Edgar Filing: COMMERCE BANCSHARES INC /MO/

CBSH 9.30.2012 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 September 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 November 1, 2012, the registrant had outstanding 87,301,292 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, 2012 (unaudited) and December 31, 2011	3
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2012, and 2011 (unaudited)	6
		Consolidated Statements of Cash Flows for the Nine Months Ended September 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	37
	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

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	September 30, 2012			December 31, 2011
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	9,638,645		$	9,177,478
Allowance for loan losses	(175,032		)	(184,532		)
Net loans	9,463,613			8,992,946
Loans held for sale	8,741			31,076
Investment securities:
Available for sale ($742,060,000 and $418,046,000 pledged in 2012 and 2011,
respectively, to secure repurchase agreements)	9,020,951			9,224,702
Trading	13,595			17,853
Non-marketable	117,540			115,832
Total investment securities	9,152,086			9,358,387
Short-term federal funds sold and securities purchased under agreements to resell	10,475			11,870
Long-term securities purchased under agreements to resell	850,000			850,000
Interest earning deposits with banks	132,144			39,853
Cash and due from banks	426,742			465,828
Land, buildings and equipment, net	350,040			360,146
Goodwill	125,585			125,585
Other intangible assets, net	5,804			7,714
Other assets	353,539			405,962
Total assets	$	20,878,769		$	20,649,367
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	5,814,932		$	5,377,549
Savings, interest checking and money market	9,025,688			8,933,941
Time open and C.D.'s of less than $100,000	1,094,215			1,166,104
Time open and C.D.'s of $100,000 and over	914,795			1,322,289
Total deposits	16,849,630			16,799,883
Federal funds purchased and securities sold under agreements to repurchase	1,257,949			1,256,081
Other borrowings	103,744			111,817
Other liabilities	360,374			311,225
Total liabilities	18,571,697			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	1,033,515			1,042,065
Retained earnings	717,138			575,419
Treasury stock of 1,561,575 shares in 2012 and 217,755 shares in 2011, at cost	(60,644		)	(8,362		)
Accumulated other comprehensive income	166,040			110,538
Total Commerce Bancshares, Inc. stockholders' equity	2,302,436			2,166,047
Non-controlling interest	4,636			4,314
Total equity	2,307,072			2,170,361
Total liabilities and equity	$	20,878,769		$	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 September 30						For the Nine Months Ended September 30
(In thousands, except per share data)	2012			2011			2012			2011
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	111,619		$	114,731		$	335,627		$	349,877
Interest and fees on loans held for sale	85			270			278			877
Interest on investment securities	46,513			51,697			157,832			164,298
Interest on short-term federal funds sold and securities purchased under
agreements to resell	24			13			70			45
Interest on long-term securities purchased under agreements to resell	4,913			3,913			13,770			9,240
Interest on deposits with banks	40			211			207			411
Total interest income	163,194			170,835			507,784			524,748
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	4,623			6,445			14,338			19,717
Time open and C.D.'s of less than $100,000	1,945			2,413			6,055			9,121
Time open and C.D.'s of $100,000 and over	1,743			2,130			5,482			7,237
Interest on federal funds purchased and securities sold under
agreements to repurchase	221			292			623			1,601
Interest on other borrowings	851			925			2,633			2,759
Total interest expense	9,383			12,205			29,131			40,435
Net interest income	153,811			158,630			478,653			484,313
Provision for loan losses	5,581			11,395			18,961			39,372
Net interest income after provision for loan losses	148,230			147,235			459,692			444,941
NON-INTEREST INCOME
Bank card transaction fees	39,488			42,149			112,655			120,915
Trust fees	23,681			22,102			70,328			66,218
Deposit account charges and other fees	19,873			21,939			59,184			62,028
Capital market fees	5,110			5,556			16,991			15,255
Consumer brokerage services	2,441			2,333			7,543			7,876
Loan fees and sales	1,358			2,034			4,625			5,933
Other	8,971			5,519			24,995			20,657
Total non-interest income	100,922			101,632			296,321			298,882
INVESTMENT SECURITIES GAINS (LOSSES), NET
Impairment (losses) reversals on debt securities	5,989			(1,200		)	11,579			2,986
Noncredit-related losses (reversals) on securities not expected to be sold	(6,546		)	369			(12,806		)	(4,741		)
Net impairment losses	(557		)	(831		)	(1,227		)	(1,755		)
Realized gains on sales and fair value adjustments	3,737			3,418			9,783			7,625
Investment securities gains, net	3,180			2,587			8,556			5,870
NON-INTEREST EXPENSE
Salaries and employee benefits	89,292			85,700			266,346			257,315
Net occupancy	11,588			11,510			33,953			34,760
Equipment	4,976			5,390			15,164			16,669
Supplies and communication	5,400			5,674			16,680			16,898
Data processing and software	19,279			16,232			55,030			50,230
Marketing	4,100			4,545			12,391			13,298
Deposit insurance	2,608			2,772			7,746			10,443
Other	16,148			21,923			52,882			61,606
Total non-interest expense	153,391			153,746			460,192			461,219
Income before income taxes	98,941			97,708			304,377			288,474
Less income taxes	32,155			31,699			99,541			91,898
Net income	66,786			66,009			204,836			196,576
Less non-controlling interest expense	780			657			2,298			1,737
Net income attributable to Commerce Bancshares, Inc.	$	66,006		$	65,352		$	202,538		$	194,839
Net income per common share — basic	$	.75		$	.72		$	2.29		$	2.14
Net income per common share — diluted	$	.75		$	.72		$	2.29		$	2.13

See accompanying notes to consolidated financial statements.

Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	For the Three Months Ended September 30						For the Nine Months Ended September 30
(In thousands)	2012			2011			2012			2011
	(Unaudited)
Net income	$	66,786		$	66,009		$	204,836		$	196,576
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	5,959			(1,091		)	12,245			4,572
Income tax (expense) benefit	(2,264		)	415			(4,653		)	(1,737		)
Net unrealized gains (losses) on OTTI securities	3,695			(676		)	7,592			2,835
Other available for sale investment securities:
Unrealized holding gains	40,582			53,143			75,427			78,278
Reclassification adjustment for gains included in net income	—			—			(342		)	(177		)
Net unrealized gains on securities	40,582			53,143			75,085			78,101
Income tax expense	(15,422		)	(20,195		)	(28,533		)	(29,679		)
Net unrealized gains on other securities	25,160			32,948			46,552			48,422
Prepaid pension cost:
Amortization of accumulated pension loss	730			821			2,190			1,901
Income tax expense	(277		)	(312		)	(832		)	(722		)
Pension loss amortization	453			509			1,358			1,179
Other comprehensive income	29,308			32,781			55,502			52,436
Comprehensive income	96,094			98,790			260,338			249,012
Non-controlling interest expense	(780		)	(657		)	(2,298		)	(1,737		)
Comprehensive income attributable to Commerce Bancshares, Inc.	$	95,314		$	98,133		$	258,040		$	247,275

See accompanying notes to consolidated financial statements.

Table of Contents

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						202,538								2,298			204,836
Other comprehensive income												55,502					55,502
Distributions to non-controlling interest														(1,976		)	(1,976		)
Purchase of treasury stock									(75,536		)						(75,536		)
Issuance of stock under purchase and equity compensation plans			(4,987		)				14,753								9,766
Net tax benefit related to equity compensation plans			1,233														1,233
Stock-based compensation			3,705														3,705
Issuance of nonvested stock awards			(8,501		)				8,501								—
Cash dividends ($.690 per share)						(60,819		)									(60,819		)
Balance September 30, 2012	$	446,387	$	1,033,515		$	717,138		$	(60,644	)	$	166,040	$	4,636		$	2,307,072
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
Other comprehensive income												52,436					52,436
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 ($.657 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

See accompanying notes to consolidated financial statements.

Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Nine Months Ended September 30
(In thousands)	2012			2011
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	204,836		$	196,576
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	18,961			39,372
Provision for depreciation and amortization	32,565			35,281
Amortization of investment security premiums, net	29,989			9,406
Investment securities gains, net(A)	(8,556		)	(5,870		)
Net gains on sales of loans held for sale	(376		)	(1,554		)
Originations of loans held for sale	—			(41,231		)
Proceeds from sales of loans held for sale	22,649			67,065
Net (increase) decrease in trading securities	5,454			(2,941		)
Stock-based compensation	3,705			3,614
(Increase) decrease in interest receivable	4,728			(1,077		)
Decrease in interest payable	(1,067		)	(4,393		)
Increase (decrease) in income taxes payable	(5,571		)	14,863
Net tax benefit related to equity compensation plans	(1,233		)	(1,025		)
Other changes, net	(10,718		)	3,011
Net cash provided by operating activities	295,366			311,097
INVESTING ACTIVITIES:
Proceeds from sales of investment securities(A)	14,931			11,699
Proceeds from maturities/pay downs of investment securities(A)	2,341,083			1,968,848
Purchases of investment securities(A)	(2,036,260		)	(2,926,445		)
Net (increase) decrease in loans	(489,628		)	288,987
Long-term securities purchased under agreements to resell	(125,000		)	(500,000		)
Repayments of long-term securities purchased under agreements to resell	125,000			100,000
Purchases of land, buildings and equipment	(19,243		)	(16,135		)
Sales of land, buildings and equipment	2,338			2,288
Net cash used in investing activities	(186,779		)	(1,070,758		)
FINANCING ACTIVITIES:
Net increase in non-interest bearing, savings, interest checking and money market deposits	554,167			1,090,342
Net decrease in time open and C.D.'s	(479,383		)	(150,511		)
Net increase in short-term federal funds purchased and securities sold under
agreements to repurchase	1,868			74,901
Repayment of long-term borrowings	(8,073		)	(404		)
Purchases of treasury stock	(75,536		)	(101,111		)
Issuance of stock under stock purchase and equity compensation plans	9,766			14,060
Net tax benefit related to equity compensation plans	1,233			1,025
Cash dividends paid on common stock	(60,819		)	(59,636		)
Net cash provided by (used in) financing activities	(56,777		)	868,666
Increase in cash and cash equivalents	51,810			109,005
Cash and cash equivalents at beginning of year	517,551			460,675
Cash and cash equivalents at September 30	$	569,361		$	569,680
(A) Available for sale and non-marketable securities
Income tax payments, net	$	104,175		$	76,795
Interest paid on deposits and borrowings	$	30,198		$	44,828
Loans transferred to foreclosed real estate	$	7,178		$	20,630

See accompanying notes to consolidated financial statements.

Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 nine month periods ended September 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 September 30, 2012 and December 31, 2011 are as follows:



(In thousands)	September 30, 2012		December 31, 2011
Commercial:
Business	$	3,098,908	$	2,808,265
Real estate – construction and land	335,113		386,598
Real estate – business	2,193,206		2,180,100
Personal Banking:
Real estate – personal	1,556,754		1,428,777
Consumer	1,243,400		1,114,889
Revolving home equity	453,527		463,587
Consumer credit card	748,885		788,701
Overdrafts	8,852		6,561
Total loans	$	9,638,645	$	9,177,478

At September 30, 2012, loans of $3.2 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, 2012 follows:



	For the Three Months Ended September 30							For the Nine Months Ended September 30
(In thousands)	Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	$	114,671		$	63,862	$	178,533	$	122,497		$	62,035	$	184,532
Provision	(2,479		)	8,060		5,581		(10,125		)	29,086		18,961
Deductions:
Loans charged off	1,795			12,480		14,275		7,502			39,710		47,212
Less recoveries on loans	1,720			3,473		5,193		7,247			11,504		18,751
Net loans charged off	75			9,007		9,082		255			28,206		28,461
Balance September 30, 2012	$	112,117		$	62,915	$	175,032	$	112,117		$	62,915	$	175,032

Table of Contents

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 Ended September 30						For the Nine Months Ended September 30
(In thousands)	Commercial		Personal Banking		Total		Commercial		Personal Banking		Total
Balance at beginning of period	$	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 September 30, 2011	$	125,233	$	62,805	$	188,038	$	125,233	$	62,805	$	188,038

The following table shows the balance in the allowance for loan losses and the related loan balance at September 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
September 30, 2012
Commercial	$	6,542	$	88,678	$	105,575	$	5,538,549
Personal Banking	1,952		26,284		60,963		3,985,134
Total	$	8,494	$	114,962	$	166,538	$	9,523,683
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 September 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 $44.4 million at September 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 $15.4 million at September 30, 2012 and $22.4 million at December 31, 2011.



(In thousands)	Sept. 30, 2012		Dec. 31, 2011
Non-accrual loans	$	55,201	$	75,482
Restructured loans (accruing)	59,761		63,773
Total impaired loans	$	114,962	$	139,255

Table of Contents

The following table provides additional information about impaired loans held by the Company at September 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
September 30, 2012
With no related allowance recorded:
Business	$	10,674	$	12,291	$	—
Real estate – construction and land	7,173		13,558		—
Real estate – business	7,289		8,524		—
Real estate – personal	1,262		1,390		—
Revolving home equity	510		843		—
	$	26,908	$	36,606	$	—
With an allowance recorded:
Business	$	19,644	$	23,758	$	1,873
Real estate – construction and land	27,101		40,728		2,328
Real estate – business	16,797		22,336		2,341
Real estate – personal	7,601		10,746		764
Consumer	1,435		1,475		21
Revolving home equity	73		73		1
Consumer credit card	15,403		15,403		1,166
	$	88,054	$	114,519	$	8,494
Total	$	114,962	$	151,125	$	8,494
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

Table of Contents

Total average impaired loans for the three and nine month periods ending September 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 September 30, 2012
Non-accrual loans	$	51,337	$	7,621	$	58,958
Restructured loans (accruing)	41,885		19,750		61,635
Total	$	93,222	$	27,371	$	120,593
For the nine months ended September 30, 2012
Non-accrual loans	$	59,159	$	7,399	$	66,558
Restructured loans (accruing)	44,063		21,204		65,267
Total	$	103,222	$	28,603	$	131,825
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

The table below shows interest income recognized during the three and nine month periods ending September 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 September 30				For the Nine Months Ended September 30
(In thousands)	2012		2011		2012		2011
Interest income recognized on impaired loans:
Business	$	248	$	72	$	745	$	217
Real estate – construction and land	210		192		630		575
Real estate – business	72		174		216		522
Real estate – personal	22		8		65		24
Consumer	16		—		47		—
Revolving home equity	1		—		2		—
Consumer credit card	328		484		983		1,451
Total	$	897	$	930	$	2,688	$	2,789

Table of Contents

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, 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
September 30, 2012
Commercial:
Business	$	3,081,649	$	2,598	$	595	$	14,066	$	3,098,908
Real estate – construction and land	318,841		549		300		15,423		335,113
Real estate – business	2,158,019		16,668		90		18,429		2,193,206
Personal Banking:
Real estate – personal	1,535,326		12,988		1,798		6,642		1,556,754
Consumer	1,226,713		15,350		1,206		131		1,243,400
Revolving home equity	450,540		1,494		983		510		453,527
Consumer credit card	732,749		8,876		7,260		—		748,885
Overdrafts	8,516		336		—		—		8,852
Total	$	9,512,353	$	58,859	$	12,232	$	55,201	$	9,638,645
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.

Table of Contents



Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
September 30, 2012
Pass	$	2,978,076	$	276,077	$	2,057,584	$	5,311,737
Special mention	56,130		7,388		44,936		108,454
Substandard	50,636		36,225		72,257		159,118
Non-accrual	14,066		15,423		18,429		47,918
Total	$	3,098,908	$	335,113	$	2,193,206	$	5,627,227
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 September 30, 2012, these were comprised of $225.6 million in personal real estate loans and $127.1 million in consumer loans, or 8.8% of the Personal Banking portfolio. At December 31, 2011, these were comprised of $222.8 million in personal real estate loans and $148.7 million in consumer loans, or 9.8% 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 September 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
September 30, 2012
FICO score:
Under 600	2.4	%	6.5	%	2.4	%	4.4	%
600 - 659	3.6		10.4		5.6		11.6
660 - 719	10.0		24.3		16.3		32.7
720 - 779	26.7		26.7		29.0		28.4
780 and Over	57.3		32.1		46.7		22.9
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, as shown in the table below. Total restructured loans include both loans on non-accrual status, which totaled $27.5 million, and other restructured loans. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected. Other restructured loans consist mainly of performing commercial loans and consumer credit card loans under debt management programs. The performing commercial loans are classified as troubled debt restructurings when, at renewal, the contractual interest rate of the renewed 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. Consumer credit card loans classified as troubled

Table of Contents

debt restructurings are loans with borrowers under debt management plans. Modifications generally involve removing the available line of credit, placing loans on amortizing status and lowering the contractual interest rate.

The following table shows the outstanding balances at September 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 past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.



(In thousands)	September 30, 2012		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	25,951	$	974
Real estate - construction and land	32,180		8,189
Real estate - business	8,003		357
Personal Banking:
Real estate - personal	4,350		553
Consumer	1,304		—
Revolving home equity	73		49
Consumer credit card	15,403		887
Total restructured loans	$	87,264	$	11,009

For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already written down to net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. The effect of modifications to consumer credit card loans was estimated to decrease interest income by approximately $2.6 million on an annual, pre-tax basis, compared to amounts contractually owed. The effect of modifications to the remaining performing loans in the personal banking portfolio was not significant.

The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing commercial loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms and are generally risk-rated as substandard. These loans had no other concessions granted other than being renewed at an interest rate judged not to be market. 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 experience and current economic factors.

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

The Company had commitments of $12.9 million at September 30, 2012 to lend additional funds to borrowers with restructured loans.

The Company’s holdings of foreclosed real estate totaled $18.2 million and $18.3 million at September 30, 2012 and December 31, 2011, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.0 million and $4.2 million at September 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.

Table of Contents

3. Investment Securities

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



(In thousands)	Sept. 30, 2012		Dec. 31, 2011
Available for sale	$	9,020,951	$	9,224,702
Trading	13,595		17,853
Non-marketable	117,540		115,832
Total investment securities	$	9,152,086	$	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 $45.4 million at September 30, 2012 and $45.3 million at 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 $72.1 million and $70.5 million at September 30, 2012 and December 31, 2011, respectively.

A summary of the available for sale investment securities by maturity groupings as of September 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	$	500	$	500
After 1 but within 5 years	217,296		241,881
After 5 but within 10 years	106,679		125,116
Total U.S. government and federal agency obligations	324,475		367,497
Government-sponsored enterprise obligations:
After 1 but within 5 years	108,506		112,286
After 5 but within 10 years	74,682		75,436
After 10 years	191,337		192,468
Total government-sponsored enterprise obligations	374,525		380,190
State and municipal obligations:
Within 1 year	92,856		93,592
After 1 but within 5 years	629,641		655,509
After 5 but within 10 years	510,060		528,245
After 10 years	193,502		183,905
Total state and municipal obligations	1,426,059		1,461,251
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,311,100		3,471,262
Non-agency mortgage-backed securities	241,657		255,172
Asset-backed securities	2,917,206		2,930,810
Total mortgage and asset-backed securities	6,469,963		6,657,244
Other debt securities:
Within 1 year	45,809		46,574
After 1 but within 5 years	60,744		63,898
After 5 but within 10 years	3,969		4,047
After 10 years	6,988		7,104
Total other debt securities	117,510		121,623
Equity securities	8,483		33,146
Total available for sale investment securities	$	8,721,015	$	9,020,951

Table of Contents

Included in U.S. government securities are $366.9 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 $127.7 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 $28.0 million at September 30, 2012.

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, 2012
U.S. government and federal agency obligations	$	324,475	$	43,022	$	—		$	367,497
Government-sponsored enterprise obligations	374,525		5,678		(13		)	380,190
State and municipal obligations	1,426,059		48,313		(13,121		)	1,461,251
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,311,100		160,215		(53		)	3,471,262
Non-agency mortgage-backed securities	241,657		13,698		(183		)	255,172
Asset-backed securities	2,917,206		14,840		(1,236		)	2,930,810
Total mortgage and asset-backed securities	6,469,963		188,753		(1,472		)	6,657,244
Other debt securities	117,510		4,113		—			121,623
Equity securities	8,483		24,663		—			33,146
Total	$	8,721,015	$	314,542	$	(14,606	)	$	9,020,951
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 September 30, 2012, the fair value of securities on this watch list was $207.1 million.

As of September 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 $108.1 million. The credit-related portion of the impairment totaled $11.3 million and was recorded in earnings. 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.

Table of Contents

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%	-	25%
Projected cumulative default	13%	-	58%
Credit support	0%	-	16%
Loss severity	33%	-	70%

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



	For the Nine Months Ended September 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	1,227			1,702
Increase in expected cash flows that are recognized over remaining life of security	(93		)	(105		)
Balance at September 30	$	11,065		$	9,192

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, 2012
Government-sponsored enterprise obligations	$	9,979	$	13	$	—	$	—	$	9,979	$	13
State and municipal obligations	16,548		34		98,242		13,087		114,790		13,121
Mortgage and asset-backed securities:
Agency mortgage-backed securities	6,072		5		19,145		48		25,217		53
Non-agency mortgage-backed securities	—		—		19,445		183		19,445		183
Asset-backed securities	122,645		770		90,503		466		213,148		1,236
Total mortgage and asset-backed securities	128,717		775		129,093		697		257,810		1,472
Total	$	155,244	$	822	$	227,335	$	13,784	$	382,579	$	14,606
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 September 30, 2012. The portfolio included 58 securities, having an aggregate fair value of $382.6 million, that were in a loss position at September 30, 2012. Securities in a loss position for 12 months or longer included those with temporary impairment totaling $215.1 million, or 2.4% of the total portfolio value and other securities identified as other-than-temporarily impaired totaling $12.2 million.

Table of Contents

The Company’s holdings of state and municipal obligations included gross unrealized losses of $13.1 million at September 30, 2012. Nearly all of these losses related to auction rate securities (ARS). This portfolio, exclusive of ARS, totaled $1.3 billion at fair value, or 14.8% 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 top five 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, 2012
Texas	9.9	%	5.2	Aa1
Florida	9.5		4.7	Aa2