Edgar Filing: COMMERCE BANCSHARES INC /MO/

CBSH 9.30.2011 10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

_________________________________________________________

For the quarterly period ended September 30, 2011



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 October 25, 2011, the registrant had outstanding 84,692,732 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, 2011 (unaudited) and December 31, 2010	3
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and 2010 (unaudited)	4
		Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2011 and 2010 (unaudited)	5
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (unaudited)	6
		Notes to Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	58
	Item 4.	Controls and Procedures	58

Part II	Other Information
	Item 1.	Legal Proceedings	59
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
	Item 6.	Exhibits	59
Signatures			60
Index to Exhibits			61

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	September 30, 2011			December 31, 2010
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	9,073,123		$	9,410,982
Allowance for loan losses	(188,038		)	(197,538		)
Net loans	8,885,085			9,213,444
Loans held for sale	39,576			63,751
Investment securities:
Available for sale ($420,348,000 and $429,439,000 pledged in 2011 and 2010,
respectively, to secure structured repurchase agreements)	9,278,066			7,294,303
Trading	9,695			11,710
Non-marketable	111,808			103,521
Total investment securities	9,399,569			7,409,534
Short-term federal funds sold and securities purchased under agreements to resell	11,400			10,135
Long-term securities purchased under agreements to resell	850,000			450,000
Interest earning deposits with banks	133,419			122,076
Cash and due from banks	424,861			328,464
Land, buildings and equipment, net	368,965			383,397
Goodwill	125,585			125,585
Other intangible assets, net	8,452			10,937
Other assets	391,756			385,016
Total assets	$	20,638,668		$	18,502,339
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	5,003,587		$	4,494,028
Savings, interest checking and money market	8,416,839			7,846,831
Time open and C.D.'s of less than $100,000	1,204,896			1,465,050
Time open and C.D.'s of $100,000 and over	1,388,755			1,279,112
Total deposits	16,014,077			15,085,021
Federal funds purchased and securities sold under agreements to repurchase	1,057,728			982,827
Other borrowings	111,869			112,273
Other liabilities	1,325,029			298,754
Total liabilities	18,508,703			16,478,875
Commerce Bancshares, Inc. stockholders’ equity:
Preferred stock, $1 par value
Authorized and unissued 2,000,000 shares	—			—
Common stock, $5 par value
Authorized 100,000,000 shares; issued 87,296,284 shares in 2011 and 86,788,322 shares in 2010	436,481			433,942
Capital surplus	980,176			971,293
Retained earnings	690,981			555,778
Treasury stock of 2,504,467 shares in 2011 and 61,839 shares in 2010, at cost	(96,205		)	(2,371		)
Accumulated other comprehensive income	115,781			63,345
Total Commerce Bancshares, Inc. stockholders' equity	2,127,214			2,021,987
Non-controlling interest	2,751			1,477
Total equity	2,129,965			2,023,464
Total liabilities and equity	$	20,638,668		$	18,502,339

See accompanying notes to consolidated financial statements.

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)	2011			2010			2011			2010
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	114,731		$	126,273		$	349,877		$	385,976
Interest and fees on loans held for sale	270			1,368			877			5,533
Interest on investment securities	51,697			50,295			164,298			159,259
Interest on short-term federal funds sold and securities purchased under
agreements to resell	13			12			45			40
Interest on long-term securities purchased under agreements to resell	3,913			862			9,240			862
Interest on deposits with banks	211			106			411			372
Total interest income	170,835			178,916			524,748			552,042
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	6,445			7,261			19,717			22,068
Time open and C.D.'s of less than $100,000	2,413			5,444			9,121			18,318
Time open and C.D.'s of $100,000 and over	2,130			3,461			7,237			10,946
Interest on federal funds purchased and securities sold under
agreements to repurchase	292			584			1,601			2,230
Interest on other borrowings	925			2,729			2,759			13,225
Total interest expense	12,205			19,479			40,435			66,787
Net interest income	158,630			159,437			484,313			485,255
Provision for loan losses	11,395			21,844			39,372			78,353
Net interest income after provision for loan losses	147,235			137,593			444,941			406,902
NON-INTEREST INCOME
Bank card transaction fees	42,149			37,723			120,915			107,872
Trust fees	22,102			20,170			66,218			59,846
Deposit account charges and other fees	21,939			21,693			62,028			71,146
Bond trading income	5,556			5,133			15,255			15,524
Consumer brokerage services	2,333			2,390			7,876			6,879
Loan fees and sales	2,034			5,830			5,933			11,141
Other	5,519			7,071			20,657			22,249
Total non-interest income	101,632			100,010			298,882			294,657
INVESTMENT SECURITIES GAINS (LOSSES), NET
Impairment (losses) reversals on debt securities	(1,200		)	5,645			2,986			11,355
Noncredit-related losses (reversals) on securities not expected to be sold	369			(7,690		)	(4,741		)	(15,533		)
Net impairment losses	(831		)	(2,045		)	(1,755		)	(4,178		)
Realized gains on sales and fair value adjustments	3,418			2,061			7,625			1,189
Investment securities gains (losses), net	2,587			16			5,870			(2,989		)
NON-INTEREST EXPENSE
Salaries and employee benefits	85,700			85,442			257,315			259,988
Net occupancy	11,510			12,086			34,760			35,697
Equipment	5,390			5,709			16,669			17,548
Supplies and communication	5,674			6,724			16,898			20,891
Data processing and software	16,232			16,833			50,230			50,936
Marketing	4,545			5,064			13,298			14,784
Deposit insurance	2,772			4,756			10,443			14,445
Indemnification obligation	—			—			(1,359		)	(1,683		)
Other	21,923			18,972			62,965			54,497
Total non-interest expense	153,746			155,586			461,219			467,103
Income before income taxes	97,708			82,033			288,474			231,467
Less income taxes	31,699			26,012			91,898			71,817
Net income	66,009			56,021			196,576			159,650
Less non-controlling interest expense (income)	657			136			1,737			(139		)
Net income attributable to Commerce Bancshares, Inc.	$	65,352		$	55,885		$	194,839		$	159,789
Net income per common share — basic	$	.76		$	.63		$	2.25		$	1.82
Net income per common share — diluted	$	.76		$	.64		$	2.24		$	1.82

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY



	Commerce Bancshares, Inc. Shareholders
(In thousands, except per share data)	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Non-Controlling Interest			Total
	(Unaudited)
Balance January 1, 2011	$	433,942	$	971,293		$	555,778		$	(2,371	)	$	63,345	$	1,477		$	2,023,464
Net income						194,839								1,737			196,576
Change in unrealized gain (loss) related to available for sale securities for which a portion of an other-than-temporary impairment has been recorded in earnings, net of tax												2,835					2,835
Change in unrealized gain (loss) on all other available for sale securities, net of tax												48,422					48,422
Amortization of pension loss, net of tax												1,179					1,179
Total comprehensive income																	249,012
Distributions to non-controlling interest														(463		)	(463		)
Purchase of treasury stock									(101,111		)						(101,111		)
Issuance of stock under purchase and equity compensation plans	1,563		5,261						7,236								14,060
Net tax benefit related to equity compensation plans			1,025														1,025
Stock-based compensation			3,614														3,614
Issuance of nonvested stock awards	976		(1,017		)				41								—
Cash dividends paid ($.690 per share)						(59,636		)									(59,636		)
Balance September 30, 2011	$	436,481	$	980,176		$	690,981		$	(96,205	)	$	115,781	$	2,751		$	2,129,965
Balance January 1, 2010	$	415,637	$	854,490		$	568,532		$	(838	)	$	46,407	$	1,677		$	1,885,905
Net income						159,789								(139		)	159,650
Change in unrealized gain (loss) related to available for sale securities for which a portion of an other-than-temporary impairment has been recorded in earnings, net of tax												12,469					12,469
Change in unrealized gain (loss) on all other available for sale securities, net of tax												35,274					35,274
Amortization of pension loss, net of tax												1,054					1,054
Total comprehensive income																	208,447
Distributions to non-controlling interest														(372		)	(372		)
Purchase of treasury stock									(1,047		)						(1,047		)
Issuance of stock under purchase and equity compensation plans	1,425		5,439						(199		)						6,665
Net tax benefit related to equity compensation plans			1,174														1,174
Stock-based compensation			4,669														4,669
Issuance of nonvested stock awards	765		(526		)				(239		)						—
Cash dividends paid ($.671 per share)						(58,836		)									(58,836		)
Balance September 30, 2010	$	417,827	$	865,246		$	669,485		$	(2,323	)	$	95,204	$	1,166		$	2,046,605

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Nine Months Ended September 30
(In thousands)	2011			2010
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	196,576		$	159,650
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	39,372			78,353
Provision for depreciation and amortization	35,281			36,891
Amortization of investment security premiums, net	9,406			16,835
Investment securities (gains) losses, net(A)	(5,870		)	2,989
Net gains on sales of loans held for sale	(1,554		)	(6,656		)
Originations of loans held for sale	(41,231		)	(316,641		)
Proceeds from sales of loans held for sale	67,065			420,391
Net increase in trading securities	(2,941		)	(15,901		)
Stock-based compensation	3,614			4,669
(Increase) decrease in interest receivable	(1,077		)	1,654
Decrease in interest payable	(4,393		)	(6,632		)
Increase (decrease) in income taxes payable	14,863			(3,514		)
Net tax benefit related to equity compensation plans	(1,025		)	(1,174		)
Other changes, net	3,011			34,954
Net cash provided by operating activities	311,097			405,868
INVESTING ACTIVITIES:
Proceeds from sales of investment securities(A)	11,699			77,678
Proceeds from maturities/pay downs of investment securities(A)	1,968,848			1,650,002
Purchases of investment securities(A)	(2,926,445		)	(2,270,478		)
Net decrease in loans	288,987			363,764
Long-term securities purchased under agreements to resell	(500,000		)	(350,000		)
Repayments of long-term securities purchased under agreements to resell	100,000			—
Purchases of land, buildings and equipment	(16,135		)	(13,161		)
Sales of land, buildings and equipment	2,288			394
Net cash used in investing activities	(1,070,758		)	(541,801		)
FINANCING ACTIVITIES:
Net increase in non-interest bearing, savings, interest checking and money market deposits	1,090,342			403,068
Net decrease in time open and C.D.'s	(150,511		)	(287,178		)
Long-term securities sold under agreements to repurchase	—			400,000
Repayment of long-term securities sold under agreements to repurchase	—			(500,000		)
Net increase in short-term federal funds purchased and securities sold under
agreements to repurchase	74,901			527,364
Repayment of long-term borrowings	(404		)	(398,200		)
Net increase in short-term borrowings	—			1
Purchases of treasury stock	(101,111		)	(1,047		)
Issuance of stock under stock purchase and equity compensation plans	14,060			6,665
Net tax benefit related to equity compensation plans	1,025			1,174
Cash dividends paid on common stock	(59,636		)	(58,836		)
Net cash provided by financing activities	868,666			93,011
Increase (decrease) in cash and cash equivalents	109,005			(42,922		)
Cash and cash equivalents at beginning of year	460,675			463,834
Cash and cash equivalents at September 30	$	569,680		$	420,912
(A) Available for sale and non-marketable securities
Income tax net payments	$	76,795		$	75,138
Interest paid on deposits and borrowings	$	44,828		$	73,419
Loans transferred to foreclosed real estate	$	20,630		$	11,140

See accompanying notes to consolidated financial statements.

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011 (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). The consolidated financial statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2010 data to conform to current year presentation. These included the reclassification of certain non-interest bearing deposits from money market accounts to non-interest bearing deposits, in order to more accurately present the Company’s balances of non-interest bearing deposits. 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. The results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of results to be attained for the full year or any other interim periods.

The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2010 Annual Report on Form 10-K.

2. Loans and Allowance for Loan Losses

Major classifications within the Company’s held to maturity loan portfolio at September 30, 2011 and December 31, 2010 are as follows:



(In thousands)	Sept. 30, 2011		Dec. 31, 2010
Commercial:
Business	$	2,769,255	$	2,957,043
Real estate – construction and land	397,598		460,853
Real estate – business	2,138,813		2,065,837
Personal Banking:
Real estate – personal	1,428,492		1,440,386
Consumer	1,105,785		1,164,327
Revolving home equity	466,946		477,518
Consumer credit card	752,458		831,035
Overdrafts	13,776		13,983
Total loans	$	9,073,123	$	9,410,982

At September 30, 2011, loans of $3.0 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 $1.2 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

Allowance for loan losses

A summary of the activity in the allowance for loan losses during the three and nine months ended September 30, 2011 follows:



	For the Three Months						For the Nine Months
	Ended September 30						Ended September 30
(In thousands)	Commercial		Personal Banking		Total		Commercial		Personal Banking		Total
Balance at beginning of period	$	127,263	$	64,275	$	191,538	$	119,946	$	77,592	$	197,538
Provision	1,503		9,892		11,395		16,783		22,589		39,372
Deductions:
Loans charged off	4,047		14,831		18,878		14,357		47,512		61,869
Less recoveries on loans	514		3,469		3,983		2,861		10,136		12,997
Net loans charged off	3,533		11,362		14,895		11,496		37,376		48,872
Balance at September 30, 2011	$	125,233	$	62,805	$	188,038	$	125,233	$	62,805	$	188,038

A summary of the activity in the allowance for loan losses during the three and nine months ended September 30, 2010 follows:



(In thousands)	For the Three Months Ended September 30		For the Nine Months Ended September 30
Balance at beginning of period	$	197,538	$	194,480
Provision for loan losses	21,844		78,353
Deductions:
Loans charged off	26,079		88,417
Less recoveries on loans	4,235		13,122
Net loans charged off	21,844		75,295
Balance at September 30, 2010	$	197,538	$	197,538

The following table shows the balance in the allowance for loan losses and the related loan balance at September 30, 2011 and December 31, 2010, 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 deemed to have similar risk characteristics, which are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.



(In thousands)	Commercial		Personal Banking		Total
September 30, 2011
Allowance for loan losses:
Impaired loans	$	6,409	$	3,687	$	10,096
All other loans	118,824		59,118		177,942
Loans outstanding:
Impaired loans	109,712		30,336		140,048
All other loans	5,195,954		3,737,121		8,933,075
December 31, 2010
Allowance for loan losses:
Impaired loans	$	6,127	$	3,243	$	9,370
All other loans	113,819		74,349		188,168
Loans outstanding:
Impaired loans	118,532		26,828		145,360
All other loans	5,365,201		3,900,421		9,265,622

Impaired loans

The table below shows the Company’s investment in impaired loans at September 30, 2011 and December 31, 2010. These loans consist of loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. The restructured loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession. They are largely comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk, and as a result were classified as troubled debt restructurings. These loans totaled $42.0 million and $41.3 million at September 30, 2011 and December 31, 2010, respectively. 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 $22.1 million at September 30, 2011 and $18.8 million at December 31, 2010.



(In thousands)	Sept. 30, 2011		Dec. 31, 2010
Non-accrual loans	$	75,912	$	85,275
Restructured loans (accruing)	64,136		60,085
Total impaired loans	$	140,048	$	145,360

The following table provides additional information about impaired loans held by the Company at September 30, 2011 and December 31, 2010, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.



							Interest Income Recognized * For the Period Ended
							September 30, 2011
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Three Months		Nine Months
September 30, 2011
With no related allowance recorded:
Business	$	21,547	$	22,878	$	—	$	—	$	—
Real estate – construction and land	7,637		25,775		—		—		—
Real estate – business	6,104		8,224		—		—		—
Real estate – personal	61		61		—		—		—
	$	35,349	$	56,938	$	—	$	—	$	—
With an allowance recorded:
Business	$	14,865	$	19,104	$	1,313	$	72	$	217
Real estate – construction and land	36,677		51,349		2,552		192		575
Real estate – business	22,882		27,192		2,544		174		522
Real estate – personal	8,128		10,696		764		8		24
Consumer credit card	22,147		22,147		2,923		484		1,451
	$	104,699	$	130,488	$	10,096	$	930	$	2,789
Total	$	140,048	$	187,426	$	10,096	$	930	$	2,789
December 31, 2010
With no related allowance recorded:
Business	$	3,544	$	5,095	$	—
Real estate – construction and land	30,979		55,790		—
Real estate – business	4,245		5,295		—
Real estate – personal	755		755		—
	$	39,523	$	66,935	$	—
With an allowance recorded:
Business	$	18,464	$	21,106	$	1,665
Real estate – construction and land	39,719		52,587		2,538
Real estate – business	21,581		25,713		1,924
Real estate – personal	7,294		9,489		936
Consumer credit card	18,779		18,779		2,307
	$	105,837	$	127,674	$	9,370
Total	$	145,360	$	194,609	$	9,370

* Represents interest income recognized on impaired loans held at September 30, 2011. Interest shown is interest recognized on accruing restructured loans as noted above.

Total average impaired loans, shown in the table below, were $140.8 million and $143.5 million, respectively, during the three and nine month periods ended September 30, 2011, compared to total average impaired loans of $173.0 million during the entire year ended December 31, 2010.



(In thousands)	Commercial		Personal Banking		Total
Average impaired loans:
For the three months ended September 30, 2011
Non-accrual loans	$	68,554	$	7,733	$	76,287
Restructured loans (accruing)	41,993		22,522		64,515
Total	$	110,547	$	30,255	$	140,802
For the nine months ended September 30, 2011
Non-accrual loans	$	70,962	$	7,277	$	78,239
Restructured loans (accruing)	43,652		21,584		65,236
Total	$	114,614	$	28,861	$	143,475

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, 2011 and December 31, 2010. As shown below, the September 30, 2011 balance of business real estate loans past due 30-89 days grew $47.8 million as compared to December 31, 2010. This increase was largely due to six loans with balances ranging from $4.0 million to $12.0 million that were renewed or for which payment was received in October 2011.



(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, 2011
Commercial:
Business	$	2,738,215	$	4,030	$	676	$	26,334	$	2,769,255
Real estate – construction and land	364,757		5,837		697		26,307		397,598
Real estate – business	2,060,992		56,611		5,262		15,948		2,138,813
Personal Banking:
Real estate – personal	1,403,167		15,422		2,580		7,323		1,428,492
Consumer	1,091,709		12,011		2,065		—		1,105,785
Revolving home equity	464,739		1,382		825		—		466,946
Consumer credit card	734,431		10,028		7,999		—		752,458
Overdrafts	13,381		395		—		—		13,776
Total	$	8,871,391	$	105,716	$	20,104	$	75,912	$	9,073,123
December 31, 2010
Commercial:
Business	$	2,927,403	$	19,853	$	854	$	8,933	$	2,957,043
Real estate – construction and land	400,420		7,464		217		52,752		460,853
Real estate – business	2,040,794		8,801		—		16,242		2,065,837
Personal Banking:
Real estate – personal	1,413,905		15,579		3,554		7,348		1,440,386
Consumer	1,145,561		15,899		2,867		—		1,164,327
Revolving home equity	475,764		929		825		—		477,518
Consumer credit card	806,373		12,513		12,149		—		831,035
Overdrafts	13,555		428		—		—		13,983
Total	$	9,223,775	$	81,466	$	20,466	$	85,275	$	9,410,982

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 information below was updated as of September 30, 2011 and December 31, 2010 for this 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 attached to loans where the borrower exhibits material 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.



Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
September 30, 2011
Pass	$	2,614,530	$	304,192	$	1,941,388	$	4,860,110
Special mention	54,141		9,949		69,918		134,008
Substandard	74,250		57,150		111,559		242,959
Non-accrual	26,334		26,307		15,948		68,589
Total	$	2,769,255	$	397,598	$	2,138,813	$	5,305,666
December 31, 2010
Pass	$	2,801,328	$	327,167	$	1,878,005	$	5,006,500
Special mention	67,142		29,345		77,527		174,014
Substandard	79,640		51,589		94,063		225,292
Non-accrual	8,933		52,752		16,242		77,927
Total	$	2,957,043	$	460,853	$	2,065,837	$	5,483,733

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 Delinquency 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 person'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 approximately $350 million in consumer and personal real estate loans, or 9% of the Personal Banking portfolio, for which FICO scores are not obtained because they are related to commercial activity. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at September 30, 2011 by FICO score.



Personal Banking Loans
	% of Loan Category
(In thousands)	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
September 30, 2011
FICO score:
Under 600	3.4	%	8.6	%	2.7	%	5.0	%
600 - 659	4.7		10.4		4.8		11.3
660 - 719	11.8		22.7		15.3		31.0
720 - 780	30.4		26.5		27.2		29.4
Over 780	49.7		31.8		50.0		23.3
Total	100.0	%	100.0	%	100.0	%	100.0	%

Troubled debt restructurings

As mentioned above, the Company's impaired loans include loans which have been classified as troubled debt restructurings. The majority of troubled debt restructurings are classified as such upon renewal when the contractual interest rate of the new loan, which may be greater or less than the rate on the previous loan, was not judged to be a market rate for debt with similar risk. As a result, the financial effects of the modifications cannot readily be quantified. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the modified terms will be collected. Other restructured loans consist mainly of performing commercial loans and consumer credit loans under debt management programs, as mentioned above. The table below shows the outstanding balance of loans classified as troubled debt restructurings at September 30, 2011, in addition to the period end balances of restructured loans which the Company considers to have been in default at any time during the previous 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, 2011		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	19,079	$	—
Real estate - construction and land	39,119		11,805
Real estate-business	18,467		1,595
Personal Banking:
Real estate personal	2,217		—
Consumer credit card	22,147		5,317
Total restructured loans	$	101,029	$	18,717

The determination of the allowance for loan losses related to troubled debt restructurings depends on the collectability of principal and interest, according to the repayment terms. As mentioned above, the majority of troubled debt restructurings were classified as such when the loans were renewed at an interest rate not judged to be market, and as such, the modified terms did not change estimated collectability under the terms of the contract. The allowance for loan losses for 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 restructured loans which management expects to collect under contractual terms, and which are maintained on accruing status, are generally risk-rated as substandard. The allowance for loan losses related to accruing restructured loans is determined by collective evaluation because the loans have similar risk characteristics. Collective evaluation, which is the same process used for other substandard loans, considers historical loss experience and current economic factors.

If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for loan loss continues to be determined based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If a substandard, accruing, troubled debt restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for loan loss is determined based on individual evaluation.

The Company had commitments of $9.1 million at September 30, 2011 to lend additional funds to borrowers with restructured loans.

Loans held for sale

In addition to the portfolio of loans which are intended to be held to maturity, the Company originates loans which it intends to sell in secondary markets. Loans classified as held for sale primarily consist of loans originated to students while attending colleges and universities. Most of this portfolio was sold in 2010 under contracts with the Federal Department of Education and various student loan agencies. Significant future student loan originations are not anticipated, because under statutory requirements effective July 1, 2010, the Company is prohibited from making federally guaranteed student loans. Also included as held for sale are certain fixed rate residential mortgage loans which are sold in the secondary market, generally within three months of origination.

The following table presents information about loans held for sale, including an impairment valuation allowance resulting from declines in fair value below cost, which is further discussed in Note 13 on Fair Value Measurements.



(In thousands)	Sept. 30, 2011			Dec. 31, 2010
Balance outstanding:
Student loans, at cost	$	37,315		$	53,901
Residential mortgage loans, at cost	2,437			10,419
Valuation allowance on student loans	(176		)	(569		)
Total loans held for sale, at lower of cost or fair value	$	39,576		$	63,751

	For the Nine Months Ended September 30
(In thousands)	2011			2010
Net gains on sales:
Student loans	$	382		$	5,347
Residential mortgage loans	1,172			1,309
Total gains on sales of loans held for sale, net	$	1,554		$	6,656

The Company’s holdings of foreclosed real estate totaled $23.8 million and $12.0 million at September 30, 2011 and December 31, 2010, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $4.1 million and $10.4 million at September 30, 2011 and December 31, 2010, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.

3. Investment Securities

Investment securities, at fair value, consisted of the following at September 30, 2011 and December 31, 2010.



(In thousands)	Sept. 30, 2011		Dec. 31, 2010
Available for sale:
U.S. government and federal agency obligations	$	360,102	$	455,537
Government-sponsored enterprise obligations	264,550		201,895
State and municipal obligations	1,259,384		1,119,485
Agency mortgage-backed securities	4,295,194		2,491,199
Non-agency mortgage-backed securities	353,229		455,790
Other asset-backed securities	2,537,251		2,354,260
Other debt securities	167,633		176,964
Equity securities	40,723		39,173
Total available for sale	9,278,066		7,294,303
Trading	9,695		11,710
Non-marketable	111,808		103,521
Total investment securities	$	9,399,569	$	7,409,534

Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank (FRB) stock held for debt and regulatory purposes, which totaled $45.3 million and $45.2 million at September 30, 2011 and December 31, 2010, respectively. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $66.4 million and $58.2 million at September 30, 2011 and December 31, 2010, respectively.

A summary of the available for sale investment securities by maturity groupings as of September 30, 2011 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments.



(Dollars in thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	7,760	$	8,115
After 1 but within 5 years	157,825		172,119
After 5 but within 10 years	162,330		179,868
Total U.S. government and federal agency obligations	327,915		360,102
Government-sponsored enterprise obligations:
Within 1 year	75,434		76,251
After 1 but within 5 years	110,448		113,520
After 5 but within 10 years	49,504		49,885
After 10 years	24,975		24,894
Total government-sponsored enterprise obligations	260,361		264,550
State and municipal obligations:
Within 1 year	102,321		103,355
After 1 but within 5 years	503,736		518,929
After 5 but within 10 years	403,055		412,367
After 10 years	232,498		224,733
Total state and municipal obligations	1,241,610		1,259,384
Mortgage and asset-backed securities:
Agency mortgage-backed securities	4,179,525		4,295,194
Non-agency mortgage-backed securities	351,629		353,229
Other asset-backed securities	2,529,825		2,537,251
Total mortgage and asset-backed securities	7,060,979		7,185,674
Other debt securities:
Within 1 year	66,513		67,382
After 1 but within 5 years	93,570		100,251
Total other debt securities	160,083		167,633
Equity securities	14,905		40,723
Total available for sale investment securities	$	9,065,853	$	9,278,066

Included in U.S. government securities are $352.0 million, at fair value, of U.S. Treasury inflation-protected securities (TIPS). 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 $139.7 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Included in equity securities is common stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $29.2 million at September 30, 2011.

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, 2011
U.S. government and federal agency obligations	$	327,915	$	32,187	$	—		$	360,102
Government-sponsored enterprise obligations	260,361		4,270		(81		)	264,550
State and municipal obligations	1,241,610		29,692		(11,918		)	1,259,384
Mortgage and asset-backed securities:
Agency mortgage-backed securities	4,179,525		115,984		(315		)	4,295,194
Non-agency mortgage-backed securities	351,629		10,203		(8,603		)	353,229
Other asset-backed securities	2,529,825		9,797		(2,371		)	2,537,251
Total mortgage and asset-backed securities	7,060,979		135,984		(11,289		)	7,185,674
Other debt securities	160,083		7,550		—			167,633
Equity securities	14,905		25,818		—			40,723
Total	$	9,065,853	$	235,501	$	(23,288	)	$	9,278,066
December 31, 2010
U.S. government and federal agency obligations	$	434,878	$	20,659	$	—		$	455,537
Government-sponsored enterprise obligations	200,061		2,364		(530		)	201,895
State and municipal obligations	1,117,020		19,108		(16,643		)	1,119,485
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,437,123		57,516		(3,440		)	2,491,199
Non-agency mortgage-backed securities	459,363		10,940		(14,513		)	455,790
Other asset-backed securities	2,342,866		12,445		(1,051		)	2,354,260
Total mortgage and asset-backed securities	5,239,352		80,901		(19,004		)	5,301,249
Other debt securities	165,883		11,081		—			176,964
Equity securities	7,569		31,604		—			39,173
Total	$	7,164,763	$	165,717	$	(36,177	)	$	7,294,303

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/A-, whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At September 30, 2011, the fair value of securities on this watch list was $241.4 million.

As of September 30, 2011, 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 $134.7 million. The credit-related portion of the impairment totaled $9.3 million and was recorded in earnings. The noncredit-related portion of the impairment totaled $7.6 million on a pre-tax basis, and has been recognized in accumulated other comprehensive income. The Company does not intend to sell these securities and believes it is not more likely than not that it will be required to sell the securities before the recovery of their amortized cost bases.

The credit 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 included the following:



Significant Inputs	Range
Prepayment CPR	6% - 25%
Projected cumulative default	11% - 56%
Credit support	0% - 18%
Loss severity	33% - 57%

The following table shows changes in the credit losses recorded in the nine months ended September 30, 2011 and 2010, for which a portion of an OTTI was recognized in other comprehensive income.



	For the Nine Months Ended September 30
(In thousands)	2011			2010
Balance at January 1	$	7,542		$	2,473
Credit losses on debt securities for which impairment was not previously recognized	53			281
Credit losses on debt securities for which impairment was previously recognized	1,702			3,897
Increase in expected cash flows that are recognized over remaining life of security	(105		)	—
Balance at September 30	$	9,192		$	6,651

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, 2011
Government-sponsored enterprise obligations	$	24,894	$	81	$	—	$	—	$	24,894	$	81
State and municipal obligations	109,967		1,082		111,627		10,836		221,594		11,918
Mortgage and asset-backed securities:
Agency mortgage-backed securities	37,510		315		—		—		37,510		315
Non-agency mortgage-backed securities	33,453		989		128,453		7,614		161,906		8,603
Other asset-backed securities	740,357		1,934		77,207		437		817,564		2,371
Total mortgage and asset-backed securities	811,320		3,238		205,660		8,051		1,016,980		11,289
Total	$	946,181	$	4,401	$	317,287	$	18,887	$	1,263,468	$	23,288
December 31, 2010
Government-sponsored enterprise obligations	$	10,850	$	530	$	—	$	—	$	10,850	$	530
State and municipal obligations	345,775		7,470		82,269		9,173		428,044		16,643
Mortgage and asset-backed securities:
Agency mortgage-backed securities	660,326		3,440		—		—		660,326		3,440
Non-agency mortgage-backed securities	15,893		36		170,545		14,477		186,438		14,513
Other asset-backed securities	487,822		1,029		24,928		22		512,750		1,051
Total mortgage and asset-backed securities	1,164,041		4,505		195,473		14,499		1,359,514		19,004
Total	$	1,520,666	$	12,505	$	277,742	$	23,672	$	1,798,408	$	36,177

The total available for sale portfolio consisted of approximately 1,500 individual securities at September 30, 2011. The portfolio included 199 securities, having an aggregate fair value of $1.3 billion that were in a loss position at September 30, 2011. Securities identified as other-than-temporarily impaired which have been in a loss position for 12 months or longer totaled $111.7 million at fair value, or 1.2% of the total available for sale portfolio value. Securities with temporary impairment which have been in a loss position for 12 months or longer totaled $205.5 million, or 2.2% of the total portfolio value.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $11.9 million at September 30, 2011. Of these losses, $11.1 million related to auction rate securities (ARS) and $802 thousand related to other state and municipal obligations. This portfolio, exclusive of ARS, totaled $1.1 billion at fair value, or 12.1% of total available for sale securities. The average credit quality of the portfolio, excluding ARS, is Aa2 as rated by Moody’s.

The portfolio is diversified in order to reduce risk, and information about the largest holdings, by state and economic sector, is shown in the table below.



	% of Portfolio	Average Life (in years)	Average Rating (Moody’s)
At September 30, 2011
Texas	11.2%	5.5	Aa1
Florida	8.4	5.0	Aa3
Washington	7.4	3.3	Aa2
Illinois	5.2	5.3	Aa2
Ohio	4.8	5.3	Aa1
General obligation	26.3%	4.0	Aa2
Housing	19.5	4.5	Aa1
Transportation	15.9	4.0	Aa3
Lease	13.1	3.8	Aa3
Limited Tax	5.8	5.3	Aa1

The remaining unrealized losses on the Company’s investments, as shown in the preceding tables, are largely contained in the portfolio of non-agency mortgage-backed securities. These securities are not guaranteed by an outside agency and are dependent on payments received from the underlying mortgage collateral. While virtually all of these securities, at purchase date, were comprised of senior tranches and were highly rated by various rating agencies, the adverse housing market and overall economic climate has resulted in low fair values for these securities. Also, as mentioned above, the Company maintains a watch list comprised mostly of these securities, and has recorded OTTI losses on certain of these securities. The Company continues to closely monitor the performance of these securities. Additional OTTI losses may arise in future periods due to further deterioration in expected cash flows, loss severities and delinquency levels of the securities’ underlying collateral, which would negatively affect the Company’s financial results.

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



	For the Nine Months Ended September 30
(In thousands)	2011			2010
Proceeds from sales of available for sale securities	$	11,202		$	77,493
Proceeds from sales of non-marketable securities	497			185
Total proceeds	$	11,699		$	77,678
Available for sale:
Gains realized on sales	$	177		$	2,684
Losses realized on sales	—			(151		)
Other-than-temporary impairment recognized on debt securities	(1,755		)	(4,178		)
Non-marketable:
Gains realized on sales	497			45
Fair value adjustments, net	6,951			(1,389		)
Investment securities gains (losses), net	$	5,870		$	(2,989	)

At September 30, 2011, securities carried at $3.9 billion were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $420.3 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 exceeds 10% of stockholders’ equity.

4. Goodwill and Other Intangible Assets

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



	September 30, 2011										December 31, 2010
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Valuation Allowance			Net Amount		Gross Carrying Amount		Accumulated Amortization			Valuation Allowance			Net Amount
Amortizable intangible assets:
Core deposit premium	$	25,720	$	(18,164	)	$	—		$	7,556	$	25,720	$	(16,108	)	$	—		$	9,612
Mortgage servicing rights	3,093		(1,846		)	(351		)	896		3,082		(1,572		)	(185		)	1,325
Total	$	28,813	$	(20,010	)	$	(351	)	$	8,452	$	28,802	$	(17,680	)	$	(185	)	$	10,937

Aggregate amortization expense on intangible assets was $766 thousand and $864 thousand, respectively, for the three months ended September 30, 2011 and 2010, and $2.3 million and $2.7 million for the nine months ended September 30, 2011 and 2010. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of September 30, 2011. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.