Edgar Filing: COMMERCE BANCSHARES INC /MO/

CBSH 6.30.2013 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, 2013



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, 2013, the registrant had outstanding 90,697,504 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, 2013 (unaudited) and December 31, 2012	3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2013, and 2012 (unaudited)	6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited)	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	40
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60
	Item 4.	Controls and Procedures	60

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

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PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	June 30, 2013			December 31, 2012
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	10,370,155		$	9,831,384
Allowance for loan losses	(166,032		)	(172,532		)
Net loans	10,204,123			9,658,852
Loans held for sale	8,941			8,827
Investment securities:
Available for sale ($746,141,000 and $736,183,000 pledged in 2013 and 2012,
respectively, to secure swap and repurchase agreements)	8,927,815			9,522,248
Trading	14,670			28,837
Non-marketable	113,470			118,650
Total investment securities	9,055,955			9,669,735
Short-term federal funds sold and securities purchased under agreements to resell	22,990			27,595
Long-term securities purchased under agreements to resell	1,200,000			1,200,000
Interest earning deposits with banks	6,816			179,164
Cash and due from banks	399,687			573,066
Land, buildings and equipment, net	352,462			357,612
Goodwill	125,585			125,585
Other intangible assets, net	4,517			5,300
Other assets	529,275			353,853
Total assets	$	21,910,351		$	22,159,589
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	5,811,473		$	6,299,903
Savings, interest checking and money market	9,573,390			9,817,943
Time open and C.D.'s of less than $100,000	1,039,131			1,074,618
Time open and C.D.'s of $100,000 and over	1,472,944			1,156,189
Total deposits	17,896,938			18,348,653
Federal funds purchased and securities sold under agreements to repurchase	1,620,694			1,083,550
Other borrowings	102,766			103,710
Other liabilities	183,166			452,102
Total liabilities	19,803,564			19,988,015
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 91,729,235 shares in 2013 and 2012	458,646			458,646
Capital surplus	1,094,922			1,102,507
Retained earnings	563,166			477,210
Treasury stock of 934,853 shares in 2013 and 196,922 shares in 2012, at cost	(35,771		)	(7,580		)
Accumulated other comprehensive income	21,864			136,344
Total Commerce Bancshares, Inc. stockholders' equity	2,102,827			2,167,127
Non-controlling interest	3,960			4,447
Total equity	2,106,787			2,171,574
Total liabilities and equity	$	21,910,351		$	22,159,589

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME



	For the Three Months Ended June 30						For the Six Months Ended June 30
(In thousands, except per share data)	2013			2012			2013			2012
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	108,018		$	112,252		$	215,804		$	224,008
Interest and fees on loans held for sale	91			88			176			193
Interest on investment securities	53,233			57,561			98,192			111,319
Interest on short-term federal funds sold and securities purchased under
agreements to resell	28			29			37			46
Interest on long-term securities purchased under agreements to resell	5,810			4,582			11,639			8,857
Interest on deposits with banks	75			112			152			167
Total interest income	167,255			174,624			326,000			344,590
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	3,375			4,634			7,299			9,715
Time open and C.D.'s of less than $100,000	1,656			2,004			3,405			4,110
Time open and C.D.'s of $100,000 and over	1,667			1,828			3,366			3,739
Interest on federal funds purchased and securities sold under
agreements to repurchase	270			177			488			402
Interest on other borrowings	829			876			1,641			1,782
Total interest expense	7,797			9,519			16,199			19,748
Net interest income	159,458			165,105			309,801			324,842
Provision for loan losses	7,379			5,215			10,664			13,380
Net interest income after provision for loan losses	152,079			159,890			299,137			311,462
NON-INTEREST INCOME
Bank card transaction fees	40,700			38,434			79,250			73,167
Trust fees	25,734			23,833			50,903			46,647
Deposit account charges and other fees	19,602			19,975			38,314			39,311
Capital market fees	3,305			5,010			7,696			11,881
Consumer brokerage services	2,853			2,576			5,539			5,102
Loan fees and sales	1,314			1,706			2,787			3,267
Other	9,168			9,282			18,064			16,024
Total non-interest income	102,676			100,816			202,553			195,399
INVESTMENT SECURITIES GAINS (LOSSES), NET
Impairment (losses) reversals on debt securities	(293		)	3			1,096			5,590
Noncredit-related reversals on securities not expected to be sold	(195		)	(353		)	(2,026		)	(6,260		)
Net impairment losses	(488		)	(350		)	(930		)	(670		)
Realized gains (losses) on sales and fair value adjustments	(1,080		)	1,686			(2,803		)	6,046
Investment securities gains (losses), net	(1,568		)	1,336			(3,733		)	5,376
NON-INTEREST EXPENSE
Salaries and employee benefits	89,569			87,511			180,450			177,054
Net occupancy	11,234			11,105			22,469			22,365
Equipment	4,680			4,999			9,363			10,188
Supplies and communication	5,797			5,667			11,386			11,280
Data processing and software	19,584			18,282			38,535			35,751
Marketing	4,048			4,469			7,407			8,291
Deposit insurance	2,790			2,618			5,557			5,138
Other	19,264			21,689			36,836			36,734
Total non-interest expense	156,966			156,340			312,003			306,801
Income before income taxes	96,221			105,702			185,954			205,436
Less income taxes	30,182			34,466			59,107			67,386
Net income	66,039			71,236			126,847			138,050
Less non-controlling interest expense	234			503			25			1,518
Net income attributable to Commerce Bancshares, Inc.	$	65,805		$	70,733		$	126,822		$	136,532
Net income per common share — basic	$	.72		$	.77		$	1.39		$	1.47
Net income per common share — diluted	$	.72		$	.76		$	1.39		$	1.46

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)	2013			2012		2013			2012
	(Unaudited)
Net income	$	66,039		$	71,236	$	126,847		$	138,050
Other comprehensive income (loss):
Net unrealized gains (losses) on securities for which a portion of an other-than-temporary impairment has been recorded in earnings	(120		)	537		1,017			3,897
Net unrealized gains (losses) on other securities	(108,254		)	17,686		(116,447		)	21,392
Pension loss amortization	475			453		950			905
Other comprehensive income (loss)	(107,899		)	18,676		(114,480		)	26,194
Comprehensive income (loss)	(41,860		)	89,912		12,367			164,244
Less non-controlling interest expense	234			503		25			1,518
Comprehensive income (loss) attributable to Commerce Bancshares, Inc.	$	(42,094	)	$	89,409	$	12,342		$	162,726

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, 2013	$	458,646	$	1,102,507		$	477,210		$	(7,580	)	$	136,344		$	4,447		$	2,171,574
Net income						126,822									25			126,847
Other comprehensive loss												(114,480		)				(114,480		)
Distributions to non-controlling interest															(512		)	(512		)
Purchase of treasury stock									(45,292		)							(45,292		)
Issuance of stock under purchase and equity compensation plans			(2,488		)				9,047									6,559
Net tax benefit related to equity compensation plans			209															209
Stock-based compensation			2,748															2,748
Issuance of nonvested stock awards			(8,054		)				8,054									—
Cash dividends ($.450 per share)						(40,866		)										(40,866		)
Balance June 30, 2013	$	458,646	$	1,094,922		$	563,166		$	(35,771	)	$	21,864		$	3,960		$	2,106,787
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 ($.438 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

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)	2013			2012
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	126,847		$	138,050
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	10,664			13,380
Provision for depreciation and amortization	20,817			21,847
Amortization of investment security premiums, net	17,227			16,862
Investment securities (gains) losses, net(A)	3,733			(5,376		)
Net gains on sales of loans held for sale	—			(375		)
Proceeds from sales of loans held for sale	—			22,508
Net (increase) decrease in trading securities	7,465			(4,006		)
Stock-based compensation	2,748			2,555
Decrease in interest receivable	116			4,495
Decrease in interest payable	(238		)	(185		)
Increase (decrease) in income taxes payable	(6,719		)	1,999
Net tax benefit related to equity compensation plans	(209		)	(744		)
Other changes, net	(14,546		)	(7,617		)
Net cash provided by operating activities	167,905			203,393
INVESTING ACTIVITIES:
Proceeds from sales of investment securities(A)	4,096			14,116
Proceeds from maturities/pay downs of investment securities(A)	1,478,237			1,479,062
Purchases of investment securities(A)	(1,309,380		)	(1,477,434		)
Net increase in loans	(555,935		)	(218,816		)
Long-term securities purchased under agreements to resell	(50,000		)	—
Repayments of long-term securities purchased under agreements to resell	50,000			—
Purchases of land, buildings and equipment	(10,713		)	(11,703		)
Sales of land, buildings and equipment	715			1,743
Net cash used in investing activities	(392,980		)	(213,032		)
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits	(863,336		)	335,614
Net increase (decrease) in time open and C.D.'s	281,268			(277,223		)
Net increase in short-term federal funds purchased and securities sold under
agreements to repurchase	537,144			49,664
Repayment of long-term borrowings	(943		)	(525		)
Purchases of treasury stock	(45,292		)	(71,652		)
Issuance of stock under stock purchase and equity compensation plans	6,559			6,785
Net tax benefit related to equity compensation plans	209			744
Cash dividends paid on common stock	(40,866		)	(40,654		)
Net cash provided by (used in) financing activities	(125,257		)	2,753
Decrease in cash and cash equivalents	(350,332		)	(6,886		)
Cash and cash equivalents at beginning of year	779,825			517,551
Cash and cash equivalents at June 30	$	429,493		$	510,665
(A) Available for sale and non-marketable securities
Income tax payments, net	$	65,453		$	64,799
Interest paid on deposits and borrowings	$	16,437		$	19,933
Loans transferred to foreclosed real estate	$	5,532		$	5,488

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 (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 2012 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, 2013 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 2012 Annual Report on Form 10-K.

2. Acquisition

On May 15, 2013, the Company and Summit Bancshares Inc. (Summit) signed a definitive merger agreement in which the Company will acquire all outstanding shares of Summit. Immediately after the merger, Summit's wholly-owned subsidiary, Summit Bank, will merge into the Bank. The Company's acquisition of Summit will add approximately $257 million in assets (including $214 million in loans), $226 million in deposits, and two branch locations in Tulsa and Oklahoma City. Under the terms of the agreement, if the transaction closes, it is anticipated that the Company will issue approximately 1,000,000 shares of Company common stock. It is anticipated that the transaction will be completed in the third quarter of 2013, pending customary closing conditions, including regulatory approvals and Summit shareholder approval.

3. Loans and Allowance for Loan Losses

Major classifications within the Company’s held to maturity loan portfolio at June 30, 2013 and December 31, 2012 are as follows:



(In thousands)	June 30, 2013		December 31, 2012
Commercial:
Business	$	3,415,361	$	3,134,801
Real estate – construction and land	398,625		355,996
Real estate – business	2,210,260		2,214,975
Personal Banking:
Real estate – personal	1,700,060		1,584,859
Consumer	1,450,781		1,289,650
Revolving home equity	422,902		437,567
Consumer credit card	760,512		804,245
Overdrafts	11,654		9,291
Total loans	$	10,370,155	$	9,831,384

At June 30, 2013, loans of $3.4 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 $1.3 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

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Allowance for loan losses

A summary of the activity in the allowance for loan losses during the three and six months ended June 30, 2013 and 2012, respectively, follows:



	For the Three Months Ended June 30							For the Six Months Ended June 30
(In thousands)	Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	$	99,821		$	68,211	$	168,032	$	105,725		$	66,807	$	172,532
Provision	(800		)	8,179		7,379		(7,390		)	18,054		10,664
Deductions:
Loans charged off	2,261			12,430		14,691		2,966			24,231		27,197
Less recoveries on loans	1,839			3,473		5,312		3,230			6,803		10,033
Net loan charge-offs (recoveries)	422			8,957		9,379		(264		)	17,428		17,164
Balance June 30, 2013	$	98,599		$	67,433	$	166,032	$	98,599		$	67,433	$	166,032
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 loan charge-offs (recoveries)	(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

The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, 2013 and December 31, 2012, 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, 2013
Commercial	$	7,548	$	76,511	$	91,051	$	5,947,735
Personal Banking	2,288		28,906		65,145		4,317,003
Total	$	9,836	$	105,417	$	156,196	$	10,264,738
December 31, 2012
Commercial	$	5,434	$	80,807	$	100,291	$	5,624,965
Personal Banking	2,051		36,111		64,756		4,089,501
Total	$	7,485	$	116,918	$	165,047	$	9,714,466

Impaired loans

The table below shows the Company’s investment in impaired loans at June 30, 2013 and December 31, 2012. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 13.



(In thousands)	June 30, 2013		Dec. 31, 2012
Non-accrual loans	$	39,092	$	51,410
Restructured loans (accruing)	66,325		65,508
Total impaired loans	$	105,417	$	116,918

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The following table provides additional information about impaired loans held by the Company at June 30, 2013 and December 31, 2012, 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, 2013
With no related allowance recorded:
Business	$	7,969	$	9,000	$	—
Real estate – construction and land	8,763		16,862		—
Real estate – business	6,040		8,802		—
Real estate – personal	603		666		—
	$	23,375	$	35,330	$	—
With an allowance recorded:
Business	$	20,185	$	23,609	$	3,054
Real estate – construction and land	22,395		24,007		2,459
Real estate – business	11,159		16,871		2,035
Real estate – personal	10,032		12,684		1,183
Consumer	4,418		4,418		86
Revolving home equity	717		717		14
Consumer credit card	13,136		13,136		1,005
	$	82,042	$	95,442	$	9,836
Total	$	105,417	$	130,772	$	9,836
December 31, 2012
With no related allowance recorded:
Business	$	9,964	$	12,697	$	—
Real estate – construction and land	8,440		15,102		—
Real estate – business	5,484		8,200		—
Real estate – personal	1,166		1,380		—
Revolving home equity	510		843		—
	$	25,564	$	38,222	$	—
With an allowance recorded:
Business	$	19,358	$	22,513	$	1,888
Real estate – construction and land	20,446		25,808		1,762
Real estate – business	17,115		23,888		1,784
Real estate – personal	14,157		17,304		857
Consumer	4,779		4,779		93
Revolving home equity	779		779		18
Consumer credit card	14,720		14,720		1,083
	$	91,354	$	109,791	$	7,485
Total	$	116,918	$	148,013	$	7,485

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Total average impaired loans for the three and six months periods ended June 30, 2013 and 2012, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended June 30, 2013
Non-accrual loans	$	36,384	$	4,949	$	41,333
Restructured loans (accruing)	41,053		25,141		66,194
Total	$	77,437	$	30,090	$	107,527
For the six months ended June 30, 2013
Non-accrual loans	$	38,733	$	5,501	$	44,234
Restructured loans (accruing)	39,854		26,210		66,064
Total	$	78,587	$	31,711	$	110,298
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

The table below shows interest income recognized during the three and six month periods ended June 30, 2013 and 2012 for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 13.



	For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands)	2013		2012		2013		2012
Interest income recognized on impaired loans:
Business	$	141	$	236	$	282	$	471
Real estate – construction and land	215		249		430		498
Real estate – business	50		105		100		210
Real estate – personal	70		9		139		17
Consumer	91		19		182		38
Revolving home equity	10		1		19		1
Consumer credit card	253		321		506		642
Total	$	830	$	940	$	1,658	$	1,877

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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, 2013 and December 31, 2012.



(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, 2013
Commercial:
Business	$	3,397,158	$	6,244	$	629	$	11,330	$	3,415,361
Real estate – construction and land	386,625		1,759		84		10,157		398,625
Real estate – business	2,160,535		36,841		138		12,746		2,210,260
Personal Banking:
Real estate – personal	1,681,776		10,893		2,532		4,859		1,700,060
Consumer	1,431,476		17,709		1,596		—		1,450,781
Revolving home equity	420,727		1,642		533		—		422,902
Consumer credit card	744,876		8,639		6,997		—		760,512
Overdrafts	11,283		371		—		—		11,654
Total	$	10,234,456	$	84,098	$	12,509	$	39,092	$	10,370,155
December 31, 2012
Commercial:
Business	$	3,110,403	$	10,054	$	1,288	$	13,056	$	3,134,801
Real estate – construction and land	325,541		16,721		56		13,678		355,996
Real estate – business	2,194,395		3,276		—		17,304		2,214,975
Personal Banking:
Real estate – personal	1,564,281		10,862		2,854		6,862		1,584,859
Consumer	1,273,581		13,926		2,143		—		1,289,650
Revolving home equity	433,437		2,121		1,499		510		437,567
Consumer credit card	786,081		10,657		7,507		—		804,245
Overdrafts	8,925		366		—		—		9,291
Total	$	9,696,644	$	67,983	$	15,347	$	51,410	$	9,831,384

Credit quality

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

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Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
June 30, 2013
Pass	$	3,302,856	$	356,347	$	2,092,071	$	5,751,274
Special mention	62,000		2,462		50,982		115,444
Substandard	39,175		29,659		54,461		123,295
Non-accrual	11,330		10,157		12,746		34,233
Total	$	3,415,361	$	398,625	$	2,210,260	$	6,024,246
December 31, 2012
Pass	$	3,018,062	$	297,156	$	2,103,913	$	5,419,131
Special mention	58,793		11,400		38,396		108,589
Substandard	44,890		33,762		55,362		134,014
Non-accrual	13,056		13,678		17,304		44,038
Total	$	3,134,801	$	355,996	$	2,214,975	$	5,705,772

The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain Personal Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At June 30, 2013, these were comprised of $228.6 million in personal real estate loans and $76.1 million in consumer loans, or 7.0% of the Personal Banking portfolio. At December 31, 2012, these were comprised of $224.5 million in personal real estate loans and $87.4 million in consumer loans, or 7.6% 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, 2013 and December 31, 2012 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
June 30, 2013
FICO score:
Under 600	2.0	%	5.6	%	2.0	%	4.0	%
600 - 659	3.1		10.9		4.9		11.6
660 - 719	9.8		24.0		16.0		33.1
720 - 779	25.6		27.4		28.7		28.5
780 and Over	59.5		32.1		48.4		22.8
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2012
FICO score:
Under 600	2.3	%	6.7	%	2.6	%	4.4	%
600 - 659	3.2		11.3		5.3		11.7
660 - 719	10.4		24.4		15.2		32.1
720 - 779	26.6		26.4		30.0		28.2
780 and Over	57.5		31.2		46.9		23.6
Total	100.0	%	100.0	%	100.0	%	100.0	%

Troubled debt restructurings

As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $89.5 million at June 30, 2013. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected, and those non-accrual loans totaled $23.1 million at June 30, 2013. Other performing restructured loans totaled $66.3 million at June 30, 2013. These are primarily comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity,

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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 commercial loans totaled $43.5 million at June 30, 2013. 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 $13.1 million at June 30, 2013. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At June 30, 2013, these loans totaled $9.7 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.

The following table shows the outstanding balances of loans classified as troubled debt restructurings at June 30, 2013, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.



(In thousands)	June 30, 2013		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	24,929	$	—
Real estate - construction and land	29,946		4,403
Real estate - business	8,979		3,753
Personal Banking:
Real estate - personal	7,343		—
Consumer	4,418		104
Revolving home equity	718		49
Consumer credit card	13,136		789
Total restructured loans	$	89,469	$	9,098

For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. No financial impact resulted from those performing loans where the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. The effects of modifications to consumer credit card loans were estimated to decrease interest income by approximately $1.5 million on an annual, pre-tax basis, compared to amounts contractually owed.

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

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

The Company had commitments of $11.4 million at June 30, 2013 to lend additional funds to borrowers with restructured loans.

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The Company’s holdings of foreclosed real estate totaled $13.4 million and $13.5 million at June 30, 2013 and December 31, 2012, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.3 million and $3.5 million at June 30, 2013 and December 31, 2012, 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.

4. Investment Securities

Investment securities, at fair value, consisted of the following at June 30, 2013 and December 31, 2012.



(In thousands)	June 30, 2013		Dec. 31, 2012
Available for sale	$	8,927,815	$	9,522,248
Trading	14,670		28,837
Non-marketable	113,470		118,650
Total investment securities	$	9,055,955	$	9,669,735

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 both June 30, 2013 and December 31, 2012. 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 $68.0 million at June 30, 2013 and $73.2 million at December 31, 2012.

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A summary of the available for sale investment securities by maturity groupings as of June 30, 2013 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:
After 1 but within 5 years	$	247,531	$	265,394
After 5 but within 10 years	80,681		86,284
After 10 years	72,863		62,179
Total U.S. government and federal agency obligations	401,075		413,857
Government-sponsored enterprise obligations:
Within 1 year	20,177		20,323
After 1 but within 5 years	89,693		92,140
After 5 but within 10 years	169,719		161,361
After 10 years	146,967		140,994
Total government-sponsored enterprise obligations	426,556		414,818
State and municipal obligations:
Within 1 year	103,698		104,485
After 1 but within 5 years	698,390		716,807
After 5 but within 10 years	564,173		554,505
After 10 years	259,367		245,397
Total state and municipal obligations	1,625,628		1,621,194
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,889,382		2,937,002
Non-agency mortgage-backed securities	230,729		242,432
Asset-backed securities	3,094,715		3,088,148
Total mortgage and asset-backed securities	6,214,826		6,267,582
Other debt securities:
Within 1 year	38,193		38,961
After 1 but within 5 years	45,751		45,826
After 5 but within 10 years	86,319		80,948
Total other debt securities	170,263		165,735
Equity securities	11,921		44,629
Total available for sale investment securities	$	8,850,269	$	8,927,815

Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities (TIPS), which totaled $413.7 million, at fair value, at June 30, 2013. 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 $126.8 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 $35.9 million at June 30, 2013.

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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, 2013
U.S. government and federal agency obligations	$	401,075	$	23,466	$	(10,684	)	$	413,857
Government-sponsored enterprise obligations	426,556		2,597		(14,335		)	414,818
State and municipal obligations	1,625,628		29,529		(33,963		)	1,621,194
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,889,382		67,921		(20,301		)	2,937,002
Non-agency mortgage-backed securities	230,729		13,400		(1,697		)	242,432
Asset-backed securities	3,094,715		6,742		(13,309		)	3,088,148
Total mortgage and asset-backed securities	6,214,826		88,063		(35,307		)	6,267,582
Other debt securities	170,263		1,251		(5,779		)	165,735
Equity securities	11,921		32,708		—			44,629
Total	$	8,850,269	$	177,614	$	(100,068	)	$	8,927,815
December 31, 2012
U.S. government and federal agency obligations	$	399,971	$	40,395	$	(1,607	)	$	438,759
Government-sponsored enterprise obligations	467,063		5,188		(677		)	471,574
State and municipal obligations	1,585,926		46,076		(16,295		)	1,615,707
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,248,007		132,953		(5		)	3,380,955
Non-agency mortgage-backed securities	224,223		12,906		(118		)	237,011
Asset-backed securities	3,152,913		15,848		(1,367		)	3,167,394
Total mortgage and asset-backed securities	6,625,143		161,707		(1,490		)	6,785,360
Other debt securities	174,727		3,127		(102		)	177,752
Equity securities	5,695		27,401		—			33,096
Total	$	9,258,525	$	283,894	$	(20,171	)	$	9,522,248

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, 2013, the fair value of securities on this watch list was $221.8 million compared to $220.7 million at December 31, 2012.

As of June 30, 2013, 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 $86.2 million. The cumulative credit-related portion of the impairment initially recorded on these securities totaled $12.5 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.

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



Significant Inputs	Range
Prepayment CPR	0%	-	33%
Projected cumulative default	16%	-	61%
Credit support	0%	-	15%
Loss severity	17%	-	81%

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The following table shows changes in the credit losses recorded in earnings during the during the six months ended June 30, 2013 and 2012, for which a portion of an OTTI was recognized in other comprehensive income.



	For the Six Months Ended June 30
(In thousands)	2013			2012
Balance at January 1	$	11,306		$	9,931
Credit losses on debt securities for which impairment was previously recognized	930			670
Increase in expected cash flows that are recognized over remaining life of security	(40		)	(70		)
Balance at June 30	$	12,196		$	10,531

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, 2013
U.S. government and federal agency obligations	$	62,179	$	10,684	$	—	$	—	$	62,179	$	10,684
Government-sponsored enterprise obligations	297,058		14,335		—		—		297,058		14,335
State and municipal obligations	580,175		21,019		81,599		12,944		661,774		33,963
Mortgage and asset-backed securities:
Agency mortgage-backed securities	609,376		20,301		—		—		609,376		20,301
Non-agency mortgage-backed securities	45,788		1,650		2,257		47		48,045		1,697
Asset-backed securities	1,832,777		11,702		104,962		1,607		1,937,739		13,309
Total mortgage and asset-backed securities	2,487,941		33,653		107,219		1,654		2,595,160		35,307
Other debt securities	99,895		5,779		—		—		99,895		5,779
Total	$	3,527,248	$	85,470	$	188,818	$	14,598	$	3,716,066	$	100,068
December 31, 2012
U.S. government and federal agency obligations	$	71,464	$	1,607	$	—	$	—	$	71,464	$	1,607
Government-sponsored enterprise obligations	102,082		677		—		—		102,082		677
State and municipal obligations	173,600		2,107		80,530		14,188		254,130		16,295
Mortgage and asset-backed securities:
Agency mortgage-backed securities	5,874		5		—		—		5,874		5
Non-agency mortgage-backed securities	—		—		12,609		118		12,609		118
Asset-backed securities	338,007		976		78,684		391		416,691		1,367
Total mortgage and asset-backed securities	343,881		981		91,293		509		435,174		1,490
Other debt securities	39,032		102		—		—		39,032		102
Total	$	730,059	$	5,474	$	171,823	$	14,697	$	901,882	$	20,171

The total available for sale portfolio consisted of approximately 1,700 individual securities at June 30, 2013. The portfolio included 507 securities, having an aggregate fair value of $3.7 billion, that were in an unrealized loss position at June 30, 2013, compared to 144 securities, with a fair value of $901.9 million, at December 31, 2012. The total amount of unrealized loss on these securities increased $79.9 million to $100.1 million at June 30, 2013, which was mainly due to a recent rise in interest rates. At June 30, 2013, the fair value of securities in an unrealized loss position for 12 months or longer with temporary impairment totaled $186.6 million, or 2.1% of the total portfolio value, and the fair value of other securities with other-than-temporary impairment totaled $2.3 million.

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The Company’s holdings of state and municipal obligations included gross unrealized losses of $34.0 million at June 30, 2013. Of these losses, $12.9 million related to auction rate securities and $21.0 million related to other state and municipal obligations. This portfolio, exclusive of ARS, totaled $1.5 billion at fair value, or 16.7% 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. The Company does not have exposure to obligations of Detroit, Michigan, which recently filed for Chapter 9 bankruptcy. The Company has processes and procedures in place to monitor its holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner.



	% of Portfolio		Average Life (in years)	Average Rating (Moody’s)
At June 30, 2013
Texas	9.8	%	5.3	Aa1
Florida	9.4		4.8	Aa2
Ohio	5.7		5.3	Aa2
Washington	5.5		4.8	Aa2
New York	5.1		6.7	Aa2
General obligation	31.7	%	4.8	Aa2
Housing	17.5		6.4	Aa1
Lease	16.7		4.9	Aa2
Transportation	13.5		4.5