Edgar Filing: COMMERCE BANCSHARES INC /MO/

CBSH 6.30.2014 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, 2014



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, 2014, the registrant had outstanding 91,640,404 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, 2014 (unaudited) and December 31, 2013	3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2014, and 2013 (unaudited)	6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (unaudited)	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39
	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

Table of contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	June 30, 2014			December 31, 2013
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	11,460,039		$	10,956,836
Allowance for loan losses	(161,532		)	(161,532		)
Net loans	11,298,507			10,795,304
Investment securities:
Available for sale ($651,952,000 pledged at June 30, 2014 and $687,680,000 at
December 31, 2013 to secure swap and repurchase agreements)	9,282,640			8,915,680
Trading	15,684			19,993
Non-marketable	93,748			107,324
Total investment securities	9,392,072			9,042,997
Short-term federal funds sold and securities purchased under agreements to resell	29,490			43,845
Long-term securities purchased under agreements to resell	950,000			1,150,000
Interest earning deposits with banks	18,877			707,249
Cash and due from banks	516,509			518,420
Land, buildings and equipment, net	346,363			349,654
Goodwill	138,921			138,921
Other intangible assets, net	8,249			9,268
Other assets	306,191			316,378
Total assets	$	23,005,179		$	23,072,036
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	6,413,161		$	6,750,674
Savings, interest checking and money market	10,085,460			10,108,236
Time open and C.D.'s of less than $100,000	942,233			983,689
Time open and C.D.'s of $100,000 and over	1,498,982			1,204,749
Total deposits	18,939,836			19,047,348
Federal funds purchased and securities sold under agreements to repurchase	1,154,323			1,346,558
Other borrowings	105,096			107,310
Other liabilities	543,771			356,423
Total liabilities	20,743,026			20,857,639
Commerce Bancshares, Inc. stockholders’ equity:
Preferred stock, $1 par value
Authorized 2,000,000 shares; issued 6,000 shares at June 30, 2014 and none at December 31, 2013	144,816			—
Common stock, $5 par value
Authorized 120,000,000 shares at June 30, 2014 and 100,000,000 at December 31, 2013;
issued 96,244,762 shares	481,224			481,224
Capital surplus	1,214,836			1,279,948
Retained earnings	537,759			449,836
Treasury stock of 4,504,256 shares at June 30, 2014
and 235,986 shares at December 31, 2013, at cost	(203,174		)	(10,097		)
Accumulated other comprehensive income	84,314			9,731
Total Commerce Bancshares, Inc. stockholders' equity	2,259,775			2,210,642
Non-controlling interest	2,378			3,755
Total equity	2,262,153			2,214,397
Total liabilities and equity	$	23,005,179		$	23,072,036

See accompanying notes to consolidated financial statements.

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME



	For the Three Months Ended June 30						For the Six Months Ended June 30
(In thousands, except per share data)	2014			2013			2014			2013
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	111,496		$	108,018		$	222,198		$	215,804
Interest and fees on loans held for sale	—			91			—			176
Interest on investment securities	53,016			53,233			98,035			98,192
Interest on short-term federal funds sold and securities purchased under
agreements to resell	24			28			50			37
Interest on long-term securities purchased under agreements to resell	2,943			5,810			7,094			11,639
Interest on deposits with banks	88			75			188			152
Total interest income	167,567			167,255			327,565			326,000
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	3,358			3,375			6,664			7,299
Time open and C.D.'s of less than $100,000	1,063			1,656			2,183			3,405
Time open and C.D.'s of $100,000 and over	1,515			1,667			2,967			3,366
Interest on federal funds purchased and securities sold under
agreements to repurchase	263			270			466			488
Interest on other borrowings	875			829			1,726			1,641
Total interest expense	7,074			7,797			14,006			16,199
Net interest income	160,493			159,458			313,559			309,801
Provision for loan losses	7,555			7,379			17,215			10,664
Net interest income after provision for loan losses	152,938			152,079			296,344			299,137
NON-INTEREST INCOME
Bank card transaction fees	44,444			40,700			86,161			79,250
Trust fees	27,765			25,734			54,338			50,903
Deposit account charges and other fees	19,709			19,602			38,299			38,314
Capital market fees	3,246			3,305			7,116			7,696
Consumer brokerage services	2,972			2,853			5,719			5,539
Loan fees and sales	1,211			1,314			2,420			2,787
Other	9,416			9,168			17,337			18,064
Total non-interest income	108,763			102,676			211,390			202,553
INVESTMENT SECURITIES GAINS (LOSSES), NET
Change in fair value of other-than-temporarily impaired securities	(785		)	(293		)	(848		)	1,096
Portion recognized in other comprehensive income	154			(195		)	(129		)	(2,026		)
Net impairment losses recognized in earnings	(631		)	(488		)	(977		)	(930		)
Realized gains (losses) on sales and fair value adjustments	(1,927		)	(1,080		)	8,456			(2,803		)
Investment securities gains (losses), net	(2,558		)	(1,568		)	7,479			(3,733		)
NON-INTEREST EXPENSE
Salaries and employee benefits	94,849			89,569			189,112			180,450
Net occupancy	11,151			11,234			22,767			22,469
Equipment	4,525			4,680			9,029			9,363
Supplies and communication	5,486			5,797			11,185			11,386
Data processing and software	19,578			19,584			38,665			38,535
Marketing	3,949			4,048			7,630			7,407
Deposit insurance	2,892			2,790			5,786			5,557
Other	20,501			19,264			41,097			36,836
Total non-interest expense	162,931			156,966			325,271			312,003
Income before income taxes	96,212			96,221			189,942			185,954
Less income taxes	30,312			30,182			59,921			59,107
Net income	65,900			66,039			130,021			126,847
Less non-controlling interest expense (income)	(631		)	234			(823		)	25
Net income attributable to Commerce Bancshares, Inc.	66,531			65,805			130,844			126,822
Less preferred stock dividends	—			—			—			—
Net income available to common shareholders	$	66,531		$	65,805		$	130,844		$	126,822
Net income per common share — basic	$	.70		$	.69		$	1.37		$	1.33
Net income per common share — diluted	$	.70		$	.69		$	1.37		$	1.32

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 June 30						For the Six Months Ended June 30
(In thousands)	2014			2013			2014			2013
	(Unaudited)
Net income	$	65,900		$	66,039		$	130,021		$	126,847
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	(58		)	(120		)	108			1,017
Net unrealized gains (losses) on other securities	43,650			(108,254		)	74,029			(116,447		)
Pension loss amortization	223			475			446			950
Other comprehensive income (loss)	43,815			(107,899		)	74,583			(114,480		)
Comprehensive income (loss)	109,715			(41,860		)	204,604			12,367
Less non-controlling interest expense (income)	(631		)	234			(823		)	25
Comprehensive income (loss) attributable to Commerce Bancshares, Inc.	$	110,346		$	(42,094	)	$	205,427		$	12,342

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)	Preferred Stock		Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Non-Controlling Interest			Total
			(Unaudited)
Balance January 1, 2014	$	—	$	481,224	$	1,279,948		$	449,836		$	(10,097	)	$	9,731		$	3,755		$	2,214,397
Net income								130,844									(823		)	130,021
Other comprehensive income														74,583						74,583
Distributions to non-controlling interest																	(554		)	(554		)
Issuance of preferred stock	144,816																			144,816
Purchase of treasury stock											(208,989		)							(208,989		)
Accelerated share repurchase forward contract					(60,000		)													(60,000		)
Issuance of stock under purchase and equity compensation plans					(3,670		)				8,911									5,241
Net tax benefit related to equity compensation plans					1,091															1,091
Stock-based compensation					4,468															4,468
Issuance of nonvested stock awards					(7,001		)				7,001									—
Cash dividends on common stock ($.450 per share)								(42,921		)										(42,921		)
Balance June 30, 2014	$	144,816	$	481,224	$	1,214,836		$	537,759		$	(203,174	)	$	84,314		$	2,378		$	2,262,153
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 on common stock ($.429 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

See accompanying notes to consolidated financial statements.

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Six Months Ended June 30
(In thousands)	2014			2013
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	130,021		$	126,847
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	17,215			10,664
Provision for depreciation and amortization	21,033			20,817
Amortization of investment security premiums, net	8,323			17,227
Investment securities (gains) losses, net(A)	(7,479		)	3,733
Net decrease in trading securities	16,845			7,465
Stock-based compensation	4,468			2,748
Decrease in interest receivable	104			116
Decrease in interest payable	(11		)	(238		)
Increase (decrease) in income taxes payable	14,719			(6,719		)
Net tax benefit related to equity compensation plans	(1,091		)	(209		)
Other changes, net	4,705			(14,546		)
Net cash provided by operating activities	208,852			167,905
INVESTING ACTIVITIES:
Proceeds from sales of investment securities(A)	63,899			4,096
Proceeds from maturities/pay downs of investment securities(A)	928,075			1,478,237
Purchases of investment securities(A)	(1,196,956		)	(1,309,380		)
Net increase in loans	(520,767		)	(555,935		)
Long-term securities purchased under agreements to resell	(250,000		)	(50,000		)
Repayments of long-term securities purchased under agreements to resell	450,000			50,000
Purchases of land, buildings and equipment	(14,583		)	(10,713		)
Sales of land, buildings and equipment	2,074			715
Net cash used in investing activities	(538,258		)	(392,980		)
FINANCING ACTIVITIES:
Net decrease in non-interest bearing, savings, interest checking and money market deposits	(272,723		)	(863,336		)
Net increase in time open and C.D.'s	252,702			281,268
Repayment of long-term securities sold under agreements to repurchase	(150,000		)	—
Net increase (decrease) in short-term federal funds purchased and securities sold under
agreements to repurchase	(42,235		)	537,144
Repayment of other long-term borrowings	(214		)	(943		)
Net decrease in other short-term borrowings	(2,000		)	—
Proceeds from issuance of preferred stock	144,816			—
Purchases of treasury stock	(208,989		)	(45,292		)
Accelerated stock repurchase agreement	(60,000		)	—
Issuance of stock under stock purchase and equity compensation plans	5,241			6,559
Net tax benefit related to equity compensation plans	1,091			209
Cash dividends paid on common stock	(42,921		)	(40,866		)
Net cash used in financing activities	(375,232		)	(125,257		)
Decrease in cash and cash equivalents	(704,638		)	(350,332		)
Cash and cash equivalents at beginning of year	1,269,514			779,825
Cash and cash equivalents at June 30	$	564,876		$	429,493
(A) Available for sale and non-marketable securities
Income tax payments, net	$	45,154		$	65,453
Interest paid on deposits and borrowings	$	13,942		$	16,437
Loans transferred to foreclosed real estate	$	3,769		$	5,532

See accompanying notes to consolidated financial statements.

Table of contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014 (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 2013 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, 2014 are not necessarily indicative of results to be attained for the full year or any other interim period.

The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2013 Annual Report on Form 10-K.

2. Acquisition and Disposition

On September 1, 2013, the Company acquired Summit Bancshares Inc. (Summit). Summit's results of operations are included in the Company's consolidated financial results beginning on that date. The transaction was accounted for using the acquisition method of accounting and, as such, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair value on the acquisition date. In this transaction, the Company acquired all of the outstanding stock of Summit in exchange for shares of Company stock valued at $43.2 million. The valuation of Company stock was determined on the basis of the closing market price of the Company's common shares on August 30, 2013. The Company's acquisition of Summit added $261.6 million in assets (including $207.4 million in loans), $232.3 million in deposits and two branch locations in Tulsa and Oklahoma City, Oklahoma. Intangible assets recognized as a result of the transaction consisted of approximately $13.3 million in goodwill and $5.6 million in core deposit premium. Most of the goodwill was assigned to the Company's Commercial segment. None of the goodwill recognized is deductible for income tax purposes.

On July 25, 2014, the Company sold banking branches in Farmington, Desloge and Bonne Terre, Missouri. The sale included approximately $13.3 million in loans, $60.3 million in deposits, and various bank premises.

3. Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at June 30, 2014 and December 31, 2013 are as follows:



(In thousands)	June 30, 2014		December 31, 2013
Commercial:
Business	$	4,095,253	$	3,715,319
Real estate – construction and land	442,093		406,197
Real estate – business	2,277,898		2,313,550
Personal Banking:
Real estate – personal	1,819,204		1,787,626
Consumer	1,637,841		1,512,716
Revolving home equity	423,566		420,589
Consumer credit card	760,289		796,228
Overdrafts	3,895		4,611
Total loans	$	11,460,039	$	10,956,836

At June 30, 2014, loans of $3.5 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 $1.1 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

Table of contents

Allowance for loan losses

A summary of the activity in the allowance for loan losses during the three and six months ended June 30, 2014 and 2013, 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	$	97,881		$	63,651	$	161,532	$	94,189		$	67,343	$	161,532
Provision	486			7,069		7,555		4,553			12,662		17,215
Deductions:
Loans charged off	1,218			11,752		12,970		2,348			24,503		26,851
Less recoveries on loans	1,779			3,636		5,415		2,534			7,102		9,636
Net loan charge-offs (recoveries)	(561		)	8,116		7,555		(186		)	17,401		17,215
Balance June 30, 2014	$	98,928		$	62,604	$	161,532	$	98,928		$	62,604	$	161,532
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

The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, 2014 and December 31, 2013, 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, 2014
Commercial	$	8,274	$	76,834	$	90,654	$	6,738,410
Personal Banking	2,461		27,891		60,143		4,616,904
Total	$	10,735	$	104,725	$	150,797	$	11,355,314
December 31, 2013
Commercial	$	8,476	$	78,516	$	85,713	$	6,356,550
Personal Banking	2,424		29,120		64,919		4,492,650
Total	$	10,900	$	107,636	$	150,632	$	10,849,200

Impaired loans

The table below shows the Company’s investment in impaired loans at June 30, 2014 and December 31, 2013. 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, 2014		Dec. 31, 2013
Non-accrual loans	$	43,260	$	48,814
Restructured loans (accruing)	61,465		58,822
Total impaired loans	$	104,725	$	107,636

Table of contents

The following table provides additional information about impaired loans held by the Company at June 30, 2014 and December 31, 2013, 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, 2014
With no related allowance recorded:
Business	$	8,673	$	10,709	$	—
Real estate – construction and land	7,058		14,876		—
Real estate – business	1,914		2,223		—
	$	17,645	$	27,808	$	—
With an allowance recorded:
Business	$	27,014	$	28,858	$	3,720
Real estate – construction and land	13,762		15,893		1,829
Real estate – business	18,413		27,780		2,725
Real estate – personal	10,512		13,684		1,129
Consumer	5,448		6,135		158
Revolving home equity	560		560		2
Consumer credit card	11,371		11,371		1,172
	$	87,080	$	104,281	$	10,735
Total	$	104,725	$	132,089	$	10,735
December 31, 2013
With no related allowance recorded:
Business	$	7,969	$	9,000	$	—
Real estate – construction and land	8,766		16,067		—
Real estate – business	4,089		6,417		—
Revolving home equity	2,191		2,741		—
	$	23,015	$	34,225	$	—
With an allowance recorded:
Business	$	19,266	$	22,597	$	3,037
Real estate – construction and land	17,632		19,708		2,174
Real estate – business	20,794		29,287		3,265
Real estate – personal	10,425		13,576		1,361
Consumer	4,025		4,025		85
Revolving home equity	666		666		2
Consumer credit card	11,813		11,813		976
	$	84,621	$	101,672	$	10,900
Total	$	107,636	$	135,897	$	10,900

Table of contents

Total average impaired loans for the three and six month periods ended June 30, 2014 and 2013, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended June 30, 2014
Non-accrual loans	$	35,908	$	7,131	$	43,039
Restructured loans (accruing)	40,167		20,745		60,912
Total	$	76,075	$	27,876	$	103,951
For the six months ended June 30, 2014
Non-accrual loans	$	38,093	$	7,347	$	45,440
Restructured loans (accruing)	39,285		21,086		60,371
Total	$	77,378	$	28,433	$	105,811
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

The table below shows interest income recognized during the three and six month periods ended June 30, 2014 and 2013 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)	2014		2013		2014		2013
Interest income recognized on impaired loans:
Business	$	181	$	141	$	361	$	282
Real estate – construction and land	142		215		283		430
Real estate – business	46		50		91		100
Real estate – personal	58		70		115		139
Consumer	71		91		142		182
Revolving home equity	7		10		14		19
Consumer credit card	228		253		456		506
Total	$	733	$	830	$	1,462	$	1,658

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 June 30, 2014 and December 31, 2013.



(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, 2014
Commercial:
Business	$	4,077,664	$	5,873	$	623	$	11,093	$	4,095,253
Real estate – construction and land	423,589		10,031		275		8,198		442,093
Real estate – business	2,256,513		4,911		—		16,474		2,277,898
Personal Banking:
Real estate – personal	1,802,553		9,559		1,235		5,857		1,819,204
Consumer	1,621,468		13,377		1,358		1,638		1,637,841
Revolving home equity	421,186		1,465		915		—		423,566
Consumer credit card	744,410		8,656		7,223		—		760,289
Overdrafts	3,622		273		—		—		3,895
Total	$	11,351,005	$	54,145	$	11,629	$	43,260	$	11,460,039
December 31, 2013
Commercial:
Business	$	3,697,589	$	5,467	$	671	$	11,592	$	3,715,319
Real estate – construction and land	386,423		9,601		—		10,173		406,197
Real estate – business	2,292,385		1,340		47		19,778		2,313,550
Personal Banking:
Real estate – personal	1,771,231		9,755		1,560		5,080		1,787,626
Consumer	1,492,960		17,482		2,274		—		1,512,716
Revolving home equity	416,614		1,082		702		2,191		420,589
Consumer credit card	777,564		9,952		8,712		—		796,228
Overdrafts	4,315		296		—		—		4,611
Total	$	10,839,081	$	54,975	$	13,966	$	48,814	$	10,956,836

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.

Table of contents



Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
June 30, 2014
Pass	$	3,993,646	$	418,424	$	2,161,318	$	6,573,388
Special mention	52,297		1,392		44,600		98,289
Substandard	38,217		14,079		55,506		107,802
Non-accrual	11,093		8,198		16,474		35,765
Total	$	4,095,253	$	442,093	$	2,277,898	$	6,815,244
December 31, 2013
Pass	$	3,618,120	$	372,515	$	2,190,344	$	6,180,979
Special mention	61,916		1,697		53,079		116,692
Substandard	23,691		21,812		50,349		95,852
Non-accrual	11,592		10,173		19,778		41,543
Total	$	3,715,319	$	406,197	$	2,313,550	$	6,435,066

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, 2014, these were comprised of $237.4 million in personal real estate loans and $7.1 million in consumer loans, or 5.3% of the Personal Banking portfolio. At December 31, 2013, these were comprised of $244.3 million in personal real estate loans and $47.5 million in consumer loans, or 6.5% 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, 2014 and December 31, 2013 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
June 30, 2014
FICO score:
Under 600	1.8	%	5.1	%	2.0	%	4.0	%
600 - 659	3.4		9.4		4.8		11.6
660 - 719	9.4		22.8		14.7		32.9
720 - 779	25.7		29.7		30.2		28.1
780 and over	59.7		33.0		48.3		23.4
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2013
FICO score:
Under 600	1.7	%	5.4	%	2.1	%	4.1	%
600 - 659	3.3		10.1		7.3		11.7
660 - 719	10.3		23.4		15.0		32.9
720 - 779	25.8		28.3		28.5		27.9
780 and over	58.9		32.8		47.1		23.4
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 $82.3 million at June 30, 2014. 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 $20.8 million at June 30, 2014. Other performing restructured loans totaled $61.5 million at June 30, 2014. These are primarily comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result were classified as

Table of contents

troubled debt restructurings. These commercial loans totaled $42.1 million at June 30, 2014. 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 $11.4 million at June 30, 2014. 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, 2014, these loans totaled $8.0 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, 2014, 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, 2014		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	32,239	$	7,606
Real estate - construction and land	20,173		4,664
Real estate - business	6,013		23
Personal Banking:
Real estate - personal	6,435		446
Consumer	5,468		1,672
Revolving home equity	560		—
Consumer credit card	11,371		1,415
Total restructured loans	$	82,259	$	15,826

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 $1.2 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 $9.5 million at June 30, 2014 to lend additional funds to borrowers with restructured loans.

Table of contents

The Company’s holdings of foreclosed real estate totaled $8.4 million and $6.6 million at June 30, 2014 and December 31, 2013, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $1.7 million and $2.8 million at June 30, 2014 and December 31, 2013, 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, 2014 and December 31, 2013.



(In thousands)	June 30, 2014		Dec. 31, 2013
Available for sale	$	9,282,640	$	8,915,680
Trading	15,684		19,993
Non-marketable	93,748		107,324
Total investment securities	$	9,392,072	$	9,042,997

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 $46.5 million at both June 30, 2014 and December 31, 2013. 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 $47.1 million at June 30, 2014 and $60.7 million at December 31, 2013.

Table of contents

A summary of the available for sale investment securities by maturity groupings as of June 30, 2014 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 and does not hold trust preferred securities.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	43,443	$	44,168
After 1 but within 5 years	259,660		276,658
After 5 but within 10 years	141,044		147,856
After 10 years	53,516		50,161
Total U.S. government and federal agency obligations	497,663		518,843
Government-sponsored enterprise obligations:
Within 1 year	32,831		33,057
After 1 but within 5 years	448,512		451,784
After 5 but within 10 years	143,551		137,177
After 10 years	142,006		136,211
Total government-sponsored enterprise obligations	766,900		758,229
State and municipal obligations:
Within 1 year	167,929		169,519
After 1 but within 5 years	710,057		734,237
After 5 but within 10 years	728,853		727,635
After 10 years	175,289		171,928
Total state and municipal obligations	1,782,128		1,803,319
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,726,315		2,795,929
Non-agency mortgage-backed securities	289,782		301,661
Asset-backed securities	2,914,610		2,920,062
Total mortgage and asset-backed securities	5,930,707		6,017,652
Other debt securities:
Within 1 year	11,939		12,012
After 1 but within 5 years	42,329		43,033
After 5 but within 10 years	86,067		83,607
Total other debt securities	140,335		138,652
Equity securities	4,194		45,945
Total available for sale investment securities	$	9,121,927	$	9,282,640

Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $518.7 million, at fair value, at June 30, 2014. 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 $132.1 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 $44.9 million at June 30, 2014.

Table of contents

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, 2014
U.S. government and federal agency obligations	$	497,663	$	25,145	$	(3,965	)	$	518,843
Government-sponsored enterprise obligations	766,900		3,656		(12,327		)	758,229
State and municipal obligations	1,782,128		34,014		(12,823		)	1,803,319
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,726,315		79,719		(10,105		)	2,795,929
Non-agency mortgage-backed securities	289,782		12,546		(667		)	301,661
Asset-backed securities	2,914,610		9,861		(4,409		)	2,920,062
Total mortgage and asset-backed securities	5,930,707		102,126		(15,181		)	6,017,652
Other debt securities	140,335		790		(2,473		)	138,652
Equity securities	4,194		41,751		—			45,945
Total	$	9,121,927	$	207,482	$	(46,769	)	$	9,282,640
December 31, 2013
U.S. government and federal agency obligations	$	498,226	$	20,614	$	(13,144	)	$	505,696
Government-sponsored enterprise obligations	766,802		2,245		(27,281		)	741,766
State and municipal obligations	1,624,195		28,321		(33,345		)	1,619,171
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,743,803		54,659		(26,124		)	2,772,338
Non-agency mortgage-backed securities	236,595		12,008		(1,620		)	246,983
Asset-backed securities	2,847,368		6,872		(10,169		)	2,844,071
Total mortgage and asset-backed securities	5,827,766		73,539		(37,913		)	5,863,392
Other debt securities	147,581		671		(6,495		)	141,757
Equity securities	9,970		33,928		—			43,898
Total	$	8,874,540	$	159,318	$	(118,178	)	$	8,915,680

The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, 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, 2014, the fair value of securities on this watch list was $171.7 million compared to $188.8 million at December 31, 2013.

As of June 30, 2014, 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 $62.0 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $13.4 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at June 30, 2014 included the following:



Significant Inputs	Range
Prepayment CPR	1%	-	25%
Projected cumulative default	0%	-	56%
Credit support	0%	-	14%
Loss severity	20%	-	81%

Table of contents

The following table shows changes in the credit losses recorded in earnings during the six months ended June 30, 2014 and 2013, for which a portion of an OTTI was recognized in other comprehensive income.



	For the Six Months Ended June 30
(In thousands)	2014			2013
Balance at January 1	$	12,499		$	11,306
Credit losses on debt securities for which impairment was previously recognized	977			930
Increase in expected cash flows that are recognized over remaining life of security	(66		)	(40		)
Balance at June 30	$	13,410		$	12,196

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, 2014
U.S. government and federal agency obligations	$	—	$	—	$	32,570	$	3,965	$	32,570	$	3,965
Government-sponsored enterprise obligations	69,973		102		295,532		12,225		365,505		12,327
State and municipal obligations	131,531		711		355,533		12,112		487,064		12,823
Mortgage and asset-backed securities:
Agency mortgage-backed securities	4,775		16		400,697		10,089		405,472		10,105
Non-agency mortgage-backed securities	37,014		23		43,762		644		80,776		667
Asset-backed securities	236,398		294		296,606		4,115		533,004		4,409
Total mortgage and asset-backed securities	278,187		333		741,065		14,848		1,019,252		15,181
Other debt securities	6,492		3		83,842		2,470		90,334		2,473
Total	$	486,183	$	1,149	$	1,508,542	$	45,620	$	1,994,725	$	46,769
December 31, 2013
U.S. government and federal agency obligations	$	96,172	$	243	$	59,677	$	12,901	$	155,849	$	13,144
Government-sponsored enterprise obligations	487,317		18,155		93,654		9,126		580,971		27,281
State and municipal obligations	478,818		15,520		178,150		17,825		656,968		33,345
Mortgage and asset-backed securities:
Agency mortgage-backed securities	717,778		26,124		—		—		717,778		26,124
Non-agency mortgage-backed securities	53,454		918		22,289		702		75,743		1,620
Asset-backed securities	1,088,556		9,072		58,398		1,097		1,146,954		10,169
Total mortgage and asset-backed securities	1,859,788		36,114		80,687		1,799		1,940,475		37,913
Other debt securities	90,028		5,604		9,034		891		99,062		6,495
Total	$	3,012,123	$	75,636	$	421,202	$	42,542	$	3,433,325	$	118,178

The total available for sale portfolio consisted of nearly 1,900 individual securities at June 30, 2014. The portfolio included 297 securities, having an aggregate fair value of $2.0 billion, that were in an unrealized loss position at June 30, 2014, compared to 507 securities, with a fair value of $3.4 billion, at December 31, 2013. The total amount of unrealized loss on these securities decreased $71.4 million to $46.8 million at June 30, 2014. At June 30, 2014, the fair value of securities in an unrealized loss position for 12 months or longer totaled $1.5 billion, or 16.3% of the total portfolio value, and did not include any securities identified as other-than-temporarily impaired.

Table of contents

The Company’s holdings of state and municipal obligations included gross unrealized losses of $12.8 million at June 30, 2014. Of these losses, $6.0 million related to auction rate securities and $6.9 million related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.7 billion at fair value, or 18.0% of total available for sale securities. The average credit quality of the portfolio, excluding auction rate securities, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and 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 municipalities which have 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.