Edgar Filing: COMMERCE BANCSHARES INC /MO/

CBSH 9.30.2014 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 September 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 October 31, 2014, the registrant had outstanding 91,706,371 shares of its $5 par value common stock, registrant’s only class of common stock.

Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q



			Page
INDEX
Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	3
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2014, and 2013 (unaudited)	6
		Consolidated Statements of Cash Flows for the Nine Months Ended September 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	38
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60
	Item 4.	Controls and Procedures	61

Part II	Other Information
	Item 1.	Legal Proceedings	62
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
	Item 6.	Exhibits	62
Signatures			63
Index to Exhibits			64

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PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	September 30, 2014			December 31, 2013
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	11,445,715		$	10,956,836
Allowance for loan losses	(161,532		)	(161,532		)
Net loans	11,284,183			10,795,304
Investment securities:
Available for sale ($470,111,000 pledged at September 30, 2014 and $687,680,000 at
December 31, 2013 to secure swap and repurchase agreements)	8,878,414			8,915,680
Trading	16,510			19,993
Non-marketable	101,705			107,324
Total investment securities	8,996,629			9,042,997
Federal funds sold and short-term securities purchased under agreements to resell	37,760			43,845
Long-term securities purchased under agreements to resell	900,000			1,150,000
Interest earning deposits with banks	239,429			707,249
Cash and due from banks	445,268			518,420
Land, buildings and equipment, net	357,122			349,654
Goodwill	138,921			138,921
Other intangible assets, net	7,771			9,268
Other assets	294,462			316,378
Total assets	$	22,701,545		$	23,072,036
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	6,446,704		$	6,750,674
Savings, interest checking and money market	9,977,055			10,108,236
Time open and C.D.'s of less than $100,000	909,246			983,689
Time open and C.D.'s of $100,000 and over	1,253,633			1,204,749
Total deposits	18,586,638			19,047,348
Federal funds purchased and securities sold under agreements to repurchase	1,395,160			1,346,558
Other borrowings	105,077			107,310
Other liabilities	325,801			356,423
Total liabilities	20,412,676			20,857,639
Commerce Bancshares, Inc. stockholders’ equity:
Preferred stock, $1 par value
Authorized 2,000,000 shares; issued 6,000 shares at September 30, 2014	144,784			—
and none at December 31, 2013
Common stock, $5 par value
Authorized 120,000,000 shares at September 30, 2014 and 100,000,000 at December 31, 2013;
issued 96,244,762 shares	481,224			481,224
Capital surplus	1,215,732			1,279,948
Retained earnings	583,490			449,836
Treasury stock of 4,425,997 shares at September 30, 2014
and 235,986 shares at December 31, 2013, at cost	(199,630		)	(10,097		)
Accumulated other comprehensive income	60,231			9,731
Total Commerce Bancshares, Inc. stockholders' equity	2,285,831			2,210,642
Non-controlling interest	3,038			3,755
Total equity	2,288,869			2,214,397
Total liabilities and equity	$	22,701,545		$	23,072,036

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 September 30						For the Nine Months Ended September 30
(In thousands, except per share data)	2014			2013			2014			2013
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	112,688		$	110,587		$	334,886		$	326,391
Interest and fees on loans held for sale	—			—			—			176
Interest on investment securities	46,338			46,356			144,373			144,548
Interest on federal funds sold and short-term securities purchased under
agreements to resell	30			35			80			72
Interest on long-term securities purchased under agreements to resell	2,684			5,095			9,778			16,734
Interest on deposits with banks	71			71			259			223
Total interest income	161,811			162,144			489,376			488,144
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	3,400			3,502			10,064			10,801
Time open and C.D.'s of less than $100,000	1,010			1,380			3,193			4,785
Time open and C.D.'s of $100,000 and over	1,518			1,535			4,485			4,901
Interest on federal funds purchased and securities sold under
agreements to repurchase	287			166			753			654
Interest on other borrowings	880			855			2,606			2,496
Total interest expense	7,095			7,438			21,101			23,637
Net interest income	154,716			154,706			468,275			464,507
Provision for loan losses	7,652			4,146			24,867			14,810
Net interest income after provision for loan losses	147,064			150,560			443,408			449,697
NON-INTEREST INCOME
Bank card transaction fees	44,802			43,891			130,963			123,141
Trust fees	28,560			25,318			82,898			76,221
Deposit account charges and other fees	20,161			20,197			58,460			58,511
Capital market fees	2,783			3,242			9,899			10,938
Consumer brokerage services	3,098			2,871			8,817			8,410
Loan fees and sales	1,367			1,553			3,787			4,340
Other	11,515			9,239			28,852			27,303
Total non-interest income	112,286			106,311			323,676			308,864
INVESTMENT SECURITIES GAINS (LOSSES), NET
Change in fair value of other-than-temporarily impaired securities	(770		)	(588		)	(1,618		)	508
Portion recognized in other comprehensive income	399			258			270			(1,768		)
Net impairment losses recognized in earnings	(371		)	(330		)	(1,348		)	(1,260		)
Realized gains (losses) on sales and fair value adjustments	3,366			980			11,822			(1,823		)
Investment securities gains (losses), net	2,995			650			10,474			(3,083		)
NON-INTEREST EXPENSE
Salaries and employee benefits	95,462			91,405			284,574			271,855
Net occupancy	11,585			11,332			34,352			33,801
Equipment	4,593			4,465			13,622			13,828
Supplies and communication	5,302			5,449			16,487			16,835
Data processing and software	19,968			19,987			58,633			58,522
Marketing	4,074			3,848			11,704			11,255
Deposit insurance	2,899			2,796			8,685			8,353
Other	18,303			17,030			59,400			53,866
Total non-interest expense	162,186			156,312			487,457			468,315
Income before income taxes	100,159			101,209			290,101			287,163
Less income taxes	31,138			32,764			91,059			91,871
Net income	69,021			68,445			199,042			195,292
Less non-controlling interest expense	836			221			13			246
Net income attributable to Commerce Bancshares, Inc.	68,185			68,224			199,029			195,046
Less preferred stock dividends	1,800			—			1,800			—
Net income available to common shareholders	$	66,385		$	68,224		$	197,229		$	195,046
Net income per common share — basic	$	.72		$	.71		$	2.09		$	2.04
Net income per common share — diluted	$	.72		$	.71		$	2.09		$	2.03

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 September 30						For the Nine Months Ended September 30
(In thousands)	2014			2013			2014			2013
	(Unaudited)
Net income	$	69,021		$	68,445		$	199,042		$	195,292
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	(244		)	(130		)	(136		)	887
Net unrealized gains (losses) on other securities	(24,062		)	3,815			49,967			(112,632		)
Pension loss amortization	223			476			669			1,426
Other comprehensive income (loss)	(24,083		)	4,161			50,500			(110,319		)
Comprehensive income	44,938			72,606			249,542			84,973
Less non-controlling interest expense	836			221			13			246
Comprehensive income attributable to Commerce Bancshares, Inc.	$	44,102		$	72,385		$	249,529		$	84,727

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)	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								199,029									13			199,042
Other comprehensive income														50,500						50,500
Distributions to non-controlling interest																	(730		)	(730		)
Issuance of preferred stock	144,784																			144,784
Purchases of treasury stock											(209,040		)							(209,040		)
Accelerated share repurchase forward contract					(60,000		)													(60,000		)
Issuance of stock under purchase and equity compensation plans					(5,234		)				12,437									7,203
Net tax benefit related to equity compensation plans					1,457															1,457
Stock-based compensation					6,631															6,631
Issuance of nonvested stock awards					(7,070		)				7,070									—
Cash dividends on common stock ($.675 per share)								(63,575		)										(63,575		)
Cash dividends on preferred stock ($.30 per share)								(1,800		)										(1,800		)
Balance September 30, 2014	$	144,784	$	481,224	$	1,215,732		$	583,490		$	(199,630	)	$	60,231		$	3,038		$	2,288,869
Balance January 1, 2013	$	—	$	458,646	$	1,102,507		$	477,210		$	(7,580	)	$	136,344		$	4,447		$	2,171,574
Net income								195,046									246			195,292
Other comprehensive loss														(110,319		)				(110,319		)
Distributions to non-controlling interest																	(740		)	(740		)
Acquisition of Summit Bancshares Inc.			1,001		11,125						31,071									43,197
Purchases of treasury stock											(69,195		)							(69,195		)
Issuance of stock under purchase and equity compensation plans					(3,957		)				12,111									8,154
Net tax benefit related to equity compensation plans					454															454
Stock-based compensation					4,605															4,605
Issuance of nonvested stock awards					(10,065		)				10,065									—
Cash dividends on common stock ($.643 per share)								(61,536		)										(61,536		)
Balance September 30, 2013	$	—	$	459,647	$	1,104,669		$	610,720		$	(23,528	)	$	26,025		$	3,953		$	2,181,486

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Nine Months Ended September 30
(In thousands)	2014			2013
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	199,042		$	195,292
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	24,867			14,810
Provision for depreciation and amortization	31,561			31,152
Amortization of investment security premiums, net	14,473			22,840
Investment securities (gains) losses, net(A)	(10,474		)	3,083
Net decrease in trading securities	14,555			15,977
Stock-based compensation	6,631			4,605
(Increase) decrease in interest receivable	(2,215		)	2,694
Decrease in interest payable	(277		)	(1,319		)
Increase in income taxes payable	4,880			7,183
Net tax benefit related to equity compensation plans	(1,457		)	(454		)
Other changes, net	4,043			(7,086		)
Net cash provided by operating activities	285,629			288,777
INVESTING ACTIVITIES:
Cash received in acquisition	—			47,643
Cash paid in sales of branches	(43,827		)	—
Proceeds from sales of investment securities(A)	64,041			6,624
Proceeds from maturities/pay downs of investment securities(A)	1,392,422			2,047,277
Purchases of investment securities(A)	(1,314,248		)	(1,522,765		)
Net increase in loans	(527,528		)	(796,215		)
Long-term securities purchased under agreements to resell	(250,000		)	(125,000		)
Repayments of long-term securities purchased under agreements to resell	500,000			175,000
Purchases of land, buildings and equipment	(34,205		)	(18,731		)
Sales of land, buildings and equipment	2,983			723
Net cash used in investing activities	(210,362		)	(185,444		)
FINANCING ACTIVITIES:
Net decrease in non-interest bearing, savings, interest checking and money market deposits	(470,427		)	(569,342		)
Net increase (decrease) in time open and C.D.'s	(17,295		)	81,449
Repayment of long-term securities sold under agreements to repurchase	(350,000		)	(50,000		)
Net increase in federal funds purchased and short-term securities sold under agreements to repurchase	398,602			726,843
Repayment of other long-term borrowings	(233		)	(961		)
Net decrease in other short-term borrowings	(2,000		)	—
Proceeds from issuance of preferred stock	144,784			—
Purchases of treasury stock	(209,040		)	(69,195		)
Accelerated stock repurchase agreement	(60,000		)	—
Issuance of stock under stock purchase and equity compensation plans	7,203			8,154
Net tax benefit related to equity compensation plans	1,457			454
Cash dividends paid on common stock	(63,575		)	(61,536		)
Cash dividends paid on preferred stock	(1,800		)	—
Net cash provided by (used in) financing activities	(622,324		)	65,866
Increase (decrease) in cash and cash equivalents	(547,057		)	169,199
Cash and cash equivalents at beginning of year	1,269,514			779,825
Cash and cash equivalents at September 30	$	722,457		$	949,024
(A) Available for sale and non-marketable securities
Income tax payments, net	$	86,002		$	84,331
Interest paid on deposits and borrowings	$	21,278		$	24,956
Loans transferred to foreclosed real estate	$	4,421		$	6,744
Loans transferred from held for sale to held for investment category	$	—		$	8,941

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 nine month periods ended September 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. The Company recognized a $2.1 million gain on the sale.

3. Loans and Allowance for Loan Losses

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



(In thousands)	September 30, 2014		December 31, 2013
Commercial:
Business	$	4,021,148	$	3,715,319
Real estate – construction and land	392,015		406,197
Real estate – business	2,306,849		2,313,550
Personal Banking:
Real estate – personal	1,854,668		1,787,626
Consumer	1,665,217		1,512,716
Revolving home equity	436,747		420,589
Consumer credit card	763,824		796,228
Overdrafts	5,247		4,611
Total loans	$	11,445,715	$	10,956,836

At September 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 $1.2 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 nine months ended September 30, 2014 and 2013, respectively, follows:



	For the Three Months Ended September 30							For the Nine Months Ended September 30
(In thousands)	Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	$	98,928		$	62,604	$	161,532	$	94,189		$	67,343	$	161,532
Provision	(717		)	8,369		7,652		3,836			21,031		24,867
Deductions:
Loans charged off	686			11,414		12,100		3,034			35,917		38,951
Less recoveries on loans	1,431			3,017		4,448		3,965			10,119		14,084
Net loan charge-offs (recoveries)	(745		)	8,397		7,652		(931		)	25,798		24,867
Balance September 30, 2014	$	98,956		$	62,576	$	161,532	$	98,956		$	62,576	$	161,532
Balance at beginning of period	$	98,599		$	67,433	$	166,032	$	105,725		$	66,807	$	172,532
Provision	(2,885		)	7,031		4,146		(10,275		)	25,085		14,810
Deductions:
Loans charged off	913			12,174		13,087		3,879			36,405		40,284
Less recoveries on loans	3,144			3,297		6,441		6,374			10,100		16,474
Net loan charge-offs (recoveries)	(2,231		)	8,877		6,646		(2,495		)	26,305		23,810
Balance September 30, 2013	$	97,945		$	65,587	$	163,532	$	97,945		$	65,587	$	163,532

The following table shows the balance in the allowance for loan losses and the related loan balance at September 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
September 30, 2014
Commercial	$	6,683	$	69,480	$	92,273	$	6,650,532
Personal Banking	2,292		26,471		60,284		4,699,232
Total	$	8,975	$	95,951	$	152,557	$	11,349,764
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 September 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)	Sept. 30, 2014		Dec. 31, 2013
Non-accrual loans	$	45,800	$	48,814
Restructured loans (accruing)	50,151		58,822
Total impaired loans	$	95,951	$	107,636

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The following table provides additional information about impaired loans held by the Company at September 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
September 30, 2014
With no related allowance recorded:
Business	$	8,573	$	10,650	$	—
Real estate – construction and land	4,176		7,866		—
Real estate – business	4,618		4,971		—
Real estate – personal	1,470		1,470		—
	$	18,837	$	24,957	$	—
With an allowance recorded:
Business	$	19,939	$	21,289	$	2,869
Real estate – construction and land	14,227		17,270		1,602
Real estate – business	17,947		28,320		2,212
Real estate – personal	8,510		11,797		1,266
Consumer	5,366		6,353		165
Revolving home equity	516		516		1
Consumer credit card	10,609		10,609		860
	$	77,114	$	96,154	$	8,975
Total	$	95,951	$	121,111	$	8,975
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

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Total average impaired loans for the three and nine month periods ended September 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 September 30, 2014
Non-accrual loans	$	38,111	$	7,267	$	45,378
Restructured loans (accruing)	32,970		19,822		52,792
Total	$	71,081	$	27,089	$	98,170
For the nine months ended September 30, 2014
Non-accrual loans	$	38,099	$	7,320	$	45,419
Restructured loans (accruing)	37,157		20,660		57,817
Total	$	75,256	$	27,980	$	103,236
For the three months ended September 30, 2013
Non-accrual loans	$	32,570	$	4,866	$	37,436
Restructured loans (accruing)	40,881		25,163		66,044
Total	$	73,451	$	30,029	$	103,480
For the nine months ended September 30, 2013
Non-accrual loans	$	36,656	$	5,287	$	41,943
Restructured loans (accruing)	40,200		25,857		66,057
Total	$	76,856	$	31,144	$	108,000

The table below shows interest income recognized during the three and nine month periods ended September 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 September 30				For the Nine Months Ended September 30
(In thousands)	2014		2013		2014		2013
Interest income recognized on impaired loans:
Business	$	146	$	124	$	438	$	372
Real estate – construction and land	97		218		290		653
Real estate – business	58		48		173		145
Real estate – personal	53		64		160		192
Consumer	72		87		215		261
Revolving home equity	7		9		20		26
Consumer credit card	236		262		707		785
Total	$	669	$	812	$	2,003	$	2,434

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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 September 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
September 30, 2014
Commercial:
Business	$	4,002,376	$	6,875	$	682	$	11,215	$	4,021,148
Real estate – construction and land	372,646		9,254		—		10,115		392,015
Real estate – business	2,281,922		7,547		—		17,380		2,306,849
Personal Banking:
Real estate – personal	1,833,181		14,481		1,254		5,752		1,854,668
Consumer	1,646,939		15,277		1,663		1,338		1,665,217
Revolving home equity	434,097		1,125		1,525		—		436,747
Consumer credit card	747,214		9,335		7,275		—		763,824
Overdrafts	5,002		245		—		—		5,247
Total	$	11,323,377	$	64,139	$	12,399	$	45,800	$	11,445,715
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.

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Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
September 30, 2014
Pass	$	3,916,446	$	367,564	$	2,189,895	$	6,473,905
Special mention	61,621		5,296		52,046		118,963
Substandard	31,866		9,040		47,528		88,434
Non-accrual	11,215		10,115		17,380		38,710
Total	$	4,021,148	$	392,015	$	2,306,849	$	6,720,012
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 September 30, 2014, these were comprised of $240.1 million in personal real estate loans and $5.9 million in consumer loans, or 5.2% 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 September 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
September 30, 2014
FICO score:
Under 600	1.4	%	5.0	%	1.7	%	4.0	%
600 - 659	3.1		10.2		4.7		11.8
660 - 719	9.5		23.3		13.6		33.0
720 - 779	25.9		28.2		29.9		28.1
780 and over	60.1		33.3		50.1		23.1
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 $81.1 million at September 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 $31.0 million at September 30, 2014. Other performing restructured loans totaled $50.2 million at September 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

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a result were classified as troubled debt restructurings. These commercial loans totaled $31.6 million at September 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 $10.6 million at September 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 September 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 September 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)	September 30, 2014		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	26,006	$	7,600
Real estate - construction and land	17,726		6,931
Real estate - business	14,949		22
Personal Banking:
Real estate - personal	5,914		35
Consumer	5,394		1,393
Revolving home equity	516		—
Consumer credit card	10,609		803
Total restructured loans	$	81,114	$	16,784

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 $12.2 million at September 30, 2014 to lend additional funds to borrowers with restructured loans.

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The Company’s holdings of foreclosed real estate totaled $7.2 million and $6.6 million at September 30, 2014 and December 31, 2013, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.8 million at both September 30, 2014 and December 31, 2013. 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 September 30, 2014 and December 31, 2013.



(In thousands)	Sept. 30, 2014		Dec. 31, 2013
Available for sale	$	8,878,414	$	8,915,680
Trading	16,510		19,993
Non-marketable	101,705		107,324
Total investment securities	$	8,996,629	$	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 $46.6 million at September 30, 2014 and $46.5 million 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 $55.0 million at September 30, 2014 and $60.7 million at December 31, 2013.

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A summary of the available for sale investment securities by maturity groupings as of September 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	$	105,095	$	106,304
After 1 but within 5 years	199,209		209,129
After 5 but within 10 years	141,705		144,063
After 10 years	53,582		48,724
Total U.S. government and federal agency obligations	499,591		508,220
Government-sponsored enterprise obligations:
Within 1 year	34,682		34,932
After 1 but within 5 years	441,738		442,742
After 5 but within 10 years	143,559		136,391
After 10 years	142,014		138,171
Total government-sponsored enterprise obligations	761,993		752,236
State and municipal obligations:
Within 1 year	193,119		195,219
After 1 but within 5 years	686,099		709,500
After 5 but within 10 years	784,832		787,070
After 10 years	154,685		150,912
Total state and municipal obligations	1,818,735		1,842,701
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,599,954		2,651,532
Non-agency mortgage-backed securities	279,479		289,772
Asset-backed securities	2,646,915		2,650,468
Total mortgage and asset-backed securities	5,526,348		5,591,772
Other debt securities:
Within 1 year	11,743		11,785
After 1 but within 5 years	42,268		42,727
After 5 but within 10 years	86,002		83,194
Total other debt securities	140,013		137,706
Equity securities	10,223		45,779
Total available for sale investment securities	$	8,756,903	$	8,878,414

Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $508.1 million, at fair value, at September 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 $131.2 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 $38.7 million at September 30, 2014.

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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
September 30, 2014
U.S. government and federal agency obligations	$	499,591	$	13,786	$	(5,157	)	$	508,220
Government-sponsored enterprise obligations	761,993		2,101		(11,858		)	752,236
State and municipal obligations	1,818,735		34,522		(10,556		)	1,842,701
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,599,954		64,576		(12,998		)	2,651,532
Non-agency mortgage-backed securities	279,479		11,426		(1,133		)	289,772
Asset-backed securities	2,646,915		8,848		(5,295		)	2,650,468
Total mortgage and asset-backed securities	5,526,348		84,850		(19,426		)	5,591,772
Other debt securities	140,013		578		(2,885		)	137,706
Equity securities	10,223		35,556		—			45,779
Total	$	8,756,903	$	171,393	$	(49,882	)	$	8,878,414
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 September 30, 2014, the fair value of securities on this watch list was $162.6 million compared to $188.8 million at December 31, 2013.

As of September 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 $58.6 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $13.7 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 September 30, 2014 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	19%	-	57%
Credit support	0%	-	16%
Loss severity	19%	-	85%

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The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities.



	For the Nine Months Ended September 30
(In thousands)	2014			2013
Cumulative OTTI credit losses at January 1	$	12,499		$	11,306
Credit losses on debt securities for which impairment was previously recognized	1,348			1,260
Increase in expected cash flows that are recognized over remaining life of security	(97		)	(59		)
Cumulative OTTI credit losses at September 30	$	13,750		$	12,507

Securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period.



	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2014
U.S. government and federal agency obligations	$	47,683	$	240	$	31,645	$	4,917	$	79,328	$	5,157
Government-sponsored enterprise obligations	184,019		849		269,271		11,009		453,290		11,858
State and municipal obligations	104,018		1,007		289,162		9,549		393,180		10,556
Mortgage and asset-backed securities:
Agency mortgage-backed securities	136,246		410		385,117		12,588		521,363		12,998
Non-agency mortgage-backed securities	77,052		325		43,537		808		120,589		1,133
Asset-backed securities	572,812		1,148		194,011		4,147		766,823		5,295
Total mortgage and asset-backed securities	786,110		1,883		622,665		17,543		1,408,775		19,426
Other debt securities	12,424		68		83,432		2,817		95,856		2,885
Total	$	1,134,254	$	4,047	$	1,296,175	$	45,835	$	2,430,429	$	49,882
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