Edgar Filing: COMMERCE BANCSHARES INC /MO/

For the Six Months Ended June 30

(In thousands)

Proceeds from sales of available for sale securities

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

_________________________________________________________

For the quarterly period ended June 30, 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 July 31, 2016, the registrant had outstanding 96,563,720 shares of its $5 par value common stock, registrant’s only class of common stock.

Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q



			Page
INDEX
Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015	3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2016 and 2015 (unaudited)	6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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	36
	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



	June 30, 2016			December 31, 2015
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	13,091,888		$	12,436,692
Allowance for loan losses	(153,832		)	(151,532		)
Net loans	12,938,056			12,285,160
Loans held for sale (including $7,094,000 of residential mortgage loans carried at fair value at June 30, 2016 and $4,981,000 at December 31, 2015)	33,254			7,607
Investment securities:
Available for sale ($583,208,000 pledged at June 30, 2016 and $568,257,000 at
December 31, 2015 to secure swap and repurchase agreements)	9,221,346			9,777,004
Trading	30,512			11,890
Non-marketable	111,931			112,786
Total investment securities	9,363,789			9,901,680
Federal funds sold and short-term securities purchased under agreements to resell	13,725			14,505
Long-term securities purchased under agreements to resell	825,000			875,000
Interest earning deposits with banks	183,223			23,803
Cash and due from banks	428,300			464,411
Land, buildings and equipment, net	342,237			352,581
Goodwill	138,921			138,921
Other intangible assets, net	6,561			6,669
Other assets	436,627			534,625
Total assets	$	24,709,693		$	24,604,962
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	6,906,265		$	7,146,398
Savings, interest checking and money market	10,978,734			10,834,746
Time open and C.D.'s of less than $100,000	749,160			785,191
Time open and C.D.'s of $100,000 and over	1,515,888			1,212,518
Total deposits	20,150,047			19,978,853
Federal funds purchased and securities sold under agreements to repurchase	1,632,272			1,963,552
Other borrowings	103,878			103,818
Other liabilities	296,675			191,321
Total liabilities	22,182,872			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	1,333,995			1,337,677
Retained earnings	470,558			383,313
Treasury stock of 1,244,063 shares at June 30, 2016
and 603,003 shares at December 31, 2015, at cost	(51,707		)	(26,116		)
Accumulated other comprehensive income	134,424			32,470
Total Commerce Bancshares, Inc. stockholders' equity	2,521,916			2,361,990
Non-controlling interest	4,905			5,428
Total equity	2,526,821			2,367,418
Total liabilities and equity	$	24,709,693		$	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 June 30					For the Six Months Ended June 30
(In thousands, except per share data)	2016			2015		2016			2015
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	121,151		$	113,467	$	240,484		$	224,753
Interest and fees on loans held for sale	692			39		827			60
Interest on investment securities	54,698			53,264		103,589			91,700
Interest on federal funds sold and short-term securities purchased under
agreements to resell	19			15		43			24
Interest on long-term securities purchased under agreements to resell	3,354			3,670		6,829			6,721
Interest on deposits with banks	151			122		421			301
Total interest income	180,065			170,577		352,193			323,559
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	3,548			3,287		7,032			6,595
Time open and C.D.'s of less than $100,000	709			818		1,451			1,698
Time open and C.D.'s of $100,000 and over	2,347			1,504		4,333			2,914
Interest on federal funds purchased and securities sold under
agreements to repurchase	725			421		1,613			788
Interest on other borrowings	907			890		2,160			1,769
Total interest expense	8,236			6,920		16,589			13,764
Net interest income	171,829			163,657		335,604			309,795
Provision for loan losses	9,216			6,757		18,655			11,177
Net interest income after provision for loan losses	162,613			156,900		316,949			298,618
NON-INTEREST INCOME
Bank card transaction fees	45,065			45,672		89,535			87,971
Trust fees	31,464			30,531		61,834			60,117
Deposit account charges and other fees	21,328			19,637		42,019			38,136
Capital market fees	2,500			2,738		5,225			5,740
Consumer brokerage services	3,491			3,507		7,000			6,843
Loan fees and sales	3,196			2,183		5,706			4,272
Other	9,526			9,967		24,275			17,730
Total non-interest income	116,570			114,235		235,594			220,809
INVESTMENT SECURITIES GAINS (LOSSES), NET	(744		)	2,143		(1,739		)	8,178
NON-INTEREST EXPENSE
Salaries and employee benefits	104,808			99,655		211,667			197,729
Net occupancy	11,092			10,999		22,395			22,560
Equipment	4,781			4,679		9,415			9,382
Supplies and communication	5,693			5,226		12,522			10,807
Data processing and software	22,770			21,045		45,669			40,551
Marketing	4,389			4,307		8,202			8,225
Deposit insurance	3,143			3,019		6,308			6,020
Other	20,413			16,533		38,384			34,034
Total non-interest expense	177,089			165,463		354,562			329,308
Income before income taxes	101,350			107,815		196,242			198,297
Less income taxes	31,542			32,492		60,912			60,960
Net income	69,808			75,323		135,330			137,337
Less non-controlling interest expense (income)	(85		)	970		63			1,929
Net income attributable to Commerce Bancshares, Inc.	69,893			74,353		135,267			135,408
Less preferred stock dividends	2,250			2,250		4,500			4,500
Net income available to common shareholders	$	67,643		$	72,103	$	130,767		$	130,908
Net income per common share — basic	$	.70		$	.72	$	1.35		$	1.30
Net income per common share — diluted	$	.70		$	.72	$	1.35		$	1.30

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	For the Three Months Ended June 30						For the Six Months Ended June 30
(In thousands)	2016			2015			2016			2015
	(Unaudited)
Net income	$	69,808		$	75,323		$	135,330		$	137,337
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	—			149			(398		)	21
Net unrealized gains (losses) on other securities	31,139			(43,483		)	101,634			(14,137		)
Pension loss amortization	356			406			718			812
Other comprehensive income (loss)	31,495			(42,928		)	101,954			(13,304		)
Comprehensive income	101,303			32,395			237,284			124,033
Less non-controlling interest expense (income)	(85		)	970			63			1,929
Comprehensive income attributable to Commerce Bancshares, Inc.	$	101,388		$	31,425		$	237,221		$	122,104

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								135,267									63			135,330
Other comprehensive income														101,954						101,954
Distributions to non-controlling interest																	(586		)	(586		)
Purchases of treasury stock											(37,462		)							(37,462		)
Issuance of stock under purchase and equity compensation plans					(11,873		)				11,871									(2		)
Excess tax benefit related to equity compensation plans					1,904															1,904
Stock-based compensation					6,287															6,287
Cash dividends on common stock ($.450 per share)								(43,522		)										(43,522		)
Cash dividends on preferred stock ($.750 per depositary share)								(4,500		)										(4,500		)
Balance June 30, 2016	$	144,784	$	489,862	$	1,333,995		$	470,558		$	(51,707	)	$	134,424		$	4,905		$	2,526,821
Balance January 1, 2015	$	144,784	$	484,155	$	1,229,075		$	426,648		$	(16,562	)	$	62,093		$	4,053		$	2,334,246
Net income								135,408									1,929			137,337
Other comprehensive income														(13,304		)				(13,304		)
Distributions to non-controlling interest																	(543		)	(543		)
Purchases of treasury stock											(3,575		)							(3,575		)
Accelerated share repurchase agreements					40,000						(140,000		)							(100,000		)
Issuance of stock under purchase and equity compensation plans					(14,682		)				16,572									1,890
Excess tax benefit related to equity compensation plans					1,662															1,662
Stock-based compensation					5,252															5,252
Cash dividends on common stock ($.429 per share)								(43,105		)										(43,105		)
Cash dividends on preferred stock ($.750 per depositary share)								(4,500		)										(4,500		)
Balance June 30, 2015	$	144,784	$	484,155	$	1,261,307		$	514,451		$	(143,565	)	$	48,789		$	5,439		$	2,315,360

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Six Months Ended June 30
(In thousands)	2016				2015
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	135,330			$	137,337
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	18,655				11,177
Provision for depreciation and amortization	20,689				21,287
Amortization of investment security premiums, net	16,014				17,797
Investment securities (gains) losses, net (A)	1,739				(8,178		)
Net gains on sales of loans held for sale	(2,994		)		(1,234		)
Originations of loans held for sale	(70,880		)		(50,143		)
Proceeds from sales and repayments of loans held for sale	96,352				43,593
Net (increase) decrease in trading securities, excluding unsettled transactions	81,184				(1,310		)
Stock-based compensation	6,287				5,252
(Increase) decrease in interest receivable	60				(618		)
Increase (decrease) in interest payable	57				(201		)
Increase in income taxes payable	73				17,622
Excess tax benefit related to equity compensation plans	(1,904		)		(1,662		)
Other changes, net	(9,785		)		2,842
Net cash provided by operating activities	290,877				193,561
INVESTING ACTIVITIES:
Proceeds from sales of investment securities (A)	2,071				683,202
Proceeds from maturities/pay downs of investment securities (A)	1,109,707				1,323,921
Purchases of investment securities (A)	(414,154		)		(1,710,977		)
Net increase in loans	(721,274		)		(477,902		)
Repayments of long-term securities purchased under agreements to resell	50,000				—
Purchases of land, buildings and equipment	(13,649		)		(15,523		)
Sales of land, buildings and equipment	5,399				3,430
Net cash provided by (used in) investing activities	18,100				(193,849		)
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits	(38,985		)		34,287
Net increase (decrease) in time open and C.D.'s	267,339				(89,049		)
Net decrease in federal funds purchased and short-term securities sold under agreements to repurchase	(331,280		)		(196,475		)
Repayment of long-term borrowings	(840		)		(215		)
Additional long-term borrowings	900			—	—
Purchases of treasury stock	(37,462		)		(3,575		)
Accelerated share repurchase agreements	—				(100,000		)
Issuance of stock under equity compensation plans	(2		)		1,890
Excess tax benefit related to equity compensation plans	1,904				1,662
Cash dividends paid on common stock	(43,522		)		(43,105		)
Cash dividends paid on preferred stock	(4,500		)		(4,500		)
Net cash used in financing activities	(186,448		)		(399,080		)
Increase (decrease) in cash and cash equivalents	122,529				(399,368		)
Cash and cash equivalents at beginning of year	502,719				1,100,717
Cash and cash equivalents at June 30	$	625,248			$	701,349
(A) Available for sale and non-marketable securities
Income tax payments, net	$	59,886			$	42,077
Interest paid on deposits and borrowings	$	16,532			$	13,964
Loans transferred to foreclosed real estate	$	861			$	2,133
Loans transferred from held for investment to held for sale	$	50,360			$	—
Settlement of accelerated stock repurchase agreement and receipt of treasury stock	$	—			$	60,000

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 and six month periods ended June 30, 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 June 30, 2016 and December 31, 2015 are as follows:



(In thousands)	June 30, 2016		December 31, 2015
Commercial:
Business	$	4,840,248	$	4,397,893
Real estate – construction and land	819,896		624,070
Real estate – business	2,399,271		2,355,544
Personal Banking:
Real estate – personal	1,927,340		1,915,953
Consumer	1,939,486		1,924,365
Revolving home equity	408,301		432,981
Consumer credit card	753,166		779,744
Overdrafts	4,180		6,142
Total loans	$	13,091,888	$	12,436,692

At June 30, 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 $1.6 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

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Allowance for loan losses

A summary of the activity in the allowance for loan losses during the three and six months ended June 30, 2016 and 2015, respectively, follows:



	For the Three Months Ended June 30							For the Six Months Ended June 30
(In thousands)	Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	$	86,027		$	66,105	$	152,132	$	82,086		$	69,446	$	151,532
Provision	1,569			7,647		9,216		5,720			12,935		18,655
Deductions:
Loans charged off	661			11,984		12,645		2,174			23,761		25,935
Less recoveries on loans	2,263			2,866		5,129		3,566			6,014		9,580
Net loan charge-offs (recoveries)	(1,602		)	9,118		7,516		(1,392		)	17,747		16,355
Balance June 30, 2016	$	89,198		$	64,634	$	153,832	$	89,198		$	64,634	$	153,832
Balance at beginning of period	$	88,906		$	64,626	$	153,532	$	89,622		$	66,910	$	156,532
Provision	(2,361		)	9,118		6,757		(4,113		)	15,290		11,177
Deductions:
Loans charged off	1,408			11,297		12,705		2,132			22,873		25,005
Less recoveries on loans	1,192			2,756		3,948		2,952			5,876		8,828
Net loan charge-offs (recoveries)	216			8,541		8,757		(820		)	16,997		16,177
Balance June 30, 2015	$	86,329		$	65,203	$	151,532	$	86,329		$	65,203	$	151,532

The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, 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
June 30, 2016
Commercial	$	1,571	$	49,695	$	87,627	$	8,009,720
Personal Banking	1,333		21,498		63,301		5,010,975
Total	$	2,904	$	71,193	$	150,928	$	13,020,695
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 June 30, 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 14.



(In thousands)	June 30, 2016		Dec. 31, 2015
Non-accrual loans	$	24,524	$	26,575
Restructured loans (accruing)	46,669		38,739
Total impaired loans	$	71,193	$	65,314

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The following table provides additional information about impaired loans held by the Company at June 30, 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
June 30, 2016
With no related allowance recorded:
Business	$	11,777	$	15,217	$	—
Real estate – construction and land	2,160		3,462		—
Real estate – business	3,072		3,261		—
Real estate – personal	352		373		—
	$	17,361	$	22,313	$	—
With an allowance recorded:
Business	$	24,905	$	25,639	$	1,059
Real estate – construction and land	160		162		7
Real estate – business	7,621		9,145		505
Real estate – personal	7,419		10,310		694
Consumer	5,596		5,596		68
Revolving home equity	400		447		21
Consumer credit card	7,731		7,731		550
	$	53,832	$	59,030	$	2,904
Total	$	71,193	$	81,343	$	2,904
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

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Total average impaired loans for the three and six month periods ended June 30, 2016 and 2015, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended June 30, 2016
Non-accrual loans	$	22,098	$	4,461	$	26,559
Restructured loans (accruing)	28,775		17,297		46,072
Total	$	50,873	$	21,758	$	72,631
For the six months ended June 30, 2016
Non-accrual loans	$	21,551	$	4,542	$	26,093
Restructured loans (accruing)	27,977		17,499		45,476
Total	$	49,528	$	22,041	$	71,569
For the three months ended June 30, 2015
Non-accrual loans	$	25,063	$	5,948	$	31,011
Restructured loans (accruing)	14,254		18,968		33,222
Total	$	39,317	$	24,916	$	64,233
For the six months ended June 30, 2015
Non-accrual loans	$	28,155	$	6,102	$	34,257
Restructured loans (accruing)	18,245		19,176		37,421
Total	$	46,400	$	25,278	$	71,678

The table below shows interest income recognized during the three and six month periods ended June 30, 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 14.



	For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands)	2016		2015		2016		2015
Interest income recognized on impaired loans:
Business	$	236	$	42	$	472	$	84
Real estate – construction and land	3		42		5		84
Real estate – business	56		15		112		30
Real estate – personal	42		48		84		96
Consumer	89		85		177		169
Revolving home equity	4		6		7		11
Consumer credit card	159		179		318		357
Total	$	589	$	417	$	1,175	$	831

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Delinquent and non-accrual loans

The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at June 30, 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
June 30, 2016
Commercial:
Business	$	4,815,328	$	11,924	$	280	$	12,716	$	4,840,248
Real estate – construction and land	815,890		1,836		—		2,170		819,896
Real estate – business	2,388,292		3,743		2,000		5,236		2,399,271
Personal Banking:
Real estate – personal	1,913,469		7,083		2,495		4,293		1,927,340
Consumer	1,919,044		17,896		2,546		—		1,939,486
Revolving home equity	403,831		2,993		1,368		109		408,301
Consumer credit card	737,946		8,017		7,203		—		753,166
Overdrafts	3,917		263		—		—		4,180
Total	$	12,997,717	$	53,755	$	15,892	$	24,524	$	13,091,888
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. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.

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Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
June 30, 2016
Pass	$	4,702,346	$	808,815	$	2,318,106	$	7,829,267
Special mention	66,786		8,561		24,770		100,117
Substandard	58,400		350		51,159		109,909
Non-accrual	12,716		2,170		5,236		20,122
Total	$	4,840,248	$	819,896	$	2,399,271	$	8,059,415
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 June 30, 2016, these were comprised of $259.7 million in personal real estate loans, or 5.2% 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 June 30, 2016 and December 31, 2015 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
June 30, 2016
FICO score:
Under 600	1.5	%	4.3	%	1.3	%	4.0	%
600 - 659	2.8		8.9		3.9		11.8
660 - 719	9.6		21.6		13.4		31.4
720 - 779	24.4		26.2		28.4		28.0
780 and over	61.7		39.0		53.0		24.8
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 $61.5 million at June 30, 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 $14.8 million at June 30, 2016. Other performing restructured loans totaled $46.7 million at June 30, 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 $30.3 million at June 30, 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 $7.7 million at June 30, 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 June 30, 2016, these loans totaled $8.3 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.

The following table shows the outstanding balances of loans classified as troubled debt restructurings at June 30, 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)	June 30, 2016		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	35,833	$	—
Real estate - construction and land	1,736		—
Real estate - business	5,457		—
Personal Banking:
Real estate - personal	4,823		683
Consumer	5,619		57
Revolving home equity	291		33
Consumer credit card	7,731		504
Total restructured loans	$	61,490	$	1,277

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 $970 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 $11.6 million at June 30, 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 June 30, 2016, the fair value of these loans was $7.1 million, and the unpaid principal balance was $6.8 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 June 30, 2016, the balance of these loans was $5.3 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. This amount approximated nearly 5% of the total auto loan portfolio and was initiated in order to rebalance the auto loan portfolio in relation to the Company's other loan categories. The group of loans held for sale are representative of the overall auto loan portfolio. The loans are being marketed to other financial institutions such as regional banks and credit unions, and in June 2016, loans of $21.8 million were sold and a gain of $114 thousand was recorded, bringing the balance at June 30, 2016 to $20.8 million. These loans are carried at lower of cost or fair value.

At June 30, 2016, none of the loans held for sale were on non-accrual status, and $22 thousand were 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 $1.6 million and $2.8 million at June 30, 2016 and December 31, 2015, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.8 million and $3.3 million at June 30, 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 June 30, 2016 and December 31, 2015.



(In thousands)	June 30, 2016		Dec. 31, 2015
Available for sale	$	9,221,346	$	9,777,004
Trading	30,512		11,890
Non-marketable	111,931		112,786
Total investment securities	$	9,363,789	$	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 June 30, 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 $64.7 million at June 30, 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 June 30, 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	$	59,365	$	59,898
After 1 but within 5 years	499,992		517,665
After 5 but within 10 years	105,802		109,977
After 10 years	35,642		33,379
Total U.S. government and federal agency obligations	700,801		720,919
Government-sponsored enterprise obligations:
Within 1 year	81,208		81,302
After 1 but within 5 years	452,204		459,978
After 5 but within 10 years	14,988		15,260
After 10 years	5,630		5,637
Total government-sponsored enterprise obligations	554,030		562,177
State and municipal obligations:
Within 1 year	135,577		136,305
After 1 but within 5 years	642,897		662,010
After 5 but within 10 years	923,727		971,348
After 10 years	61,917		64,198
Total state and municipal obligations	1,764,118		1,833,861
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,509,991		2,589,915
Non-agency mortgage-backed securities	814,917		831,616
Asset-backed securities	2,293,845		2,298,725
Total mortgage and asset-backed securities	5,618,753		5,720,256
Other debt securities:
Within 1 year	5,996		6,052
After 1 but within 5 years	88,771		90,755
After 5 but within 10 years	222,737		231,176
After 10 years	11,588		11,281
Total other debt securities	329,092		339,264
Equity securities	5,678		44,869
Total available for sale investment securities	$	8,972,472	$	9,221,346

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $400.5 million, at fair value, at June 30, 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 $44.8 million at June 30, 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
June 30, 2016
U.S. government and federal agency obligations	$	700,801	$	22,381	$	(2,263	)	$	720,919
Government-sponsored enterprise obligations	554,030		8,147		—			562,177
State and municipal obligations	1,764,118		70,435		(692		)	1,833,861
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,509,991		79,952		(28		)	2,589,915
Non-agency mortgage-backed securities	814,917		16,803		(104		)	831,616
Asset-backed securities	2,293,845		15,664		(10,784		)	2,298,725
Total mortgage and asset-backed securities	5,618,753		112,419		(10,916		)	5,720,256
Other debt securities	329,092		10,546		(374		)	339,264
Equity securities	5,678		39,191		—			44,869
Total	$	8,972,472	$	263,119	$	(14,245	)	$	9,221,346
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 June 30, 2016, the fair value of securities on this watch list was $78.9 million compared to $95.8 million at December 31, 2015.

As of June 30, 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 $37.1 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.4 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at June 30, 2016 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	17%	-	52%
Credit support	0%	-	27%
Loss severity	18%	-	63%

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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 Six Months Ended June 30
(In thousands)	2016			2015
Cumulative OTTI credit losses at January 1	$	14,129		$	13,734
Credit losses on debt securities for which impairment was not previously recognized	—			76
Credit losses on debt securities for which impairment was previously recognized	270			407
Increase in expected cash flows that are recognized over remaining life of security	(37		)	(51		)
Cumulative OTTI credit losses at June 30	$	14,362		$	14,166

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



	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2016
U.S. government and federal agency obligations	$	—	$	—	$	33,379	$	2,263	$	33,379	$	2,263
State and municipal obligations	17,375		334		9,478		358		26,853		692
Mortgage and asset-backed securities:
Agency mortgage-backed securities	14,257		22		2,611		6		16,868		28
Non-agency mortgage-backed securities	3,790		2		57,411		102		61,201		104
Asset-backed securities	529,895		6,782		189,558		4,002		719,453		10,784
Total mortgage and asset-backed securities	547,942		6,806		249,580		4,110		797,522		10,916
Other debt securities	—		—		19,685		374		19,685		374
Total	$	565,317	$	7,140	$	312,122	$	7,105	$	877,439	$	14,245
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 June 30, 2016. The portfolio included 145 securities, having an aggregate fair value of $877.4 million, that were in an unrealized loss position at June 30, 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 $38.4 million to $14.2 million at June 30, 2016, largely due to a lower rate environment. At June 30, 2016, the fair value of securities in an unrealized loss position for 12 months or longer totaled $312.1 million, or 3.4% of the total portfolio value.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $692 thousand at June 30, 2016, most of which related to auction rate securities. This portfolio totaled $1.8 billion at fair value, or 19.9% 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.