Edgar Filing: COMMERCE BANCSHARES INC /MO/

CBSH 6.30.2012 10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

_________________________________________________________

For the quarterly period ended June 30, 2012



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

____________________________________________________________

For the transition period from to

Commission File No. 0-2989



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



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

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

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

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

Yes þ No o

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

Yes þ No o

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



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

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

Yes o No þ

As of July 31, 2012, the registrant had outstanding 87,630,025 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, 2012 (unaudited) and December 31, 2011	3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2012, and 2011 (unaudited)	6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	54
	Item 4.	Controls and Procedures	54

Part II	Other Information
	Item 1.	Legal Proceedings	55
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
	Item 6.	Exhibits	55
Signatures			56
Index to Exhibits			57

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	June 30, 2012			December 31, 2011
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	9,376,915		$	9,177,478
Allowance for loan losses	(178,533		)	(184,532		)
Net loans	9,198,382			8,992,946
Loans held for sale	8,874			31,076
Investment securities:
Available for sale ($629,599,000 and $418,046,000 pledged in 2012 and 2011,
respectively, to secure repurchase agreements)	9,206,451			9,224,702
Trading	14,313			17,853
Non-marketable	116,190			115,832
Total investment securities	9,336,954			9,358,387
Short-term federal funds sold and securities purchased under agreements to resell	7,455			11,870
Long-term securities purchased under agreements to resell	850,000			850,000
Interest earning deposits with banks	92,544			39,853
Cash and due from banks	410,666			465,828
Land, buildings and equipment, net	350,897			360,146
Goodwill	125,585			125,585
Other intangible assets, net	6,381			7,714
Other assets	355,253			405,962
Total assets	$	20,742,991		$	20,649,367
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	5,637,373		$	5,377,549
Savings, interest checking and money market	8,983,090			8,933,941
Time open and C.D.'s of less than $100,000	1,113,824			1,166,104
Time open and C.D.'s of $100,000 and over	1,097,346			1,322,289
Total deposits	16,831,633			16,799,883
Federal funds purchased and securities sold under agreements to repurchase	1,305,745			1,256,081
Other borrowings	111,292			111,817
Other liabilities	263,552			311,225
Total liabilities	18,512,222			18,479,006
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 89,277,398 shares in 2012 and 2011	446,387			446,387
Capital surplus	1,033,523			1,042,065
Retained earnings	671,297			575,419
Treasury stock of 1,581,929 shares in 2012 and 217,755 shares in 2011, at cost	(61,388		)	(8,362		)
Accumulated other comprehensive income	136,732			110,538
Total Commerce Bancshares, Inc. stockholders' equity	2,226,551			2,166,047
Non-controlling interest	4,218			4,314
Total equity	2,230,769			2,170,361
Total liabilities and equity	$	20,742,991		$	20,649,367

See accompanying notes to consolidated financial statements.

Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME



	For the Three Months Ended June 30						For the Six Months Ended June 30
(In thousands, except per share data)	2012			2011			2012			2011
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	112,252		$	116,769		$	224,008		$	235,146
Interest and fees on loans held for sale	88			309			193			607
Interest on investment securities	57,561			57,712			111,319			112,601
Interest on short-term federal funds sold and securities purchased under
agreements to resell	29			22			46			32
Interest on long-term securities purchased under agreements to resell	4,582			3,165			8,857			5,327
Interest on deposits with banks	112			110			167			200
Total interest income	174,624			178,087			344,590			353,913
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	4,634			6,372			9,715			13,272
Time open and C.D.'s of less than $100,000	2,004			2,965			4,110			6,708
Time open and C.D.'s of $100,000 and over	1,828			2,434			3,739			5,107
Interest on federal funds purchased and securities sold under
agreements to repurchase	177			687			402			1,309
Interest on other borrowings	876			919			1,782			1,834
Total interest expense	9,519			13,377			19,748			28,230
Net interest income	165,105			164,710			324,842			325,683
Provision for loan losses	5,215			12,188			13,380			27,977
Net interest income after provision for loan losses	159,890			152,522			311,462			297,706
NON-INTEREST INCOME
Bank card transaction fees	38,434			41,304			73,167			78,766
Trust fees	23,833			22,544			46,647			44,116
Deposit account charges and other fees	19,975			20,789			39,311			40,089
Capital market fees	5,010			4,979			11,881			9,699
Consumer brokerage services	2,576			2,880			5,102			5,543
Loan fees and sales	1,706			2,075			3,267			3,899
Other	9,282			6,773			16,024			15,138
Total non-interest income	100,816			101,344			195,399			197,250
INVESTMENT SECURITIES GAINS (LOSSES), NET
Impairment (losses) reversals on debt securities	3			(2,119		)	5,590			4,186
Noncredit-related losses (reversals) on securities not expected to be sold	(353		)	1,469			(6,260		)	(5,110		)
Net impairment losses	(350		)	(650		)	(670		)	(924		)
Realized gains on sales and fair value adjustments	1,686			2,606			6,046			4,207
Investment securities gains, net	1,336			1,956			5,376			3,283
NON-INTEREST EXPENSE
Salaries and employee benefits	87,511			84,223			177,054			171,615
Net occupancy	11,105			11,213			22,365			23,250
Equipment	4,999			5,702			10,188			11,279
Supplies and communication	5,667			5,692			11,280			11,224
Data processing and software	18,282			17,531			35,751			33,998
Marketing	4,469			4,495			8,291			8,753
Deposit insurance	2,618			2,780			5,138			7,671
Visa litigation	5,690			—			5,690			(1,359		)
Other	15,999			21,877			31,044			41,042
Total non-interest expense	156,340			153,513			306,801			307,473
Income before income taxes	105,702			102,309			205,436			190,766
Less income taxes	34,466			32,692			67,386			60,199
Net income	71,236			69,617			138,050			130,567
Less non-controlling interest expense	503			583			1,518			1,080
Net income attributable to Commerce Bancshares, Inc.	$	70,733		$	69,034		$	136,532		$	129,487
Net income per common share — basic	$	.80		$	.76		$	1.54		$	1.42
Net income per common share — diluted	$	.80		$	.75		$	1.54		$	1.41

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)	2012			2011			2012			2011
	(Unaudited)
Net income	$	71,236		$	69,617		$	138,050		$	130,567
Other comprehensive income (loss):
Available for sale debt securities for which a portion of an other-than-temporary impairment (OTTI) has been recorded in earnings:
Unrealized holding gains (losses) subsequent to initial OTTI recognition	866			(812		)	6,286			5,663
Income tax (expense) benefit	(329		)	309			(2,389		)	(2,152		)
Net unrealized gains (losses) on OTTI securities	537			(503		)	3,897			3,511
Other available for sale investment securities:
Unrealized holding gains	28,526			35,540			34,845			25,135
Reclassification adjustment for gains included in net income	—			(1		)	(342		)	(177		)
Net unrealized gains on securities	28,526			35,539			34,503			24,958
Income tax expense	(10,840		)	(13,505		)	(13,111		)	(9,484		)
Net unrealized gains on other securities	17,686			22,034			21,392			15,474
Prepaid pension cost:
Amortization of accumulated pension loss	730			540			1,460			1,080
Income tax expense	(277		)	(205		)	(555		)	(410		)
Pension loss amortization	453			335			905			670
Other comprehensive income	18,676			21,866			26,194			19,655
Comprehensive income	89,912			91,483			164,244			150,222
Non-controlling interest expense	(503		)	(583		)	(1,518		)	(1,080		)
Comprehensive income attributable to Commerce Bancshares, Inc	$	89,409		$	90,900		$	162,726		$	149,142

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)	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Non-Controlling Interest			Total
	(Unaudited)
Balance January 1, 2012	$	446,387	$	1,042,065		$	575,419		$	(8,362	)	$	110,538	$	4,314		$	2,170,361
Net income						136,532								1,518			138,050
Other comprehensive income												26,194					26,194
Distributions to non-controlling interest														(1,614		)	(1,614		)
Purchase of treasury stock									(71,652		)						(71,652		)
Issuance of stock under purchase and equity compensation plans			(3,491		)				10,276								6,785
Net tax benefit related to equity compensation plans			744														744
Stock-based compensation			2,555														2,555
Issuance of nonvested stock awards			(8,350		)				8,350								—
Cash dividends ($.460 per share)						(40,654		)									(40,654		)
Balance June 30, 2012	$	446,387	$	1,033,523		$	671,297		$	(61,388	)	$	136,732	$	4,218		$	2,230,769
Balance January 1, 2011	$	433,942	$	971,293		$	555,778		$	(2,371	)	$	63,345	$	1,477		$	2,023,464
Net income						129,487								1,080			130,567
Other comprehensive income												19,655					19,655
Distributions to non-controlling interest														(358		)	(358		)
Purchase of treasury stock									(18,341		)						(18,341		)
Issuance of stock under purchase and equity compensation plans	1,563		5,483						6,317								13,363
Net tax benefit related to equity compensation plans			955														955
Stock-based compensation			2,372														2,372
Issuance of nonvested stock awards	976		(856		)				(120		)						—
Cash dividends ($.438 per share)						(40,110		)									(40,110		)
Balance June 30, 2011	$	436,481	$	979,247		$	645,155		$	(14,515	)	$	83,000	$	2,199		$	2,131,567

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)	2012			2011
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	138,050		$	130,567
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	13,380			27,977
Provision for depreciation and amortization	21,847			23,732
Amortization of investment security premiums, net	16,862			2,413
Investment securities gains, net(A)	(5,376		)	(3,283		)
Net gains on sales of loans held for sale	(375		)	(1,147		)
Originations of loans held for sale	—			(28,631		)
Proceeds from sales of loans held for sale	22,508			51,297
Net increase in trading securities	(4,006		)	(374		)
Stock-based compensation	2,555			2,372
(Increase) decrease in interest receivable	4,495			(1,095		)
Decrease in interest payable	(185		)	(2,686		)
Increase in income taxes payable	1,999			5,594
Net tax benefit related to equity compensation plans	(744		)	(955		)
Other changes, net	(7,617		)	(10,912		)
Net cash provided by operating activities	203,393			194,869
INVESTING ACTIVITIES:
Proceeds from sales of investment securities(A)	14,116			11,202
Proceeds from maturities/pay downs of investment securities(A)	1,479,062			1,400,631
Purchases of investment securities(A)	(1,477,434		)	(1,809,501		)
Net (increase) decrease in loans	(218,816		)	139,927
Long-term securities purchased under agreements to resell	—			(500,000		)
Repayments of long-term securities purchased under agreements to resell	—			100,000
Purchases of land, buildings and equipment	(11,703		)	(11,133		)
Sales of land, buildings and equipment	1,743			1,711
Net cash used in investing activities	(213,032		)	(667,163		)
FINANCING ACTIVITIES:
Net increase in non-interest bearing, savings, interest checking and money market deposits	335,614			705,923
Net decrease in time open and C.D.'s	(277,223		)	(62,335		)
Net increase in short-term federal funds purchased and securities sold under
agreements to repurchase	49,664			299,643
Repayment of long-term borrowings	(525		)	(352		)
Net increase in short-term borrowings	—			8
Purchases of treasury stock	(71,652		)	(18,341		)
Issuance of stock under stock purchase and equity compensation plans	6,785			13,363
Net tax benefit related to equity compensation plans	744			955
Cash dividends paid on common stock	(40,654		)	(40,110		)
Net cash provided by financing activities	2,753			898,754
Increase (decrease) in cash and cash equivalents	(6,886		)	426,460
Cash and cash equivalents at beginning of year	517,551			460,675
Cash and cash equivalents at June 30	$	510,665		$	887,135
(A) Available for sale and non-marketable securities
Income tax payments, net	$	64,799		$	54,661
Interest paid on deposits and borrowings	$	19,933		$	30,916
Loans transferred to foreclosed real estate	$	5,488		$	18,343

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012 (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. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2011 data to conform to current year presentation. 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 six month periods ended June 30, 2012 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 2011 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 June 30, 2012 and December 31, 2011 are as follows:



(In thousands)	June 30, 2012		December 31, 2011
Commercial:
Business	$	2,993,067	$	2,808,265
Real estate – construction and land	346,048		386,598
Real estate – business	2,190,838		2,180,100
Personal Banking:
Real estate – personal	1,501,170		1,428,777
Consumer	1,162,532		1,114,889
Revolving home equity	447,601		463,587
Consumer credit card	732,388		788,701
Overdrafts	3,271		6,561
Total loans	$	9,376,915	$	9,177,478

At June 30, 2012, loans of $3.1 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 six months ended June 30, 2012 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	$	117,474		$	64,058	$	181,532	$	122,497		$	62,035	$	184,532
Provision	(4,448		)	9,663		5,215		(7,646		)	21,026		13,380
Deductions:
Loans charged off	3,179			13,841		17,020		5,707			27,230		32,937
Less recoveries on loans	4,824			3,982		8,806		5,527			8,031		13,558
Net loans charged off	(1,645		)	9,859		8,214		180			19,199		19,379
Balance June 30, 2012	$	114,671		$	63,862	$	178,533	$	114,671		$	63,862	$	178,533

Table of Contents

A summary of the activity in the allowance for loan losses during the three and six months ended June 30, 2011 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	$	128,351	$	66,187	$	194,538	$	119,946	$	77,592	$	197,538
Provision	1,815		10,373		12,188		15,280		12,697		27,977
Deductions:
Loans charged off	3,946		15,656		19,602		10,310		32,681		42,991
Less recoveries on loans	1,043		3,371		4,414		2,347		6,667		9,014
Net loans charged off	2,903		12,285		15,188		7,963		26,014		33,977
Balance June 30, 2011	$	127,263	$	64,275	$	191,538	$	127,263	$	64,275	$	191,538

The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, 2012 and December 31, 2011, 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, 2012
Commercial	$	6,624	$	108,916	$	108,047	$	5,421,037
Personal Banking	2,046		26,979		61,816		3,819,983
Total	$	8,670	$	135,895	$	169,863	$	9,241,020
December 31, 2011
Commercial	$	6,668	$	108,167	$	115,829	$	5,266,796
Personal Banking	4,090		31,088		57,945		3,771,427
Total	$	10,758	$	139,255	$	173,774	$	9,038,223

Impaired loans

The table below shows the Company’s investment in impaired loans at June 30, 2012 and December 31, 2011. 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 that were 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 $57.2 million at June 30, 2012 and $41.3 million at December 31, 2011. 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. Restructured loans also include certain credit card loans under various debt management and assistance programs, which totaled $16.5 million at June 30, 2012 and $22.4 million at December 31, 2011.



(In thousands)	June 30, 2012		Dec. 31, 2011
Non-accrual loans	$	62,177	$	75,482
Restructured loans (accruing)	73,718		63,773
Total impaired loans	$	135,895	$	139,255

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The following table provides additional information about impaired loans held by the Company at June 30, 2012 and December 31, 2011, 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, 2012
With no related allowance recorded:
Business	$	9,704	$	11,756	$	—
Real estate – construction and land	10,796		18,841		—
Real estate – business	11,642		15,558		—
Real estate – personal	750		773		—
Revolving home equity	511		843		—
	$	33,403	$	47,771	$	—
With an allowance recorded:
Business	$	28,453	$	31,912	$	2,488
Real estate – construction and land	29,191		44,523		2,664
Real estate – business	19,130		24,226		1,472
Real estate – personal	7,551		10,701		673
Consumer	1,559		1,599		42
Revolving home equity	118		367		4
Consumer credit card	16,490		16,490		1,327
	$	102,492	$	129,818	$	8,670
Total	$	135,895	$	177,589	$	8,670
December 31, 2011
With no related allowance recorded:
Business	$	19,759	$	22,497	$	—
Real estate – construction and land	8,391		22,746		—
Real estate – business	6,853		9,312		—
Real estate – personal	793		793		—
	$	35,796	$	55,348	$	—
With an allowance recorded:
Business	$	15,604	$	19,286	$	1,500
Real estate – construction and land	37,387		47,516		2,580
Real estate – business	20,173		24,799		2,588
Real estate – personal	7,867		10,671		795
Consumer credit card	22,428		22,428		3,295
	$	103,459	$	124,700	$	10,758
Total	$	139,255	$	180,048	$	10,758

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Total average impaired loans for the three and six month periods ending June 30, 2012 and 2011, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the Three Months Ended June 30, 2012
Non-accrual loans	$	58,662	$	7,165	$	65,827
Restructured loans (accruing)	50,102		20,324		70,426
Total	$	108,764	$	27,489	$	136,253
For the Six Months Ended June 30, 2012
Non-accrual loans	$	63,113	$	7,287	$	70,400
Restructured loans (accruing)	45,164		21,939		67,103
Total	$	108,277	$	29,226	$	137,503
For the Three Months Ended June 30, 2011
Non-accrual loans	$	69,104	$	7,063	$	76,167
Restructured loans (accruing)	46,037		21,679		67,716
Total	$	115,141	$	28,742	$	143,883
For the Six Months ended June 30, 2011
Non-accrual loans	$	72,186	$	7,045	$	79,231
Restructured loans (accruing)	44,495		21,107		65,602
Total	$	116,681	$	28,152	$	144,833

The table below shows interest income recognized during the three and six month periods ending June 30, 2012 and 2011 for impaired loans held at the end of each respective period. This interest relates to accruing restructured loans, as discussed above.



	For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands)	2012		2011		2012		2011
Interest income recognized on impaired loans:
Business	$	236	$	85	$	471	$	170
Real estate – construction and land	249		186		498		373
Real estate – business	105		204		210		407
Real estate – personal	9		7		17		14
Consumer	19		—		38		—
Revolving home equity	1		—		1		—
Consumer credit card	321		447		642		894
Total	$	940	$	929	$	1,877	$	1,858

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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, 2012 and December 31, 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
June 30, 2012
Commercial:
Business	$	2,972,009	$	6,416	$	519	$	14,123	$	2,993,067
Real estate – construction and land	326,022		1,828		—		18,198		346,048
Real estate – business	2,168,201		1,083		—		21,554		2,190,838
Personal Banking:
Real estate – personal	1,481,713		10,106		1,735		7,616		1,501,170
Consumer	1,151,696		9,280		1,425		131		1,162,532
Revolving home equity	445,096		1,270		680		555		447,601
Consumer credit card	716,799		8,651		6,938		—		732,388
Overdrafts	2,839		432		—		—		3,271
Total	$	9,264,375	$	39,066	$	11,297	$	62,177	$	9,376,915
December 31, 2011
Commercial:
Business	$	2,777,578	$	4,368	$	595	$	25,724	$	2,808,265
Real estate – construction and land	362,592		1,113		121		22,772		386,598
Real estate – business	2,151,822		8,875		29		19,374		2,180,100
Personal Banking:
Real estate – personal	1,406,449		11,671		3,045		7,612		1,428,777
Consumer	1,096,742		15,917		2,230		—		1,114,889
Revolving home equity	461,941		1,003		643		—		463,587
Consumer credit card	769,922		10,484		8,295		—		788,701
Overdrafts	6,173		388		—		—		6,561
Total	$	9,033,219	$	53,819	$	14,958	$	75,482	$	9,177,478

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 attached 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, 2012
Pass	$	2,857,378	$	278,895	$	2,038,169	$	5,174,442
Special mention	65,052		5,739		49,057		119,848
Substandard	56,514		43,216		82,058		181,788
Non-accrual	14,123		18,198		21,554		53,875
Total	$	2,993,067	$	346,048	$	2,190,838	$	5,529,953
December 31, 2011
Pass	$	2,669,868	$	304,408	$	1,994,391	$	4,968,667
Special mention	37,460		4,722		52,683		94,865
Substandard	75,213		54,696		113,652		243,561
Non-accrual	25,724		22,772		19,374		67,870
Total	$	2,808,265	$	386,598	$	2,180,100	$	5,374,963

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 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 loans for which FICO scores are not obtained because the loans are related to commercial activity. At June 30, 2012, these were comprised of $219.9 million in personal real estate loans and $140.2 million in consumer loans, or 9.4% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at June 30, 2012 and December 31, 2011 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
June 30, 2012
FICO score:
Under 600	3.0	%	7.4	%	2.4	%	4.7	%
600 - 659	4.2		11.3		5.7		11.6
660 - 719	11.7		24.1		16.2		32.3
720 - 779	30.2		25.8		29.7		28.4
780 and Over	50.9		31.4		46.0		23.0
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2011
FICO score:
Under 600	3.4	%	8.4	%	2.6	%	4.9	%
600 - 659	4.1		11.0		4.9		11.2
660 - 719	12.2		23.2		15.1		31.0
720 - 779	29.2		26.0		26.3		29.0
780 and Over	51.1		31.4		51.1		23.9
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 following table shows the outstanding balances at June 30, 2012 of loans classified as troubled debt restructurings, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the

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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)	June 30, 2012		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	33,687	$	—
Real estate - construction and land	35,649		10,140
Real estate - business	13,221		1,765
Personal Banking:
Real estate - personal	2,852		553
Consumer	1,428		119
Revolving home equity	73		—
Consumer credit card	16,491		1,126
Total restructured loans	$	103,401	$	13,703

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 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 $9.5 million at June 30, 2012 to lend additional funds to borrowers with restructured loans.

The Company’s holdings of foreclosed real estate totaled $20.1 million and $18.3 million at June 30, 2012 and December 31, 2011, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.8 million and $4.2 million at June 30, 2012 and December 31, 2011, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.

3. Investment Securities

Investment securities, at fair value, consisted of the following at June 30, 2012 and December 31, 2011.



(In thousands)	June 30, 2012		Dec. 31, 2011
Available for sale	$	9,206,451	$	9,224,702
Trading	14,313		17,853
Non-marketable	116,190		115,832
Total investment securities	$	9,336,954	$	9,358,387

Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $45.3 million at both June 30, 2012 and December 31, 2011. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $70.9 million and $70.5 million at June 30, 2012 and December 31, 2011, respectively.

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A summary of the available for sale investment securities by maturity groupings as of June 30, 2012 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.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	7,962	$	8,014
After 1 but within 5 years	189,657		206,839
After 5 but within 10 years	135,908		155,270
Total U.S. government and federal agency obligations	333,527		370,123
Government-sponsored enterprise obligations:
After 1 but within 5 years	108,745		112,338
After 5 but within 10 years	28,318		28,561
After 10 years	125,441		125,803
Total government-sponsored enterprise obligations	262,504		266,702
State and municipal obligations:
Within 1 year	87,437		88,192
After 1 but within 5 years	591,654		614,243
After 5 but within 10 years	453,346		468,436
After 10 years	200,329		187,666
Total state and municipal obligations	1,332,766		1,358,537
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,660,014		3,802,110
Non-agency mortgage-backed securities	262,191		269,304
Asset-backed securities	2,981,425		2,991,092
Total mortgage and asset-backed securities	6,903,630		7,062,506
Other debt securities:
Within 1 year	36,708		37,495
After 1 but within 5 years	69,786		73,319
Total other debt securities	106,494		110,814
Equity securities	14,135		37,769
Total available for sale investment securities	$	8,953,056	$	9,206,451

Included in U.S. government securities are $362.0 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 $127.5 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 $27.0 million at June 30, 2012.

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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, 2012
U.S. government and federal agency obligations	$	333,527	$	36,596	$	—		$	370,123
Government-sponsored enterprise obligations	262,504		4,326		(128		)	266,702
State and municipal obligations	1,332,766		42,003		(16,232		)	1,358,537
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,660,014		142,232		(136		)	3,802,110
Non-agency mortgage-backed securities	262,191		9,515		(2,402		)	269,304
Asset-backed securities	2,981,425		11,637		(1,970		)	2,991,092
Total mortgage and asset-backed securities	6,903,630		163,384		(4,508		)	7,062,506
Other debt securities	106,494		4,320		—			110,814
Equity securities	14,135		23,634		—			37,769
Total	$	8,953,056	$	274,263	$	(20,868	)	$	9,206,451
December 31, 2011
U.S. government and federal agency obligations	$	328,530	$	36,135	$	—		$	364,665
Government-sponsored enterprise obligations	311,529		4,169		—			315,698
State and municipal obligations	1,220,840		35,663		(11,219		)	1,245,284
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,989,464		117,088		(493		)	4,106,059
Non-agency mortgage-backed securities	315,752		8,962		(7,812		)	316,902
Asset-backed securities	2,692,436		7,083		(6,376		)	2,693,143
Total mortgage and asset-backed securities	6,997,652		133,133		(14,681		)	7,116,104
Other debt securities	135,190		6,070		—			141,260
Equity securities	18,354		23,337		—			41,691
Total	$	9,012,095	$	238,507	$	(25,900	)	$	9,224,702

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 June 30, 2012, the fair value of securities on this watch list was $211.4 million.

As of June 30, 2012, 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 $109.9 million. The credit-related portion of the impairment totaled $10.7 million and was recorded in earnings. The noncredit-related portion of the impairment totaled $684 thousand 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 likely that it will be required to sell the securities before the recovery of their amortized cost bases.

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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	0%	-	30%
Projected cumulative default	13%	-	53%
Credit support	0%	-	17%
Loss severity	33%	-	57%

The following table shows changes in the credit losses recorded in the six months ended June 30, 2012 and 2011, for which a portion of an OTTI was recognized in other comprehensive income.



	For the Six Months Ended June 30
(In thousands)	2012			2011
Balance at January 1	$	9,931		$	7,542
Credit losses on debt securities for which impairment was not previously recognized	—			53
Credit losses on debt securities for which impairment was previously recognized	670			871
Increase in expected cash flows that are recognized over remaining life of security	(70		)	(53		)
Balance at June 30	$	10,531		$	8,413

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, 2012
Government-sponsored enterprise obligations	$	32,357	$	128	$	—	$	—	$	32,357	$	128
State and municipal obligations	130,356		940		87,238		15,292		217,594		16,232
Mortgage and asset-backed securities:
Agency mortgage-backed securities	7,292		8		19,737		128		27,029		136
Non-agency mortgage-backed securities	—		—		74,614		2,402		74,614		2,402
Asset-backed securities	374,732		1,488		70,362		482		445,094		1,970
Total mortgage and asset-backed securities	382,024		1,496		164,713		3,012		546,737		4,508
Total	$	544,737	$	2,564	$	251,951	$	18,304	$	796,688	$	20,868
December 31, 2011
State and municipal obligations	$	65,962	$	712	$	110,807	$	10,507	$	176,769	$	11,219
Mortgage and asset-backed securities:
Agency mortgage-backed securities	72,019		493		—		—		72,019		493
Non-agency mortgage-backed securities	23,672		784		118,972		7,028		142,644		7,812
Asset-backed securities	1,236,526		4,982		87,224		1,394		1,323,750		6,376
Total mortgage and asset-backed securities	1,332,217		6,259		206,196		8,422		1,538,413		14,681
Total	$	1,398,179	$	6,971	$	317,003	$	18,929	$	1,715,182	$	25,900

The total available for sale portfolio consisted of approximately 1,600 individual securities at June 30, 2012. The portfolio included 121 securities, having an aggregate fair value of $796.7 million, that were in a loss position at June 30, 2012. Securities identified as other-than-temporarily impaired which have been in a loss position for 12 months or longer totaled $60.5 million at fair value, or .7% 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 $191.5 million, or 2.1% of the total portfolio value.

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The Company’s holdings of state and municipal obligations included gross unrealized losses of $16.2 million at June 30, 2012. Of these losses, $15.8 million related to auction rate securities (ARS) and $430 thousand related to other state and municipal obligations. This portfolio, exclusive of ARS, totaled $1.2 billion at fair value, or 13.4% 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 June 30, 2012
Texas