,150		$	65,213		$	204,480		$	202,550
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	46			(327		)	(352		)	(306		)
Net unrealized gains (losses) on other securities	(13,747		)	16,891			87,887			2,754
Pension loss amortization	359			283			1,077			1,095
Other comprehensive income (loss)	(13,342		)	16,847			88,612			3,543
Comprehensive income	55,808			82,060			293,092			206,093
Less non-controlling interest expense	605			601			668			2,530
Comprehensive income attributable to Commerce Bancshares, Inc.	$	55,203		$	81,459		$	292,424		$	203,563

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, 2016	$	144,784	$	489,862	$	1,337,677		$	383,313		$	(26,116	)	$	32,470	$	5,428		$	2,367,418
Net income								203,812								668			204,480
Other comprehensive income														88,612					88,612
Distributions to non-controlling interest																(704		)	(704		)
Purchases of treasury stock											(38,476		)						(38,476		)
Issuance of stock under purchase and equity compensation plans					(14,057		)				14,054								(3		)
Excess tax benefit related to equity compensation plans					2,629														2,629
Stock-based compensation					8,901														8,901
Cash dividends on common stock ($.675 per share)								(65,294		)									(65,294		)
Cash dividends on preferred stock ($1.125 per depositary share)								(6,750		)									(6,750		)
Balance September 30, 2016	$	144,784	$	489,862	$	1,335,150		$	515,081		$	(50,538	)	$	121,082	$	5,392		$	2,560,813
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 agreements					60,000						(160,000		)						(100,000		)
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 ($.643 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

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)	2016				2015
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	204,480			$	202,550
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	25,918				19,541
Provision for depreciation and amortization	30,997				32,100
Amortization of investment security premiums, net	23,357				23,249
Investment securities (gains) losses, net (A)	3,704				(7,800		)
Net gains on sales of loans held for sale	(4,924		)		(2,184		)
Originations of loans held for sale	(115,768		)		(75,589		)
Proceeds from sales of loans held for sale	117,746				72,973
Net (increase) decrease in trading securities, excluding unsettled transactions	77,262				(5,042		)
Stock-based compensation	8,901				7,702
Increase in interest receivable	(331		)		(2,652		)
Increase (decrease) in interest payable	269				(96		)
Increase in income taxes payable	1,787				16,312
Excess tax benefit related to equity compensation plans	(2,629		)		(1,871		)
Other changes, net	(24,602		)		(365		)
Net cash provided by operating activities	346,167				278,828
INVESTING ACTIVITIES:
Proceeds from sales of investment securities (A)	7,946				684,893
Proceeds from maturities/pay downs of investment securities (A)	1,659,778				1,923,785
Purchases of investment securities (A)	(1,080,003		)		(2,507,803		)
Net increase in loans	(817,886		)		(782,559		)
Repayments of long-term securities purchased under agreements to resell	150,000				75,000
Purchases of land, buildings and equipment	(18,479		)		(22,718		)
Sales of land, buildings and equipment	5,831				4,752
Net cash used in investing activities	(92,813		)		(624,650		)
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits	280,495				(319,853		)
Net increase (decrease) in time open and C.D.'s	14,510				(130,591		)
Net increase (decrease) in federal funds purchased and short-term securities sold under agreements to repurchase	(473,661		)		330,679
Repayment of long-term borrowings	(3,872		)		(227		)
Additional long-term borrowings	1,469			—	—
Purchases of treasury stock	(38,476		)		(9,147		)
Accelerated share repurchase agreements	—				(100,000		)
Issuance of stock under equity compensation plans	(3		)		1,914
Excess tax benefit related to equity compensation plans	2,629				1,871
Cash dividends paid on common stock	(65,294		)		(64,041		)
Cash dividends paid on preferred stock	(6,750		)		(6,750		)
Net cash used in financing activities	(288,953		)		(296,145		)
Decrease in cash and cash equivalents	(35,599		)		(641,967		)
Cash and cash equivalents at beginning of year	502,719				1,100,717
Cash and cash equivalents at September 30	$	467,120			$	458,750
(A) Available for sale and non-marketable securities
Income tax payments, net	$	88,531			$	70,860
Interest paid on deposits and borrowings	$	24,438			$	20,937
Loans transferred to foreclosed real estate	$	1,031			$	2,459
Loans transferred from held for investment to held for sale, net	$	42,688			$	—
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, 2016 (Unaudited)

1. Principles of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2015 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, 2016 are not necessarily indicative of results to be attained for the full year or any other interim period.

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

2. Loans and Allowance for Loan Losses

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



(In thousands)	September 30, 2016		December 31, 2015
Commercial:
Business	$	4,770,883	$	4,397,893
Real estate – construction and land	800,545		624,070
Real estate – business	2,520,528		2,355,544
Personal Banking:
Real estate – personal	1,968,005		1,915,953
Consumer	1,972,969		1,924,365
Revolving home equity	417,591		432,981
Consumer credit card	760,022		779,744
Overdrafts	19,698		6,142
Total loans	$	13,230,241	$	12,436,692

At September 30, 2016, 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 $1.6 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, 2016 and 2015, 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	$	89,198		$	64,634	$	153,832	$	82,086		$	69,446	$	151,532
Provision	(1,411		)	8,674		7,263		4,309			21,609		25,918
Deductions:
Loans charged off	291			11,872		12,163		2,465			35,633		38,098
Less recoveries on loans	2,759			2,841		5,600		6,325			8,855		15,180
Net loan charge-offs (recoveries)	(2,468		)	9,031		6,563		(3,860		)	26,778		22,918
Balance September 30, 2016	$	90,255		$	64,277	$	154,532	$	90,255		$	64,277	$	154,532
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

The following table shows the balance in the allowance for loan losses and the related loan balance at September 30, 2016 and December 31, 2015, 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, 2016
Commercial	$	1,816	$	44,526	$	88,439	$	8,047,430
Personal Banking	1,253		20,594		63,024		5,117,691
Total	$	3,069	$	65,120	$	151,463	$	13,165,121
December 31, 2015
Commercial	$	1,927	$	43,027	$	80,159	$	7,334,480
Personal Banking	1,557		22,287		67,889		5,036,898
Total	$	3,484	$	65,314	$	148,048	$	12,371,378

Impaired loans

The table below shows the Company’s investment in impaired loans at September 30, 2016 and December 31, 2015. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 14.



(In thousands)	Sept. 30, 2016		Dec. 31, 2015
Non-accrual loans	$	15,645	$	26,575
Restructured loans (accruing)	49,475		38,739
Total impaired loans	$	65,120	$	65,314

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The following table provides additional information about impaired loans held by the Company at September 30, 2016 and December 31, 2015, 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, 2016
With no related allowance recorded:
Business	$	7,053	$	10,018	$	—
Real estate – construction and land	1,228		1,594		—
	$	8,281	$	11,612	$	—
With an allowance recorded:
Business	$	28,369	$	30,171	$	1,284
Real estate – construction and land	214		219		18
Real estate – business	7,662		9,077		514
Real estate – personal	6,703		9,564		602
Consumer	5,537		5,537		66
Revolving home equity	636		646		18
Consumer credit card	7,718		7,718		567
	$	56,839	$	62,932	$	3,069
Total	$	65,120	$	74,544	$	3,069
December 31, 2015
With no related allowance recorded:
Business	$	9,330	$	11,777	$	—
Real estate – construction and land	2,961		8,956		—
Real estate – business	4,793		6,264		—
Real estate – personal	373		373		—
	$	17,457	$	27,370	$	—
With an allowance recorded:
Business	$	18,227	$	20,031	$	1,119
Real estate – construction and land	1,227		2,804		63
Real estate – business	6,489		9,008		745
Real estate – personal	7,667		10,530		831
Consumer	5,599		5,599		63
Revolving home equity	704		852		67
Consumer credit card	7,944		7,944		596
	$	47,857	$	56,768	$	3,484
Total	$	65,314	$	84,138	$	3,484

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Total average impaired loans for the three and nine month periods ended September 30, 2016 and 2015, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended September 30, 2016
Non-accrual loans	$	15,106	$	3,928	$	19,034
Restructured loans (accruing)	31,372		17,082		48,454
Total	$	46,478	$	21,010	$	67,488
For the nine months ended September 30, 2016
Non-accrual loans	$	19,387	$	4,336	$	23,723
Restructured loans (accruing)	29,117		17,359		46,476
Total	$	48,504	$	21,695	$	70,199
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

The table below shows interest income recognized during the three and nine month periods ended September 30, 2016 and 2015, 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)	2016		2015		2016		2015
Interest income recognized on impaired loans:
Business	$	277	$	63	$	830	$	188
Real estate – construction and land	2		22		7		66
Real estate – business	42		33		126		99
Real estate – personal	39		47		118		142
Consumer	89		87		267		261
Revolving home equity	7		6		22		17
Consumer credit card	174		186		522		558
Total	$	630	$	444	$	1,892	$	1,331

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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, 2016 and December 31, 2015.



(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, 2016
Commercial:
Business	$	4,758,519	$	3,100	$	506	$	8,758	$	4,770,883
Real estate – construction and land	794,731		2,357		2,147		1,310		800,545
Real estate – business	2,513,270		5,011		327		1,920		2,520,528
Personal Banking:
Real estate – personal	1,954,889		6,901		2,581		3,634		1,968,005
Consumer	1,951,011		19,510		2,448		—		1,972,969
Revolving home equity	414,251		2,246		1,071		23		417,591
Consumer credit card	742,820		9,366		7,836		—		760,022
Overdrafts	19,254		444		—		—		19,698
Total	$	13,148,745	$	48,935	$	16,916	$	15,645	$	13,230,241
December 31, 2015
Commercial:
Business	$	4,384,149	$	2,306	$	564	$	10,874	$	4,397,893
Real estate – construction and land	617,838		3,142		—		3,090		624,070
Real estate – business	2,340,919		6,762		—		7,863		2,355,544
Personal Banking:
Real estate – personal	1,901,330		7,117		3,081		4,425		1,915,953
Consumer	1,903,389		18,273		2,703		—		1,924,365
Revolving home equity	427,998		2,641		2,019		323		432,981
Consumer credit card	762,750		8,894		8,100		—		779,744
Overdrafts	5,834		308		—		—		6,142
Total	$	12,344,207	$	49,443	$	16,467	$	26,575	$	12,436,692

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, 2016
Pass	$	4,625,175	$	798,168	$	2,421,327	$	7,844,670
Special mention	76,105		860		46,281		123,246
Substandard	60,845		207		51,000		112,052
Non-accrual	8,758		1,310		1,920		11,988
Total	$	4,770,883	$	800,545	$	2,520,528	$	8,091,956
December 31, 2015
Pass	$	4,278,857	$	618,788	$	2,281,565	$	7,179,210
Special mention	49,302		1,033		15,009		65,344
Substandard	58,860		1,159		51,107		111,126
Non-accrual	10,874		3,090		7,863		21,827
Total	$	4,397,893	$	624,070	$	2,355,544	$	7,377,507

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, 2016, these were comprised of $251.7 million in personal real estate loans, or 4.9% of the Personal Banking portfolio, compared to $257.8 million at December 31, 2015. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at September 30, 2016 and December 31, 2015 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
September 30, 2016
FICO score:
Under 600	1.4	%	4.2	%	1.2	%	4.0	%
600 - 659	3.0		8.5		3.8		11.9
660 - 719	10.3		21.0		13.2		31.4
720 - 779	24.8		26.5		28.1		28.4
780 and over	60.5		39.8		53.7		24.3
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2015
FICO score:
Under 600	1.5	%	4.5	%	1.5	%	3.9	%
600 - 659	3.0		9.7		3.9		12.0
660 - 719	9.1		21.8		13.6		31.7
720 - 779	25.0		26.4		28.4		27.9
780 and over	61.4		37.6		52.6		24.5
Total	100.0	%	100.0	%	100.0	%	100.0	%

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Troubled debt restructurings

As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $59.0 million at September 30, 2016. 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 $9.6 million at September 30, 2016. Other performing restructured loans totaled $49.5 million at September 30, 2016. 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 $33.2 million at September 30, 2016. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $7.7 million at September 30, 2016. 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, 2016, these loans totaled $8.2 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, 2016, 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, 2016		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	34,227	$	—
Real estate - construction and land	784		676
Real estate - business	5,742		751
Personal Banking:
Real estate - personal	4,387		358
Consumer	5,560		62
Revolving home equity	613		67
Consumer credit card	7,718		537
Total restructured loans	$	59,031	$	2,451

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 $926 thousand on an annual, pre-tax basis, compared to amounts contractually owed.

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

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

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

The Company had commitments of $11.5 million at September 30, 2016 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, 2016, the fair value of these loans was $4.4 million, and the unpaid principal balance was $4.3 million.

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, 2016, the balance of these loans was $5.1 million. These loans are carried at lower of cost or fair value.

In March 2016, the Company designated certain loans secured by automobiles as held for sale in order to rebalance the auto loan portfolio in relation to the Company's other loan categories. The loans were sold in the second and third quarters and totaled $33.6 million, resulting in a net gain of $56 thousand. The group of loans were representative of the overall auto loan portfolio and were sold to other financial institutions.

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

Foreclosed real estate/repossessed assets

The Company’s holdings of foreclosed real estate totaled $950 thousand and $2.8 million at September 30, 2016 and December 31, 2015, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.5 million and $3.3 million at September 30, 2016 and December 31, 2015, respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.

3. Investment Securities

Investment securities, at fair value, consisted of the following at September 30, 2016 and December 31, 2015.



(In thousands)	Sept. 30, 2016		Dec. 31, 2015
Available for sale	$	9,438,871	$	9,777,004
Trading	28,586		11,890
Non-marketable	108,224		112,786
Total investment securities	$	9,575,681	$	9,901,680

Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. The available for sale and the trading portfolios are carried at fair value. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $46.9 million at September 30, 2016 and $46.8 million at December 31, 2015. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. These holdings are carried at cost. Non-marketable securities also include private equity investments, which amounted to $61.0 million at September 30, 2016 and $65.6 million at December 31, 2015. In the absence of readily ascertainable market values, these securities are carried at estimated fair value.

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A summary of the available for sale investment securities by maturity groupings as of September 30, 2016 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	59,068	$	60,028
After 1 but within 5 years	500,823		514,620
After 5 but within 10 years	106,427		110,802
After 10 years	72,340		70,199
Total U.S. government and federal agency obligations	738,658		755,649
Government-sponsored enterprise obligations:
Within 1 year	11,589		11,627
After 1 but within 5 years	419,071		424,410
After 5 but within 10 years	14,988		15,205
Total government-sponsored enterprise obligations	445,648		451,242
State and municipal obligations:
Within 1 year	153,968		155,078
After 1 but within 5 years	626,147		641,498
After 5 but within 10 years	941,494		983,236
After 10 years	55,248		56,189
Total state and municipal obligations	1,776,857		1,836,001
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,590,902		2,663,677
Non-agency mortgage-backed securities	922,302		937,208
Asset-backed securities	2,403,019		2,409,324
Total mortgage and asset-backed securities	5,916,223		6,010,209
Other debt securities:
Within 1 year	5,997		6,025
After 1 but within 5 years	97,136		98,939
After 5 but within 10 years	214,311		222,376
After 10 years	11,588		11,472
Total other debt securities	329,032		338,812
Equity securities	5,678		46,958
Total available for sale investment securities	$	9,212,096	$	9,438,871

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $437.9 million, at fair value, at September 30, 2016. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $46.9 million at September 30, 2016.

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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, 2016
U.S. government and federal agency obligations	$	738,658	$	19,132	$	(2,141	)	$	755,649
Government-sponsored enterprise obligations	445,648		5,637		(43		)	451,242
State and municipal obligations	1,776,857		59,760		(616		)	1,836,001
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,590,902		72,803		(28		)	2,663,677
Non-agency mortgage-backed securities	922,302		15,145		(239		)	937,208
Asset-backed securities	2,403,019		14,026		(7,721		)	2,409,324
Total mortgage and asset-backed securities	5,916,223		101,974		(7,988		)	6,010,209
Other debt securities	329,032		9,946		(166		)	338,812
Equity securities	5,678		41,280		—			46,958
Total	$	9,212,096	$	237,729	$	(10,954	)	$	9,438,871
December 31, 2015
U.S. government and federal agency obligations	$	729,846	$	5,051	$	(7,821	)	$	727,076
Government-sponsored enterprise obligations	794,912		2,657		(4,546		)	793,023
State and municipal obligations	1,706,635		37,061		(1,739		)	1,741,957
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,579,031		47,856		(8,606		)	2,618,281
Non-agency mortgage-backed securities	879,186		8,596		(7,819		)	879,963
Asset-backed securities	2,660,201		1,287		(17,107		)	2,644,381
Total mortgage and asset-backed securities	6,118,418		57,739		(33,532		)	6,142,625
Other debt securities	335,925		377		(4,982		)	331,320
Equity securities	5,678		35,325		—			41,003
Total	$	9,691,414	$	138,210	$	(52,620	)	$	9,777,004

The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, cash flow analyses are prepared. For more complex analyses, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At September 30, 2016, the fair value of securities on this watch list was $103.7 million compared to $95.8 million at December 31, 2015.

As of September 30, 2016, 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 $34.6 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 September 30, 2016 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	18%	-	51%
Credit support	0%	-	30%
Loss severity	17%	-	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)	2016			2015
Cumulative OTTI credit losses at January 1	$	14,129		$	13,734
Credit losses on debt securities for which impairment was not previously recognized	—			76
Credit losses on debt securities for which impairment was previously recognized	270			407
Increase in expected cash flows that are recognized over remaining life of security	(171		)	(73		)
Cumulative OTTI credit losses at September 30	$	14,228		$	14,144

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, 2016
U.S. government and federal agency obligations	$	36,586	$	61	$	33,613	$	2,080	$	70,199	$	2,141
Government-sponsored enterprise obligations	49,901		43		—		—		49,901		43
State and municipal obligations	26,335		227		16,276		389		42,611		616
Mortgage and asset-backed securities:
Agency mortgage-backed securities	24,564		23		2,304		5		26,868		28
Non-agency mortgage-backed securities	61,283		127		39,070		112		100,353		239
Asset-backed securities	279,282		1,510		365,402		6,211		644,684		7,721
Total mortgage and asset-backed securities	365,129		1,660		406,776		6,328		771,905		7,988
Other debt securities	7,936		36		12,458		130		20,394		166
Total	$	485,887	$	2,027	$	469,123	$	8,927	$	955,010	$	10,954
December 31, 2015
U.S. government and federal agency obligations	$	491,998	$	3,098	$	31,012	$	4,723	$	523,010	$	7,821
Government-sponsored enterprise obligations	157,830		1,975		110,250		2,571		268,080		4,546
State and municipal obligations	66,998		544		31,120		1,195		98,118		1,739
Mortgage and asset-backed securities:
Agency mortgage-backed securities	530,035		2,989		291,902		5,617		821,937		8,606
Non-agency mortgage-backed securities	653,603		7,059		54,536		760		708,139		7,819
Asset-backed securities	2,207,922		12,492		223,311		4,615		2,431,233		17,107
Total mortgage and asset-backed securities	3,391,560		22,540		569,749		10,992		3,961,309		33,532
Other debt securities	244,452		3,687		25,218		1,295		269,670		4,982
Total	$	4,352,838	$	31,844	$	767,349	$	20,776	$	5,120,187	$	52,620

The total available for sale portfolio consisted of approximately 2,000 individual securities at September 30, 2016. The portfolio included 152 securities, having an aggregate fair value of $955.0 million, that were in an unrealized loss position at September 30, 2016, compared to 466 securities, with a fair value of $5.1 billion, at December 31, 2015. The total amount of unrealized losses on these securities decreased $41.7 million to $11.0 million at September 30, 2016, largely due to a lower rate environment. At September 30, 2016, the fair value of securities in an unrealized loss position for 12 months or longer totaled $469.1 million, or 5.0% of the total portfolio value.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $616 thousand at September 30, 2016, of which $378 thousand related to auction rate securities. This portfolio totaled $1.8 billion at fair value, or 19.5% of total available for sale securities. The average credit quality of the portfolio, excluding auction rate securities, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and the Company has processes and procedures in place to monitor its holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner.

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