Edgar Filing: COMMERCE BANCSHARES INC /MO/

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 June 30, 2017



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

____________________________________________________________

For the transition period from to

Commission File No. 0-2989



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



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

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

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

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

Yes þ No o

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

Yes þ No o

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



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

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

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

As of August 1, 2017, the registrant had outstanding 101,625,940 shares of its $5 par value common stock, registrant’s only class of common stock.

Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q



			Page
INDEX
Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016	3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2017 and 2016 (unaudited)	6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59
	Item 4.	Controls and Procedures	60

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

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	June 30, 2017			December 31, 2016
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	13,626,592		$	13,412,736
Allowance for loan losses	(157,832		)	(155,932		)
Net loans	13,468,760			13,256,804
Loans held for sale (including $14,118,000 and $9,263,000 of residential mortgage loans carried at fair value at June 30, 2017 and December 31, 2016, respectively)	22,002			14,456
Investment securities:
Available for sale ($719,820,000 and $568,553,000 pledged at June 30, 2017 and
December 31, 2016, respectively, to secure swap and repurchase agreements)	9,439,701			9,649,203
Trading	22,291			22,225
Non-marketable	102,388			99,558
Total investment securities	9,564,380			9,770,986
Federal funds sold and short-term securities purchased under agreements to resell	16,520			15,470
Long-term securities purchased under agreements to resell	625,000			725,000
Interest earning deposits with banks	80,860			272,275
Cash and due from banks	433,747			494,690
Land, buildings and equipment, net	334,586			337,705
Goodwill	138,921			138,921
Other intangible assets, net	7,002			6,709
Other assets	387,065			608,408
Total assets	$	25,078,843		$	25,641,424
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	7,314,506		$	7,429,398
Savings, interest checking and money market	11,427,615			11,430,789
Time open and C.D.'s of less than $100,000	679,668			713,075
Time open and C.D.'s of $100,000 and over	1,403,873			1,527,833
Total deposits	20,825,662			21,101,095
Federal funds purchased and securities sold under agreements to repurchase	1,256,444			1,723,905
Other borrowings	101,903			102,049
Other liabilities	266,627			213,243
Total liabilities	22,450,636			23,140,292
Commerce Bancshares, Inc. stockholders’ equity:
Preferred stock, $1 par value
Authorized 2,000,000 shares; issued 6,000 shares	144,784			144,784
Common stock, $5 par value
Authorized 120,000,000 shares;
issued 102,003,046 shares	510,015			510,015
Capital surplus	1,546,534			1,552,454
Retained earnings	390,853			292,849
Treasury stock of 207,294 shares at June 30, 2017
and 364,711 shares at December 31, 2016, at cost	(10,373		)	(15,294		)
Accumulated other comprehensive income	42,070			10,975
Total Commerce Bancshares, Inc. stockholders' equity	2,623,883			2,495,783
Non-controlling interest	4,324			5,349
Total equity	2,628,207			2,501,132
Total liabilities and equity	$	25,078,843		$	25,641,424

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 June 30					For the Six Months Ended June 30
(In thousands, except per share data)	2017		2016			2017		2016
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	134,273	$	121,151		$	262,596	$	240,484
Interest and fees on loans held for sale	263		692			459		827
Interest on investment securities	54,975		54,698			110,240		103,589
Interest on federal funds sold and short-term securities purchased under
agreements to resell	37		19			60		43
Interest on long-term securities purchased under agreements to resell	3,684		3,354			7,477		6,829
Interest on deposits with banks	362		151			759		421
Total interest income	193,594		180,065			381,591		352,193
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	4,342		3,548			8,232		7,032
Time open and C.D.'s of less than $100,000	674		709			1,318		1,451
Time open and C.D.'s of $100,000 and over	2,822		2,347			5,585		4,333
Interest on federal funds purchased and securities sold under
agreements to repurchase	2,038		725			3,577		1,613
Interest on other borrowings	911		907			1,799		2,160
Total interest expense	10,787		8,236			20,511		16,589
Net interest income	182,807		171,829			361,080		335,604
Provision for loan losses	10,758		9,216			21,886		18,655
Net interest income after provision for loan losses	172,049		162,613			339,194		316,949
NON-INTEREST INCOME
Bank card transaction fees	44,999		45,065			88,203		89,535
Trust fees	33,120		30,241			65,134		59,484
Deposit account charges and other fees	22,861		21,328			44,803		42,019
Capital market fees	2,156		2,500			4,498		5,225
Consumer brokerage services	3,726		3,491			7,375		7,000
Loan fees and sales	4,091		3,196			7,259		5,706
Other	12,131		10,749			22,878		26,625
Total non-interest income	123,084		116,570			240,150		235,594
INVESTMENT SECURITIES GAINS (LOSSES), NET	1,651		(744		)	879		(1,739		)
NON-INTEREST EXPENSE
Salaries and employee benefits	108,829		104,808			221,198		211,667
Net occupancy	11,430		11,092			22,873		22,395
Equipment	4,776		4,781			9,385		9,415
Supplies and communication	5,446		5,693			11,155		12,522
Data processing and software	23,356		22,770			46,453		45,669
Marketing	4,488		4,389			7,712		8,202
Deposit insurance	3,592		3,143			7,063		6,308
Other	22,677		20,413			45,585		38,384
Total non-interest expense	184,594		177,089			371,424		354,562
Income before income taxes	112,190		101,350			208,799		196,242
Less income taxes	33,201		31,542			58,108		60,912
Net income	78,989		69,808			150,691		135,330
Less non-controlling interest expense (income)	29		(85		)	227		63
Net income attributable to Commerce Bancshares, Inc.	78,960		69,893			150,464		135,267
Less preferred stock dividends	2,250		2,250			4,500		4,500
Net income available to common shareholders	$	76,710	$	67,643		$	145,964	$	130,767
Net income per common share — basic	$	.75	$	.67		$	1.43	$	1.29
Net income per common share — diluted	$	.75	$	.66		$	1.43	$	1.28

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 June 30					For the Six Months Ended June 30
(In thousands)	2017		2016			2017		2016
	(Unaudited)
Net income	$	78,989	$	69,808		$	150,691	$	135,330
Other comprehensive income (loss):
Net unrealized gains (losses) on securities for which a portion of an other-than-temporary impairment has been recorded in earnings	76		—			171		(398		)
Net unrealized gains on other securities	11,241		31,139			30,243		101,634
Pension loss amortization	341		356			681		718
Other comprehensive income	11,658		31,495			31,095		101,954
Comprehensive income	90,647		101,303			181,786		237,284
Less non-controlling interest expense (income)	29		(85		)	227		63
Comprehensive income attributable to Commerce Bancshares, Inc.	$	90,618	$	101,388		$	181,559	$	237,221

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 December 31, 2016	$	144,784	$	510,015	$	1,552,454		$	292,849		$	(15,294	)	$	10,975	$	5,349		$	2,501,132
Adoption of ASU 2016-09					3,441			(2,144		)									1,297
Net income								150,464								227			150,691
Other comprehensive income														31,095					31,095
Distributions to non-controlling interest																(1,252		)	(1,252		)
Purchases of treasury stock											(10,628		)						(10,628		)
Issuance of stock under purchase and equity compensation plans					(15,556		)				15,549								(7		)
Stock-based compensation					6,195														6,195
Cash dividends on common stock ($.450 per share)								(45,816		)									(45,816		)
Cash dividends on preferred stock ($.750 per depositary share)								(4,500		)									(4,500		)
Balance June 30, 2017	$	144,784	$	510,015	$	1,546,534		$	390,853		$	(10,373	)	$	42,070	$	4,324		$	2,628,207
Balance December 31, 2015	$	144,784	$	489,862	$	1,337,677		$	383,313		$	(26,116	)	$	32,470	$	5,428		$	2,367,418
Net income								135,267								63			135,330
Other comprehensive income														101,954					101,954
Distributions to non-controlling interest																(586		)	(586		)
Purchases of treasury stock											(37,462		)						(37,462		)
Issuance of stock under purchase and equity compensation plans					(11,873		)				11,871								(2		)
Excess tax benefit related to equity compensation plans					1,904														1,904
Stock-based compensation					6,287														6,287
Cash dividends on common stock ($.429 per share)								(43,522		)									(43,522		)
Cash dividends on preferred stock ($.750 per depositary share)								(4,500		)									(4,500		)
Balance June 30, 2016	$	144,784	$	489,862	$	1,333,995		$	470,558		$	(51,707	)	$	134,424	$	4,905		$	2,526,821

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Six Months Ended June 30
(In thousands)	2017				2016
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	150,691			$	135,330
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	21,886				18,655
Provision for depreciation and amortization	19,890				20,689
Amortization of investment security premiums, net	17,827				16,014
Investment securities (gains) losses, net (A)	(879		)		1,739
Net gains on sales of loans held for sale	(3,547		)		(2,880		)
Originations of loans held for sale	(96,943		)		(70,880		)
Proceeds from sales of loans held for sale	92,423				68,486
Net decrease in trading securities, excluding unsettled transactions	6,097				81,184
Stock-based compensation	6,195				6,287
(Increase) decrease in interest receivable	(428		)		60
Increase (decrease) in interest payable	(692		)		57
Increase in income taxes payable	1,483				73
Other changes, net	(1,985		)		(9,785		)
Net cash provided by operating activities	212,018				265,029
INVESTING ACTIVITIES:
Proceeds from sales of investment securities (A)	6,552				2,071
Proceeds from maturities/pay downs of investment securities (A)	910,411				1,109,707
Purchases of investment securities (A)	(625,931		)		(414,154		)
Net increase in loans	(234,405		)		(693,522		)
Repayments of long-term securities purchased under agreements to resell	100,000				50,000
Purchases of land, buildings and equipment	(14,117		)		(13,649		)
Sales of land, buildings and equipment	2,527				5,399
Net cash provided by investing activities	145,037				45,852
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits	77,562				(38,985		)
Net increase (decrease) in time open and C.D.'s	(157,367		)		267,339
Net decrease in federal funds purchased and short-term securities sold under agreements to repurchase	(467,461		)		(331,280		)
Repayment of long-term borrowings	(146		)		(840		)
Additional long-term borrowings	—			—	900
Purchases of treasury stock	(10,628		)		(37,462		)
Issuance of stock under equity compensation plans	(7		)		(2		)
Cash dividends paid on common stock	(45,816		)		(43,522		)
Cash dividends paid on preferred stock	(4,500		)		(4,500		)
Net cash used in financing activities	(608,363		)		(188,352		)
Increase (decrease) in cash and cash equivalents	(251,308		)		122,529
Cash and cash equivalents at beginning of year	782,435				502,719
Cash and cash equivalents at June 30	$	531,127			$	625,248
(A) Available for sale and non-marketable securities
Income tax payments, net	$	54,621			$	59,886
Interest paid on deposits and borrowings	$	21,203			$	16,532
Loans transferred to foreclosed real estate	$	461			$	861
Loans transferred from held for investment to held for sale	$	—			$	50,360

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017 (Unaudited)

1. Principles of Consolidation and Presentation

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

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

2. Loans and Allowance for Loan Losses

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



(In thousands)	June 30, 2017		December 31, 2016
Commercial:
Business	$	4,852,408	$	4,776,365
Real estate – construction and land	848,152		791,236
Real estate – business	2,727,349		2,643,374
Personal Banking:
Real estate – personal	2,009,203		2,010,397
Consumer	2,038,514		1,990,801
Revolving home equity	403,387		413,634
Consumer credit card	740,865		776,465
Overdrafts	6,714		10,464
Total loans	$	13,626,592	$	13,412,736

At June 30, 2017, loans of $3.9 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.6 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 six months ended June 30, 2017 and 2016, respectively, follows:



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

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



	Impaired Loans				All Other Loans
(In thousands)	Allowance for Loan Losses		Loans Outstanding		Allowance for Loan Losses		Loans Outstanding
June 30, 2017
Commercial	$	1,454	$	44,937	$	91,285	$	8,382,972
Personal Banking	1,433		20,221		63,660		5,178,462
Total	$	2,887	$	65,158	$	154,945	$	13,561,434
December 31, 2016
Commercial	$	1,817	$	44,795	$	89,544	$	8,166,180
Personal Banking	1,292		19,737		63,279		5,182,024
Total	$	3,109	$	64,532	$	152,823	$	13,348,204

Impaired loans

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



(In thousands)	June 30, 2017		Dec. 31, 2016
Non-accrual loans	$	13,362	$	14,283
Restructured loans (accruing)	51,796		50,249
Total impaired loans	$	65,158	$	64,532

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



(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
June 30, 2017
With no related allowance recorded:
Business	$	5,566	$	9,000	$	—
Real estate – construction and land	537		752		—
	$	6,103	$	9,752	$	—
With an allowance recorded:
Business	$	29,226	$	29,821	$	914
Real estate – construction and land	65		68		3
Real estate – business	9,543		10,961		537
Real estate – personal	6,286		9,258		570
Consumer	6,242		6,280		259
Revolving home equity	582		582		10
Consumer credit card	7,111		7,111		594
	$	59,055	$	64,081	$	2,887
Total	$	65,158	$	73,833	$	2,887
December 31, 2016
With no related allowance recorded:
Business	$	7,375	$	10,470	$	—
Real estate – construction and land	557		752		—
	$	7,932	$	11,222	$	—
With an allowance recorded:
Business	$	29,924	$	31,795	$	1,318
Real estate – construction and land	69		72		3
Real estate – business	6,870		8,072		496
Real estate – personal	6,394		9,199		642
Consumer	5,281		5,281		57
Revolving home equity	584		584		1
Consumer credit card	7,478		7,478		592
	$	56,600	$	62,481	$	3,109
Total	$	64,532	$	73,703	$	3,109

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



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended June 30, 2017
Non-accrual loans	$	9,867	$	4,539	$	14,406
Restructured loans (accruing)	34,765		15,780		50,545
Total	$	44,632	$	20,319	$	64,951
For the six months ended June 30, 2017
Non-accrual loans	$	10,238	$	4,027	$	14,265
Restructured loans (accruing)	33,333		15,991		49,324
Total	$	43,571	$	20,018	$	63,589
For the three months ended June 30, 2016
Non-accrual loans	$	22,098	$	4,461	$	26,559
Restructured loans (accruing)	28,775		17,297		46,072
Total	$	50,873	$	21,758	$	72,631
For the six months ended June 30, 2016
Non-accrual loans	$	21,551	$	4,542	$	26,093
Restructured loans (accruing)	27,977		17,499		45,476
Total	$	49,528	$	22,041	$	71,569

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



	For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands)	2017		2016		2017		2016
Interest income recognized on impaired loans:
Business	$	319	$	236	$	637	$	472
Real estate – construction and land	1		3		2		5
Real estate – business	88		56		175		112
Real estate – personal	36		42		71		84
Consumer	80		89		159		177
Revolving home equity	6		4		12		7
Consumer credit card	145		159		289		318
Total	$	675	$	589	$	1,345	$	1,175

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Delinquent and non-accrual loans

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



(In thousands)	Current or Less Than 30 Days Past Due		30 – 89 Days Past Due		90 Days Past Due and Still Accruing		Non-accrual		Total
June 30, 2017
Commercial:
Business	$	4,842,945	$	2,761	$	372	$	6,330	$	4,852,408
Real estate – construction and land	843,289		4,319		—		544		848,152
Real estate – business	2,721,612		3,904		—		1,833		2,727,349
Personal Banking:
Real estate – personal	1,997,661		6,060		1,978		3,504		2,009,203
Consumer	2,012,634		22,526		2,203		1,151		2,038,514
Revolving home equity	400,306		2,154		927		—		403,387
Consumer credit card	722,604		9,111		9,150		—		740,865
Overdrafts	6,414		300		—		—		6,714
Total	$	13,547,465	$	51,135	$	14,630	$	13,362	$	13,626,592
December 31, 2016
Commercial:
Business	$	4,763,274	$	3,735	$	674	$	8,682	$	4,776,365
Real estate – construction and land	789,633		1,039		—		564		791,236
Real estate – business	2,639,586		2,154		—		1,634		2,643,374
Personal Banking:
Real estate – personal	1,995,724		9,162		2,108		3,403		2,010,397
Consumer	1,957,358		29,783		3,660		—		1,990,801
Revolving home equity	411,483		1,032		1,119		—		413,634
Consumer credit card	757,443		10,187		8,835		—		776,465
Overdrafts	10,014		450		—		—		10,464
Total	$	13,324,515	$	57,542	$	16,396	$	14,283	$	13,412,736

Credit quality

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

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Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
June 30, 2017
Pass	$	4,617,838	$	843,151	$	2,629,544	$	8,090,533
Special mention	180,380		1,754		44,279		226,413
Substandard	47,860		2,703		51,693		102,256
Non-accrual	6,330		544		1,833		8,707
Total	$	4,852,408	$	848,152	$	2,727,349	$	8,427,909
December 31, 2016
Pass	$	4,607,553	$	788,778	$	2,543,348	$	7,939,679
Special mention	116,642		722		45,479		162,843
Substandard	43,488		1,172		52,913		97,573
Non-accrual	8,682		564		1,634		10,880
Total	$	4,776,365	$	791,236	$	2,643,374	$	8,210,975

The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain Personal Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At June 30, 2017, these were comprised of $227.4 million in personal real estate loans, or 4.4% of the Personal Banking portfolio, compared to $237.2 million at December 31, 2016. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at June 30, 2017 and December 31, 2016 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
June 30, 2017
FICO score:
Under 600	1.2	%	3.2	%	1.0	%	4.9	%
600 - 659	2.7		5.7		1.8		14.8
660 - 719	10.6		18.5		9.5		34.8
720 - 779	26.1		26.9		21.8		25.8
780 and over	59.4		45.7		65.9		19.7
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2016
FICO score:
Under 600	1.3	%	3.4	%	1.0	%	4.9	%
600 - 659	2.6		6.4		1.8		15.5
660 - 719	10.4		19.7		9.7		34.9
720 - 779	25.4		26.3		21.1		25.1
780 and over	60.3		44.2		66.4		19.6
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 $59.2 million at June 30, 2017. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected, and those non-accrual loans totaled $7.4 million at June 30, 2017. Other performing restructured loans totaled $51.8 million at June 30, 2017. These include certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result the loans were classified as troubled debt restructurings. These commercial loans totaled $36.8 million at June 30, 2017. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $7.1 million at June 30, 2017. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At June 30, 2017, these loans totaled $7.6 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.

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



(In thousands)	June 30, 2017		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	34,088	$	—
Real estate - construction and land	537		—
Real estate - business	7,710		—
Personal Banking:
Real estate - personal	3,995		353
Consumer	5,149		50
Revolving home equity	582		47
Consumer credit card	7,111		649
Total restructured loans	$	59,172	$	1,099

For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. No financial impact resulted from those performing loans where the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. The effects of modifications to consumer credit card loans were estimated to decrease interest income by approximately $862 thousand on an annual, pre-tax basis, compared to amounts contractually owed.

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

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

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

Loans held for sale

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

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

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

Foreclosed real estate/repossessed assets

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

3. Investment Securities

Investment securities, at fair value, consisted of the following at June 30, 2017 and December 31, 2016.



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

Most 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 $47.1 million at June 30, 2017 and $46.9 million at December 31, 2016. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. These holdings are carried at cost. Non-marketable securities also include private equity investments, which amounted to $55.0 million at June 30, 2017 and $52.3 million at December 31, 2016. 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 June 30, 2017 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.



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

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $432.0 million, at fair value, at June 30, 2017. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $16.8 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Interest on these bonds is currently being paid at the maximum failed auction rates. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $47.7 million at June 30, 2017.

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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
June 30, 2017
U.S. government and federal agency obligations	$	912,028	$	5,575	$	(5,048	)	$	912,555
Government-sponsored enterprise obligations	446,864		892		(1,471		)	446,285
State and municipal obligations	1,745,068		34,717		(1,988		)	1,777,797
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,604,217		29,780		(13,799		)	2,620,198
Non-agency mortgage-backed securities	1,063,236		8,063		(4,410		)	1,066,889
Asset-backed securities	2,249,399		5,725		(4,698		)	2,250,426
Total mortgage and asset-backed securities	5,916,852		43,568		(22,907		)	5,937,513
Other debt securities	315,496		2,745		(537		)	317,704
Equity securities	5,463		42,384		—			47,847
Total	$	9,341,771	$	129,881	$	(31,951	)	$	9,439,701
December 31, 2016
U.S. government and federal agency obligations	$	919,904	$	7,312	$	(6,312	)	$	920,904
Government-sponsored enterprise obligations	450,448		1,126		(1,576		)	449,998
State and municipal obligations	1,778,684		12,223		(12,693		)	1,778,214
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,674,964		31,610		(20,643		)	2,685,931
Non-agency mortgage-backed securities	1,054,446		7,686		(6,493		)	1,055,639
Asset-backed securities	2,389,176		3,338		(11,213		)	2,381,301
Total mortgage and asset-backed securities	6,118,586		42,634		(38,349		)	6,122,871
Other debt securities	327,030		935		(2,012		)	325,953
Equity securities	5,678		45,585		—			51,263
Total	$	9,600,330	$	109,815	$	(60,942	)	$	9,649,203

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

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

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



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

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



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

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



	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2017
U.S. government and federal agency obligations	$	145,884	$	5,048	$	—	$	—	$	145,884	$	5,048
Government-sponsored enterprise obligations	181,682		1,471		—		—		181,682		1,471
State and municipal obligations	168,613		1,365		13,761		623		182,374		1,988
Mortgage and asset-backed securities:
Agency mortgage-backed securities	959,777		13,795		1,720		4		961,497		13,799
Non-agency mortgage-backed securities	503,709		4,165		47,189		245		550,898		4,410
Asset-backed securities	795,526		2,606		234,619		2,092		1,030,145		4,698
Total mortgage and asset-backed securities	2,259,012		20,566		283,528		2,341		2,542,540		22,907
Other debt securities	65,547		500		1,463		37		67,010		537
Total	$	2,820,738	$	28,950	$	298,752	$	3,001	$	3,119,490	$	31,951
December 31, 2016
U.S. government and federal agency obligations	$	349,538	$	2,823	$	32,208	$	3,489	$	381,746	$	6,312
Government-sponsored enterprise obligations	190,441		1,576		—		—		190,441		1,576
State and municipal obligations	700,779		12,164		15,195		529		715,974		12,693
Mortgage and asset-backed securities:
Agency mortgage-backed securities	1,147,416		20,638		2,150		5		1,149,566		20,643
Non-agency mortgage-backed securities	688,131		6,373		34,946		120		723,077		6,493
Asset-backed securities	780,209		5,277		358,778		5,936		1,138,987		11,213
Total mortgage and asset-backed securities	2,615,756		32,288		395,874		6,061		3,011,630		38,349
Other debt securities	179,639		1,986		975		26		180,614		2,012
Total	$	4,036,153	$	50,837	$	444,252	$	10,105	$	4,480,405	$	60,942

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

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



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

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

At June 30, 2017, securities totaling $3.9 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the Federal Reserve Bank and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $719.8 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.

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4. Goodwill and Other Intangible Assets

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

June 30, 2017

December 31, 2016

(In thousands)

Gross Carrying Amount

Accumulated Amortization

Valuation Allowance

Net Amount

Gross Carrying Amount

Accumulated Amortization

Valuation Allowance