Edgar Filing: COMMERCE BANCSHARES INC /MO/

10-Q

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 March 31, 2016



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 April 29, 2016, the registrant had outstanding 96,547,944 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 March 31, 2016 (unaudited) and December 31, 2015	3
		Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2016 and 2015 (unaudited)	6
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (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	59
	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



	March 31, 2016			December 31, 2015
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	12,697,870		$	12,436,692
Allowance for loan losses	(152,132		)	(151,532		)
Net loans	12,545,738			12,285,160
Loans held for sale (including $4,505,000 of residential mortgage loans carried at fair value at March 31, 2016 and $4,981,000 at December 31, 2015)	60,078			7,607
Investment securities:
Available for sale ($581,035,000 pledged at March 31, 2016 and $568,257,000 at
December 31, 2015 to secure swap and repurchase agreements)	9,552,179			9,777,004
Trading	23,130			11,890
Non-marketable	117,259			112,786
Total investment securities	9,692,568			9,901,680
Federal funds sold and short-term securities purchased under agreements to resell	9,075			14,505
Long-term securities purchased under agreements to resell	825,000			875,000
Interest earning deposits with banks	171,651			23,803
Cash and due from banks	375,481			464,411
Land, buildings and equipment, net	350,423			352,581
Goodwill	138,921			138,921
Other intangible assets, net	6,539			6,669
Other assets	331,478			534,625
Total assets	$	24,506,952		$	24,604,962
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	7,065,066		$	7,146,398
Savings, interest checking and money market	11,205,357			10,834,746
Time open and C.D.'s of less than $100,000	766,810			785,191
Time open and C.D.'s of $100,000 and over	1,649,076			1,212,518
Total deposits	20,686,309			19,978,853
Federal funds purchased and securities sold under agreements to repurchase	957,388			1,963,552
Other borrowings	103,806			103,818
Other liabilities	312,167			191,321
Total liabilities	22,059,670			22,237,544
Commerce Bancshares, Inc. stockholders’ equity:
Preferred stock, $1 par value
Authorized 2,000,000 shares; issued 6,000 shares	144,784			144,784
Common stock, $5 par value
Authorized 120,000,000 shares;
issued 97,972,433 shares	489,862			489,862
Capital surplus	1,332,429			1,337,677
Retained earnings	424,677			383,313
Treasury stock of 1,267,747 shares at March 31, 2016
and 603,003 shares at December 31, 2015, at cost	(52,653		)	(26,116		)
Accumulated other comprehensive income	102,929			32,470
Total Commerce Bancshares, Inc. stockholders' equity	2,442,028			2,361,990
Non-controlling interest	5,254			5,428
Total equity	2,447,282			2,367,418
Total liabilities and equity	$	24,506,952		$	24,604,962

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 March 31
(In thousands, except per share data)	2016			2015
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	119,333		$	111,286
Interest and fees on loans held for sale	135			21
Interest on investment securities	48,891			38,436
Interest on federal funds sold and short-term securities purchased under
agreements to resell	24			9
Interest on long-term securities purchased under agreements to resell	3,475			3,051
Interest on deposits with banks	270			179
Total interest income	172,128			152,982
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	3,484			3,308
Time open and C.D.'s of less than $100,000	742			880
Time open and C.D.'s of $100,000 and over	1,986			1,410
Interest on federal funds purchased and securities sold under
agreements to repurchase	888			367
Interest on other borrowings	1,253			879
Total interest expense	8,353			6,844
Net interest income	163,775			146,138
Provision for loan losses	9,439			4,420
Net interest income after provision for loan losses	154,336			141,718
NON-INTEREST INCOME
Bank card transaction fees	44,470			42,299
Trust fees	30,370			29,586
Deposit account charges and other fees	20,691			18,499
Capital market fees	2,725			3,002
Consumer brokerage services	3,509			3,336
Loan fees and sales	2,510			2,089
Other	14,749			7,763
Total non-interest income	119,024			106,574
INVESTMENT SECURITIES GAINS (LOSSES), NET	(995		)	6,035
NON-INTEREST EXPENSE
Salaries and employee benefits	106,859			98,074
Net occupancy	11,303			11,561
Equipment	4,634			4,703
Supplies and communication	6,829			5,581
Data processing and software	22,899			19,506
Marketing	3,813			3,918
Deposit insurance	3,165			3,001
Other	17,971			17,501
Total non-interest expense	177,473			163,845
Income before income taxes	94,892			90,482
Less income taxes	29,370			28,468
Net income	65,522			62,014
Less non-controlling interest expense	148			959
Net income attributable to Commerce Bancshares, Inc.	65,374			61,055
Less preferred stock dividends	2,250			2,250
Net income available to common shareholders	$	63,124		$	58,805
Net income per common share — basic	$	.65		$	.58
Net income per common share — diluted	$	.65		$	.58

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 March 31
(In thousands)	2016			2015
	(Unaudited)
Net income	$	65,522		$	62,014
Other comprehensive income (loss):
Net unrealized losses on securities for which a portion of an other-than-temporary impairment has been recorded in earnings	(398		)	(128		)
Net unrealized gains on other securities	70,495			29,346
Pension loss amortization	362			406
Other comprehensive income	70,459			29,624
Comprehensive income	135,981			91,638
Less non-controlling interest expense	148			959
Comprehensive income attributable to Commerce Bancshares, Inc.	$	135,833		$	90,679

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, 2016	$	144,784	$	489,862	$	1,337,677		$	383,313		$	(26,116	)	$	32,470	$	5,428		$	2,367,418
Net income								65,374								148			65,522
Other comprehensive income														70,459					70,459
Distributions to non-controlling interest																(322		)	(322		)
Purchases of treasury stock											(36,432		)						(36,432		)
Issuance of stock under purchase and equity compensation plans					(9,895		)				9,895								—
Excess tax benefit related to equity compensation plans					1,236														1,236
Stock-based compensation					3,411														3,411
Cash dividends on common stock ($.225 per share)								(21,760		)									(21,760		)
Cash dividends on preferred stock ($.375 per depositary share)								(2,250		)									(2,250		)
Balance March 31, 2016	$	144,784	$	489,862	$	1,332,429		$	424,677		$	(52,653	)	$	102,929	$	5,254		$	2,447,282
Balance January 1, 2015	$	144,784	$	484,155	$	1,229,075		$	426,648		$	(16,562	)	$	62,093	$	4,053		$	2,334,246
Net income								61,055								959			62,014
Other comprehensive income														29,624					29,624
Distributions to non-controlling interest																(219		)	(219		)
Purchases of treasury stock											(1,718		)						(1,718		)
Issuance of stock under purchase and equity compensation plans					(9,547		)				11,412								1,865
Excess tax benefit related to equity compensation plans					857														857
Stock-based compensation					2,740														2,740
Cash dividends on common stock ($.214 per share)								(21,752		)									(21,752		)
Cash dividends on preferred stock ($.375 per depositary share)								(2,250		)									(2,250		)
Balance March 31, 2015	$	144,784	$	484,155	$	1,223,125		$	463,701		$	(6,868	)	$	91,717	$	4,793		$	2,405,407

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Three Months Ended March 31
(In thousands)	2016			2015
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	65,522		$	62,014
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	9,439			4,420
Provision for depreciation and amortization	10,146			10,694
Amortization of investment security premiums, net	11,188			15,099
Investment securities (gains) losses, net (A)	995			(6,035		)
Net gains on sales of loans held for sale	(969		)	(467		)
Originations of loans held for sale	(24,009		)	(17,806		)
Proceeds from sales of loans held for sale	22,666			15,575
Net (increase) decrease in trading securities, excluding unsettled transactions	76,143			(4,361		)
Stock-based compensation	3,411			2,740
Increase in interest receivable	(473		)	(788		)
Increase in interest payable	280			27
Increase in income taxes payable	26,133			24,904
Excess tax benefit related to equity compensation plans	(1,236		)	(857		)
Other changes, net	(3,352		)	(9,642		)
Net cash provided by operating activities	195,884			95,517
INVESTING ACTIVITIES:
Proceeds from sales of investment securities (A)	94			185,732
Proceeds from maturities/pay downs of investment securities (A)	542,059			609,144
Purchases of investment securities (A)	(180,774		)	(1,125,969		)
Net increase in loans	(320,987		)	(260,799		)
Repayments of long-term securities purchased under agreements to resell	50,000			—
Purchases of land, buildings and equipment	(7,389		)	(8,575		)
Sales of land, buildings and equipment	520			3
Net cash provided by (used in) investing activities	83,523			(600,464		)
FINANCING ACTIVITIES:
Net increase in non-interest bearing, savings, interest checking and money market deposits	421,286			218,837
Net increase in time open and C.D.'s	418,177			12,921
Net decrease in federal funds purchased and short-term securities sold under agreements to repurchase	(1,006,164		)	(252,055		)
Repayment of other long-term borrowings	(12		)	(204		)
Purchases of treasury stock	(36,432		)	(1,718		)
Issuance of stock under equity compensation plans	—			1,865
Excess tax benefit related to equity compensation plans	1,236			857
Cash dividends paid on common stock	(21,760		)	(21,752		)
Cash dividends paid on preferred stock	(2,250		)	(2,250		)
Net cash used in financing activities	(225,919		)	(43,499		)
Increase (decrease) in cash and cash equivalents	53,488			(548,446		)
Cash and cash equivalents at beginning of year	502,719			1,100,717
Cash and cash equivalents at March 31	$	556,207		$	552,271
(A) Available for sale and non-marketable securities
Income tax payments, net	$	2,658		$	2,953
Interest paid on deposits and borrowings	$	8,073		$	6,817
Loans transferred to foreclosed real estate	$	471		$	482
Loans transferred from held for investment to held for sale	$	50,360		$	—

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016 (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 by an independent registered public accounting firm, but 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. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2015 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three month period ended March 31, 2016 are not necessarily indicative of results to be attained for the full year or any other interim period.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company's most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto.

2. Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at March 31, 2016 and December 31, 2015 are as follows:



(In thousands)	March 31, 2016		December 31, 2015
Commercial:
Business	$	4,575,081	$	4,397,893
Real estate – construction and land	745,369		624,070
Real estate – business	2,395,933		2,355,544
Personal Banking:
Real estate – personal	1,903,969		1,915,953
Consumer	1,904,320		1,924,365
Revolving home equity	423,005		432,981
Consumer credit card	744,364		779,744
Overdrafts	5,829		6,142
Total loans	$	12,697,870	$	12,436,692

At March 31, 2016, loans of $3.7 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 $1.5 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 months ended March 31, 2016 and 2015, respectively, follows:



	For the Three Months Ended March 31
(In thousands)	Commercial			Personal Banking		Total
Balance January 1	$	82,086		$	69,446	$	151,532
Provision	4,151			5,288		9,439
Deductions:
Loans charged off	1,513			11,777		13,290
Less recoveries on loans	1,303			3,148		4,451
Net loan charge-offs (recoveries)	210			8,629		8,839
Balance March 31, 2016	$	86,027		$	66,105	$	152,132
Balance January 1	$	89,622		$	66,910	$	156,532
Provision	(1,752		)	6,172		4,420
Deductions:
Loans charged off	724			11,576		12,300
Less recoveries on loans	1,760			3,120		4,880
Net loan charge-offs (recoveries)	(1,036		)	8,456		7,420
Balance March 31, 2015	$	88,906		$	64,626	$	153,532

The following table shows the balance in the allowance for loan losses and the related loan balance at March 31, 2016 and December 31, 2015, 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
March 31, 2016
Commercial	$	2,963	$	58,199	$	83,064	$	7,658,184
Personal Banking	1,385		22,188		64,720		4,959,299
Total	$	4,348	$	80,387	$	147,784	$	12,617,483
December 31, 2015
Commercial	$	1,927	$	43,027	$	80,159	$	7,334,480
Personal Banking	1,557		22,287		67,889		5,036,898
Total	$	3,484	$	65,314	$	148,048	$	12,371,378

Impaired loans

The table below shows the Company’s investment in impaired loans at March 31, 2016 and December 31, 2015. 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. 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)	Mar. 31, 2016		Dec. 31, 2015
Non-accrual loans	$	29,367	$	26,575
Restructured loans (accruing)	51,020		38,739
Total impaired loans	$	80,387	$	65,314

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The following table provides additional information about impaired loans held by the Company at March 31, 2016 and December 31, 2015, 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
March 31, 2016
With no related allowance recorded:
Business	$	10,381	$	12,874	$	—
Real estate – construction and land	2,335		3,307		—
Real estate – business	3,593		4,739		—
Real estate – personal	362		373		—
	$	16,671	$	21,293	$	—
With an allowance recorded:
Business	$	34,821	$	36,845	$	2,328
Real estate – construction and land	546		6,962		67
Real estate – business	6,523		8,773		568
Real estate – personal	7,377		10,291		656
Consumer	5,945		5,945		119
Revolving home equity	541		592		31
Consumer credit card	7,963		7,963		579
	$	63,716	$	77,371	$	4,348
Total	$	80,387	$	98,664	$	4,348
December 31, 2015
With no related allowance recorded:
Business	$	9,330	$	11,777	$	—
Real estate – construction and land	2,961		8,956		—
Real estate – business	4,793		6,264		—
Real estate – personal	373		373		—
	$	17,457	$	27,370	$	—
With an allowance recorded:
Business	$	18,227	$	20,031	$	1,119
Real estate – construction and land	1,227		2,804		63
Real estate – business	6,489		9,008		745
Real estate – personal	7,667		10,530		831
Consumer	5,599		5,599		63
Revolving home equity	704		852		67
Consumer credit card	7,944		7,944		596
	$	47,857	$	56,768	$	3,484
Total	$	65,314	$	84,138	$	3,484

Total average impaired loans for the three month periods ended March 31, 2016 and 2015, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended March 31, 2016
Non-accrual loans	$	21,004	$	4,623	$	25,627
Restructured loans (accruing)	27,179		17,701		44,880
Total	$	48,183	$	22,324	$	70,507
For the three months ended March 31, 2015
Non-accrual loans	$	31,281	$	6,258	$	37,539
Restructured loans (accruing)	22,280		19,386		41,666
Total	$	53,561	$	25,644	$	79,205

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The table below shows interest income recognized during the three month periods ended March 31, 2016 and 2015, respectively, 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 March 31
(In thousands)	2016		2015
Interest income recognized on impaired loans:
Business	$	274	$	135
Real estate – construction and land	2		80
Real estate – business	36		15
Real estate – personal	46		53
Consumer	90		52
Revolving home equity	5		4
Consumer credit card	146		174
Total	$	599	$	513

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 March 31, 2016 and December 31, 2015.



(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
March 31, 2016
Commercial:
Business	$	4,551,468	$	6,806	$	709	$	16,098	$	4,575,081
Real estate – construction and land	734,547		8,112		—		2,710		745,369
Real estate – business	2,379,738		9,961		—		6,234		2,395,933
Personal Banking:
Real estate – personal	1,890,775		6,477		2,512		4,205		1,903,969
Consumer	1,884,817		16,726		2,777		—		1,904,320
Revolving home equity	419,114		2,147		1,624		120		423,005
Consumer credit card	728,741		7,885		7,738		—		744,364
Overdrafts	5,593		236		—		—		5,829
Total	$	12,594,793	$	58,350	$	15,360	$	29,367	$	12,697,870
December 31, 2015
Commercial:
Business	$	4,384,149	$	2,306	$	564	$	10,874	$	4,397,893
Real estate – construction and land	617,838		3,142		—		3,090		624,070
Real estate – business	2,340,919		6,762		—		7,863		2,355,544
Personal Banking:
Real estate – personal	1,901,330		7,117		3,081		4,425		1,915,953
Consumer	1,903,389		18,273		2,703		—		1,924,365
Revolving home equity	427,998		2,641		2,019		323		432,981
Consumer credit card	762,750		8,894		8,100		—		779,744
Overdrafts	5,834		308		—		—		6,142
Total	$	12,344,207	$	49,443	$	16,467	$	26,575	$	12,436,692

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.

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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.



Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
March 31, 2016
Pass	$	4,435,061	$	733,542	$	2,318,735	$	7,487,338
Special mention	64,964		8,026		20,180		93,170
Substandard	58,958		1,091		50,784		110,833
Non-accrual	16,098		2,710		6,234		25,042
Total	$	4,575,081	$	745,369	$	2,395,933	$	7,716,383
December 31, 2015
Pass	$	4,278,857	$	618,788	$	2,281,565	$	7,179,210
Special mention	49,302		1,033		15,009		65,344
Substandard	58,860		1,159		51,107		111,126
Non-accrual	10,874		3,090		7,863		21,827
Total	$	4,397,893	$	624,070	$	2,355,544	$	7,377,507

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 March 31, 2016, these were comprised of $250.2 million in personal real estate loans, or 5.0% of the Personal Banking portfolio, compared to $257.8 million at December 31, 2015. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at March 31, 2016 and December 31, 2015 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
March 31, 2016
FICO score:
Under 600	1.4	%	4.6	%	1.4	%	4.3	%
600 - 659	2.8		9.2		3.9		12.5
660 - 719	9.8		22.1		15.1		32.7
720 - 779	24.7		26.5		27.1		27.9
780 and over	61.3		37.6		52.5		22.6
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2015
FICO score:
Under 600	1.5	%	4.5	%	1.5	%	3.9	%
600 - 659	3.0		9.7		3.9		12.0
660 - 719	9.1		21.8		13.6		31.7
720 - 779	25.0		26.4		28.4		27.9
780 and over	61.4		37.6		52.6		24.5
Total	100.0	%	100.0	%	100.0	%	100.0	%

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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 $66.4 million at March 31, 2016. 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 $15.4 million at March 31, 2016. Other performing restructured loans totaled $51.0 million at March 31, 2016. These include 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 the loans were classified as troubled debt restructurings. These commercial loans totaled $33.9 million at March 31, 2016. 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 $8.0 million at March 31, 2016. 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 March 31, 2016, these loans totaled $8.8 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 March 31, 2016, 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)	March 31, 2016		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	39,577	$	—
Real estate - construction and land	2,849		81
Real estate - business	4,587		—
Personal Banking:
Real estate - personal	4,995		370
Consumer	5,969		465
Revolving home equity	431		63
Consumer credit card	7,963		547
Total restructured loans	$	66,371	$	1,526

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 $927 thousand 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

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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 $12.6 million at March 31, 2016 to lend additional funds to borrowers with restructured loans.

Loans held for sale

Beginning January 1, 2015, certain long-term fixed rate personal real estate loan originations have been designated as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 10. At March 31, 2016, the fair value of these loans was $4.5 million, and the unpaid principal balance was $4.3 million.

Beginning in the third quarter of 2015, the Company has designated certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans at various times while the student is attending school or shortly after graduation. At March 31, 2016, the balance of these loans was $5.2 million. These loans are carried at lower of cost or fair value.

In March 2016, the Company designated certain loans secured by automobiles, totaling $50.4 million, as held for sale. The loans are being marketed to other financial institutions such as regional banks and credit unions, and the amount expected to be sold approximates nearly 5% of the total auto loan portfolio. The group of loans held for sale are representative of the overall auto loan portfolio. These loans are carried at lower of cost or fair value.

At March 31, 2016, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing. Interest income with respect to loans held for sale is accrued based on the principal amount outstanding and the loan's contractual interest rate. Gains and losses in fair value resulting from the application of the fair value option, or lower of cost or fair value accounting, are recognized in loan fees and sales in the consolidated statements of income.

Foreclosed real estate/repossessed assets

The Company’s holdings of foreclosed real estate totaled $2.0 million and $2.8 million at March 31, 2016 and December 31, 2015, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.6 million and $3.3 million at March 31, 2016 and December 31, 2015, respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.

3. Investment Securities

Investment securities, at fair value, consisted of the following at March 31, 2016 and December 31, 2015.



(In thousands)	Mar. 31, 2016		Dec. 31, 2015
Available for sale	$	9,552,179	$	9,777,004
Trading	23,130		11,890
Non-marketable	117,259		112,786
Total investment securities	$	9,692,568	$	9,901,680

Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. The available for sale and the trading portfolios are carried at fair value. 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 $46.9 million at March 31, 2016 and $46.8 million at December 31, 2015. 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. These holdings are carried at cost. Non-marketable securities also include private equity investments, which amounted to $70.0 million at March 31, 2016 and $65.6 million at December 31, 2015. In the absence of readily ascertainable market values, these securities are carried at estimated fair value.

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A summary of the available for sale investment securities by maturity groupings as of March 31, 2016 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 but are collateralized by residential mortgages. 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.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	58,866	$	60,127
After 1 but within 5 years	498,613		514,076
After 5 but within 10 years	104,754		108,327
After 10 years	35,444		32,780
Total U.S. government and federal agency obligations	697,677		715,310
Government-sponsored enterprise obligations:
Within 1 year	10,680		10,754
After 1 but within 5 years	572,163		579,157
After 5 but within 10 years	125,012		126,156
After 10 years	5,630		5,591
Total government-sponsored enterprise obligations	713,485		721,658
State and municipal obligations:
Within 1 year	99,478		99,618
After 1 but within 5 years	680,866		698,660
After 5 but within 10 years	916,693		948,352
After 10 years	64,768		66,161
Total state and municipal obligations	1,761,805		1,812,791
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,538,407		2,611,384
Non-agency mortgage-backed securities	852,059		863,158
Asset-backed securities	2,445,528		2,440,055
Total mortgage and asset-backed securities	5,835,994		5,914,597
Other debt securities:
Within 1 year	9,327		9,341
After 1 but within 5 years	94,819		95,938
After 5 but within 10 years	222,744		227,750
After 10 years	12,000		11,748
Total other debt securities	338,890		344,777
Equity securities	5,678		43,046
Total available for sale investment securities	$	9,353,529	$	9,552,179

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $397.4 million, at fair value, at March 31, 2016. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in equity securities is common and preferred stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $43.0 million at March 31, 2016.

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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
March 31, 2016
U.S. government and federal agency obligations	$	697,677	$	20,297	$	(2,664	)	$	715,310
Government-sponsored enterprise obligations	713,485		8,353		(180		)	721,658
State and municipal obligations	1,761,805		52,229		(1,243		)	1,812,791
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,538,407		73,025		(48		)	2,611,384
Non-agency mortgage-backed securities	852,059		12,341		(1,242		)	863,158
Asset-backed securities	2,445,528		7,493		(12,966		)	2,440,055
Total mortgage and asset-backed securities	5,835,994		92,859		(14,256		)	5,914,597
Other debt securities	338,890		6,673		(786		)	344,777
Equity securities	5,678		37,368		—			43,046
Total	$	9,353,529	$	217,779	$	(19,129	)	$	9,552,179
December 31, 2015
U.S. government and federal agency obligations	$	729,846	$	5,051	$	(7,821	)	$	727,076
Government-sponsored enterprise obligations	794,912		2,657		(4,546		)	793,023
State and municipal obligations	1,706,635		37,061		(1,739		)	1,741,957
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,579,031		47,856		(8,606		)	2,618,281
Non-agency mortgage-backed securities	879,186		8,596		(7,819		)	879,963
Asset-backed securities	2,660,201		1,287		(17,107		)	2,644,381
Total mortgage and asset-backed securities	6,118,418		57,739		(33,532		)	6,142,625
Other debt securities	335,925		377		(4,982		)	331,320
Equity securities	5,678		35,325		—			41,003
Total	$	9,691,414	$	138,210	$	(52,620	)	$	9,777,004

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 March 31, 2016, the fair value of securities on this watch list was $85.9 million compared to $95.8 million at December 31, 2015.

As of March 31, 2016, 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 $39.9 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.2 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 March 31, 2016 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	17%	-	53%
Credit support	0%	-	25%
Loss severity	19%	-	68%

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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 Three Months Ended March 31
(In thousands)	2016			2015
Cumulative OTTI credit losses at January 1	$	14,129		$	13,734
Credit losses on debt securities for which impairment was previously recognized	123			17
Increase in expected cash flows that are recognized over remaining life of security	(18		)	(29		)
Cumulative OTTI credit losses at March 31	$	14,234		$	13,722

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
March 31, 2016
U.S. government and federal agency obligations	$	—	$	—	$	32,780	$	2,664	$	32,780	$	2,664
Government-sponsored enterprise obligations	—		—		15,445		180		15,445		180
State and municipal obligations	31,624		512		10,997		731		42,621		1,243
Mortgage and asset-backed securities:
Agency mortgage-backed securities	33,723		40		2,819		8		36,542		48
Non-agency mortgage-backed securities	155,845		752		66,103		490		221,948		1,242
Asset-backed securities	1,000,464		9,430		172,710		3,536		1,173,174		12,966
Total mortgage and asset-backed securities	1,190,032		10,222		241,632		4,034		1,431,664		14,256
Other debt securities	20,356		276		13,425		510		33,781		786
Total	$	1,242,012	$	11,010	$	314,279	$	8,119	$	1,556,291	$	19,129
December 31, 2015
U.S. government and federal agency obligations	$	491,998	$	3,098	$	31,012	$	4,723	$	523,010	$	7,821
Government-sponsored enterprise obligations	157,830		1,975		110,250		2,571		268,080		4,546
State and municipal obligations	66,998		544		31,120		1,195		98,118		1,739
Mortgage and asset-backed securities:
Agency mortgage-backed securities	530,035		2,989		291,902		5,617		821,937		8,606
Non-agency mortgage-backed securities	653,603		7,059		54,536		760		708,139		7,819
Asset-backed securities	2,207,922		12,492		223,311		4,615		2,431,233		17,107
Total mortgage and asset-backed securities	3,391,560		22,540		569,749		10,992		3,961,309		33,532
Other debt securities	244,452		3,687		25,218		1,295		269,670		4,982
Total	$	4,352,838	$	31,844	$	767,349	$	20,776	$	5,120,187	$	52,620

The total available for sale portfolio consisted of approximately 2,000 individual securities at March 31, 2016. The portfolio included 228 securities, having an aggregate fair value of $1.6 billion, that were in an unrealized loss position at March 31, 2016, compared to 466 securities, with a fair value of $5.1 billion, at December 31, 2015. The total amount of unrealized losses on these securities decreased $33.5 million to $19.1 million at March 31, 2016, largely due to a lower rate environment. At March 31, 2016, the fair value of securities in an unrealized loss position for 12 months or longer totaled $314.3 million, or 3.3% of the total portfolio value.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $1.2 million at March 31, 2016. Of these losses, $1.1 million related to auction rate securities and $171 thousand related to other state and municipal obligations. This portfolio, exclusive of auction rate securities, totaled $1.8 billion at fair value, or 18.8% 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 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.

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The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.



	For the Three Months Ended March 31
(In thousands)	2016			2015
Proceeds from sales of available for sale securities	$	—		$	185,053
Proceeds from sales of non-marketable securities	94			679
Total proceeds	$	94		$	185,732
Available for sale:
Gains realized on sales	$	—		$	2,526
Other-than-temporary impairment recognized on debt securities	(123		)	(17		)
Non-marketable:
Gains realized on sales	42			226
Fair value adjustments, net	(914		)	3,300
Investment securities gains (losses), net	$	(995	)	$	6,035

At March 31, 2016, securities totaling $3.9 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the Federal Reserve Bank and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $581.0 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.

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4. Goodwill and Other Intangible Assets

The following table presents information about the Company's intangible assets which have estimable useful lives.



	March 31, 2016										December 31, 2015
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Valuation Allowance			Net Amount		Gross Carrying Amount		Accumulated Amortization			Valuation Allowance			Net Amount
Amortizable intangible assets:
Core deposit premium	$	31,270	$	(26,574	)	$	—		$	4,696	$	31,270	$	(26,239	)	$	—		$	5,031
Mortgage servicing rights	4,904		(3,031		)	(30		)	1,843		4,638		(2,971		)	(29		)	1,638
Total	$	36,174	$	(29,605	)	$	(30	)	$	6,539	$	35,908	$	(29,210	)	$	(29	)	$	6,669

Aggregate amortization expense on intangible assets was $395 thousand and $473 thousand for the three month periods ended March 31, 2016 and 2015, respectively. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of March 31, 2016. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.



(In thousands)
2016	$	1,457
2017	1,105
2018	846
2019	700
2020	572

Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2016 is as follows:



(In thousands)	Goodwill		Core Deposit Premium			Mortgage Servicing Rights
Balance January 1, 2016	$	138,921	$	5,031		$	1,638
Originations	—		—			266
Amortization	—		(335		)	(60		)
Impairment	—		—			(1		)
Balance March 31, 2016	$	138,921	$	4,696		$	1,843

Goodwill allocated to the Company’s operating segments at March 31, 2016 and December 31, 2015 is shown below.



(In thousands)
Consumer segment	$	70,721
Commercial segment	67,454
Wealth segment	746
Total goodwill	$	138,921

5. Guarantees

The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured, and in the event of nonperformance by customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.

Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At March 31,

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2016, that net liability was $2.7 million, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $346.6 million at March 31, 2016.

The Company periodically enters into risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral and at March 31, 2016, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 3 to 11 years. At March 31, 2016, the fair value of the Company's guarantee liabilities for RPAs was $267 thousand, and the notional amount of the underlying swaps was $58.6 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default.

6. Pension

The amount of net pension cost is shown in the table below:



	For the Three Months Ended March 31
(In thousands)	2016			2015
Service cost - benefits earned during the period	$	133		$	126
Interest cost on projected benefit obligation	967			1,216
Expected return on plan assets	(1,437		)	(1,523		)
Amortization of prior service cost	(68		)	—
Amortization of unrecognized net loss	651			655
Net periodic pension cost	$	246		$	474

Substantially all benefits accrued under the Company’s defined benefit pension plan were frozen effective January 1, 2005, and the remaining benefits were frozen effective January 1, 2011. During the first three months of 2016, the Company made no funding contributions to its defined benefit pension plan and made minimal funding contributions to a supplemental executive retirement plan (the CERP), which carries no segregated assets. The Company has no plans to make any further contributions, other than those related to the CERP, during the remainder of 2016.

Effective January 1, 2016, the Company changed the method used to estimate the interest cost component of net periodic pension cost for its defined benefit pension plan. Prior to the change, the interest cost component was estimated by utilizing a single weighted average discount rate derived from the yield curve used to measure the projected benefit obligation. Under the new method, the interest cost component is estimated by applying the specific annual spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. This change provides a more precise measurement of the interest cost by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates. The Company accounted for this change prospectively as a change in accounting estimate. The change resulted in a decrease of approximately $900 thousand in the interest cost component of the estimated annual net periodic pension cost for 2016.

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7. Common and Preferred Stock *

Presented below is a summary of the components used to calculate basic and diluted income per share. The Company applies the two-class method of computing income per share, as nonvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. The two-class method requires the calculation of separate income per share amounts for the nonvested share-based awards and for common stock. Income per share attributable to common stock is shown in the table below. Nonvested share-based awards are further discussed in Note 12.



	For the Three Months Ended March 31
(In thousands, except per share data)	2016		2015
Basic income per common share:
Net income attributable to Commerce Bancshares, Inc.	$	65,374	$	61,055
Less preferred stock dividends	2,250		2,250
Net income available to common shareholders	63,124		58,805
Less income allocated to nonvested restricted stock	894		796
Net income allocated to common stock	$	62,230	$	58,009
Weighted average common shares outstanding	95,566		100,053
Basic income per common share	$	.65	$	.58
Diluted income per common share:
Net income available to common shareholders	$	63,124	$	58,805
Less income allocated to nonvested restricted stock	893		794
Net income allocated to common stock	$	62,231	$	58,011
Weighted average common shares outstanding	95,566		100,053
Net effect of the assumed exercise of stock-based awards - based on
the treasury stock method using the average market price for the respective periods	216		314
Weighted average diluted common shares outstanding	95,782		100,367
Diluted income per common share	$	.65	$	.58

Unexercised stock options and stock appreciation rights of 468 thousand and 322 thousand were excluded in the computation of diluted income per common share for the three month periods ended March 31, 2016 and 2015, respectively, because their inclusion would have been anti-dilutive.

The Company also has 6,000,000 depositary shares outstanding, representing 6,000 shares of 6.00% Series B Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share, having an aggregate liquidation preference of $150.0 million (“Series B Preferred Stock”). Each depositary share has a liquidation preference of $25.00 per share. Dividends on the Series B Preferred Stock, if declared, accrue and are payable quarterly, in arrears, at a rate of 6.00%. The Series B Preferred Stock qualifies as Tier 1 capital for the purposes of the regulatory capital calculations. In the event that the Company does not declare and pay dividends on the Series B Preferred Stock for the most recent dividend period, the ability of the Company to declare or pay dividends on, purchase, redeem or otherwise acquire shares of its common stock or any securities of the Company that rank junior to the Series B Preferred Stock is subject to certain restrictions under the terms of the Series B Preferred Stock.

* All prior year share and per share amounts in this note have been restated for the 5% common stock dividend distributed in December 2015.

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8. Accumulated Other Comprehensive Income

The table below shows the activity and accumulated balances for components of other comprehensive income. The largest component is the unrealized holding gains and losses on available for sale securities. Unrealized gains and losses on debt securities for which an other-than-temporary impairment (OTTI) has been recorded in current earnings are shown separately below. The other component is the amortization from other comprehensive income of losses associated with pension benefits, which occurs as the losses are included in current net periodic pension cost.



	Unrealized Gains (Losses) on Securities (1)					Pension Loss (2)			Total Accumulated Other Comprehensive Income
(In thousands)	OTTI			Other
Balance January 1, 2016	$	3,316		$	49,750	$	(20,596	)	$	32,470
Other comprehensive income (loss) before reclassifications	(765		)	113,702		—			112,937
Amounts reclassified from accumulated other comprehensive income	123			—		583			706
Current period other comprehensive income (loss), before tax	(642		)	113,702		583			113,643
Income tax (expense) benefit	244			(43,207